Luckin Coffee and Kudi, hovering around 9.9

This article analyzes the low-price strategy of the coffee brand Kudi Coffee and explores the impact of price wars on the coffee industry. It shows the impact of price wars on coffee brands and the industry, and also provides suggestions for brands to explore new opportunities. If you are concerned about the changes in the Chinese coffee market and the survival of emerging brands, this analysis and thinking is worth reading.

Luckin Coffee probably didn't expect that it would be dragged back into the battlefield of price war.

At the beginning of the year, Kudi Coffee, created by the former founder of Luckin Coffee, entered the "100 Cities and 1,000 Stores" stage, with more than 70 hot-selling products all starting at 9.9 yuan, and there is a chance to get a free coffee reward for 0 yuan if you invite new friends. This is exactly the same as the "low-price strategy" of Luckin Coffee when it burned money for subsidies in the early stage.

When Kudi launched the price war, Luckin Coffee was still holding its price at around 20 yuan. Kudi, which seemed to be more cost-effective, quickly opened up the market. Under pressure, Luckin, which officially entered the "10,000-store scale", shouted slogans such as "Let high-quality coffee enter the 9.9 yuan era" to cope with the price pressure brought by its "fellow teacher" Kudi.

Kudi Coffee has eroded the profit moat that Luckin Coffee has worked so hard to build.

Can Kudi, which is following Luckin Coffee's old path, catch up? What impact will the new round of coffee price war have on the market? Where will the development of coffee brands turn in the future?

01 Luckin Coffee, which is rarely profitable, enters the "Cuddy vortex"

In recent years, Luckin Coffee has been slowly raising prices. Through early accumulation and the creation of popular products, it has gradually gotten rid of the "burning money subsidy" strategy adopted in the initial expansion, and finally raised the price of most coffee from single digits to more than 20 yuan.

Judging from Luckin's financial report data, before the average price per cup was less than 12 yuan, Luckin had been in a state of large losses. After the strategy of burning money for performance was questioned, Luckin reorganized the company and began to gradually increase prices. By 2022, Luckin's average price per cup of coffee had risen to 15.55 yuan, and Luckin's operating profit turned from negative to positive for the first time.

According to Luckin's first quarter report in 2023, Luckin's revenue was 4.437 billion yuan, a year-on-year increase of 85%; net profit attributable to the parent company was 565 million yuan, a year-on-year increase of 28 times. The substantial increase in revenue is due to the simultaneous increase in store openings and single-store store efficiency. During the period, Luckin's stores increased by 42% year-on-year, and single-store revenue increased by 30% year-on-year.

In May this year, Luckin Coffee, having tasted the sweetness of franchising, announced the official opening of the store franchise model in 241 cities in 23 provinces. Based on the original joint venture cooperation model, it launched a new cooperation model for potential franchisees with existing stores, requiring franchisees to prepare available stores before the cooperation is reached, once again accelerating store expansion.

However, Luckin Coffee, which was supposed to be moving forward quickly and accelerating profitability, suddenly slammed on the brakes and began to make concessions and cut prices again to compete with new "imitators."

Betting on Argentina has made the little-known brand Kudi Coffee quickly famous after the Qatar World Cup. When you open the Kudi Coffee applet, the homepage clearly lists the activities of "Invite 1 friend to place an order to get a free drink coupon for 0 yuan", "Add a welfare officer to get 6 free drink coupons for the whole venue", and "Coffee Carnival free drink from 9.9 yuan". Under the familiar low-price strategy, Kudi is opening stores like Luckin Coffee. According to the official forecast of the brand, by July, Kudi stores will exceed 5,000, and the expansion speed is far faster than Luckin Coffee.

In addition to low prices, Kudi's influence is also closely related to Luckin Coffee. Since entering the coffee market, "marketing" has been one of Luckin Coffee's labels, from celebrity endorsements such as Tang Wei and Zhang Zhen to various joint activities. These marketing methods that once made Luckin Coffee so popular are now being used again by Kudi Coffee.

Kudi Coffee chose to become the Chinese sponsor of the Argentina national football team, using the popularity of sports and international stars to quickly increase its voice. A few days ago, Messi's China tour set off a wave of enthusiasm on social platforms, and Kudi took advantage of the opportunity to launch a series of activities "Argentina team invites you to drink Kudi for 1 yuan", once again breaking its own price bottom line, so that consumers can even drink a cup of coffee for free.

In comparison, the fundamental way for Kudi and Luckin to seize the market is through subsidies and low prices. This method can quickly attract consumers' attention and accumulate the first batch of user groups.

02 Low prices are not a long-term solution

In China's coffee market, low-price strategies are already commonplace. In 2022, Starbucks, Tims China and other established boutique coffee brands have successively launched group purchases and distributed "buy one get one free" coupons and other price reduction promotions on platforms such as Douyin and Ele.me, reducing prices again and again.

