"9.9 yuan" stirs up the domestic coffee market, who benefits the most from Starbucks, Luckin and Cudi?

A year and a half after the 9 Block 9 promotion entered the coffee industry, a number of coffee brands have performed differently.

Recently, Starbucks and Luckin Coffee, two major coffee chains, listed companies, both disclosed their results for the quarter ended June 30, 2024. Starbucks reported total net income of $9.114 billion last quarter, down 0.6% year-on-year. The net profit attributable to the parent company was 1.055 billion US dollars, a year-on-year decrease of 7.6%. Among them, Starbucks China achieved net income of US$733.8 million in the last quarter, an increase of 5% sequentially after excluding the impact of foreign exchange changes, and the overall operating margin achieved double-digit growth for two consecutive quarters.

Last quarter, Luckin Coffee's total net income was 8.403 billion yuan, a year-on-year increase of 35.5%, setting a new high in single-quarter revenue; The net profit attributable to the parent company was 871 million yuan, down 12.8% year-on-year. Overall, in the first half of this year, Luckin Coffee's total net income reached 14.681 billion yuan, a year-on-year increase of 38%. The net profit was 788 million yuan, down nearly 50% year-on-year.

Starbucks China's revenue growth in the last quarter was mainly driven by successful beverage innovation, localized festive food, and increased frequency of breakfast time membership. Luckin's second-quarter revenue growth was primarily driven by an increase in the number of products sold, an increase in the number of operating stores, and an increase in the number of transacting customers per month.

"Cudi Coffee's overall performance improved in the second quarter." Recently, Li Yingbo, chief strategy officer of Cudi Coffee, another local Chinese coffee chain, said in a group interview with the media, including The Paper, that Cudi is currently more concerned about how to subsidize consumers and operators.

The price war has been going on for a year and a half, and several coffee brands are happy and some are sad

According to public information, the reporter combed that Cudi Coffee, which was established in 2022, took the lead in launching a 9-9 promotional campaign in February 2023, and further reduced it from 9 to 8 8 in May of that year.

At present, in the Chinese market, Starbucks, which has been in the market for 25 years, focuses on the third space, takes the high-end route, and all stores are directly operated in the mode of direct operation, and is currently accelerating its entry into the new county to expand its stores. Founded in 2017, Luckin Coffee focuses on cost-effectiveness, and in recent years, it has become the chain brand with the largest number of stores in China's coffee market by relying on co-branding and rapid store expansion. Cudi Coffee was built by Lu Zhengyao, Qian Zhiya, the founders of Luckin Coffee, and the original core team of Luckin Coffee, which was established less than 2 years ago, and quickly entered the affordable coffee market by relying on low-price promotional activities such as 9 pieces of 9 and 8 pieces of 8.

Although the business models are different, the fierce market competition pattern has somewhat affected the development of coffee brands.

In the latest quarter, Starbucks global earnings report showed that China's same-store sales fell by 14% in the last quarter, with average ticket prices and same-store transactions both down 7%.

"The past year has seen unprecedented store expansions and massive price wars in the industry, even at the expense of same-store sales and profitability, which have caused significant and permanent changes in the market environment." Starbucks Global Chief Executive Officer Nathhan made the remarks during a recent post-earnings call.

"In the face of profound changes in the competitive landscape of the industry, same-store sales and other data will inevitably be affected in the short term, and Starbucks China's focus is on the current situation and steady growth." Liu Wenjuan, co-CEO of Starbucks China, said that the continuous growth of key business data such as net income, store transaction volume and profit margin continues to grow sequentially, which is the current focus of Starbucks China.

In the first half of last year, Luckin Coffee turned losses into profits, and continued to make profits in the first half of this year, but profits declined year-on-year. Luckin pointed out in the financial report that the decline in operating profit in the second quarter was mainly due to the decline in the average selling price of the company's products and the continued volatility of market dynamics and competition.

However, Guo Jinyi commented on the performance of the second quarter on the earnings call, saying that he was "generally satisfied". Guo Jinyi said that in the second quarter, the market environment was changeable, and the industry was seasonal, and in the face of opportunities and challenges, Luckin Coffee achieved rapid growth in revenue and returned to normal growth.

As for one of the initiators of the "9 Pieces 9" coffee promotion, Cudi Coffee is currently in the brand development period and is more concerned about expanding its market share. Li Yingbo told The Paper that the Chinese market will not be a slow process, it may be an exponential jump, and Cudi is currently focusing on developing market-related businesses and strategies with two-way subsidies, including the price of consumers and the laying of stores.

Accelerate the sinking and expansion of stores into the mainstream, what will the brands do in the future?

As the price war continues to impact the coffee market, the sinking market has become a new battlefield for coffee brands.

Starbucks China, which takes the high-end route, has always adopted a fully direct-operated model, and all stores are directly operated. As of June 30, Starbucks had 39,477 stores worldwide. Among them, the number of stores in China is 7,306, accounting for more than 18% of the total number of stores in the world.

