With Luckin Coffee’s 10,000 stores, is Mixue Ice City getting an enemy or a comrade?

How did Luckin Coffee do it from being forced to delist to opening 10,000 stores? This article focuses on Luckin Coffee, a brand that has been reborn from the ashes, and analyzes its development methods to summarize its experience. In addition to the analysis, it also briefly discusses the views on the "milk coffee dispute", come and have a look.

The three-year period has expired.

Three years ago, Luckin Coffee was exposed for financial fraud, its stock price plummeted, and it had to delist; now, Luckin has not only survived, but has also officially achieved the "10,000 stores" achievement, becoming China's first 10,000-store chain coffee brand.

On June 5, Luckin Coffee announced that its 10,000th store opened in Xiamen, Fujian, and simultaneously launched the "10,000 Stores Celebration" event. During the event, each consumer can receive a 9.9 yuan coffee coupon per week. Due to the popularity of the event, the Luckin Coffee mini program crashed during the peak lunch hour that day, and the official had to issue an emergency announcement, asking users to move to the Luckin Coffee APP to place orders.

From the frequent release of hot products to the joint launch of hot products, to the "10,000 Stores Celebration" event that crashed the mini program, there is no need to say much about Luckin's explosive popularity. Previously, Daofa communicated with some coffee practitioners and reached a consensus:

For the coffee industry, Luckin Coffee’s value lies not only in its brand rebirth after a heavy blow, but more importantly, its early success in making its coffee products like milk tea and affordable has greatly influenced the subsequent coffee consumption habits of domestic users.

With the rise of Luckin Coffee as a clue, the domestic milk tea and coffee market has quietly changed. This time, Luckin Coffee has achieved the goal of 10,000 stores, and the old issue of "milk coffee dispute" has once again been pushed to the front of the majority of practitioners.

In today's article, we look back at how Luckin Coffee, which was founded less than six years ago, has grown to a scale of 10,000 stores. How will the emergence of a brand with 10,000 stores in the coffee industry affect the market competition between coffee and milk tea?

01 Review of Luckin Coffee’s path to 10,000 stores: Mixue Ice City mixed with Nova Coffee?

How did Luckin Coffee manage to open 10,000 stores in less than 6 years? Here is a diagram showing the store expansion overview:

On October 28, 2017, Luckin Coffee opened its first store in Beijing Galaxy SOHO, and subsequently entered 13 first-tier cities including Shanghai, Shenzhen, Guangzhou, Shenzhen, Nanjing, Wuhan, etc. At that time, Luckin Coffee mostly selected locations in core business districts and office buildings, accompanied by posters of Tang Wei and Zhang Zhen holding coffee on the elevator screens.

By the end of 2018, Luckin had 2,073 stores, all of which were self-operated. At this time, Luckin quickly gained popularity through a combination of "grasping the main customer base + core locations + celebrity voice" .

After conquering the first-tier cities, Luckin Coffee gradually penetrated into the second- and third-tier cities and opened up a small-scale recruitment of joint venture partners.

As of December 31, 2019, Luckin Coffee had 4,507 self-operated stores and 282 franchised stores in a total of 42 cities across the country.

The following year, Luckin Coffee had become China's largest coffee chain, but it soon reached its life-or-death moment. In January 2020, Muddy Waters released a research report shorting Luckin Coffee. In April, Luckin Coffee revealed that it had committed fraud, and its stock price plummeted by 80%, with its market value evaporating by nearly $5 billion. Two months later, Luckin Coffee was ordered to delist from Nasdaq.

After delisting, Luckin Coffee chose to cut off its arms to survive and took the initiative to close some stores with poor performance. In order to reduce the burden, Luckin Coffee increased its efforts to recruit joint ventures in its expansion strategy, but it still has not fully opened its joint venture channels.

By the end of 2020, Luckin's own stores had dropped to 3,929, while franchise stores had increased to 874, achieving full-year net revenue of 4.033 billion yuan, a year-on-year increase of 33.3%.

Image source: Essence Securities

In January 2021, Luckin Coffee officially opened for franchise recruitment. This round of franchise recruitment opened 168 cities, mainly second- and third-tier cities, excluding first-tier cities such as Beijing, Shanghai, Guangzhou, Shenzhen, and Wuhan. According to official disclosures, the total initial investment cost of the franchise store is approximately 350,000 to 370,000 yuan.

Image source: Official WeChat

It is worth noting that unlike most brands that charge commissions based on turnover, Luckin charges commissions based on gross profit and does not charge franchise fees. If the gross profit does not exceed 20,000 yuan, Luckin will return 100% to its franchise partners. Only when the gross profit exceeds 20,000 yuan will Luckin charge commissions, and the return ratio will begin to decrease until it exceeds 80,000 yuan, when the ratio is reduced to 60%.