At the same time, while players in the new tea beverage market are cross-border layout of coffee, they also want to share the market share through price advantages. On February 1 this year, COCO announced that the price of freshly ground American coffee in coffee stores nationwide has dropped to 3.9 yuan, and the price of raw coconut latte has dropped to 8.9 yuan, with the highest drop of nearly 70%. Nayuki's Tea also released a 9.9 yuan coffee voucher for four choices in Douyin group buying, starting to give subsidies...

Ultimately, the reason why brands start price wars is to grab a certain market share, or even to maintain their own user groups under fierce price competition. For some brands such as Kudi Coffee, although price wars can quickly attract attention and increase brand awareness and influence, they will also bring certain problems to the operator.

Take Kudi Coffee as an example. A Kudi Coffee franchisee said in an interview with Shijie that the dividing line between whether a Kudi store can make a profit is around 400 cups. In April, Kudi launched a Douyin promotion with a price of 9.5 yuan per cup, and his store just managed to break even. However, as users gradually reduced their use of Douyin coupons, the store's daily cup volume in June was less than 400 cups, and the store began to suffer losses.

For franchisees, continued low prices mean declining profits. The price adjustment process will also be accompanied by the loss of fixed customer groups, which can easily lead to losses. This will greatly affect Kudi's market expansion.

In addition to profitability issues, the decline in quality caused by price wars also triggered concerns. The co-founder of a well-known coffee community once said: At present, some coffee brands have been seeking quick success in order to achieve short-term expansion and profitability, using marketing techniques to sell relatively low-quality coffee products, which will affect the upward development of the entire category to a certain extent.

On social media, management issues such as inventory, raw material supply, and distribution of Kudi Coffee have been frequently exposed, and the industry has mixed opinions on the supply of its coffee beans and other raw materials. On the user side, many users also said that Kudi Coffee is not delicious and they will not buy it again. Even if these may be individual problems of some stores, they can also reflect Kudi's shortcomings in standardized management.

How long can a pure price war last, how to solve the exposed problems, how can brands achieve long-term development besides discounts...this series of issues need to be thought about and faced by the coffee brands involved in the "battle".

03 Scenario innovation and sinking market are new directions

For brands, low-price strategies are difficult to sustain. Only brands with larger scale, more distinctive products and more innovation can survive in the fiercely competitive coffee market. Differentiating brands through innovative scenarios and products may be one of the directions in which coffee brands should focus.

For example, the "coffee during the day and wine at night" model, which has been proven to be feasible, extends the application scenarios of coffee shops to the evening, making the combination of coffee and wine a supplement for business growth. Considering the influence of caffeine, consumers tend not to buy coffee products at night, so few coffee shops are open at night. The addition of wine and beverages not only enriches the product but also better improves the efficiency of coffee shops.

After going public, Tims launched Tims "Coffee Beer" stores. In addition to its original coffee products, the new stores also offer 31 types of beer and snacks. Starbucks also began to set up special stores selling alcoholic beverages and create creative drinks that combine coffee and alcohol to attract young consumers.

Coffee is not just a drink for young people, but also a lifestyle. This allows coffee brands to radiate to other living spaces, and products for pets, homes, travel and other scenarios have also become the direction for coffee brands to create new growth. For example, Tims launched pet sweatshirts and poker game sets, Luckin launched fans for summer scenes, and M Stand cooperated with fashion brands to launch slipper gift boxes, all of which expand coffee scenes to various fields of food, clothing, housing and transportation, and integrate more deeply into the lives of young people.

In addition to the creative extension of scenes, the sinking market is also a direction that coffee brands can develop in the future.

Not long ago, Luckin Coffee announced the launch of the first round of new retail partner recruitment plan for 2023, covering multiple third- and fourth-tier cities such as Qinzhou and Baotou; in 2023, Starbucks also chose to enter 10 new cities below the third tier, mainly fifth-tier cities. As the Chief Operating Officer of Starbucks China said: The county market has great consumer potential and the market space is in urgent need of development. Starbucks values ​​not only the more than 300 prefecture-level markets across the country, but also nearly 3,000 county markets.

The continuous decline in coffee prices has given coffee brands the opportunity to explore business opportunities in low-tier cities. However, in this process, there are still problems such as difficult logistics and distribution and the lack of consumer habits. Brands still need to make specific adjustments based on market characteristics and consumer needs.

03 Conclusion

Nowadays, coffee has gradually moved out of the niche circle and become a high-frequency consumer product for young people. With the help of the capital market, the scale of the coffee industry has expanded rapidly, and the number of brands entering the market has continued to grow. Under huge competitive pressure, price wars have become the first shot for new brands to open up the market, and both Kudi and Luckin have achieved remarkable results.

However, while brands are expanding their territory, they must also consider the negative impact of price wars to avoid being swept away by low prices and pushing the industry into a vicious competitive environment.

Author: Dake

Source: WeChat public account "TopKlout (ID: TopKlout)"