China News Weekly: Wang Shan

Published in the 2024th issue of China News Weekly magazine on January 1, 15

"In the past 12 months, the total number of Chinese coffee brands in the world has surpassed that of the United States for the first time, jumping to the first place in the world with 4,97 stores. ”

On December 2023, 12, the latest report released by the research institute "World Coffee Portal" shows that China has surpassed the United States to become the world's largest market for branded coffee shops. Over the same period, U.S. branded coffee shops grew by just 13% and now stands at 4,40062.

"China – a tea-drinking country today has more branded coffee shops than the United States. CNN said. Coffee has been in the Chinese commercial market for more than 40 years, and it has started the stage of mass business narrative. At present, Chinese brands and enterprises are giving coffee a new soul, making it gradually become a consumer necessity for Chinese people to "drink leisurely" like tea.

According to the above-mentioned statistics, more than 1,8 of the 1,1 stores that Chinese coffee brands have expanded in the global market have new stores from Luckin Coffee and Cudi Coffee. In 2023, the two giants of Luckin and Cudi are leading the all-round competition of Chinese freshly brewed coffee brands in terms of store size, taste innovation, and market sinking.

Also in 2023, Luckin and Cudi officially opened the "going to sea" trial. Focusing on cost performance, product innovation and marketing, Luckin took the lead in anchoring the Singapore market, followed by Cudi, and quickly "blossomed" in Southeast Asia, Japan, South Korea and North America. A number of senior analysts in the consumer industry told China News Weekly that at present, Chinese coffee brands are still in the stage of "testing the waters" and are facing many uncertainties. At present, the top priority is still to improve the supply chain and continue to expand the broad space of the domestic coffee market.

The 100 billion market continues to heat up

Zhao Wei, who has many years of experience in the brand market in a catering company, hit it off with a friend last year and founded her own restaurant brand in Beijing.

What makes the restaurant special is the "shop-within-shop" business model: special coffee and desserts during the day, cocktails and dinner in the evening, and a "hidden" bistro that customers can explore on their own, serving specialty cocktails. Her entrepreneurial philosophy is: "There is no absolute red ocean for everything, demand is created, and entrepreneurs must find their own uniqueness in the track." ”

In the neighborhood where she opened her store, there are not only a number of chain coffee shops such as Luckin, Cudi, Starbucks, Peet's, and Grid, but also various self-operated coffee shops such as Terrace Coffee and Mobile Coffee Cart. "Compared with other restaurants, we do not provide regular coffee, but based on the logic of cocktail pairing, and create based on different themes, combining ingredients and techniques to make special coffee, so as to attract more coffee lovers who pursue diverse tastes. Zhao Wei said.

Innovative, diverse, and universal...... The "localization" of coffee is sweeping through Chinese cities. In first- and second-tier cities, chain coffee shops and independent boutique cafes that can be encountered around the corner are densely distributed in core business districts and subway stations, and they have connected the footprints of the public "Citywalk". In county-level cities, there has also been a wave of coffee entrepreneurship.

For a long time in the past, due to the low availability of prices and the number of stores, the localization of coffee in China has been slow, and freshly made coffee has always been an industry with low penetration rate and low growth rate.

The node of change occurred in April 2021, and the "raw coconut latte" quickly became a hit after its launch. This single product contributed 4.8 billion yuan in revenue to Luckin in the first 12 months after its launch, and the annual sales exceeded 6 million cups. By organically blending coffee and milk tea, it has made coffee more acceptable to more Chinese people.

