10,000 stores, hot products, marketing, 9.9, these are the four key words that helped Luckin Coffee surpass Starbucks

In 2023, Luckin Coffee's annual revenue surpassed Starbucks, making it the first coffee chain brand in the Chinese market to have more than 10,000 stores. The author conducted a face-to-face direct comparison between Luckin Coffee and Starbucks from multiple dimensions, analyzing what Luckin Coffee did right, what Starbucks changed, and what the future prospects of the two companies might be.

In the second quarter of 2023, Luckin's quarterly revenue exceeded Starbucks for the first time; in 2023, Luckin's annual revenue surpassed Starbucks; also in 2023, Luckin became the first coffee chain brand in the Chinese market to have more than 10,000 stores. The "number one" in the Chinese coffee market has officially changed hands.

But none of this is surprising.

It took 17 months to go public, and it survived the financial fraud crisis. In 2021, the key word for talking about Luckin Coffee was still "resurrection", but in 2022, it became "return to the center position". Luckin Coffee has always been running at a high speed, and its momentum continues to be fierce.

During this period, the giant Starbucks experienced ups and downs in China, with performance fluctuating, and its business position was continuously eroded by more than one Chinese brand. The always aloof Starbucks finally rolled up its sleeves and fought closely, increasing discounts, issuing coupons crazily, and formulating the long-term goal of "2025 China Strategic Vision", which aims to achieve the goal of 9,000 stores by then.

The two giants, Luckin Coffee and Starbucks, have entered a stalemate phase of speed and endurance competition. Obviously, Luckin Coffee is currently in a position of catching up, and has surpassed Starbucks with its relatively aggressive and successful store opening, new product, marketing, and promotion strategies. Luckin Coffee has more than 16,000 stores in total, and is still expanding in the sinking market, while Starbucks is relatively conservative in sinking due to its high customer unit price. Luckin Coffee launches more than 100 new products a year, including popular products such as the sauce-flavored latte, while Starbucks is still exploring ways to do localized marketing. As for price, Luckin Coffee and Starbucks are at the two ends of the coffee price spectrum, and have temporarily won the competition between the customer unit price of 9.9 yuan and more than 30 yuan.

Doujiao will conduct a direct face-to-face comparison between Luckin Coffee and Starbucks from these dimensions to see what Luckin Coffee did right, what Starbucks changed, and what the future prospects of the two companies might be.

1. Whoever seizes the sinking market will occupy the big market

According to statistics, by 2023, there will be nearly 50,000 coffee shops in China, surpassing the United States to become the country with the most coffee shops in the world. Obviously, the crazy opening of Luckin Coffee, Kudi and Starbucks has directly increased the number of coffee shops in the Chinese market. However, the number of 50,000 is far from the saturation point. Another set of data shows that China's annual per capita coffee cups are more than ten times lower than Japan and the United States.

There is a lot of room for coffee brands to expand. Luckin Coffee aims to open 20,000 stores by 2024, while Starbucks aims to open 9,000 stores by 2025. Luckin Coffee is far ahead of Starbucks in terms of store opening speed and pace .

According to Luckin's 2023 financial report, by the end of 2023, Luckin had a total of 16,248 stores, and in fiscal year 2023 alone, Luckin opened 8,034 stores, a year-on-year increase of 97.8%. Luckin's store opening pace and efficiency are truly amazing, as it can double the store base, which is already very high. Looking at Starbucks, according to the first quarter of fiscal year 2024, as of December 31, 2023, the net new stores in China during the reporting period were 169. Currently, Starbucks has more than 7,000 stores in mainland China.

Going further, Luckin's store structure is divided into two categories, one is self-operated stores, and the other is franchise stores . The financial report shows that Luckin has 10,628 self-operated stores and 5,620 franchise stores. In offline business, franchising is almost a must for brands to achieve rapid expansion. At present, Luckin has formed three franchise models: store franchising, targeted point franchising, and new partner franchising. Luckin's official display shows that as of December 28, 2023, Luckin Coffee has reviewed and approved the site selection of 788 stores for store franchising, of which 240 have been opened. At present, all cities where Luckin Coffee has opened franchise stores can participate in store franchising.

Luckin's full-year franchise revenue in 2023 is 6.226 billion yuan, up 102.8% from 3.069 billion yuan in 2022. The revenue growth of franchise stores is higher than that of self-operated stores (82.7%).

Luckin Coffee has accelerated its store openings by opening franchises, and its revenue has also expanded. In contrast, Starbucks is unlikely to open franchises at present. In an interview with the media, Zhuang Shuai, founder of Bailian Consulting, said, "From the perspective of Starbucks' global management model, there should be no problems with management and quality control when expanding into more markets and opening more stores in China, but the possibility of opening franchises under a strong management model is relatively small."

