After the first year of "rolling wins" with Starbucks, Luckin Coffee still faces challenges in low-price competition.

Under the strategy of prioritizing scale, Luckin Coffee has not stopped its expansion.

On February 23, Luckin Coffee (LKNCY.OTC) released its 2023 full-year performance and fourth-quarter financial report. The annual revenue reached 24.903 billion yuan (approximately 3.45 billion U.S. dollars), an increase of 87.3% year-on-year, with fourth-quarter revenue of 7.065 billion yuan, a 91.2% year-on-year increase.

As a result, Luckin Coffee's annual revenue surpassed Starbucks China's 3.16 billion U.S. dollars for the first time.

Over the past year, Luckin Coffee's pace of opening stores has been accelerating.

By the end of 2023, Luckin Coffee had a total of 16,248 stores, nearly doubling year-on-year. In the first to third quarters of 2023, Luckin Coffee added 1,137, 1,485, and 2,437 stores respectively. In the fourth quarter, the number of new stores reached a record high of 2,975.

However, along with Luckin Coffee's aggressive expansion, some "side effects" have emerged.

On one hand, according to sources close to Luckin Coffee, 60% of its new stores in 2023 were "shadow stores," meaning they were opened within a 500-meter radius of existing stores, impacting the traffic of older stores.

On the other hand, the price war in the coffee industry is far from over, and continuous discounts have had a negative impact on Luckin Coffee's profit margins.

In 2023, Luckin Coffee's store operating profit margin decreased by 2.1 percentage points year-on-year to 22.2%. In the fourth quarter, the profit margin of Luckin Coffee's self-operated stores dropped significantly by 8.1 percentage points to 13.5% compared to the same period last year.

Liu Yuenan, an analyst at CICC, believes that due to seasonal factors, the "Celebration with Ten Thousand Stores" promotion, adjustments to franchise subsidies, intense industry competition, and accelerated store openings, Luckin Coffee's operating profit margin in the fourth quarter declined both year-on-year and quarter-on-quarter.

During the performance briefing after the financial report was released, Luckin Coffee's management acknowledged the significant drop in profit in the fourth quarter, stating that it is both an industry norm and in line with the company's strategic expectations. Luckin Coffee stated that it will continue to expand market share while rewarding users according to its established strategy.

Previously, Luckin Coffee CEO Guo Jin had publicly stated that the 9.9 yuan coffee promotion would last for at least two years. However, during this performance briefing, there was no further statement regarding promotional activities.

Some consumers have noticed that Luckin Coffee has recently adjusted its promotional activities by moving the 9.9 yuan coupon to a secondary menu, significantly reducing the discount. About half a year ago, the 9.9 yuan coffee promotion launched by Luckin Coffee was widely seen as targeting KFC, which had already opened over 5,000 stores at that time. TradeWind01 reached out to Luckin Coffee for inquiries about any other arrangements for promotional activities, but as of the time of publication, there has been no response from the other party.

Interestingly, just two days after Luckin Coffee released its earnings report on February 26th, KFC seemed to be sending a message across - announcing that its global store count had reached 7,000 and would launch a promotion called "Good Coffee All for 9.9 Unlimited".

At the same time, KFC is providing different subsidies to franchisees based on factors such as store location and rent, with the highest subsidy per cup reaching 14.5 yuan. The total estimated subsidy for the promotion is expected to reach 200-300 million yuan.

For Luckin Coffee, which is "closely monitoring" store profit performance, whether to "follow or not" KFC's move may prove to be a difficult decision.

After releasing its earnings report on February 23rd, Luckin Coffee saw a 0.98% decline in the pink sheet market, closing at $23.76 per share.