Starbucks’ real anxiety, Luckin’s fake calmness

Starbucks adheres to its high-quality brand positioning and does not participate in price wars, but faces fierce market competition and pressure from declining performance.

The US stock market earnings season is always a mixed bag of happy and sad news. This time, it was Starbucks that suffered a setback.

On May 1, local time, Starbucks released its second quarter financial report for fiscal year 2024. The company's revenue and earnings per share were both lower than market expectations. After the opening of the market that day, Starbucks' stock price suffered a flash crash, and once plummeted by nearly 18%. As of the close of the day, Starbucks plummeted 15.88%, and its market value evaporated by US$15.915 billion overnight. In the following two days of the week, despite the rapid growth of the Dow Jones and S&P 500 indices, Starbucks still failed to get out of the slump and closed with a negative decline.

Some analysts pointed out that the performance announced by Starbucks in this quarter may be the worst among all major companies so far. Subsequently, JPMorgan Chase lowered Starbucks' target price from $100 to $92. Investment banks such as Deutsche Bank and William Blair also followed suit and downgraded Starbucks' ratings. This is indeed a bit "humiliating" for Starbucks.

In the financial report, Starbucks CEO Laxman Narasimhan said bluntly: "In a highly challenging environment, this quarter's results do not reflect the strength of our brand, our capabilities or future opportunities." "It did not meet our expectations."

Coincidentally, Luckin Coffee also released its first quarter financial report for 2024 on April 30. The financial report data showed that Luckin Coffee still ranked first in the number of stores in the Chinese coffee market, with total net revenue of RMB 6.278 billion in the first quarter, a year-on-year increase of 41.5%. The number of stores increased by 2,342 in the first quarter.

Luckin's profitability has been confirmed in both self-operated and franchised stores. In the quarter, Luckin's self-operated store revenue increased by 45.8% year-on-year; franchised store revenue increased by 32.8% year-on-year. Compared with Starbucks' anxiety, Luckin's financial report seems to be peaceful.

So, how did Starbucks' performance collapse? Faced with such a report card, how should Starbucks learn from its mistakes and then be brave? Is Luckin Coffee really able to rest on its laurels behind its seemingly gratifying performance?

1. 9.9 as fierce as a tiger?

In the quarterly financial report, Starbucks encountered a more severe "ambush" in the Chinese market than in the United States. Among them, the sales of US stores fell by 3% year-on-year, while the market expected an increase of 2.31%, and the sales of Chinese stores fell by 11% year-on-year, while the market expected a decrease of 1.64%.

In the highly valued Chinese market, sales not only fell by more than double digits but also fell significantly short of market expectations, which easily reminds people of the rapid rise of Luckin Coffee and other coffee brands.

Price is the strongest fundamental factor.

Just a few days before Starbucks released its latest financial report, "The 9.9 yuan trend has finally reached Starbucks" was on the Weibo hot search list. However, compared with other brands' aggressive price wars, Starbucks' discounts seem insignificant.

"45.9 yuan for two cups" and "55.9 yuan for three cups", and these are limited flavors. Starbucks' coupons are not bad value, but they are not good value either, and they have fallen into a state of being dispensable and useless.

Although the average amount of money spent at Starbucks increased by 2% during the quarter, customer traffic to the coffee shop fell by 6%. It can be seen that the slight increase in customer orders is not worth the decline in customer visit frequency.

Starbucks has been committed to expanding the market in recent years. Since September 2022, Starbucks has proposed to accelerate its expansion in China and reach 9,000 stores by 2025. However, compared with Luckin Coffee, which has a scale of tens of thousands, Starbucks's speed of expansion is still not fast.

In Starbucks' store expansion strategy, county towns are the most important sector. However, the recognition of Starbucks by young people in small towns is full of uncertainty.

Previously, the International Labor Organization (ILO) conducted a survey on how many cups of Starbucks users around the world could buy with their daily salary. The results showed that based on the average salary in Japan, people can drink 21 cups a day, while in South Korea it reaches 27 cups, and in China it is only 6 cups.