"In the past two years, the penetration rate of domestic ready-made coffee has increased rapidly, the number of stores has increased by leaps and bounds, and an 'upward spiral' has formed at both ends of supply and demand - more and more stores are opened, the unit price is getting lower and lower, and the barriers to mass consumption of coffee have been removed one by one. Liu Jiaren, deputy general manager of Cinda Securities R&D Center, commented, "To a certain extent, domestic brands have successfully made take-out freshly made coffee into an 'infrastructure' and achieved mutual success with the market." ”

According to Luckin's financial report data, from the fourth quarter of 2022 to the third quarter of 2023, Luckin opened a total of 5412,2023 net new stores. As of the end of September 9, the total number of Luckin stores has reached 13273,22, an increase of 5.2023% quarter-on-quarter, and at the end of the third quarter of <>, the total number of Luckin stores in China and sales have surpassed Starbucks' Chinese stores, becoming a real "local trump card".

Cudi, built by the founder team of Luckin, has also been "conquering the city" since its birth. On October 2023, 10, on the occasion of its first anniversary, Cudi announced that it had reached 22,6061 stores worldwide and proposed to reach its goal of 2025,2 stores worldwide by <>.

According to the data of the Prospective Industry Research Institute, as of September 2023, among the top 9 coffee chain brand stores in the Chinese market, Luckin, Starbucks and Cudi are firmly in the top three, Lucky Coffee, a brand under Mixue Bingcheng, ranks fourth with about 3000,1000 stores, followed by Manner, Chunlai, NOWWA, and Fresh Fruit Coffee, which have less than <>,<> stores, all of which exceed the number of stores of foreign brands Tims Tianhao and Costa Coffee.

Different from overseas markets, China's coffee market in 2023 will be accompanied by trends such as declining coffee brand prices, taste innovation, and market sinking. "The two main secrets for coffee brands to attract consumers are a low-price strategy, which provides a low cost of trial and error, and a marketing strategy that drives impulsive consumer behavior. Zhao Wei commented, "Once the consumption habit is cultivated, it is conducive to the conversion of repurchase consumption again." ”

Coffee brands have started a price war in the second half of 2023, with Luckin pushing "9.9 yuan per week", Cudi shouting "8.8 yuan for the whole scene, half price for the second cup", and Lucky Coffee even achieved "9.9 yuan for two cups". Behind the "throwing money and giving away coupons" is actually the promotion strategy of coffee brands that fit the preferences of local Chinese consumers. "Sales volume is the core of the coffee supply chain, which can drive the construction of the supply chain from the upstream origin to the midstream roasting equipment and enhance the brand competitiveness. Liu Jiaren said.

On the other hand, local coffee brands are very good at "fancy innovation" in their products. In 2023, the most out-of-the-circle cross-border "top stream" is the joint product "Sauce Latte" of Luckin and Moutai Group, which sold more than 9.542 million cups on the first day of listing in September, with sales exceeding 1 million yuan.

Different from overseas markets dominated by American, latte, and espresso demand, merchants have found that Chinese people prefer to drink milk coffee and special blends, so Chinese coffee brands are not "rolling" beans, but fancy renovation of flavors - in addition to tea coffee, wine coffee, rice coffee, fruit coffee, and even niche flavors such as herbal tea coffee, pepper coffee, and sour horn coffee based on urban characteristics.

The domestic market continues to heat up, and consulting firm Frost &Sullivan has analyzed that the size of China's coffee market can reach 2023.1806 billion yuan in 23, with a compound growth rate of 5.2% in the previous three years, far exceeding the global average growth rate of <>%.

"The Red Sea for Chinese coffee brands is far from coming. Liu Jiaren said that China's current per capita coffee data is only 11 cups/year, compared with the overseas per capita order of 200-300 cups/year, there is still huge room for improvement. "As long as the supply chain can keep up and the brand quality control is properly controlled, the ceiling for the development of coffee scale is very high. ”

County coffee in the cold winter

The rapid expansion of China's coffee stores is also inseparable from the staking of chain brands in the sinking market. Relying on the joint venture model, the expanding Luckin and Cudi have set off a craze for coffee in China's county seats.