Not opening up to franchising is an important foundation for building a "brand", especially since Starbucks has always emphasized its core value as a "third space" and needs to have stronger control over individual stores. Luckin's single-store model is smaller and has simpler functions, namely making coffee and selling, so it is more suitable for franchising . Take McDonald's as an example. When the core culture and values ​​of a brand are very strong, the influence of individual franchisees' uncertainty can be suppressed.

Different paths lead to the same destination. Luckin Coffee and Starbucks have the same goal of accelerating store coverage, and their paths are also very similar - pointing to the lower-tier markets.

In a financial report conference call, Luckin Coffee Chairman and CEO Guo Jinyi said that in 2024, Luckin will continue to increase the number of stores in high-tier cities, and accelerate the expansion of sinking markets through intermodal models to expand market share. Starbucks China Chairman and CEO Wang Jingying said: "The long-term opportunities in the Chinese market are obvious, including increasing penetration in existing cities and entering new county-level markets."

As of the first quarter (Q4 2023), Starbucks has entered 857 of the nearly 3,000 cities above the county level in China. "In the past few years, the profitability of our new stores in county-level markets has also been better than that in first-tier cities. Therefore, we will continue to accelerate our expansion into more county-level markets."

Judging from the store layout of the two, Luckin Coffee has a greater ability to penetrate lower-tier cities and a faster speed .

Starbucks' current main base is in high-tier cities, most of which are located in coastal areas or economically developed provinces. According to Yunshangguan data, Starbucks has the largest number of stores in shopping malls in Guangdong, accounting for 16.20%; Ningxia has the smallest number of stores, accounting for only 0.09%. Popular and mid-range shopping malls are the first choice for Starbucks stores, accounting for more than 90% of stores in these two types of shopping malls. Wanda Plaza is the shopping district with the largest number of Starbucks stores, followed by Wuyue Plaza and Powerlong Plaza.

According to the data from Zhaimen Canyan, the average customer spending of Starbucks, Luckin Coffee and Kudi Coffee is 38.06 yuan, 16.49 yuan and 10.06 yuan respectively. Even though Starbucks’ average customer spending dropped by 9% in the last quarter of 2023, it is still twice that of Luckin Coffee. The higher average customer spending has affected Starbucks’ expansion to lower-tier cities to a certain extent.

Luckin's location selection logic has changed. Previously, office scenes have always been the main target of Luckin's store openings, but scanning the new stores from the end of 2022 to the end of 2023, the proportion of new stores in office scenes is shrinking, only 37%. The store opening rate of community scene stores reached 64%, which is twice that of office scenes. Community stores represent coffee, or Luckin's main customer base has begun to shift from white-collar workers to a wider range of people.

Luckin Coffee store layout scenario distribution | Source: Jihai Data

A more detailed analysis of the performance of the two in the sinking market.

According to information released by Jiuhai Data, from October 2022 to September 30, 2023, Luckin Coffee entered 69 new prefecture-level cities, covering 29 provinces in China. This covers 310 cities in mainland China, almost all cities above the fourth tier. The tentacles only did not involve Xinjiang and Tibet. During the same period, Starbucks entered 27 new cities, covering 71% of prefecture-level cities in China.

Interestingly, even in the county market, Starbucks' main base is still in the relatively developed Yangtze River Delta. The county with the most Starbucks stores is Kunshan, Suzhou. Kunshan has been ranked first among the top 100 counties in China for many years, and its GDP of more than 500 billion is even higher than that of many inland provincial capitals. In the same period, the city with the most new Luckin stores is Qiannan Buyi and Miao Autonomous Prefecture.

In the truly sinking market, that is, third-tier and below cities, Luckin's store opening rate exceeds 100%, and the contribution rate of new stores in third-tier and below cities reaches 36%, while this figure for Starbucks is less than 20%.

Image source: Polar Ocean Data

Obviously, Luckin's failure was more thorough .

There are already many coffee shops in Beijing, Shanghai, Guangzhou and Shenzhen. Luckin Coffee and Starbucks are working hard to increase the density of stores in high-tier cities, but the ceiling still exists. The sinking market is a blank market to be filled. Whoever occupies the sinking market faster means who can seize the Chinese market to a greater extent. "2023 Coffee and Tea Consumption Insights" shows that the number of users of coffee liquid in the county rural market has increased by 110% year-on-year. In terms of coffee consumption, the growth rate of per capita consumption in the county rural market is 26% higher than that of the first-tier market, making it the fastest growing market at all levels.

