Text/Fang Yi
Edit/Midnight
At the moment when the coffee industry is making a comeback, a market shock caused by Lu Zhengyao, the former helmsman of Luckin Coffee and the current founder of Cudi Coffee, is opening with unprecedented intensity.
Recently, with the announcement of Luckin's new price adjustment strategy, an in-depth game around "value" and "price" has quietly kicked off.
In this battlefield filled with gunpowder, Cudi Coffee is like a challenger who does not play cards according to common sense, and resolutely chooses a radical path of "killing a thousand enemies and losing 800 yourself", vowing to fight a bloody way in a market full of giants.
Source: Cudi Coffee's official website
In this battle, Lu Zhengyao's figure looms, with a radical expansion posture and controversial methods, continuing to influence the direction of the chess game: on the one hand, Luckin Coffee strives to transform and seek brand upgrading through price adjustment; On the other hand, Cudi Coffee is trying to plant the seeds of cost-effectiveness in the hearts of consumers through continuous price offensives, so as to drag down coffee giants such as Luckin and even Starbucks.
Judging from the latest performance of Luckin and Starbucks, Lu Zhengyao has indeed had a non-negligible impact on them.
While Luckin and Starbucks continue to focus on market expansion and digital innovation in an attempt to attract consumers with differentiated strategies, they also share a common denominator: the financial results clearly show that they are under pressure from margins due to increased competition in the industry.
Source: Starbucks official website
Luckin, known for its rapid expansion and preferential strategy, has achieved some growth in sales, but its profit margins have been significantly compressed due to the price war, and it has returned to a loss-making situation.
Starbucks, the leader in the high-end coffee market, has struggled to maintain its brand premium through quality and service, but in a fierce market competition, it has also had to face the reality of increased customer price sensitivity, which has affected its profit margin performance, and its latest quarterly financial report shows that its revenue and net profit are declining.
In a game of interlocking, every move is a matter of life and death. This is not only a battle for market share, but also a test of corporate strategic vision, cost control and brand resilience.
So, who will survive the long and fierce competition?
1. Luckin wants to raise prices, but Cudi doesn't let go
In the new round of competition in the coffee retail market, Luckin Coffee announced a product price adjustment strategy, aiming to improve brand positioning and operational efficiency by optimizing the price structure. This decision reflects Luckin's attempt to find a more stable profit model after a series of strategic adjustments and market tests.
However, the price increase immediately triggered a ripple effect among other players in the market, with Cudi Coffee showing a particularly aggressive competitive stance.
Cudi Coffee chose to be at this node, not only did not follow the trend of price increases, but instead increased the intensity of the price war, and adopted the strategy of "killing a thousand enemies and losing 800 self", intending to attract more consumers by maintaining or even further reducing product prices, so as to quickly seize market share. This move is undoubtedly a direct response to Luckin's decision to raise prices, and it also reflects Lu Zhengyao's will not let go.
Source: Cudi Coffee's official website
Why did Cudi choose to fight a price war at this time? This may be seen from the current predicament of Luckin Coffee. Luckin's price increase reflects not only the realistic consideration of cost pressure, but also a self-help battle that has to be fought after the deterioration of the company's financial situation.
Looking back at Luckin's financial history, the dramatic turning point was the financial fraud scandal of 2020. This turmoil not only caused Luckin to fall into a crisis of confidence and the stock price plummeted, but also lit up a "red light" for its financial health. Although Luckin has since gradually recovered through a series of reform measures, including management restructuring and business model adjustment, and even achieved a turnaround for a period of time. But the good times don't last long, and after entering 2023, Luckin seems to be stuck in a "financial quagmire" again.
Luckin Coffee's financial report for the first quarter of 2024 shows that Luckin achieved revenue of 6.2781 billion yuan in the quarter, a year-on-year increase of 41.5%, and a net loss of 83.174 million yuan, compared with a profit of 565 million yuan in the same period of the previous year.
Returning to the losing track is a worrying sign.
This is not accidental, but the result of a combination of factors. On the one hand, the tight global supply chain has led to a surge in raw material costs, especially the rise in the price of core raw materials such as coffee beans, which has directly squeezed Luckin's profit margins. On the other hand, the overall growth rate of the domestic consumer market has slowed down, and consumers' price sensitivity has increased, making Luckin in a dilemma between maintaining market share and increasing unit prices.
