Luckin Coffee raises prices, "backstabbing" migrant workers returning home

From the initial price cuts to snipe Kudi Coffee to the current price increase strategy after establishing its advantage in the number of stores, Luckin's move not only affects consumers, but also marks the end of the price war in the coffee industry. This article will deeply analyze the business logic behind Luckin's price increase, the changes in the industry structure, and the new market competition challenges it faces, and explore Luckin's way of survival in the post-price war era.

This year's Spring Festival, young people who returned home for the New Year found that many new Luckin Coffee stores had opened in their hometowns, and the prices had also increased.

In fact, if you are a worker who often drinks Luckin Coffee, you should have discovered that the price of Luckin Coffee varies in different cities, stores, and even at different times in the same store due to different coupons and promotions. However, before 2025, most of Luckin Coffee will cost around 10 yuan regardless of the discount.

Until after New Year's Day 2025, the original prices of many of Luckin's products have been raised by about 3 yuan, and the price of the cheapest American coffee after coupons will "easily" exceed 10 yuan.

The workers who were "backstabbed" cried, but practitioners and investors laughed.

Luckin's initial price cut was to counter the 9.9 coffee war launched by Kudi in Q1 2023. Luckin now has more than 20,000 stores, far ahead of Kudi's more than 8,700 stores. But Luckin's price was to sacrifice some profits. As more and more stores were opened, same-store sales showed negative growth for three consecutive quarters.

The purpose of price reduction is to snipe the opponent, and the purpose of price increase is to end the war. At the time when Luckin Coffee raised its prices, Starbucks was reported to be considering selling its domestic business, and Cudi announced the suspension of investment in the "store-in-store" franchise model, which was regarded by the industry as the end of the price war after nearly two years.

Luckin's stock price has risen to $38 per share at its peak in the past two years, and now it is stable at around $28 per share. Some investors predict that as the weather warms up in March, Luckin's stock price will further recover. However, with the advent of the new tea beverage industry listing boom, the problems left for Luckin are gradually increasing.

01 Luckin Coffee in my hometown has also quietly raised its prices

Huahua, who returned to her hometown from Beijing for the Chinese New Year, saw that a new Luckin Coffee store had opened downstairs from her home. When she was about to have a drink, she discovered that Luckin Coffee in her hometown had also increased its prices, with the same increase as in Beijing.

The original price of some Luckin Coffee products has been increased by about 3 yuan. Specifically, products with an original price of 23 yuan, such as American coffee, have increased to 26 yuan, products with an original price of 26 yuan, such as latte, have increased to 29 yuan, and products with an original price of 29 yuan, such as the popular single product raw coconut latte, have increased to 32 yuan.

Previously, the threshold for using its iconic 9.9 yuan coupon has been raised, and only one coupon can be received per week, and the scope of application has been reduced from all products to three coffees (standard American, latte and oat latte) and three juices, and light milk tea. Some netizens complained that the products they often ordered could not be used with the 9.9 yuan coupon.

At the same time, Luckin Coffee's card has also changed to a tiered pricing system with a one-month validity period. Some users said that they used to buy a card for 10 cups for 99 yuan, and after using it a few times and returning the remaining times, they were refunded at an average price of 9.9 yuan. Now they want to refund in advance, and the price per cup has become 12.9 yuan.

Regarding this wave of adjustments, Luckin Coffee’s official customer service told the media that they have not received any notification of a unified price adjustment. The different promotions at each store will lead to differences in coffee prices. The specific price is subject to the display on the APP.

Image source: Luckincoffee Ruixing Coffee Weibo

Although Luckin Coffee has not publicly announced a price increase, there are several costs that cannot be ignored.

First, the supply price of raw coffee beans continues to fluctuate. The cumulative increase in the price of US ICE coffee futures in 2024 exceeded 70%, far exceeding the increase in gold during the same period. According to statistics from "Focus One", Luckin Coffee provides about 35 SKUs of coffee drinks and about 20 SKUs of non-coffee drinks.

The second is its operating costs. According to the financial report, Luckin Coffee's store rent and other operating costs in the third quarter of 2024 increased by 60.3% compared with the same period in 2023, delivery costs increased by 57.9% year-on-year, and material costs increased by 24.9% year-on-year.

"Luckin Coffee's pricing has always been high, but it will continue to offer discounts to you." Consumer track investor Chen Lin told "Focus One" that this continuous discount comes from, on the one hand, Luckin will use big data to issue coupons, and send different coupons based on the user's consumption habits and purchase frequency, the store's geographical location, customer flow and the pricing of surrounding competitors. On the other hand, different franchisees have different subsidies, resulting in price differences in different stores.