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Data provided by Zhaimen Canyan shows that the average customer spending of Starbucks, Luckin Coffee and Kudi is 38.06 yuan, 16.49 yuan and 10.06 yuan respectively. Such a price ladder makes people worry about Starbucks's decline.

In some counties, the price of a cup of Starbucks is equivalent to a family's daily food expenses. Even after the price reduction to around 25 yuan per cup, it still seems "a bit expensive" to most people in low-tier cities.

If Starbucks is determined to develop the sinking market, it is hard to imagine how much support the current pricing can provide to the brand, and further increasing discounts is almost a foregone conclusion.

Let's talk about Luckin Coffee again. Although it got a piece of the pie from Starbucks with the 9.9 yuan price tag, Luckin Coffee itself was also left with a lot of hidden injuries after using the Seven Injury Fist.

The latest quarterly report shows that Luckin opened 2,342 new stores during the period, but same-store sales of self-operated stores decreased by 20.3%, compared with an increase of 29.6% in the same period last year. When the number of stores reaches more than 10,000, Luckin's high density in first-tier cities will lead to stores competing for business with each other, and the growth of single-store sales and sales per square meter will inevitably become unsustainable.

Luckin Coffee is somewhat tired of the price war it has been engaged in for so long, but now, the price war it has taken initiative to engage in has become a last resort. Luckin Coffee is quietly reducing the intensity of the price war, and the scope of use of the 9.9 yuan coupon is shrinking. However, if Luckin Coffee doesn't do it, others will.

Kudi Coffee previously announced that it would extend its current store subsidy policy for two years; on the Tims side, the breakfast combination of "warm food + coffee" is getting cheaper and cheaper... In the short term, no one can escape safely from the coffee price war.

2. The Paradox of Specialty Coffee

However, up to now, Starbucks’ external attitude has always been: I’m not interested in price wars.

At the earnings conference, CEO Rashman Narasimhan said, "China's coffee and tea market is facing fierce price competition, but we choose not to participate in it. We are a premium brand." In Narasimhan's view, Starbucks' focus is still on the high-end market.

The CEO’s statement is consistent with founder Howard Schultz, who has made it clear: “We are not in a discount war or a price war. Over time, as customers learn more about coffee, they will want to upgrade from low-end or discounted products. As long as we continue to earn the respect of the market, they will choose to upgrade to Starbucks.”

Schultz's implication was simple: Starbucks' quality deserves its high price.

But some consumers don't think so.

The saying "Starbucks doesn't have specialty coffee" can be seen everywhere on the Internet. Starbucks naturally disagrees with such a statement, not to mention that it now has a specialty coffee brand "Starbucks Reserve". But in the eyes of consumers, Starbucks Reserve is more of an advanced "third space" that caters to the needs of young people to check in and take photos, and the middle class and business elites to date and talk about things, but it is not so everyday.

In fact, it’s not that working people and office workers don’t like specialty coffee, but their specialty coffee still needs to be limited to a short radius from the workplace, within the range of walking or takeout. Whether they have to choose Starbucks Reserve is “ok but not necessary” for most people, and “it is still quite expensive, much more expensive than ordinary Starbucks.”

Take Shanghai for example, you can find a coffee shop every three or five steps, and boutique coffee chains such as Manner, Peet's, M Stand, and various independent brands are everywhere. What's more, most of them are cheaper than Starbucks. For the same price, why would consumers choose Starbucks, which tastes inferior to boutique coffee, and pay for the brand premium?

The same problem is not only seen in Starbucks Reserve.

At the beginning of this year, Seesaw closed nearly 40 stores in the past four months. The price of a single cup of Seesaw coffee is similar to that of Starbucks, and the cup size is even smaller. The high price has caused difficulties for both investors and franchisees, and has also become an obstacle for the brand to expand its stores on a large scale.

The cruel truth is that as long as there is no way to scale up, the brand effect is not enough, and consumers willing to patronize the coffee shop are not as many as other big brands. Under such negative feedback, boutique coffee that is neither high nor low is on thin ice.

For Starbucks, its brand identity means it must make specialty coffee. However, how to strike a balance between product pricing and consumer acceptance of specialty coffee still requires careful consideration.