Source: Luckin Coffee official website
In this context, Luckin's price increase measures can be seen as an inevitable choice to seek a way out of the financial difficulties. Faced with the embarrassing situation of returning to losses and the urgent need to improve gross profit margins, Luckin seems to be able to directly boost revenue by raising product selling prices, which is a strategy that is both direct and full of risks.
After all, in the current environment of fierce competition and volatile consumer loyalty, price increases are a double-edged sword, which can increase cash flow in the short term, but can also lead to customer churn and damage brand image.
It is worth noting that this decision of Luckin may also be a big gamble after careful consideration. The "bet" is the market's recognition of the brand value, and it is also the willingness of consumers to pay a higher price for this "habit" after they are accustomed to the convenience and quality brought by Luckin.
However, the outcome of the gamble is still uncertain, and whether Luckin can ensure the stability of its customer base by optimizing its product structure and enhancing brand stickiness while raising its price will be the key to determining whether it can successfully get out of financial difficulties.
But in any case, Cudi Coffee continued to implement the strategy of grabbing the market at a low price, which somewhat dragged down the pace of Luckin, and the chain reaction caused by this price war also affected other players in the market.
2. Starbucks can't sit still, and more brands are involved
Cudi cries Luckin, who threatens Starbucks.
As an iconic brand in the high-end coffee market, Starbucks has always occupied a niche in the market with its unique consumer experience and brand premium.
In the face of Luckin's attack, Starbucks has struggled to deal with it: on the one hand, it is trying to maintain its high-end brand image, and is reluctant to easily participate in the price war, fearing that this move will damage its long-established brand value; On the other hand, in the face of market share pressure, Starbucks has also had to take measures, including local price adjustments, the introduction of more preferential packages, and the promotion of digital transformation and membership services, in order to maintain quality while retaining consumers.
Source: Starbucks official website
However, this series of actions by Starbucks did not translate into performance growth. Instead, it seems to be mired in some kind of anxiety. This anxiety stems from the delicate balance between dealing with low-price competition from local brands such as Luckin and keeping their high-end market solid.
At the same time, Starbucks' financial report data also directly reflects this struggle: in the continuous market game, despite efforts to adjust its strategy, its profit margins are still facing squeeze, and its performance is weak.
Starbucks' financial report for the second quarter of fiscal year 2024 shows that during the reporting period, it achieved revenue of $8.56 billion, a year-on-year decrease of 2%; Net profit was $770 million, down 15% year-on-year. Starbucks shares fell after the earnings release as revenue, earnings and same-store sales growth fell in response to market expectations.
In terms of revenue composition, the Chinese market contributed $710 million in the second quarter, down 8% year-on-year, while same-store sales fell sharply by 11%.
Previously, Starbucks China suffered consecutive quarters of declining performance, mostly due to lower operating margins and year-over-year same-store sales, partly due to the recurrence of the pandemic and unfavorable foreign exchange factors. For example, in the first quarter of fiscal 2023, same-store sales in Starbucks China fell by 14%. In addition, the significant decline in operating margins and fierce competition with local competitors such as Luckin are also factors that cannot be ignored.
It's clear that Starbucks is showing signs of slowing growth.
Starbucks' predicament is also a common challenge for many coffee brands. Under the chain reaction triggered by Luckin's price increase, the entire industry seems to be involved in a large-scale price scuffle, whether it is international brands or local emerging forces, all of them are looking for ways to survive.
Local brands such as Pacific Coffee, Costa Coffee, Tim Hortons, as well as emerging independent cafes, are either following up with price increases or enhancing differentiated services in an effort to find a foothold in this melee. What's more, some brands have taken the opportunity to launch "price protection" or limited-time promotions in an attempt to attract more customers and expand their market share amid market fluctuations.
Behind this price war, the profound changes in the competitive landscape of the coffee industry have been exposed. Luckin's initiative not only stirred up the calm of the market, but also forced Starbucks and many brands to re-examine their market positioning and strategic direction.