Taking Luckin as an example, in its "2023 New Retail Partner Recruitment Plan", 33 third- and fourth-tier cities such as Baotou, Panzhihua, and Xishuangbanna have been added. According to the research report of Guohai Securities, as of September 2023, the number of online coffee stores on the Meituan platform has reached a year-on-year growth rate of 9% and 78% in third- and fourth-tier cities, while Lucky Coffee, NOWWA, Cudi and Luckin are the brands with the highest proportion of stores in lower-tier cities, with the proportion of Lucky Coffee reaching nearly 74%.

While the overall market is heating up, the "involution" of the coffee track is also intensifying. According to the statistics of Narrow Door Restaurant, as of September 2023, the number of newly opened stores in the coffee track in the past year is 9,7, of which nearly 7,3 stores have been closed. Non-leading chain brands and non-dominant independent stores are under pressure.

Coffee shop owners who have become franchisees or managers for the first time in 2023, especially those in county towns, are suffering from the first cold winter after entering the industry due to the low penetration rate and commercialization of local coffee and the impact of the off-season in the market.

"Sichuan Luckin Coffee transferred, due to the tight capital chain, reluctantly transferred two stores. "Henan Xinxiang transferred Luckin Coffee, don't disturb if you are not sincere!" ...... In the dense store transfer information on the Xiaohongshu platform, on the last day of 2023, Chen Mo also typed such a line of words, "Cudi Coffee Store Transfer".

The Cudi coffee shop that Chen Mo joined is located in a county-level city in Jinhua, Zhejiang, which has opened four Cudi coffee shops. According to him, his store has a daily sales volume of about 4~400 cups in the summer peak season, and 500 cups can bring a monthly profit of about 500,3 yuan, but the daily sales in the off-season are only about 100 cups recently. "I only earn about 2 yuan for a cup of coffee, how can I maintain my expenses? Chen Mo sighed.

Ah Cai, located in a county town in Liangshan Yi Autonomous Prefecture, Sichuan Province, will also join Luckin Coffee Shop with his family in 2023. She also said, "The current business situation is very bad, the coffee audience in the county is very small, and the impact of the winter off-season is also very large." ”

The pressure on the affiliates to survive has been building up for a long time. At the end of December last year, a number of Cudi affiliates issued an open letter on the Xiaohongshu platform, in which they said that Cudi had problems such as disjointed supply chain and shortage of goods in the surrounding area, low R&D products and co-branding effects, low gross profit, and unprofessional operation team. "According to the usual feedback of the affiliates in the WeChat group, these problems are basically in line with the facts. There is also a shortage of supply chains, and those that sell well cannot be ordered, and those that cannot be sold will be sent to you every day. Chen Mo said.

The importance of the hematopoietic capacity of the supply chain tests the ability of chain brands to continue to expand in third- and fourth-tier cities. In order to seize the market, Cudi's bold attempts continue. On January 2024, 1, at the same time as the launch of the second brand Tea Cat, Cudi also officially released a new human-machine collaboration strategy, which plans to implement the application of commercial robots on a large scale in stores around the world, and store business hours can be extended to 3 hours. However, Chen Mo said that the implementation of this strategy in stores is still "difficult to implement" for the time being, "because everyone is currently losing money, and a robotic arm costs 24,15 yuan, and there may be no associate to do it." ”

There are also more and more young people returning to their hometowns to start businesses and open independent boutique cafes in the county. On the social media platform Xiaohongshu, the hashtag "County Coffee" has more than 3,<> original notes.

In July 2023, Baoqiang returned to his hometown of Tieling, Liaoning Province, and opened his own store "Next to Heaven" in the alley in the city center, with a business model of "day coffee and night wine". "Today's turnover is 7 yuan...... 163 yuan, 30 yuan, 95 yuan, 114 yuan. This is the store turnover he recorded in the past 105 days. In the off-season, he said, the real daily turnover is "really miserable". Under the influence of nearby brand chains such as Luckin, the coffee business is not easy to do, and the revenue of "day coffee" is not as good as that of "night wine".