Not only Luckin Coffee and Starbucks, but also Nova Coffee, which already has more than 1,800 stores, has proposed a "Thousand Counties Plan"; Kudi Coffee accounts for 18.13%, 12.31% and 6.71% of the third-tier, fourth-tier and fifth-tier cities, respectively. The coffee chain war in the sinking market may be more bloody and cruel than that in high-tier cities in the future.

2. Luckin Coffee, a new hit product, wins

In an interview, Lin Yue, chief consultant of Lingyan Management Consulting, said: "Starbucks' bigger challenge is how to maintain its leading position through product and service innovation." - But at present, Starbucks lags behind Luckin Coffee in terms of the number of new products and the number of popular products .

The financial report shows that in 2023, Luckin Coffee launched a total of 102 new products, with more than 2 billion items sold and more than 1.9 billion cups of freshly made beverages sold. In one year, Luckin Coffee had eight products with sales exceeding 100 million, including Coconut Cloud Latte, Velvet Latte and the popular Sauce Latte. Starbucks only launched 28 new products in the summer of 2023. In the earnings call, Starbucks executives used the adjective "unprecedented" to describe this data. In the fourth quarter of 2023, Starbucks launched only 12 new coffee drinks.

Zhu Danpeng, a food industry analyst, said that consumers generally “love the new and dislike the old”, so the overall innovation speed of China’s food and beverage industry is very fast. “Compared with the innovation speed of the entire industry, Starbucks China launches about 30 new products a year, which is generally slow and lower than the industry average .”

Luckin Coffee is the "volume king" in the coffee industry. The situation of tea drinks is similar to that of coffee. Gu Ming's prospectus states that it launched 107 new products in the first three quarters of 2023; Nayuki's Tea launched more than 87 new products in the first half of 2023. The "Kamen 2023 Beverage Market Insight Report" counted more than 40 brands this year, and more than 1,600 new products were launched from January to September.

Arranging and combining various raw materials and constantly stimulating consumers with new products, new flavors, and new collaborations is the main way to expand the scale of the ready-made beverage market, which has a relatively low threshold. Peng Xin, the founder of Nayuki's Tea, once said: "The tea beverage industry has taken innovation to the extreme, and it has also reached the extreme. Other industries are lucky to launch a new product once a month, but the tea beverage industry launches more than one new product a week."

I can feel the fatigue of tea drink entrepreneurs, but this is the inevitable trend after the intensified competition. Coffee and tea drinks are in a similar situation. If we look at the proportion, Luckin's hit rate is not too high, but the current situation in the industry is that as long as you hit a big hit, it is enough to enhance the brand's influence.

Jiangxiang Latte is the absolute ceiling-level hit product in the coffee and tea beverage field in 2023. Luckin Coffee stated in its earnings call that last year, the single-day sales of Jiangxiang Latte exceeded 100 million yuan, with a total of 45.83 million cups sold, and the sales of a single product exceeded 900 million yuan, breaking Luckin Coffee's single product sales record.

In 2023, Luckin's average monthly transaction customers will be 48.4 million, a year-on-year increase of 124.1%. In the fourth quarter, the average monthly transaction customers increased by 154.2% year-on-year to 62.4 million, setting a record high and the highest increase in a single quarter last year . From the first to the third quarter of last year, its average monthly transaction customers were 29.5 million, 43.1 million, and 58.5 million, respectively. Luckin attributed the rapid growth in the average monthly transaction customers to product innovation and accelerated store layout.

The launch of new products, price wars, and crazy store openings are a test of the brand's supply chain capabilities. Industry insiders said: "9.9 yuan is the price limit of Luckin Coffee's current operating efficiency. This is also a pricing strategy made under the extremely large scale and supply chain, and taking into account the comprehensive costs such as rent, labor, and discounts. As a long-term activity, it has a certain competitive advantage over brands with smaller store scales."

Luckin's supply chain advantage can be seen in the case of Jiangxiang Latte. The ingredients of Jiangxiang Latte include espresso, white wine flavor thick milk (prepared milk-containing beverage), pure milk, and cream. The so-called Jiangxiang flavor and Moutai are processed together with thick milk. Luckin's thick milk supplier is Ningxia Cezanne Dairy. Chairman Yan Jianguo said that during the production of thick milk, Moutai Distillery escorted Moutai worth 30 million yuan and sent people to watch each bottle being added to the raw materials and then transported the bottles away. "The processing process is very strict."

