It's time to determine the winner in the price war between Luckin Coffee and KFC | Jianzhi Research

In 2023, the chain coffee industry is booming.

With the opening of Luckin Coffee's 10,000th store, the first domestic coffee brand with 10,000 stores is born. Luckin Coffee's new competitor, Coodi Coffee, has opened nearly 7,000 stores in one year, approaching Starbucks in terms of quantity. They have also signed endorsement deals with Fan Chengcheng and Wang Yibo, igniting a frenzy among fans...

Major chain brands are constantly innovating in product, expanding their store network, and engaging in co-branding and marketing collaborations, collectively driving the growth of the coffee economy.

Even Vans, Ray-Ban, and LV are entering the coffee race through collaborations with coffee brands or opening experiential stores, attempting to stir up the consumption desire of the younger generation.

(Left: "Motor Sister" buying Coodi Coffee for Wang Yibo merchandise, Right: LV×Manner co-branded newsstand attracting many young people for photo ops, image source: Xiaohongshu)

However, not all players in this industry are expanding aggressively. In 2023, a large number of coffee shops have closed down. According to statistics, as of September last year, there were a total of 77,083 new coffee shops, but the net increase was only 42,450. This means that nearly 35,000 stores were eliminated in the competition.

The coffee industry is experiencing a surging wave, with ups and downs, some achieving milestone performance while others exit the stage in disappointment.

Current Situation: Cross-border collaborations and expansion, a hot market

In 2023, major chain coffee brands have launched ambitious expansion plans, with "expansion" becoming the keyword in the coffee industry. As of September last year, the total number of freshly brewed coffee shops in China exceeded 170,000, and it is expected to exceed 240,000 by 2027.

Luckin Coffee, Starbucks, and Coodi are the top three in terms of scale, with Luckin Coffee and Starbucks increasing their number of new stores by 2.3 times and 1.2 times respectively compared to 2022. Luckin Coffee has become the first domestic coffee brand to surpass 10,000 stores, while Coodi is catching up with Starbucks in terms of store count.

(Number of major coffee brand stores as of the end of December 2023, data source: Narrow Gate Restaurant Eye, Huaxin Securities Research Institute)

Concerns have also arisen: has the competition among coffee shops entered a white-hot stage similar to the new tea beverage market?

In the eyes of most industry insiders, there are significant differences between the two. Some believe that the coffee market is still in the cultivation stage, with significant room for increased consumption frequency. Moreover, the coffee market has a higher concentration compared to the tea beverage market, making it a more attractive investment opportunity.In 2023, there were 24 financing cases in the coffee industry, with a total amount of 1.731 billion yuan, making it the hottest consumer sector in China.

It is also more common for new tea beverage brands to enter the coffee industry after the capital tide recedes. According to statistics, at least 7 new tea beverage brands have established their own coffee business lines, with 6 of them launching coffee sub-brands. Among them, the earliest coffee sub-brand launched by HEYTEA, "Lucky Coffee," has the second-highest number of stores after COFFiiD.

However, behind the cross-industry expansion of many brands, the coffee business is not as easy as it seems.

On the one hand, industry leaders continue to engage in price wars. The battle between Luckin Coffee and COFFiiD over the 9.9 yuan and 8.8 yuan strategies has been going on for nearly a year. How long can this strategy of burning money for market share last?

On the other hand, under the expansion and dominance of "price wars," the survival of the fittest in the coffee industry is evident. Many boutique and independent coffee shops closed in 2023. Where will their path lead?

The emergence of the B-side of the coffee industry: rapid store expansion, supply chain slowdown

In 2023, the most exciting and closely watched aspect of the coffee market was the price war between Luckin Coffee and COFFiiD.

Starting from the second quarter of last year, the price war between the two, with prices of 8.8 yuan and 9.9 yuan, began. At first, this did not have a significant impact on Luckin Coffee's performance. The low prices, combined with the summer peak season, actually led to the best quarterly profit performance, far exceeding market expectations.

However, the situation changed in the third quarter.