He said that different prices in different stores can be considered price discrimination to a certain extent. However, this also makes consumers assume that the price of coffee will fluctuate every day, so they are not particularly sensitive to prices. They will only think that the discount they get today is smaller, not that the price has increased.

Luckin Coffee’s price increase this time has made workers feel “stabbed in the back”, but Ale, a coffee industry practitioner, believes that it will not have much impact on user churn rate in the long run.

First, Luckin has educated its users. Many people started drinking coffee from Luckin, and Luckin has a high store coverage rate. Users think of the Luckin brand as "the most cost-effective coffee in office buildings." There is no better alternative brand in the short term. Second, there have been regional cheaper coffee brands in the past, but from a global perspective, the Luckin brand is actually quite strong.

02 Why did Luckin Coffee withdraw from the price war?

Luckin Coffee chose to raise prices at this point in time, not only out of the need to stabilize its own profits, but also out of consideration for changes in the industry's competitive situation.

This wave of price war started two years ago.

Kudi Coffee opened its first store at the end of October 2022. This project continued the founder Lu Zhengyao's previous strategy of "low price for scale", using low prices to attract users and increase customer traffic, thereby attracting franchisees to join. In February 2023, Kudi launched a price war of 9.9 yuan.

Luckin Coffee hesitated about the price war. In 2022, the unit price of Luckin Coffee's coffee cups was about 15 yuan. If it fought, the price would drop to 9.9 yuan, which meant that the price it had raised with great difficulty would fall again. If it didn't fight, no one in the Luckin Coffee team wanted to lose to the Lu Zhengyao team, which had a close relationship with Luckin Coffee.

In the face of Kudi’s “9.9 yuan promotion for the whole store” slogan that has lasted for three years, Luckin Coffee launched a “9.9 yuan for a cup” coupon in a small area around Kudi Coffee in April 2023 on the pretext of its anniversary store celebration, and promoted it to all stores nationwide in June. In August, Luckin Coffee began to promote 9.9 yuan coupons on Douyin. In the same month, Luckin Coffee Chairman and CEO Guo Jinyi said at the performance meeting that the 9.9 yuan activity would be normalized and “last for at least two years.”

After the 9.9 yuan event, data showed that based on a rough calculation of Luckin's store revenue/total number of cups in 2023, the latest unit price of a cup is about 13 yuan. Luckin's costs are relatively fixed, and in order to snipe its competitors, the unit price of a cup is reduced by more than 2 yuan, which is equivalent to a profit of more than 2 yuan per cup.

In order to snipe its competitors, Luckin is still frantically grabbing locations. Luckin opened a total of 8,034 stores in 2023, and by the third quarter of 2024, the total number of stores has exceeded 20,000.

The crazy expansion of stores and the 9.9 yuan price war have brought negative effects: more new stores have been opened, which has affected the order volume and customer flow of old stores. The 9.9 yuan price war has lowered the average selling price, further reducing sales. Among them, the same-store sales of self-operated stores (sales of stores that have been open for a certain period of time) have shown negative growth for three consecutive quarters in 2024, but it has narrowed in the third quarter.

Chen Lin said that Luckin Coffee is still mainly operated directly, and needs to bear the pressure of reducing profits for every cup of low-priced coffee sold in the store. At the same time, Luckin Coffee also has to subsidize the low-priced coffee of franchisees. In other words, the more low-priced coffee a store sells, the more Luckin Coffee's profits will be diluted.

A year after the price war was launched, Luckin Coffee suffered a net loss of 82.3 million yuan in the first quarter of 2024, ending six consecutive quarters of profitability. It then reduced its "9.9" efforts and returned to profitability in the second quarter, but profits continued to be under pressure. In the third quarter of 2024, Luckin Coffee's net profit was 1.303 billion yuan, with a net profit margin of 12.8%, lower than 13.7% in the same period last year.

Previously, Luckin Coffee tried to increase the number of orders in its stores and supplement operations during the afternoon tea period by making milk tea, but the effect on improving profits has not been obvious at present. Price increases may have a more direct effect on increasing profits.

In addition to price adjustments, Luckin also slowed down its store openings. In Q2 2024, Luckin's store openings slowed down to 1,371 from 2,342 in Q1, and the net opening of new stores in Q3 was 1,382, which was basically the same as in Q2.

Chen Lin pointed out that Luckin Coffee's price increase for some of its products and slowed store openings were precisely timed to buy itself some breathing space, and also basically announced the end of the price war in the coffee industry.

On the one hand, Luckin has more stores than Kudi, and there are not many vacancies in the market. It is basically meaningless to increase the number of stores. According to data from Zhaimen Canyan, Kudi currently has 8,723 stores, less than half of Luckin, and Kudi temporarily stopped recruiting merchants for the "store-in-store" model in December, which means that its store opening speed will slow down further.

