Fighting in Southeast Asia, Luckin Coffee opens up a second battlefield

The expansion strategies of Chinese coffee brands Luckin Coffee and Kudi Coffee in the Southeast Asian market show different characteristics. Luckin Coffee tends to be high-end and expand cautiously, while Kudi Coffee adopts a low-price, high-frequency strategy. Both are actively exploring business models suitable for the local market.

Competition among Chinese coffee brands continues to rise, the most typical of which are Luckin Coffee and Kudi Coffee, which extended the war to Southeast Asia last year.

In April 2023, Luckin Coffee opened its first store in Singapore, a country with the highest per capita coffee consumption in Southeast Asia. Four months later, Kudi Coffee also debuted in Seoul, South Korea, where "iced American coffee runs in the blood."

In the past year, Luckin Coffee's overseas expansion was limited to Singapore, where they opened 38 stores. The next step is to expand to the entire Southeast Asia and the United States.

Kudi Coffee has gradually expanded from South Korea to Malaysia, Thailand, Indonesia, and even the United States, and currently has business in 28 countries and regions around the world.

To become a global brand, going overseas is the only way. The destinations of the two companies are highly overlapping, but it is not easy for Luckin Coffee and Kudi to capture the Southeast Asian market.

01 Two pricing logics

Both companies sell coffee, but at least overseas, they adopt completely different strategies.

In Singapore, Luckin Coffee did not continue the domestic strategy of 9.9 yuan to grab the market. Singaporeans like to drink coconut, so Luckin's popular product, Raw Coconut Latte, was also launched in Singapore. This product is priced at 8 (1 Singapore dollar is about 5.17 yuan) Singapore dollars, sold at a 20% discount; while the price of a cup of Starbucks latte in Singapore is 7.1 Singapore dollars.

Singapore is the country with the highest per capita coffee consumption in Southeast Asia, with a population of less than 6 million supporting more than 30 international coffee brands. In Singapore's hawker centers, residents can buy a 500ml cup of coffee for 1.7 SGD at a coffee shop called "Golden Taste", which is not even enough to buy a bottle of water.

If the price is a factor, Luckin Coffee is clearly no match for local brands. Luckin does not need to use low prices for market education, but in order to attract customers, new users can download the Luckin app and register to buy their first drink at 0.99 SGD, and receive a 50% discount coupon.

"Luckin Coffee actually wants to go high-end and transform into a brand store," a Kudi employee and a former Luckin Coffee employee expressed similar views to Tech Planet. "The average price of Luckin Coffee must be stable at more than 12 yuan to make a profit," said a Luckin Coffee employee.

According to LatePost, citing people close to Luckin Coffee, Luckin Coffee will not follow the domestic strategy of price wars and rapid expansion when going overseas, nor will it seek to quickly eliminate local brands, but will prefer cautious expansion.

Even in China, Luckin has reduced the types of coffee that can be purchased for 9.9 yuan. A former Luckin employee said that Luckin's stores are now upgrading and transforming into brand stores, but large stores can do more experience and service upgrades, but this means extended cost recovery and increased operating costs.

Kudi Coffee is completely different from Luckin Coffee. Tech Planet learned that the average price of Kudi Coffee in Singapore is 4-5 SGD, while a 500ml bottle of mineral water in Singapore costs 2-3 SGD. An employee said that this pricing is basically the same as Luckin Coffee.

In Thailand, a cup of Kudi coffee costs about 50 Thai baht (about 10 yuan). In Indonesia, a cup of coffee costs 18,000 Indonesian rupiah (about 9 yuan), only one-fifth of Starbucks. In South Korea, Kudi started to offer discounts as soon as it went online. During the promotion period, iced Americano cost 800 won (4.24 yuan) and 1,500 won (7.95 yuan). An employee said that Kudi's promotion in South Korea has not yet ended.

An employee of Kudi said that Kudi now adopts strategic pricing overseas.

Unlike Luckin Coffee, which is a high-end coffee brand, Kudi hopes to carve out a path for itself through low prices, high frequency, and high quality. Their ultimate goal is to achieve global settlement and have one app that can be used all over the world. In theory, as long as the number of cups sold in a single store is large enough, there is nothing wrong with the strategy of relying on low prices to increase sales.

However, Luckin Coffee and Cudi are still testing the waters.

In July this year, Li Yingbo of Kudi Coffee said in an interview with Tech Planet that Kudi Coffee's overseas stores are still in the early market cultivation stage. The first step is to build a supply chain system, that is, to ensure the compliance of the warehouse and logistics system in each country and the export of raw materials.

Luckin Coffee CEO Guo Jinyi also said not long ago, "The opening of the Singapore store is the first step for Luckin Coffee to expand overseas. Although we are still in the early stages of exploration and testing, we hope to cultivate the Singapore market in the long term, bring new consumer experiences, and inject new vitality and development momentum into the local coffee market."

02 Scale effect is drastically reduced

Relying on huge financing, low-cost and rapid store opening, and a market subsidy of 9.9 yuan, Luckin Coffee and Coodi quickly gained a foothold in the domestic coffee market. The former's sales exceeded Starbucks in 2023, while the latter opened 7,000 stores in just one year.