In the competition at the level of 10,000 stores, the price war may be able to attract attention in the short term, but in the long run, the core competitiveness of the brand is still in the comprehensive embodiment of quality, innovation, service and cultural value. How to build a healthy profit model while maintaining competitiveness has become a difficult problem for all coffee brands.
3. Will the price war be fought for another two years? Cudi is still holding on
The key to the price war is to rely on scale. This is also an important reason why Cudi was able to drag Luckin and then affect other players such as Starbucks.
Cudi Coffee, as a new force that has emerged in the Chinese coffee market in recent years, has sprung up in the market with an astonishing growth rate since its establishment. Up to now, the total number of stores in the country has exceeded 7,000, and it has become a rival that Luckin and Starbucks cannot ignore.
Relying on its rapidly expanding size, Cudi is full of offensive ambitions, and its style of play since its establishment has mainly relied on price wars, which are highly controversial - is it a long-term solution to drag down opponents with price wars? In addition to price, does Cudi have a core competitiveness?
To answer these two questions, one must go back to Cudi Coffee itself to find the answer.
It is undeniable that with its aggressive strategy, Cudi Coffee has become a role to be reckoned with in the market. Since its establishment, it has engaged in hand-to-hand combat with Luckin Coffee, mainly adopting a low-price strategy and playing in a simple and crude manner.
In the price war of coffee companies, consumers get benefits. But from the brand side, if the price war can't make the opponent admit defeat, it is very likely to consume itself in the end. Because the price war depends on a number of factors, such as the cost of raw materials, consumer acceptance, the overall strength of the brand and the speed of industry innovation, etc., but the core is to have enough "ammunition".
For coffee brands, there are two main sources of "ammunition" for price wars, one is to use investors' money for financing such as Luckin back then; Second, traditional coffee companies such as Starbucks can achieve self-blood supply. Obviously, the current Cudi does not fit the above characteristics. Cudi's confidence in the price war mainly depends on franchisees, but the core appeal of franchisees is to make money, which also means that the patience of franchisees is limited.
Source: Cudi Coffee's official website
In addition, from the perspective of the macro environment, global coffee bean prices fluctuate, supply chains are unstable, and in order to maintain low prices, brands need to constantly absorb cost pressures, which is a huge test for any player. At the same time, consumers are becoming more sensitive, and they are beginning to seek value experience beyond cost performance, which means that price competition alone is difficult to maintain market advantage in the long term.
Based on such a premise, the current situation of Cudi Coffee is not optimistic. Although it can attract a large number of customers through the low-price strategy, its financial position is under great pressure in the ongoing price war. High operating costs, compressed profit margins, and possible quality doubts all pose a threat to Cudi's long-term growth. In addition, the lag in brand building and service innovation also makes Cudi more vulnerable in the competition with rivals such as Starbucks and Luckin.
Therefore, whether Cudi can really fight the price war for another two years depends not only on the strength of its capital chain, but also on whether it can achieve innovation and upgrading of its business model while maintaining low prices.
In fact, there is not much time left for Cudi, and Wired Insight previously wrote in the article "Business Declines, Seeking Transfer, Closing Stores, Franchisees Don't Play with Cudi?" Due to the difficulty of making profits, many franchisees have transferred equipment and closed stores, and at the same time, they have also exposed supply chain problems, and their stamina is slightly insufficient, and they are currently in a strong situation.
Looking back on the competitive situation of the domestic coffee market in recent years, we can clearly feel the tension of "Jiang people have talents". During this period of prosperity intertwined with turbulence and change, the domestic coffee market showed an obvious development trend, which also made the entire coffee industry begin to pay attention to the subtle relationship between value and price, as well as the game of cost control and brand building.
However, the consensus of the industry is that the domestic coffee market is bound to be more diversified and the operation will be more refined. In the past, brand price wars may bring short-term shocks to the industry, but in the long run, building brand core competitiveness, deepening consumer insight, and innovating service models are the keys to winning the future market.
In the future, the competitive winner of the coffee market needs the brand to have a strong enough "core", and be able to adjust the strategy in a timely manner in the rapidly changing market, and adhere to the construction of products and services and industrial chain. This is true for Luckin, Starbucks, and new brands like Cudi.