Despite the phenomenon of the "Sauce Latte" becoming a hit product in the third quarter, Luckin Coffee still couldn't escape the long-term impact of the price war on its profits. In addition, the diversion of new stores opened at a high speed and the arrival of the industry's off-season in winter led to a further decline in overall operational data, including key indicators such as same-store sales growth rate and store profit margin.According to third-party data in November, Luckin Coffee's daily cup volume has dropped to below 450 cups, which is worse than market expectations. Market concerns mainly focus on two aspects:

First, although Luckin Coffee introduces new products quickly and has popular genes, the coffee industry has low barriers to entry and severe product homogeneity. Luckin Coffee has launched a total of 65 new products, twice as many as Manner and Costa, and more than KFC and Starbucks. However, the hot-selling products of major brands are mainly latte. How can Luckin Coffee create a "Coconut Latte"? It may be unknown to many people, but Luckin Coffee's new product co-branded with Maotai was launched last week. The new product is called "Sauce Chocolate" with the gimmick of "the first cup of Maotai in the Year of the Dragon". However, the publicity of this co-branding is much smaller than the previous one. Obviously, marketing methods based on cross-border and novel flavors can no longer easily arouse consumers' curiosity. After the novelty wears off, the repurchase intention is also not high.

Second, the market is concerned about whether Luckin Coffee will continue to "stick to the end" if KFC continues the price war. In fact, long-term price wars in any industry are not realistic. They are just a means of exchanging market share for short-term profits, especially when KFC also has its own difficulties. Recently, there was a complaint from a joint venture partner on Xiaohongshu, which directly pointed out problems such as KFC's supply chain disconnection and frequent out-of-stock issues. This letter resonated with some joint venture partners and consumers.

Zhitong App once analyzed in the article "Earnings Report: Luckin Coffee earns 1 billion in a single quarter! With the price war against KFC, Luckin Coffee wins again" that KFC's business logic is similar to that of Luckin Coffee, both of which rely on the low-cost and fast store opening model of franchisees to obtain financial support and operational integration supply chain capabilities, thereby reducing costs in all aspects and running a healthy single-store model to achieve positive profitability.

But this is also a double-edged sword. Although rapid expansion in the short term can occupy advantageous positions, if the expansion speed is too fast and the supply chain capabilities cannot keep up, it will result in a longer payback period for franchisees and continuous subsidies. Luckin Coffee also carried out large-scale optimization of stores in 2021, and the average price rose to 14 yuan. Only when the gross profit margin reached 60%, the operating cash flow tended to balance.

Looking at Kudi, although there is no specific data disclosure, the year-long price war and the high cost of top-tier endorsements, industry estimates suggest that the marketing expenses alone reach as high as 100-150 million yuan per quarter.

Furthermore, the recent actions of forcing joint venture partners to give discounts and automatic delivery can also roughly infer that Kudi's current cash flow situation is not optimistic.

A game that solely burns money cannot last long.

Boutique and Independent Coffee Shops Continue to Struggle

The head-on price war has also accelerated the industry's consolidation.

The first to be affected are high-end boutique coffee brands such as NOWWA, Pacific Coffee, and Seesaw.

According to statistics, the number of NOWWA coffee shops has decreased by more than 500 since the end of 2022; Pacific Coffee has been opening fewer stores each year for the past three years, with a one-third reduction in scale in 2023; there have also been rumors of widespread store closures for Seesaw Coffee.

Luckin Coffee's entry has indeed changed the coffee consumption mindset of a large number of people. These boutique coffee shops have not had the time to cultivate a Starbucks-like customer base, nor have they been able to create a hit product like the Coconut Latte. Their brand marketing has also fallen behind, naturally facing elimination.

Countless independent coffee shops have also been impacted by low-priced coffee. Among them, weaker individual coffee shops that have not been able to establish a taste advantage in the face of product homogeneity are facing rising rental and labor costs, as well as intensified industry competition, leading to large-scale closures.

According to Meituan's statistics, in Shanghai, which has the highest number of coffee shops globally, the number of independent coffee shops has decreased for the first time this year, dropping from 60.1% last year to 55%.

Clearly, in 2024, these boutique and independent coffee shops will continue to "survive in the cracks" of the cost-effectiveness strategies of chain brands, and it is also time for the price war between chain brands to determine the winners and losers.