Why does coffee in China cost 9.9 yuan?

From international brand Starbucks to local chain Luckin Coffee, and then to emerging brand Kudi, the coffee price war is intensifying. This article deeply explores the business logic and market impact behind this price phenomenon, reveals why 9.9 yuan has become a standard price in the Chinese coffee market, and how this change has reshaped the business model and competitive strategy of the coffee industry.

My friends, Starbucks may really be on the verge of collapse.

A few days ago, news broke that Starbucks is studying the possibility of selling equity in the Chinese market and has even begun evaluating which potential investors can take over.

Brothers, in two years, maybe Starbucks China will be a state-owned enterprise and the people's coffee.

As for why they want to sell themselves, the reason is very simple. In the face of the 9.9 yuan coffee everywhere, the 20 or 30 yuan Starbucks is really no match.

Nowadays, in China, no cup of coffee can escape the curse of 9.9 yuan. Anything higher than this price has to spend a lot of effort to convince consumers that it is worth the price, otherwise we can turn left and find a more cost-effective option.

So, why has 9.9 yuan become the standard price for coffee in China?

01 Cudi's Revenge

The originator of the 9.9 yuan price scam is not Luckin Coffee, but Cudi.

In February 2023, Kudi Coffee launched a "Coffee Carnival in Hundred Cities and Thousands of Stores", raising the price of a single cup to RMB 9.9 for the first time.

How can a new brand that is only four months old have the confidence to charge 9.9 yuan?

The reason lies with the franchisees.

Lu Zhengyao, the founder of Kudi, is also the founder of Luckin Coffee. Now that Luckin Coffee has become so big, most of the legacy is left by Lu Zhengyao.

But after the financial fraud incident, Boss Lu was kicked out by investors. So the creation of Kudi is more or less like the story in martial arts movies, where the most trouble-making elder brother is expelled from the sect and wanders around the world looking for revenge.

It just so happens that this senior brother has a full set of "Luckin Coffee Secrets" with him. As long as he has financial support, it will not be difficult for him to open a small account and rebuild the mountain gate.

Since its inception, Kudi, like Luckin Coffee, has used a thorough data-driven + Internet approach to run its coffee shops. The data on everything from account income and expenditure, profit calculations to the profit and loss of each product, to specific sales analysis and hourly order volume are all very clear.

Relying on data, Kudi can accurately control the profit and loss of a single cup of coffee.

Kudi executives have long disclosed the cost structure of a single cup of coffee. The price of a cup of coffee includes the cost of raw materials, rent, labor, and water and electricity expenses.

The cost of coffee beans is about 2 to 2.5 yuan, plus milk syrup and packaging materials, the total cost of raw materials is 5.5 yuan. As for other expenses, based on the sales of 400 cups per day in a single store, the labor cost per cup of coffee is less than 2 yuan, and the water, electricity and miscellaneous expenses are about 0.2 yuan.

As for rent, with the experience of Luckin Coffee, Kudi basically does not open large stores, but only quick-service stores of 20 to 30 square meters. Therefore, the rent cost of a cup of coffee is 1.25 yuan.

Adding up, 5.5 yuan (raw materials) + 0.2 yuan (miscellaneous expenses) + 2 yuan (labor) + 1.25 yuan (rent) = 8.95 yuan, and the cost of a cup can be kept at around 9 yuan, which means that the price of 9.9 yuan is just at the break-even point. It won't lose money on each cup sold, but it definitely won't make much money.

Moreover, the above figures are based on the assumption that a single store can sell 400 cups per day.

It can be said that for a 9.9 yuan cup of coffee, 400 cups must be sold a day. 400 cups is the life and death line for small stores + large chains like Kudi and Luckin Coffee.

So, could Cudi, who was only 4 months old at the time, cross this line between life and death?

Of course not.

400 cups per day is not a small number. Even for today's Kudi, according to official disclosure, the daily cup volume of regular stores is about 300-450 cups, which means that many stores cannot pass this life-and-death line.

Moreover, this life-and-death line has an invisible condition, that is, the number of stores must be large, and the supply chain must rely on large-scale procurement to keep the price of raw materials down.

Now, Kudi has more than 10,000 stores and is a major purchaser. But more than a year ago, suppliers were not necessarily willing to give Kudi the lowest price.

What to do? Lu Zhengyao has a solution.

Some media reported that when Lu Zhengyao founded Kudi, he took away a lot of information and contact information of Luckin's potential franchisees. These people were originally interested in Luckin, but Luckin did not accept them, so they were intercepted by Kudi.

In addition, when Kudi was recruiting investors in the early days, it was emphasized that the founder and team of Kudi Coffee were the original team of Luckin Coffee, and the products and supply chain were the same as Luckin Coffee. Many franchisees joined Kudi because they actually regarded it as a substitute for Luckin Coffee.

