A "super rich second generation" has arrived in the competitive 9.9 coffee market

Ken Yue Coffee joins the 9.9 yuan coffee price war. This article discusses its market strategy and challenges, and analyzes the competitiveness of the "super rich second generation" brand in the fierce coffee market. It is recommended for readers who are interested in coffee market trends and brand strategies.

Can he really fight, or is he just bloated?

From 2023, KFC began to sell coffee with unprecedented efforts, launched independent stores, and competed with Luckin Coffee with a preferential price of 9.9 yuan. Due to insufficient attention and the slow turnaround of giants, KCOFFEE fell behind in the years when the coffee market grew rapidly. China's coffee market has entered a stage of development where the old and the new are replaced. At this moment, Kenyue Coffee, which has entered the market, has once again taken up the banner of "9.9 yuan for the whole store".

Some people will never be able to visit Rome in their entire life, while others are born in Rome.

Ken Yue Coffee, whose name sounds like a mixture of Chinese and Western styles, is such a "super rich second generation" who was born with a silver spoon in his mouth.

Luckin Coffee, the most inspiring benchmark in the coffee industry in China, just opened its 10,000th store last June. Kudi, a "poor boy" from the same family, could only look at this extraordinary threshold from afar. But in 2023, Kenyue Coffee, which was backed by a mountain, had sold 190 million cups of coffee in 10,000 KFC stores.

After all, it has a more well-known English name - KCOFFEE.

At a time when competition in the Chinese coffee market is the most intense, KFC has extended its business reach and joined the battle. In 2023, KCOFFEE's independent coffee shops opened one after another and were named Kenyue Coffee at the end of the year. On March 29, Kenyue Coffee launched a 100-store celebration event, and like Luckin Coffee and Kudi, it began to shout "All coffee is 9.9 yuan every day."

The coffee industry is booming. Who has more chips: the small giants who started from scratch or the rich second generation who have the support of big companies?

Image source: Beijing KFC

1. Weak seedlings irrigated by overwhelming water

When you step into the KFC store near Shuang'an Shopping Mall in Haidian District, Beijing, you can immediately feel the collision of two smells in the air - the aroma of fried chicken and the aroma of roasted coffee beans. The Kenyue coffee counter is right in front of the door, while the KFC counter is hidden deeper and requires two turns to get to.

“Is KFC also making coffee?” This is the first question many consumers ask when they enter a store.

KFC, which is working harder than ever to sell coffee, does not seem to have gained the expected huge traffic.

In October 2022, KFC opened its first independent KCOFFEE store in Shanghai, and now there are more than 100 stores. In May this year alone, 49 new KFC coffee shops were opened. Yum China CEO Joey Wat mentioned several times at the Q1 earnings conference this year that KFC intends to expand at a fairly aggressive pace and has set a goal of opening 300 stores by 2024.

The store opening speed has been accelerated, and the product pricing and marketing are also closely competing with Luckin Coffee.

Ken Yue Coffee's products are mainly priced below 22 yuan. In addition to flavored lattes priced between 15 and 22 yuan, and sparkling American coffees priced between 12 and 18 yuan, there are also SOEs priced as low as 7 yuan, which is highly similar to the price range of Luckin Coffee's products. If you include the 9.9 yuan discount for the entire store and the 8.8 yuan monthly card promotion, all products in the store can be priced below 10 yuan.

In the extremely involuted and highly homogenized Chinese coffee market, almost all brands are doing two big things: competing for the number of stores and competing for prices. In these two things, the second generation of rich people born with a silver spoon in their mouths have an incomparable natural advantage.

Qu Cuirong said that Ken Yue Coffee, which has an independent storefront, adopts a "shoulder-to-shoulder" store model and is located next to a KFC restaurant. The two can share a kitchen, thus reducing the investment and operating costs of the coffee shop.

According to Yum China's Q1 2024 financial report, KFC added 307 stores during the reporting period, with a total of 10,600 stores, covering more than 1,900 towns. This means that by reusing KFC's store resources, Kenyue Coffee can almost achieve "10,000 stores at birth".

In the early promotional stage, 440 million KFC members could see KFC coffee advertisements when they opened the mini program or App interface. In addition, KFC's breakfast and afternoon tea scenes are also naturally suitable for selling coffee products.

However, this has not made KCOFFEE stand out in the Chinese coffee market. Instead, it has become a "little transparent" company with a large size but weak momentum.

In 2023, KCOFFEE sold 190 million cups of coffee, while Luckin Coffee, which also has 10,000 stores, sold more than 1.9 billion cups, a gap of 1:10 between the two.

At what step did KCOFFEE fall behind?

2. During the most attractive bonus period, KCOFFEE fell behind

As early as 2014, KCOFFEE had already appeared on the counters of KFC restaurants. Noticing the growing interest of Chinese consumers in coffee, KFC decided to improve on its instant coffee products and launch freshly ground coffee. By 2016, KCOFFEE's affordable freshly ground coffee had sold more than 100 million cups, making it one of the best-selling coffee chain brands in China at the time.

At that time, Luckin Coffee, which would overturn Chinese consumers' perception of coffee, would not be launched for another two years. The domestic coffee market, which had an annual growth rate of 16%, was still dominated by specialty coffees priced above 30 yuan, such as Starbucks and Man Coffee. Yum China's hope in the coffee market was the independent brand COFFii & JOY, which was launched in 2018 and whose main product was specialty freshly ground coffee priced at around 30 yuan.