The attractive joint venture conditions have accelerated Luckin's store expansion. At the end of the second quarter of 2022, Luckin's store count surpassed Starbucks for the first time, reaching 7,195, achieving 100% coverage of first-tier, new first-tier, and second-tier cities, 99% coverage of third-tier cities, and 90% coverage of fourth-tier cities.

It was during this period that Luckin Coffee was known as the "Mixue Ice City of the coffee industry". The latter originated in Henan, China, and achieved rapid expansion across the country through a joint venture model, focusing on low-tier cities. At one time, Mixue Ice City's franchise stores accounted for more than 99% of the total number of stores, and it was also the first brand in the domestic tea beverage industry to have 10,000 stores.

In order to accelerate the pace of expansion, in December 2022, Luckin Coffee launched a new round of joint venture recruitment plan, mainly targeting third- and fourth-tier cities such as Anhui, Henan, the three northeastern provinces, Inner Mongolia, Shanxi, and Shaanxi, to further sink. This move has also achieved remarkable results. In the first quarter of 2023 alone, Luckin Coffee opened 1,137 stores.

So far, Luckin Coffee has a total of 9,351 stores nationwide, including 3,041 franchise stores.

At the end of May this year, Luckin Coffee, which is familiar with the joint venture, opened the door to "joint venture with stores", targeting investors of stores that are operating within the lease contract period or self-owned shops. It can be said that this operation is actually to seize the market, so that those who have already made investment choices will switch to Luckin Coffee and further increase their own market share.

As for the store franchise business, Nova Coffee has already made similar attempts. According to the Financial Investment News, the brand looks for existing stores with food business licenses, fills them with the brand's machines, goods and manpower, renovates the stores, puts Nova Coffee's brand elements on them, and then sells coffee.

Following this light-asset operation idea, Nova Coffee's franchisees include partners from Western restaurants, fast food restaurants, bakeries, bars, etc. In just three years since its establishment, it has opened more than 1,700 stores in more than 100 cities across the country, ranking TOP2 on iMedia's "2022 Chinese Coffee Chain Brand List", second only to Luckin Coffee.

In the coffee industry, Nova Coffee has replicated the above model across the country. Logically, Luckin Coffee is now willing to try the "store co-operation" model, which is more or less in line with the achievements of its competitors.

A comprehensive review of Luckin's road to 10,000 stores shows that January 2020 and June 2023 are destined to be engraved in the brand's history. It can also be seen that its expansion strategy is very clear:

With self-operated stores, we have secured a stable presence in first- and second-tier cities, and accelerated the layout of the lower-tier markets through the joint venture model. The conditions for joint ventures are also gradually relaxed, first opening up joint ventures to exercise overall management capabilities and establish a SOP system, and then opening up joint ventures with stores to further achieve market expansion.

02 The Wandian incident ignited the "milk coffee dispute", the essence of which is to share the market

After Luckin Coffee opened 10,000 stores, the debate over milk tea vs. coffee became increasingly intense.

Let’s look at milk tea first. The China Chain Store & Franchise Association analyzed that last year, new tea drinks featuring tea + milk + fruit + culture began to enter the mature stage of industry development. Overall, the penetration rate of the target customer group has exceeded 40%, which can be described as a red ocean.

Let’s look at coffee. From the perspective of demand, Starbucks’ new CEO Nassin recently commented on the domestic market:

Currently, China's per capita coffee consumption is 12 cups per year, while Japan is 200 cups and the United States is 380 cups, so there is still a lot of room for growth.

The above viewpoint compares the caffeine intake of global users and believes that there is still a huge blue ocean in the domestic coffee market. The implication is that coffee consumer education is still in its early stages and there is a lot of room for market imagination.

The domestic coffee and milk tea market development stages are different, but more than one coffee brand founder has told DaoFa that many people are actually using milk tea ideas to make coffee, Luckin Coffee is an example. In other words, the "milk coffee battle" was doomed at the beginning of the track.

This competition was first reflected in brand positioning .

An in-depth research report on Mixue Ice City by China Merchants Securities shows that Mixue Ice City's profitability has verified the feasibility of the "high quality and low price" route. Looking at the coffee market, similar logic has been reused by many chain coffee brands.

For example, to celebrate the opening of 10,000 stores, Luckin Coffee issued a 9.9 yuan designated coffee voucher to each user every week from June 5 this year, and stated that "high-quality coffee has entered the 9.9 yuan era . " For another example, Guo Xingjun, the founder of Nova Coffee, once told Daofa that the tea beverage market as a whole has become more and more advanced over the years, indicating that consumers have always been pursuing quality products.