The interviewed entrepreneurs also plan to "hold on" a little longer, ready to continue to wait for the spring to pick up. Chen Mo and Baoqiang both said that the loss in the early stage is a normal situation, and there is also a certain budget for this. "Personally, I'm more optimistic about Cudi's prospects and can accept the current escort. When the rent is due, you may consider relocating, but if you can't afford it, you will have to move out. Chen Mo said.

Baoqiang is also still optimistic about the development of coffee consumption habits in the county, and he said that the turnover since the opening of the store has increased month by month. "I don't have a quick success mentality, I can take my time. When the weather warms up, we will make adjustments according to the business situation, but I will not be blind. ”

Liu Jiaren believes that chain coffee and entrepreneurial cafes are not on the same track, Luckin and Cudi focus on take-out freshly made coffee, focusing on improving the cost performance of products and reaching more people through taste adjustment. "Self-operated and entrepreneurial brands still have their own space outside of chain coffee, of course, there are great differences in consumer groups and consumption scenarios in the sinking market in different regions. ”

"The consumption gap in high, medium and low-tier cities is expected to be further reduced, and the domestic coffee market still has a lot of room for growth. Cudi Coffee responded to China News Weekly.

"Go to sea" to test the waters

　　随着国内市场的“蛋糕”越做越大，瑞幸和库迪也在2023年开启出海的步伐。

　　2023年3月31日，瑞幸在新加坡的两家新店进入试营业阶段，打响了中国现制咖啡品牌的出海“第一枪”。四个月后，8月8日，库迪咖啡在韩国首尔江南区开设了首家海外门店，宣布正式启动国际化战略。

　　第一站着陆后，瑞幸和库迪的路径却截然不同。前者仅仅锚定新加坡市场，门店数量稳步扩张。瑞幸董事长兼首席执行官郭谨一曾表示，希望新加坡门店能跑通瑞幸在海外的商业模式。12月25日，瑞幸咖啡宣布其在新加坡的第30家门店正式开业。

　　库迪则陆续开拓了印尼、日本、加拿大、中国香港等地区首店。2023年12月，库迪又开出了越南、泰国、马来西亚、菲律宾和新加坡首店，已进军东南亚、日韩和北美市场。许多为库迪海外业务宣传、招商的小红书账号的最新信息显示，库迪仍在持续“火热”招募海外联营商，还就美国门店选址，南美、欧洲地区的发展意向与用户互动。

The one step ahead of the sea was the instant coffee brand that was easy to transport. Since October 2022, Asian-American e-commerce platform Yami and fresh food platform Weee! have successively appeared in the United States, while Amazon has launched Santonban and Black Moli on the shelves.

Compared with cross-border e-commerce, freshly made coffee brands that need to operate offline face higher costs. "In addition to the cost of building supply chain logistics, façade, water and electricity, manpower, etc., it is also necessary to consider the proximity of local food culture and consumption habits, trademark registration and operation and other laws and regulations. Li Tong, who works in marketing in the United States, said. As a result, the Asia-Pacific region is often a must for Chinese tea and coffee brands to go global.

Supply chain construction is the primary issue for chain brands to go overseas. The operator of the Xiaohongshu account "Cudi Coffee Malaysia Leader" told China News Weekly, "The supply chain logistics of the store has been improved and is basically on the right track. The above-mentioned operators said that except for dairy products, which are difficult to pass through customs, other raw materials, equipment and other transportation logistics are sent from China.

Similar to the domestic market, cost-effectiveness and advertising investment are also the main strategies for coffee brands to go overseas. In terms of pricing, Luckin and Cudi still follow the domestic "subsidy + low price" approach. For example, Cudi Malaysia is priced at RM3.9 for the first cup and RM6.9 for other products, while Luckin Singapore will enjoy S$0.99 for the first cup and half price for the second cup when the Singapore store opens.