That is why, until this stage, KCOFFEE is still positioned as a side dish and an additional service in KFC restaurants. According to its 2016 financial report, the significance of KCOFFEE's existence is more to help KFC "increase transactions during breakfast and afternoon tea hours."

COFFii & JOY store

It was not until May 2019 that Luckin Coffee achieved the "miracle" of going public 18 months after its establishment through large-scale advertising, offline store expansion, and substantial preferential subsidies. Yum China may have noticed the change in the wind direction.

In September of the same year, KFC KCOFFEE launched a 28 yuan monthly card, and coffee products can be purchased for 1 yuan a day. But its actions were still not fast enough. Nearly 8 years after the launch of the freshly ground coffee business, KCOFFEE still does not have an independent store and cannot get rid of the current situation of being sold together with Jiuzhen Juice, Sugar-Free Coke and other beverages, and continues to be an "ancillary business" to increase transaction volume.

From 2019 to 2023, KCOFFEE, which did not receive enough attention, did not quickly seize the dividends of the rapid growth stage of the coffee market. Not only was its growth rate far lower than that of affordable coffee brands represented by Luckin Coffee, it also hardly appeared in the observation field of industry research reports.

In comparison, as of the first quarter of this year, Luckin Coffee was still expanding at a rate of 2,372 new stores, while Kudi opened more than 7,000 stores within 18 months of its establishment.

The coffee industry, which has been surging, has been “supported” to a market size of more than 600 billion yuan. After being “cultivated” for several years, the average amount of coffee consumed by Chinese consumers has increased from 4 cups in 2016 to 17 cups. But KCOFFEE obviously has not kept up.

Compared with other brands, Yum China has been relatively slow in opening independent coffee shops, and has even taken some detours.

In 2022, COFFii & JOY encountered the cold wave of the retreat of specialty coffee in the Chinese market and announced its closure after two years of operation. KCOFFEE was the only one left in Yum China's coffee business. In October of the same year, KCOFFEE opened its first independent store in Shanghai.

During the rapid growth bonus period of the coffee market, KCOFFEE fell behind.

3. It’s not easy for the second generation of rich people to dominate the world

As we enter 2024, the smoke of the 9.9 yuan price war has gradually dissipated, but the competition beneath the surface remains fierce.

Luckin Coffee has been increasing revenue but not profit since Q1, and its net profit has turned from profit to loss, so it has to slowly narrow the 9.9 yuan discount space. Starting from April 1, Kudi Coffee began to raise product prices in some cities, ranging from 2 to 7 yuan. The price of the "8.8 yuan Americano" exclusively for new customers at COSTA has returned to 21.6 yuan, and the price of Americano for new customers at Bumianhai Coffee has increased from 5.9 yuan to 7.9 yuan. LAVAZZA has also removed the Italian coffee + ice cream combination at the member price.

What does it mean that Ken Yue Coffee has once again raised the banner of “9.9 yuan for all items”?

A view generally agreed upon by practitioners is that KFC has excellent supply chain capabilities, operational capabilities and brand power, and its chain operation model can achieve better quality control while maintaining the affordability of coffee products. At the same time, Yum! Brands' accumulated experience in brand operations can also help Kentucky Coffee continue to enter the mainstream coffee market.

Jack, the owner of the coffee brand "Runaway Coffee Beans", told Snow Leopard Finance: "Based on KFC's understanding of the food industry, it is a small probability event that they make bad coffee."

In addition, Kenyue Coffee has a large number of KFCs and many sales outlets, which can reach consumers more widely. Under the premise that the price range of the affordable coffee market is converging, the higher the store density and the more convenient the location, the more consumers it can attract.

However, some industry insiders believe that KFC’s scale of tens of thousands of stores is just a foundation for Kenyue Coffee and does not have an absolute advantage.

A catering practitioner told Snow Leopard Finance that the underlying logic of location selection for coffee shops and fast food restaurants is different. For example, a large number of coffee shops are located in the basement of office buildings, which is more convenient for office workers to consume in the store, but fast food restaurants are more likely to open stores on streets with high traffic. The strategy of opening stores close to KFC may limit the development of Kenyue Coffee.

At present, KCOFFEE's independent stores are mainly distributed in third- and fourth-tier cities in Anhui, Hebei, Henan, Hunan, Hubei, Jiangxi, Liaoning, Sichuan, Shandong and other provinces, focusing on the sinking market. However, this is not KFC's main battlefield. According to statistics from Zhaimen Canyan, among KFC's more than 10,000 stores, second-tier and above cities account for a total of 64%.

What's more, the sinking market is now a bloody battle and close combat. Kenyue Coffee, which entered the market too late and moved slowly, will face considerable challenges.

The low-price strategy is a double-edged sword. While increasing customer traffic, it will also dilute the brand's profits. For KFC, which has already encountered growth troubles, with total revenue growing by only 1% in the first quarter and restaurant profit margins falling by 2.9 percentage points year-on-year, it is unknown how long the regular discount of 9.9 yuan can last.

Faced with the complex and ever-changing Chinese market, the story of the "super rich second generation" dominating the market is not so easy to tell.

Author: Liu Shuhan; Source public account: Xuebao Finance (ID: 1093197)