While Luckin and Cudi are fighting for the "9 Pieces of 9" promotion, Starbucks China is also constantly exploring blue ocean opportunities. In the first quarter of this year, Starbucks China added 213 new stores and entered 38 new county-level markets, with the number of new stores increasing by about 13% year-on-year, and the scale of stores in lower-tier markets further expanded. According to Starbucks China executives, the number of new stores opened in the Chinese market will break a record this fiscal year at the current pace of store opening.

Luckin Coffee, a cheap coffee giant, adopts a dual-channel operation model of "direct + joint operation". According to the reporter's understanding, at the end of December 2022, Luckin Coffee took the lead in opening up partner recruitment in 9 provinces and 41 cities. As of June 30 this year, the total number of Luckin stores reached 19,961, including 13,056 self-operated stores, accounting for more than 65%, and 6,905 associated stores. It is worth noting that in July this year, the 20,000th store of Luckin Coffee officially opened in Beijing, further deepening the store layout.

However, the number of Luckin Coffee stores has previously shown double-digit growth, and the pace of new store openings of Luckin has slowed down in the second quarter of this year. According to the financial report, the number of net new stores opened in the second quarter was 1,371, and the number of stores increased by 7.4% quarter-on-quarter.

Guo Jinyi also pointed out in the second quarter conference call that as the competition in China's coffee market becomes more intense, Luckin Coffee will maintain a stable and sustainable store opening strategy, while increasing the number of stores in high-tier cities, and accelerate the expansion of the offline market through the joint operation model.

Cudi Coffee adopts a full association model, that is, Cudi does not charge a franchise fee to the associates, but charges a certain service fee according to the gross profit. If the affiliate chooses to close the store, Cudi will help them recover the coffee machine, counter, door and other parts according to depreciation, further reducing the risk of the affiliate exiting.

Founded in October 2022, Cudi Coffee has expanded its business to 28 countries and regions around the world, with more than 7,500 stores, ranking fourth in the world. Li Yingbo pointed out to reporters that the current proportion of stores in first, second and third-tier cities has reached 1:1:1, and the joint operation model is the key point for Cudi to increase the number of stores rapidly in the past year. In response to whether Cudi was "cutting leeks from affiliates", Li Yingbo responded that as of May this year, Cudi's cumulative store closure rate was 2.6%; Secondly, the number of stores with positive overall cash flow was 97.8%.

It is worth noting that Cudi Coffee officially issued a plan to open 8,000 convenience stores in the second half of the year at the half-year work meeting that ended a few days ago, and put forward the goal of laying out 50,000 convenience stores in the next three years. Li Yingbo, chief strategy officer of Cudi Coffee, pointed out that the so-called convenience store is the business that can be carried in multiple scenarios and formats such as convenience stores, bakeries, restaurants, snack shops, hotels, etc., which can be realized with only 2 to 3 square meters of space. In the future, convenience stores will be one of the important strategies for the company's development, deeply integrated into various scenarios and formats. In addition, in order to facilitate customers and cope with competition, Cudi has made it clear that it will closely follow the layout of competing stores.

In addition to continuing to sink and expand stores, in the face of the pricing impact of affordable coffee, Starbucks China said that it will firmly adhere to a differentiated growth strategy.

"In a competitive environment with frequent promotions, Starbucks China maintains a high degree of restraint and avoids price wars." Liu Wenjuan, co-CEO of Starbucks China, also said that at the same time, it has adopted a targeted and precise pricing strategy to create new sales increments and cultivate customers' consumption habits, which is in line with Starbucks China's high-end positioning.

Luckin's ambition should not be underestimated, Guo Jinyi mentioned on the conference call that Luckin Coffee's goal is to become a world-class century-old brand, and it is constantly working hard to achieve this. For the future strategy, Guo Jinyi said that he will adhere to the market share as the core goal of the current company's development, quickly adjust the pace according to the competitive situation, continue to pay attention to market share, and continuously expand the leading edge.

In Cudi Coffee's view, three years is at least a cycle that needs to be passed through for market cultivation. The 9 Block 9 promotion will also be a "long-term campaign" for the next three years.

"The 9 block 9 promotion to subsidize consumers will last for three years, and the subsidy for affiliates will continue until the end of 2026." Li Yingbo said that at present, more and more brands have entered the affordable coffee track, and to a certain extent, this market will become more and more mature. Cudi Coffee will continue to adjust the duration and intensity of the promotion policy according to the expansion speed of the market.

Whether it is Cudi Coffee, the initiator of the 9 block 9 promotion, or Luckin Coffee, which has the largest number of stores, or Starbucks, the old brand Starbucks, they are actively adjusting their market strategies based on the current development situation in the current fierce market competition.

(Source: The Paper)

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