With this trick, Kudi expanded its stores very aggressively in the early days, opening three to four thousand stores in just a few months. With the scale, costs came down.

And with the support of franchisees, Kudi dared to engage in a price war with Luckin Coffee from the very beginning. At the beginning, it was 9.9 yuan, then 8.8 yuan, and now it is 9.9 yuan for all drinks.

Even if many stores cannot reach the life-and-death line of 400 cups for a long time, it will not affect the business of Cudi's parent company, because it is the franchisees who are bleeding anyway.

It can be said that Lu Zhengyao is Kudi’s irreplaceable core asset.

Even if other coffee chain brands can learn from Luckin Coffee in terms of stores, products, and style, they cannot copy the entire Luckin Coffee philosophy like Kudi did, as if he had opened the Sharingan. It is even more impossible for them to explore a radical gameplay based on Luckin Coffee, such as killing one thousand enemies at a cost of 9.9 yuan but losing 800 yuan.

If Cudi's 9.9 yuan price is a declaration of war against Luckin Coffee, then the subsequent plot is that the entire industry, whether in the coffee business or not, are all caught up in this meat grinder-like coffee war.

02 The spread of 9.9 yuan

Faced with Cudi's suicidal charge, Luckin Coffee was a little confused at first.

Some media reported that just after Lu Zhengyao offered the 9.9 yuan price, Luckin's second-generation CEO Guo Jinyi was about to follow suit. However, he was stopped by the investment institution that actually holds the majority of the company's shares.

Investors think that Ruizi’s financial data is very good. Thanks to the hard work of Raw Coconut Latte, the company has been profitable for two consecutive years. If it continues to work hard, it may be able to return to the US stock market, and our old investors can also get out of the predicament.

At this juncture, Lao Guo, you must not fall into Lu Zhengyao's trap and try to destroy the financial report by selling it for 9.9 yuan.

Besides, no matter how awesome Kudi is, it's just a new brand that's been established for four months, with less than a thousand stores. There's no need for us to make a big fuss.

As a result, Luckin Coffee was a step slow in its response and did not follow up on the 9.9 yuan war in the second quarter of 2023. Instead, it simply banned the company's upstream suppliers from providing services to Kudi.

This hesitation gave Kudi a glimmer of hope. Lu Zhengyao led Kudi to open 3,000 stores in one quarter. By the time Luckin found that Lu Zhengyao's revenge had reached its feet, the brand had already become a super player with 4,000 stores.

Faced with the continuously deteriorating competitive situation, Luckin Coffee began to fully follow the 9.9 yuan price.

Luckin Coffee's response gave Cudi more motivation to be more aggressive. Since you also offer 9.9 yuan, we will be more brutal and offer 8.8 yuan to see who can be the biggest.

Moreover, we cannot stop opening stores. Regardless of whether it makes money or not, we must first let the franchisees suffer. According to media reports, the most powerful investment promotion staff of Kudi single-handedly negotiated the franchise of 80 stores in one year. By the first anniversary of Kudi's establishment, the number of stores had exceeded 6,000.

Faced with Kudi's suicidal price war and store expansion war, Luckin had to increase the issuance of 9.9 yuan coupons and also go deep into the sinking market to open stores, competing with Kudi for store locations around every office building, every community, and every school.

The result is that Luckin's profit per cup and average cup volume in stores both declined in the second half of 2023. Luckin, which had been profitable for two consecutive years, was pulled back below the loss line by this price war.

Fortunately, the losses were not without gain. Although Luckin Coffee could no longer strangle Kudi in one fell swoop, its expansion pace was temporarily curbed. For a period of time, the number of its stores remained at around 6,000 to 7,000, without further growth.

This 9.9 yuan price war seemed to have reached a brief stalemate in the winter of 2023.

But these two coffee companies are not the only ones in the Chinese market.

Although neither of them can kill the other, the two brands have a combined number of more than 20,000 stores (now more than 30,000), a scale that is enough to change the minds of Chinese consumers and re-establish price anchors.

When 9.9 yuan became the "standard price" for coffee, every coffee chain with a little capital had to choose to lower the price to 9.9 yuan or even lower, otherwise they would have to give up their coffee business.

CoCo followed suit, as did Nova Coffee. McDonald's and KFC couldn't wait to separate their "McCafe" and "KFC Coffee" brands and launched coffee at single-digit prices.

Convenience stores like FamilyMart now simply sell freshly ground coffee and sandwiches in packages, and the price is still 9.9 yuan.

Tims, a Canadian coffee chain that originally focused on the high-end market, also chose to use coupons to lower the price of coffee to $9.90.