Almost all of the 11 countries in Southeast Asia are mature markets for coffee consumption. The average Japanese consumer is 300 cups of coffee per year, the average Korean consumer is 405 cups of coffee per year, and even in Thailand, the average consumer is 180 cups per year. Coffee brands do not need market education.

The premise for the success of the 9.9 yuan strategy is that the Chinese coffee market is still in its bonus period and the entire consumer market is large enough. In Singapore, which has a population of only 6 million and an area equivalent to that within China's 5th ring road, this strategy has been proven to be unfeasible.

In Singapore, Flash Coffee, which has been imitating Luckin Coffee and providing heavy subsidies, entered bankruptcy liquidation procedures in October last year.

According to Momentum Works’ analysis, a key reason for Flash Coffee’s failure was that its founders fell into a vicious cycle of “having to spend more time raising funds => therefore spending less time on products and operations => operations deteriorated when unsupervised => potential investors became more cautious => founders had to spend more time raising funds”.

There are 11 countries in Southeast Asia, and each country has its own unique preferences.

For example, Singapore requires that beverages sold locally be labeled and graded according to their sugar and saturated fat content. Luckin's raw coconut latte is graded D, the least healthy grade, which has deterred many consumers.

Li Yingbo, chief operating officer of Kudi Coffee, told Tech Planet that Kudi will adjust its products based on the needs of each country. For example, the sweetness of coffee in Southeast Asian countries is about 1.5 to two times that of ours, and they drink it very sweetly.

It is just a matter of adjusting the sweetness, which does not require a high level of supply chain richness. The problem is that each country has different taste preferences. Domestic rice milk latte is popular in Australia and Canada, while Indonesia likes Pampas blue yogurt jasmine latte.

Different countries have different requirements for the degree of roasting of coffee beans. South Korea prefers medium roasting, while the United States prefers deep roasting. Coffee brands need to customize menus for each country overseas. Luckin Coffee and Kudi have already promoted different products in different countries based on their preferences.

This greatly increases the complexity of the supply chain. After all, the current supply chains of Luckin and Kudi serve the domestic market more.

On the other hand, mature coffee consumption habits also mean that the market depth is limited.

Considering the population size and development, the breadth of the market is limited. According to a report by Momentum Works, Indonesia and Thailand are the largest markets in Southeast Asia. In 2023, the coffee market size of Indonesia will be about US$947 million and that of Thailand will be about US$807 million. The combined size of these two is less than 5% of the Chinese market.

The market is small and fragmented, and the demands are diverse, which greatly reduces the economies of scale.

03 Standing at the same starting line again

In 2023, China's chain coffee brands expanded rapidly at a rate of 46 new stores per day, and coffee completely entered the low-price era. Coffee brands completed a new round of market education, but the result was poor performance.

Luckin Coffee's financial report for the first quarter of this year showed that the company achieved net income of 6.278 billion yuan, a year-on-year increase of 41.5%. Compared with 7.065 billion yuan and 7.2 billion yuan in the previous two quarters, Luckin Coffee's revenue has dropped for two consecutive quarters.

What's worse is that Luckin Coffee turned from profit to loss in the first quarter, which was the first time it had a single-quarter loss in the past two years, with a net loss of 83.2 million yuan. In the same period last year, it still achieved a net profit of about 565 million yuan.

Coffee requires economies of scale. As the coffee brand with the most stores in China, Luckin Coffee is still not profitable, which shows the operating difficulties of other brands.

An employee of a leading domestic coffee brand told Tech Planet that it is currently a good time to make coffee in China, but not the best time to make profits.

Going overseas to seek growth has become one of the few options for coffee brands. Luckin Coffee originally planned to go overseas in 2020, but it was delayed due to financial fraud.

In China, Luckin Coffee obviously has more market share than Kudi, but overseas, both are in the early stages of market development. More than one Kudi Coffee employee told Tech Planet that overseas is an opportunity for Kudi to overtake.

Unlike the domestic rapid expansion by relying on full franchise, Kudi Coffee will adopt the model of direct operation, franchise and regional partnership to promote overseas. A Kudi overseas development said that the advantage of regional agency is that you can get operating commission after the entire region is opened, instead of just the previous single store commission.

Unlike its direct sales model in China, Luckin Coffee plans to expand overseas through a large-scale franchising model.

According to LatePost, Luckin Coffee plans to have its headquarters control the final decision-making power over growth and marketing, and provide mid- and back-end and supply chain support. National/regional franchisees (deciding on a joint venture/authorization/franchise model based on each country's situation) will manage local stores and some suppliers, and franchisees can make suggestions to the headquarters.

As a world language, the globalization of coffee enterprises has long been inevitable, and many well-known coffee brands have also global layout. However, in mature markets, only differentiation can lead to success.

It is no longer realistic for the two familiar rivals, Kudi and Luckin, to continue to copy the highly consistent domestic play. The reality of the overseas market also does not allow them to repeat the miracle of opening 5,000 stores a year. It will take a while for their competition to be decided.

Text | Wang Lin Cover source | TuChong Creative This article is written by the author of Operation Party [Tech Planet], WeChat public account: [Tech Planet], original/authorized to be published on Operation Party, and any reproduction without permission is prohibited.

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