Compared with the situation many years ago when Starbucks dominated the mainland coffee market, more and more new coffee brands are now committed to allowing consumers to drink high-quality and affordable coffee. In February this year, "CoCo Coffee" even entered the coffee market from the new tea beverage market with a price of 3.9 yuan per cup of freshly ground American coffee, allowing milk tea consumers to get in touch with coffee at a low threshold.

To make a simple inference, when faced with coffee and milk tea with similar positioning and pricing, when milk tea consumers have the habit of consuming caffeine on a daily basis, the situation of "choosing one of the two" will only increase. Milk tea consumption is seasonal in nature. Under the influence of the coffee consumption mentality, the closer it gets to summer, the more users who pursue health and reduce burden are likely to give up milk tea with higher calories and choose a cup of low-calorie coffee instead. It is not ruled out that in the future, some of the existing milk tea users will be converted into new coffee users.

03 The business model of “milky coffee” is similar, and the product is the key to success

In addition to brand positioning, the business models and product development ideas of new domestic coffee consumer brands are also becoming more and more "milk tea-like".

As mentioned above, Mixue Bingcheng is well-known for its ability to expand through franchise stores. In some remote areas, users can also buy a cup of Mixue Bingcheng tea more conveniently. This case shows that the premise for tea brands to build minds is to "make it available to users."

On the other hand, chain coffee brands represented by Luckin Coffee, Nova Coffee, Kudi Coffee, and Bixing Coffee, including M STAND and MANNER, which originally expanded relatively slowly, have paid more and more attention to the number and speed of store expansion in recent years.

In particular, Kudi Coffee took only one month to grow from a start-up to a hundred stores, and had opened 3,000 offline stores seven months after its founding. This year, Norva Coffee has frequently announced the opening of hundreds of new stores, with 110 new stores in January and 205 in May. During the period of accelerating store expansion across the country, Norva Coffee has taken store density as an important indicator.

The store expansion actions of tea brands are usually to occupy the minds of consumers. The better the store location, the more it can reflect the brand power. According to Daofa's observation, in the selection of store locations, chain coffee brands also consider indicators such as customer flow and store location. For first- and second-tier central cities, they mainly consider office buildings, while in lower-tier peripheral cities, they mostly choose shopping malls. This means that the "milk coffee battle" will inevitably involve competition for store locations.

Not only in offline stores, "milk coffee" also has a similar logic in online public and private domain operations.

On May 26, at the Shanghai Coffee Industry Summit Forum, Wu Binbin, the founder of Bixing Coffee, stated that his team has many years of experience in the new tea beverage industry. At the beginning of the establishment of the new coffee brand, they researched the business models of the top brands in the new tea beverage industry, including digital operations, as a reference for the start of Bixing Coffee.

Image source: Shanghai Coffee Industry Summit Forum

For the entire "milk coffee" market, the tacit understanding in the business model means an all-round competition in upstream supply chain capabilities, brand digital operations, store operating efficiency and team effectiveness.

Ultimately, brand power can only be conveyed to consumers through products. And the competition in the product end of "milky coffee" is also what consumers feel most deeply.

Previously, the Nova Coffee team learned from Meituan Dianping and Alibaba Local Life that before and after consuming Nova Coffee, the most purchased item by users, besides coffee, is milk tea. Therefore, Nova Coffee pays more attention to the palatability of coffee and continues to develop fruit coffee series to lower the threshold for new users to accept the brand. At the same time, it maintains the monthly update to increase the efforts to promote user activation and attract new users.

With the continuous development of flavored coffee and the increase in the frequency of new products, the product boundaries between coffee and milk tea are becoming less clear, and creating "explosive products" has become a breakthrough that all brands can only hope for. Focusing on products, from popular ingredients such as seasonal fresh fruits and Yunnan coffee beans to various cultural IPs and cross-border joint ventures, milk tea and coffee are gradually becoming like each other.

Let’s get back to the Luckin Coffee 10,000 store incident.

Last year, Starbucks China also proposed a goal of reaching 9,000 stores by 2025. Now, we turn our attention back to the seed players in China, including Cha Baidao, Shanghai Auntie, Gu Ming, Shuyi Herbal Jelly, Nova Coffee, Kudi Coffee, and Bixing Coffee... The "milk coffee battle" is about to usher in the most lively moment. Let's guess who may be the next brand to break through 10,000 stores?

Author: Chu Qing, Li Zi

WeChat public account: "Knife Skills Research Institute"