The peak season for coffee sales has arrived, and this prolonged industry price war has also brought about new changes.
The "new king" and "old king" in the industry both have similar anxieties about making money: the financial report shows that LKNCY increased revenue but not profits in the first quarter of 2024, with a net loss of 71.42 million yuan in that quarter and a net profit of 564 million yuan in the same period last year; Starbucks (SBUX. US) saw a decline in revenue and net profit in the second quarter of fiscal year 2024 (from January 1 to March 31, 2024); Among them, the net profit was 772 million US dollars, a year-on-year decrease of 14.96%.
On the surface, the strongest seems to be the "catfish" Cody, who initiated this price war: after announcing the extension of the current store subsidy policy until December 31, 2026, on May 21, Cody announced the start of a three-month "summer fruit coffee season" - an unlimited promotion of 9.9 yuan for all beverages.
In response to this, Kudi Coffee responded to an interview with the Daily Economic News on May 22 that the "summer fruit coffee season" is one of the measures to cultivate the market. During this stage, the company has achieved good results in various indicators such as store sales, customer size, and customer repurchase. Therefore, it has decided to extend the promotional activities for three months. "The overall performance of stores in the first quarter of this year was good, with over 95% of stores having positive cash flow in April.".
It is worth noting that on the same day, Kudi officially launched a new convenience store model called "COTTI Express". Kudi told the Daily Economic News reporter that the store type is a "store in store" with three major characteristics: small footprint, small investment, and low breakeven point.
"By doing the same 9.9 yuan activity, Kairuixing may be able to make money, but opening a Kudi is not enough, and the cup volume cannot increase." A franchisee who overturned their Kudi store in February this year, Kairuixing, told the Daily Economic News reporter.
Kudi is "bleeding" and burning money to persevere in the price war. Although Li Yingbo, Chief Strategy Officer of Kudi Coffee, revealed last year that the cost of a cup of coffee from Kudi will not exceed 9 yuan, according to the August 2023 research report of China Merchants Securities, the hidden cost of a single cup of coffee from Kudi exceeds 11 yuan, higher than Luckin Coffee.
Based on this, the launch of the new store model seems not only to compete for more franchisees, but also to alleviate the cash flow pressure brought by its low price strategy. The price war has been going on for a year, how many bullets does Kudi still have? Does the repeated shrinkage and profit warning of Luckin's "9.9 yuan for a drink" campaign mean that this war is coming to an end?
In store stores with low entry barriers, Kudi tells new stories to franchisees?
With the increasingly fierce competition in the catering industry, almost every chain brand is encrypting their offline stores. At this time, the low threshold and light asset franchise model has not only become a "trap" for franchisees, but also a major way for brands to quickly compete for high-quality offline locations.
On May 21st, Kudi officially announced the launch of the convenience store model "COTTI Express". The Daily Economic News reporter learned from Kudi that the store model will be widely integrated into various formats and scenarios such as convenience stores and chain restaurants in the future.
A reporter from the Daily Economic News found on the official website of Kudi that there are currently four types of stores to choose from: in store, standard store, brand store, and outdoor store, with an in store area of 6-11 square meters. In terms of investment amount, compared with standard stores, in store stores have reduced the total cabinet advertising by 7000 yuan and waived 20000 yuan in basic decoration expenses.
Several Kudi joint venture partners told reporters that Kudi has already been testing its stores in multiple locations across the country. On social media platforms such as Xiaohongshu, there are many users sharing about Kudi, which operates in regional bakeries and pharmacies.
User shared Kudi store in store Xiaohongshu
Regarding the launch of the new store model, Li Yingbo, Chief Strategy Officer of Kudi Coffee, stated that the convenience store model will complement the existing conventional store model, "forming a huge capillary network that is infinitely close to customers and further improving purchasing convenience.".
"The in store model can not only optimize the operating costs of stores, but also help brands expand quickly and cover a wider range of potential consumer groups." Wang Jie, a senior consulting consultant at Zhuoshi Consulting, pointed out in an interview with the Daily Economic News that multiple top coffee brands, represented by Tim Tianhao China Coffee, have launched the in store model, which has differentiated consumption scenarios.
For Tim Tianhao China Coffee, the store in store strategy is an important step in expanding its scale, and Kudi also holds the same idea.
Based on the current size of Kudi's stores, according to data from Narrow Door Dining Eye, as of May 5th, Kudi Coffee has a total of 6819 stores. On February 26th, Kudi officially announced that the number of stores has reached 7000, less than a year and a half since the first store was launched. On May 22nd, Kudi also confirmed to reporters that the current global number of stores has exceeded 7000.
According to the strategic goal of having 20000 global stores by 2025, as stated in the internal letter of Coodie Coffee's one-year anniversary, the number of new stores added each year is almost on par with the past year.
But Kudi's new store seems to be unable to open. At the end of February this year, Kudi exclusively responded to the Daily Economic News that since its opening in October 2022, there have been a total of 61 closed and terminated stores. At that time, brand monitoring data from Jihai showed that in the past 90 days, Kudi had opened 352 new stores and closed 322 new stores during that time period.
Several Kudi joint venture partners have also told reporters from the Daily Economic News that they or their affiliated partners have closed, flipped, or transferred their stores. "It's too difficult to make a profit without making a profit," they said.