3. Difficulty of Full Competition

Although the financial report data looks good at first glance, a closer look reveals that Luckin Coffee also has hidden problems.

In the quarter, Luckin's same-store sales growth rate at its own-operated stores was -20.3%, compared with 29.6% in the same period of 2023; the operating profit at the self-operated store level was RMB 320 million, and the operating profit margin at the store level was 7.0%, compared with RMB 790 million in the same period of 2023, and the operating profit margin at the store level was 25.2%.

In response to the negative situation in the financial report, Luckin Coffee Chairman and CEO Guo Jinyi said that there are many factors. Objectively, the cold wave and temperature fluctuations in the first quarter affected consumer travel, while subjectively, the company took market share as its main strategic development goal, adjusted the pace of store openings, and further widened the gap between the brand and its competitors by rapidly expanding stores.

Opening more stores means spending more money. It remains unknown whether the decline in single-store sales and the increase in costs can help Luckin Coffee gain a more solid market position in the long run.

When Starbucks and Luckin Coffee both encountered varying degrees of performance pressure, things became delicate. Are there problems with both of these two leading companies?

The truth is, the gears of the industry have started to turn. When Shanghai became the city with the most coffee shops in the world, alert consumers should be able to sense that the market is becoming increasingly saturated. Although brands are expected to achieve higher growth rates in the vast Chinese lower-tier markets, the entire domestic coffee market is also evolving into a fully competitive industry.

In a fully competitive industry, all resources in the market have been mobilized, and there is no monopoly that can occur by any individual or group. Products are homogeneous and have no obvious differences, and companies are always price takers rather than price setters.

How to break through the increasingly approaching industry ceiling and find incremental growth from the existing stock is the key, or to put it bluntly, it is "stealing other people's customers."

How to grab it specifically? Either increase quantity or improve quality.

From the perspective of "volume", in a fully competitive industry, companies are price takers, which is the price war mentioned above; and from the perspective of "quality improvement", although facing the dilemma of homogenization, the truth lies in the details, and the addition of taste is still the deciding factor in brand reputation.

Coffee products are usually divided into basic products and new products. The quality of basic products depends on coffee beans, supply chain and grinding and brewing technology, which is a relatively long-term practice. At the same time, the consumer group of black coffee or "coffee + milk" combination is relatively smaller than the universal population of sweet milk coffee.

This is why, if specialty coffee wants to occupy the market, it often requires a long period of market education and the right price-performance ratio.

Therefore, in addition to the daily advancement of basic models, it will become the norm for coffee brands to develop new products that are relatively better developed from each other in the future.

From Luckin Coffee’s perspective, the overwhelming number of new product SKUs has long become an important label for the brand. In addition to the most important milestone, the Raw Coconut Latte, the Little White Pear Latte, Orange C Americano, etc. have all become popular new products.

Starbucks has made it clear that it will continue to implement three major strategies in China in the future: more new coffee products, digital empowerment of stores, and further layout of sinking markets. Among them, new product research and development is a very important part. In terms of Starbucks' past achievements, new products have become a minefield. Not to mention that there are few products that go viral, every new product is likely to trigger criticism from netizens.

We do not question Starbucks' R&D capabilities, but we hope that it can further study the tastes of Chinese consumers and make coffee drinks that are more suitable for Chinese babies as soon as possible. Once Starbucks' R&D team has mastered the concept, Starbucks, which has no worries about brand effect, will undoubtedly have more important bargaining chips.

The good days are gone, and the two leading companies are unprepared for the difficulties in the coffee industry.

Starbucks has revised its growth forecast for 2024 for the third time. The company now expects global revenue growth to be in the low single digits, far below the previous forecast range of 7% to 10%. And Guo Jinyi also admitted: "(Luckin)'s business in the second quarter still faces many challenges."

In a fully competitive market, brands will rack their brains to win customers. They believe that making less money but performing better than their peers are both acceptable outcomes.

Fortunately, hard-earned money is still money. The more brutal the market, the more it can be a touchstone for the brand.

After all, truly strong people never complain about the environment.

Author: Koala is a Deer

WeChat Official Account: New Retail Business Review (ID: 1089053)