The marketing aspect also shows the ambition of the brand. As early as June 2023, Cudi officially announced that it would become the global sponsor of the Argentine national football team, and advertisements containing the image of Messi are also being laid in overseas stores on a large scale. Online, brands advertise on platforms such as TikTok and Xiaohongshu and invite overseas influencers to visit stores, while offline, they carry out special marketing activities based on local culture.

"Overseas markets are different from domestic ones, and the underlying infrastructure such as supply chains and operations need to be built in advance, and there are also certain differences in consumer habits and tastes. Cudi said that in the future, it will continue to explore and explore overseas markets.

"Coffee brands are facing fierce competition in the global market, and domestic best-selling products may not be able to run overseas, and product localization and innovation are also a major problem. Consumer goods mainly rely on brand, product, and channel competition, and brand cultivation is not a one-day effort, so it is necessary to establish a competitive advantage in product and channel operation first. The investment research team of Hexu Zhiyuan Fund said.

"At this stage, Chinese coffee goes overseas, mostly to 'test the water'. Liu Jiaren said. A person who understands the situation of chain coffee going overseas told reporters that due to the high coffee penetration rate of overseas people, coffee consumption habits have been formed, and the core factor affecting sales and revenue is the location advantage of the store. "As long as the location is appropriate, the sales volume is relatively better than that of domestic stores. ”

"The overseas expansion of coffee brands or the trial operation of overseas Chinese with the domestic operation framework have not yet reached the stage where they can verify their success. Zhou Heng, a senior analyst in the field of new consumption, also said.

Uncertain overseas markets

The road to sea is not all smooth sailing, and brands that are starting their journey for the first time also need to be careful of underwater "reefs".

Recently, the trademark dispute between Luckin and "Thailand Fake Luckin" has sounded the alarm for Chinese start-ups. In December 2023, China's Luckin sued Royal Thai 12R Group for trademark copyright infringement and lost the lawsuit, and the latter even filed a counterclaim to claim 50 billion baht from China's Luckin.

"It's outrageous. Ah Cai, who is engaged in purchasing agents in Thailand part-time, commented after encountering a Thai Luckin store on the side of the road. She told China Newsweek that Thailand's Luckin menu is in English, Chinese and Thai, and the coffee products sold in the store are completely different from China's Luckin.

According to WIPO's global patent database, 50R Group applied for the trademark "Thailand Luckin" in 2018, which was successfully registered in 2020 and expires in 2028. The logo is an exact reproduction of the word mark "Luckin Coffee" with Thai characters appended, and mirrors the Luckin deer head pattern. A trademark planner who specializes in international trademark business said that the cybersquatting behavior of 50R Group not only brought strong misleading to consumers, but also caused the preemptive brand to lose the initiative in the local market.

"Trademark rights are territorial, and being preemptively registered means that others have preemptively controlled the brand's market access channels, which is a very fatal blow to the brand's market expansion in the region. Yuan Yuan, a lawyer at Dentons (Shanghai) Law Firm in Beijing, told China News Weekly that preemptively registered brands will be hindered in many ways. Taking China's legal framework as an example, a squatter's trademark rights can be filed and registered with the customs office in China, while the genuine brand owner may be found to be infringing when the imported goods enter the country and be intercepted.

What's even more fatal is that "the 'Thai Luckin' brand has actually started to operate the same business as China's Luckin." This has a greater impact than the bad faith registration of ordinary trademark hoarding. Yuan Yuan believes that "the bigger the Chinese Luckin brand becomes, the popularity of Thailand Luckin will also rise, which makes China Luckin inevitably fall into the embarrassment of 'making wedding dresses for others'." ”

In unknown corners, Luckin may already have many "stand-ins". Coincidentally, on December 2023, 12, a Xiaohongshu netizen found a "copycat" Luckin by the sea in Cesme, Turkey, and the trademark of this independent coffee shop is "Buckin Coffee" and a similar deer head pattern.