The transportation and storage of thick milk has extremely high requirements for logistics. According to Luckin's financial report, Luckin mainly cooperates with two logistics and distribution companies; and cooperates with three well-known domestic third-party warehousing and logistics service providers to be responsible for transportation between warehouses and distribution from warehouses to stores. Luckin has leased about 30 warehouses from third parties across China for storage and inventory management.

From upstream raw materials to midstream suppliers, logistics and transportation to terminal store production and sales, Luckin has built a smooth and complete supply chain system.

Huang Yun, chief strategy officer of SF Express Group, once said: "We followed Luckin's store opening process in Chengdu and Xi'an. We had to open 2-3 stores a week, and the layout of a city had to be completed within a month, and there could be no mistakes in the process. This places very high demands on the supply chain."

Starbucks is also laying out its supply chain in China. In September 2023, the Starbucks China Coffee Innovation Industrial Park, with a total investment of 1.5 billion yuan, was officially completed and put into production in Kunshan, Jiangsu. This marks that China has taken the lead in achieving large-scale integration of the vertical industry chain "from green beans to coffee" in Starbucks' global markets. Starbucks' supply chain capabilities as a giant company are obvious to all.

3. Luckin Coffee’s marketing is fast, accurate and ruthless, while Starbucks is trying to keep up with the pace of China

Products and stores are the hardware of a brand, while marketing is a dimension that reflects the brand's soft power. Luckin's marketing moves are fast, accurate and ruthless, and it is even generally believed by the industry to have the fastest marketing team in China. Starbucks, as an overseas giant and an evangelist in the Chinese coffee market, has obvious brand advantages, but it still needs to adapt to the rhythm of the Chinese market and find a way to participate in the competition in the Chinese market.

Luckin is good at joint ventures. In 2023, starting with the joint venture with Han Meilin at the beginning of the year, Luckin launched the "New Year Luckin" paper bags and cup sleeves. Later, Luckin also cooperated with many well-known brands and IPs such as Line Dog, Doraemon, and Biaoren. Of course, we have to mention the sauce-flavored latte here. Once the product was launched, it also sparked a discussion about who was benefiting from Luckin and Moutai. At least in the end, from the sales data, Luckin made a lot of money.

According to statistics from Doujiao, in 2023, Luckin Coffee collaborated with well-known IPs such as Striped Dog, Doraemon, Tom and Jerry 10 times .

After the sauce-flavored latte, Luckin Coffee's other joint project is with Tom and Jerry. For this joint project, Luckin Coffee not only launched new products, but also produced related peripheral products such as cup sleeves and stickers. Many consumers who bought Doujiao bought Doujiao because they wanted stickers. This joint project also became a hot topic, and it is clear that the purpose of the joint project has been achieved. According to the Securities Times, the joint project was sold out in the live broadcast room of Luckin Coffee on Douyin, and once ranked first on the group purchase list.

In addition to joint ventures, Luckin is also a master of sports marketing. It cooperated with swimming champion and high-quality idol Wang Shun at the Asian Games; signed a partnership with China Women's Basketball Team 9 days before winning the Asian Cup; signed Gu Ailing before the Winter Olympics; and signed a contract to become the exclusive coffee partner for China and Southeast Asia at the Australian Open (this year's Australian Open attracted a lot of attention because Zheng Qinwen entered the finals)... A series of operations have repeatedly proved Luckin's "fast, accurate and ruthless" marketing style.

In comparison, Starbucks also has joint names and signed spokespersons, but their grasp of Chinese market traffic and hot spots is slightly inferior.

In January this year, Starbucks collaborated with the Chinese comic "Havoc in Heaven". Starbucks said that it has fully integrated the image of the Monkey King Sun Wukong from the aspects of beverage R&D creativity, beverage production, takeaway delivery and product peripherals. One of the peripherals is a straw limited to the Monkey King, which can be used to stir and drink coffee. For this collaboration, Starbucks also launched a customized new product, the frozen latte.

It is very rare for Starbucks to collaborate with Chinese IPs and launch co-branded products simultaneously. It is undeniable that Starbucks attaches great importance to the deep connection with local Chinese consumers. After all, Starbucks previously collaborated with international brands such as Disney, Swarovski, and ANNA SUI. These co-branded products belong to the global system of the brand, and the Chinese market plays more of a role as a sales area.

In order to deeply integrate with the Chinese market, Starbucks has made many attempts over the years. In November 2023, Fei Xiang became Starbucks' "Happy Holidays Ambassador", and a Fei Xiang sticker was included with the new product "Red Fuji Latte". Starbucks "got" traffic thanks to the popularity of Fei Xiang's new film "The Legend of the Gods". However, the cooperation between Starbucks and Fei Xiang is only short-term. If Starbucks wants to truly try "localized marketing", perhaps it needs to learn from Luckin Coffee how to capture hot spots and take advantage of the traffic effect.