And Kudi must seize his joint venture partners. According to a research report by China Merchants Securities, Kudi's current source of funds is mainly one-time cash flow provided by the opening of new stores. Each new store can provide cash flow of 100000 to 150000 yuan for Kudi, and the 3000 to 4000 stores in the first half of 2023 provided over 400 million yuan in funding. Meanwhile, in terms of markup profits in the raw material supply chain, Kudi can generate approximately 100 million yuan in revenue during the same period.
So, after launching the second brand Tea Cat and human-machine collaboration strategy, Kudi provided an attractive new story for existing and potential franchisees.
In an interview with the Daily Economic News, Zhang Shule, an Internet analyst, said, "The store in store model is a way to further expand store coverage. Kudi, which is itself a fast-food model, can effectively reduce costs and increase efficiency by further compressing stores and tying sales. After all, the channel cost has been limiting Kudi's capital chain, and further flattening will enable its 9.9 yuan price war to continue for a period of time."
Luckin and Starbucks are struggling to make money, and Kudi is intensifying its price war: how long can a 9.9 yuan coffee last?
Indeed, Kudi still doesn't want to give up his "trump card" - low price.
On April 29th, Kudi announced that the current store subsidy policy will be extended until December 31st, 2026, covering existing stores and future new stores. Different stores can receive different amounts of subsidies based on factors such as rent and competition, with a maximum subsidy of 14 yuan per cup.
What factors are the basis for extending the subsidy policy period?
On May 22, in an interview with the Daily Economic News, Kudi Coffee stated that it believes that the Chinese coffee market is still in its early stages. Therefore, Kudi has decided to extend the subsidy policy for joint venture stores until the end of 2026. "During this period, providing subsidies to joint venture stores is to further ensure and improve their profitability, and we believe that two years is a reasonable and necessary time.".
In addition, on May 21st, Kudi announced the start of a three-month "summer fruit and coffee season", with all drinks priced at 9.9 yuan on unlimited promotion, except for a few special stores.
Kudi Coffee stated that the "summer fruit coffee season" is one of the measures to cultivate the market, and it is also a decision based on market feedback obtained from the previous global 7000 store 9.9 yuan promotion. During this stage, the company has achieved good results in store sales, customer size, customer repurchase and other indicators. Therefore, it has been decided to extend the promotion for three months. According to Kudi, the overall performance of stores in the first quarter of this year was good, with over 95% of stores having positive cash flow in April.
But other coffee brands involved in the price war are no longer fighting.
According to the financial report, Luckin achieved a revenue of 6.278 billion yuan in the first quarter of this year, a year-on-year increase of 41.5%; The net loss was 71.42 million yuan, and the net profit for the same period last year was 564 million yuan. Regarding the performance drop this time, Luckin CEO Guo Jinyi explained during a conference call, "Due to seasonal and intense industry competition, profits have declined."
Therefore, Luckin's "9.9 yuan for a drink" activity did not last for at least two years as promised by Guo Jinyi during the financial report conference in August 2023. The activity has been shrinking since the beginning of this year.
Meanwhile, Starbucks, which has always symbolized high-end, also finds it difficult to stand alone.
On May 1st, Starbucks released its financial report for the second quarter of the 2024 fiscal year (January 1st to March 31st, 2024). The financial report shows that the company's Q2 revenue was 8.56 billion US dollars, a year-on-year decrease of 2%; The net profit was 772.5 million US dollars, lower than the 908.3 million US dollars in the same period last year.
It is worth noting that the company's same store sales in the first quarter decreased by 4% year-on-year, marking the first decline since 2020, with a market expectation of a 1.46% increase. Among them, sales in US stores decreased by 3% year-on-year, while sales in Chinese stores decreased by 11% year-on-year.
Starbucks CEO Nasihan explained the performance fluctuations in the Chinese market during the financial report conference call: "Macro pressures have led to a decrease in traffic this quarter, which has been affected by occasional customer reductions, changes in holiday patterns, a highly promotional environment, and the normalization of customer behavior since the reopening of the market last year."
During the reporting period, the 90 day active membership scale of China's sinking market grew rapidly, with a growth rate exceeding that of high tier cities. Its huge market potential has led Starbucks to make China's counties the next development focus.
Under the combined influence of internal and external factors, Starbucks has also had to embark on the path of exchanging price for quantity, launching various discount coupons such as "55.9 yuan three cups" and "45.9 yuan two cups" to compete for more market share in the industry that has been rewritten by the "9.9 yuan promotion". The stock price of Starbucks fell by nearly 14% before the first quarterly report was released in the U.S. stock market, and its market value evaporated by more than 100 billion yuan from the previous day, which was the largest decline of Starbucks' stock price since the outbreak of COVID-19 in March 2020.
For this price war that has been going on for a year, Zhang Shule said that using a price war to cut the stock market to the extreme, especially Starbucks' market, to ensure the continuous expansion of its own scale has become the current choice of Kudi and Luckin; Price wars also have a role in incubating users and exploring incremental markets. After all, coffee consumption is still relatively niche in China. "Kudi tasted the sweetness through price wars, but at the same time, there is no other choice.".
"The price war will continue, and Starbucks has also made moves under revenue pressure. It is currently in a strategic stalemate and will continue for a period of time, unless either Coody or Luckin can completely break the deadlock or be forced to withdraw," he said.
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