Even Cudi, the founder of the 9.9 yuan ticket, has now increased the price to 9.9 yuan for the entire venue, and claims that he has made plans to keep the price at 9.9 yuan for three years.

It can be said that 9.9 yuan has become a price black hole, pulling all coffee brands to lower their prices to this range. Those who are unwilling or unable to lower their prices will have to bear the consequences of not lowering their prices.

Brands like Manner, which sells products in the 20 yuan price range, can still maintain around a thousand stores, while the number of stores of M Stand and Peel's, which sell products at higher prices, is capped at around one or two hundred.

Even worse is Seesaw, which was once a representative brand of Chinese boutique coffee. As its founder was restricted from high consumption and its stores were closed one by one, it can be said that it has withdrawn from the main battlefield of chain coffee. Along with Seesaw, there are also a large number of small coffee chains that have no ability to lower prices and can only choose to go bankrupt or shrink.

At this point, the current coffee market has become a multiple-choice question worth 9.9 yuan.

It’s either 9.9 or out.

03 Will Starbucks join the 9.9 yuan price?

Starbucks now stands at a crossroads of life and death.

If you compare the third-quarter financial reports of Starbucks and Luckin Coffee this year, you can understand how anxious Starbucks China is now.

This quarter, Luckin Coffee’s revenue exceeded 10 billion yuan, 4.6 billion yuan more than Starbucks China.

Considering that the price of a single cup of Luckin Coffee is less than half of that of Starbucks, or even only one-third, it can be understood that the number of cups sold by Luckin Coffee in a quarter is at least four times that of Starbucks.

What’s even more brutal is that in the second quarter, Luckin’s revenue was 3.1 billion behind Starbucks. Unexpectedly, in just one quarter, Starbucks couldn’t even catch up with Luckin’s taillights.

It would be fine if there was only one Luckin Coffee in China, but what is scary is that the Chinese coffee market is now full of "little Luckin Coffees".

It can be said that if Starbucks does not follow the 9.9 yuan price, or does not make more aggressive price cuts, it may not just be Luckin Coffee that will give it a beating.

But on the other hand, Starbucks' current business model means that it is impossible to accept the 9.9 yuan model.

Because Starbucks is different from any of the companies we mentioned above. It is not a coffee brand, nor is it a real catering company that sells products, but a real estate company.

Anyone who talks about Starbucks will mention the concept of its "third space", which is a space different from home and office.

The "third space" is not just a marketing concept, but a real product that Starbucks sells.

It opened a store in a commercial center, in fact, to serve as a temporary meeting room for companies that don't have enough meeting rooms, as a workstation for office workers who don't want to work at their desks, and as an interview room for recruiters who want to interview. Most of the 30 yuan per drink is paid as "temporary use of space fee".

Among all coffee brands, only Starbucks can do this business because it has too strong bargaining power on rent.

A strong international brand like Starbucks can often get a longer rent-free period and lower prices when entering some new shopping malls. In addition, they can also adopt a turnover-based deduction method to pay rent based on a share of sales. The rent cost can be controlled at around 8%.

The rental cost ratio of ordinary brand coffee shops is generally 15 percentage points higher than that of Starbucks.

If everyone is competing for the "third space", then Starbucks' cost for the most important raw material, "space", is 15 percentage points lower than that of all its competitors, making it impossible to compete.

However, all of this is based on Starbucks' unique brand appeal.

But if Starbucks joins the 9.9 yuan war one day, will it still have the brand appeal it has today? Can the investment manager of the complex still give it an extra-long rent-free period?

It's impossible, right? You're the same price as Ruizi Kuzi, so what's the point of talking about high-end, classy, ​​and brand value?

If it really did so, with its current presence of more than 7,000 stores across the country, many of which are located in the most conspicuous locations on the first floor of large shopping malls, if it dares to blatantly lower prices, the shopping malls will dare to charge it high rents, and then it will be a story of closing the stores and running away.

Therefore, it is impossible for Starbucks to really lower its price to 9.9 yuan today. Now, relying on various promotional activities or Xianyu ordering, it has reduced the price to just over 20 yuan in disguise, which is already its limit.

At this point, we can understand why Starbucks China is considering selling itself.

The only solution is to take advantage of the fact that the Starbucks brand is still worth some money, attract large investment institutions to come in, and sell it to a good family.

Moreover, referring to history, we will find that when these international chains get into trouble in the Chinese market, they can often find a way out by completely handing over to the local Chinese team and carrying out thorough localized operations.

For example, Yum China independently operates KFC, making KFC a joint-branding fanatic and the source of Crazy Four literature.

Another example is McDonald's transformed into a local enterprise, Golden Arches, and carried out digitalization and brand renewal, gaining a large number of McDonald's followers.

These cases tell us that when international brands trust the Chinese team, they may really be able to create business miracles.