Yuan Yuan suggested that companies should investigate and review the trademark registration of their brands around the world, especially to confirm whether there are similar situations in key target markets in other countries, and take corresponding measures to deal with them as soon as possible.

Does Luckin have been "plundered" of its potential market share by maliciously preemptive brands, does it mean that its pace of going overseas is one step slower? The above two analysts agreed that it is not so "easy" for Chinese coffee brands to go overseas, and there is no need to "rush", and going overseas is not their primary business direction at this stage. "The core comparative advantage of the overseas business should lie in the high demand in the future, as well as the perfect supply chain, such as the control of the upstream origin and the core bargaining power. At this stage, there is no profound comparative advantage for the overseas expansion of ready-made coffee brands compared to instant coffee brands. Liu Jiaren pointed out.

Due to the huge domestic market space, Chinese coffee brands should focus on developing the scale of the domestic market and stabilizing the supply chain.

"Even in the most advanced cities in China, there is still a gap of more than 300 times between Shanghai's per capita annual coffee consumption and mature coffee markets such as the United States and South Korea that exceed 10 cups per year. A research report released by Minsheng Securities in August 2023 pointed out that "the Shanghai coffee market is not yet mature, which also means that the domestic coffee market, which is relatively lagging behind in the development stage, has greater development potential." ”

The research report also believes that the space of domestic ready-made coffee stores is still broad, and leading brands such as Luckin are expected to usher in a larger market share; in the future, with the accelerated expansion of major chain brands and the gradual improvement of industry maturity, the chain rate of the coffee industry will also tend to increase.

The Project Café East Asia 2024 report also predicts that China's global coffee store growth will continue to maintain 2024% in 24 and slow to 2028% by 6.

However, it is also the general trend for the new consumer industry to go overseas. At this point, the new tea brand of coffee's "brother" track has taken the lead.

From 2020 to 2022, the growth rate of the domestic new tea beverage market will decline. Since 2018, brands such as Hey Tea, Mixue Bingcheng, and Nai Xue's Tea have successively gone overseas, and in 2023, Tea Baidao, Charlie Yishi, A Little Bit, and Sweet Lala have landed their first overseas stores. New tea brands have initially found a way to go overseas, including catering to the preferences of local consumers, launching IP localization marketing, and expanding the market with a franchise model.

Zhou Heng, a senior analyst in the field of new consumption, told China News Weekly that it is much easier for Chinese milk tea brands to go overseas than for Chinese coffee brands. The reasons are, firstly, the consumption awareness of the sugar water market is common in the global market, and there is no need for education costs; second, to a certain extent, Chinese milk tea is a "dimensionality reduction attack" in overseas localities, and its rich fresh-cut fruits and raw material categories have a substitution effect on the previous sugar water in East Asia and other developed regions of the world; third, the process of milk tea going overseas also contains large-scale, labor-intensive organizational management and store management experience output, which is also the advantage experience of the Chinese market.

Correspondingly, Chinese coffee brands are facing many challenges. First, the international coffee markets in Southeast Asia, Japan, South Korea, Europe and the United States have cultivated mature coffee culture and habits, and are leading in the product dimension; second, the product taste of Chinese coffee brands is not necessarily as suitable for the global market as the local market; third, the cost of coffee raw materials in various places is difficult to reduce, and Chinese coffee brands do not have advantages in terms of cost and management.

Chinese coffee brands need to explore their own future. The investment research team of Hexu Zhiyuan Fund pointed out: "In essence, tea originated in China, and going overseas is more about 'exporting' and using Chinese tea to seize the minds of consumers, while coffee is a foreign product, and going overseas is a kind of 'return', which needs to seize a place in the fierce competition." ”

(Chen Mo, A Cai, Baoqiang, Li Tong, and Zhou Heng are pseudonyms in the article)

China News Weekly, Issue 2024, 2

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