4. 9.9 vs. High-end

Luckin Coffee and Starbucks are often compared because they are in the same field and are the two largest companies. However, the two are in completely different price ranges. Luckin Coffee has grown rapidly to its current scale with its low-price strategy of 9.9 yuan, while Starbucks claims to be a high-end coffee brand. Standing at the two ends of the same price range, Luckin Coffee and Starbucks need to consider what to do next.

9.9 brings benefits to Luckin Coffee, but also puts a lot of burden on it.

Low prices bring more consumers, allowing Luckin's revenue to grow rapidly. According to the financial report, in 2023, the company achieved revenue of 24.903 billion yuan, a year-on-year increase of 87.3%, and net profit of 2.848 billion yuan, a year-on-year increase of 610.22%. This is a positive sign.

But a detailed analysis shows that Luckin's profit performance is not good. In the fourth quarter, Luckin's operating profit margin declined significantly. Under US accounting standards (GAAP), Luckin's operating profit was 213 million yuan, and its operating profit margin was 3.0%, lower than 8.5% in the same period of 2022, and also set the worst operating profit level in a single quarter last year. From the first quarter to the fourth quarter of 2023, Luckin's operating profit margins were 15.3%, 18.9%, 13.4% and 3.0% respectively.

Luckin’s explanation was very direct: the average selling price of its products had dropped.

9.9 is the key to success, but 9.9 is also the key to difficulty. Will Luckin Coffee continue to offer 9.9? From actual observation, Luckin Coffee has already tightened the 9.9 discount. It is no longer 9.9 yuan for the entire store, but only a few designated drinks are participating in the promotion, and the entrance is buried deeper. Originally, the discount price was directly displayed in the mini program menu after receiving the coupon, but now you need to enter another tab to enjoy the discount.

At the earnings conference, Guo Jinyi said: Due to the company's strategic decision to continue to give back to customers and expand the market, as well as the impact of seasonal factors and adjustments to the product portfolio structure, profits in the fourth quarter fell. This is both an objective law of the industry and fully in line with the company's strategic expectations. Luckin will pay close attention to market changes, adopt a more scientific and friendly pricing strategy, reduce users' decision-making costs, further expand the user base, and continue to increase consumption frequency. "In the current environment of intensified competition, Luckin, as the leader of the Chinese coffee market, will adhere to its current development strategy and pricing strategy."

There was no positive response, nor a clear statement. Perhaps Luckin Coffee has also begun to waver about the 9.9 price. An industry insider once calculated that "the pure material cost of a cup of coffee should be between 5 yuan and 5.5 yuan. In addition, there are management, operation, terminal space and other expenses. Franchisees must also make a profit. So 9.9 yuan should be the floor price. If it is lower, it will not be profitable." Some franchisees have also complained in interviews that it is difficult to make money because of the 9.9 price.

It seems that Luckin Coffee needs to carefully consider whether to continue to increase its ultra-low price route. Starbucks is also facing a dilemma .

First, Starbucks has increased its discounts in the Chinese market, as can be seen from the 9% drop in average order value in the new quarter's financial report. Starbucks China Chairman and CEO Wang Jingying said in a conference call that the 9% drop mainly came from two aspects: First, sales of higher-priced goods have decreased, and such goods account for a small proportion of the sales mix; second, targeted promotions and personalized discounts are being tried to encourage consumers to increase purchase frequency.

Secondly, Starbucks still needs to maintain its high-end positioning. In the previous earnings call, Starbucks clearly stated that it "has no intention of participating in price wars" and wants to become "the preferred brand in the high-end coffee market."

The sinking route and preferential strategies have helped Starbucks to resume double-digit growth in the Chinese market. In the fourth quarter of 2023, Starbucks' revenue growth in the Chinese market reached 18%, higher than 8.7% in North America and 9.9% in the overall international business. However, sticking to the "high-end" route can easily put the brand in a situation where it has to have both and it is difficult to let go. Starbucks' desire to "sink with quality" is fundamentally different from the "high-end cost-effectiveness" of domestic snack brands. Starbucks did not take out the boldness of domestic snack brands to completely bury themselves in the soil and reshape the price positioning with the white-label approach.

Starbucks Global CEO Nathaniel Nathhan said, "We continue to lead in brand affinity and have the highest brand awareness, familiarity and purchase intent."

It can be foreseen that 2024 will be crucial for both Luckin Coffee and Starbucks, involving continued expansion, performance, and also the choice of path.

Author: Li Jinglin, WeChat public account: Spicy