On the other hand, there was news before the New Year that Starbucks was informally evaluating potential investors' interest in its Chinese equity. Starbucks may sell part of its Chinese business equity or operate its Chinese business independently. Luckin Coffee has lost another direct competitor in the Chinese market.

However, Kudi has no intention of "trucing the price war" yet. Recently, Li Yingbo, chief strategy officer of Kudi Coffee, said that the company has no plans to increase prices and will stick to the 9.9 yuan price strategy.

Ale believes that Kudi has to maintain low prices. Once the prices are raised, the sales of franchisees will be directly affected. "But Kudi cannot withstand any impact of any franchisee 'store closing wave'."

03 After quitting 9.9, Luckin Coffee and others collectively seek a way out

In China's industry environment, price wars seem to be an inevitable link. In addition to the coffee industry, e-commerce, local life, catering and new tea drinks have all seen price wars. When there are many players in an industry and giants emerge, new challengers will often launch price wars.

Price wars are a powerful weapon for these players to compete for users and educate the market, but price wars will inevitably have victims. "For the industry, price wars will drive out good money with bad money. As long as new players join, the low-price game will be played all over again, falling into a vicious cycle, and no one will 'win' in the end," said Ale.

At present, a number of independent coffee shops and small-scale coffee chain players in the coffee and new tea beverage industry have been eliminated due to this round of price war. Chen Lin believes that by 2025, the pattern of the coffee industry will be basically stable, and the head effect of brands will be more concentrated.

More and more coffee and tea brands have stopped price wars. The prices of some drinks and desserts of Mixue Bingcheng have increased by 1 yuan; Heytea and Starbucks have all shouted the slogan of "giving up price wars"; on Tims Coffee's official mini program and third-party takeaway platforms, some bagels have increased by 2 yuan, and some meal sets have also been increased in price.

Since the fourth quarter of 2024, the giants in the catering industry have begun to launch an "anti-low price" campaign, due to comprehensive considerations of multiple factors such as cost control and quality improvement.

For example, KFC raised its prices by 2%, with the specific adjustment ranging from 0.5 yuan to 2 yuan; McDonald's added a packaging fee, charging a packaging service fee based on the number of items; some products of Saizeriya also increased in price. The price of the porcini chicken cheese baked rice, which used to be priced at 18 yuan per serving, has slightly increased to 20 yuan; the price of tuna salad, which used to be priced at 11 yuan per serving, has increased to 12 yuan.

The end of the price war means a return to healthy business development. Next, brands should seek to improve quality, differentiate and innovate their strategies.

Back to Luckin Coffee itself, although it currently has the largest number of stores in the coffee industry, it faces a lot of competition.

Image source: Luckincoffee Ruixing Coffee Weibo

An investor analyzed that Luckin Coffee adopted a low-price strategy when it was first established, and later successfully raised prices once because it launched popular products such as the raw coconut latte, which made it natural to raise prices. "New products mean that no one has ever tried them, and the brand can define the price range of new products by itself. Even if it is higher than the regular category, as long as it tastes good, users are willing to pay for it."

Similarly, if Luckin Coffee wants to raise prices now, it depends on whether it can continue its previous ability to launch new products. Luckin Coffee has been constantly launching new products, and has also had "short-term hits" such as the sauce-flavored latte, but it is not easy to replicate the next "classic long-selling hit" similar to the raw coconut latte.

Another competitive point is that directly-operated stores currently account for the bulk of Luckin's revenue. As Luckin continues to increase the number of stores in first-tier cities, the focus of store expansion will be on third-tier cities and below, mainly franchise stores. These markets will be advantageous markets for the new tea drinks.

Since 2022, the growth rate of Luckin's franchise stores has exceeded that of its own stores. By Q3 2024, Luckin had a total of 7,407 franchise stores, accounting for 34.7% of the total number of stores. At the same time, Luckin has single-handedly turned coffee into milk tea, and launched lemon tea and light milk tea products in mid-2024, and is constantly launching new products. Its categories and locations (especially in the sinking market) will compete with existing milk tea brands.

2025 is the first year for new tea drinks to be launched on the market. These new tea drink brands are also collectively trying and expanding their coffee sub-brand lines. For example, Mixue Bingcheng, the king of sinking, has Lucky Coffee. Gu Ming, which also has a high penetration rate in the "free shipping zone" provinces of the sinking market, also has its own coffee SKU. Milk tea and coffee will definitely have a battle in 2025, and the industry will continue to be exciting.

Author | Su Qi Editor | Wei Jia