Can Luckin Coffee’s Founder Replicate His Previous Success After Opening 3,000 Stores in 7 Months? | TiPost Focus

“This is an unprecedented speed.”

Many industry experts, including Long Zhen, the founder of Joining Comments, were quite surprised by the rapid growth of Cotti Coffee.

According to the latest information released by Cotti Coffee on May 31, the brand’s 3000th store has been opened in Beijing Guomao III. The information released by the startup coffee company at the briefing on May 10 showed that the number of its stores has reached 2,500, and it is expected to reach 5,000 by the end of July. According to Li Yingbo, Cotti Coffee’s chief strategy officer, the brand opened more than 1,000 stores in just one month in April.

As a start-up coffee chain brand, this speed is really amazing. According to data from Narrow Gate Research, the top three brands with the most store openings in 2022 were Luckin Coffee (opening 2,939 new stores), Lucky Coffee (opening 1,521 new stores), and Maikafei (opening 763 new stores).

As a brand founded by Qian Zhiya, the founder and former CEO chairman of Luckin Coffee in October 2022, Cotti Coffee nearly completed Luckin’s one-year journey in just 7 months. Although Lu Zhengyao never stood in the center of the stage, his shadow has always been vaguely present in the Cotti system.

However, doubts have come along with the rapid development.

The cost of expanding fast

It is very easy to find negative reviews of Cotti Coffee on social media.

“Immature, high cup volume, but low revenue, and the franchisee doesn’t make much money.”

“I thought I could play around by being a managed franchisee, but the sales were getting worse every day during the trial operation……”

“Opening two Cotti stores within 160 meters, it is doomed to lose money even before opening. It is said that two teams recruited merchants separately and did not know each other……”

“Cotti’s investment is really arrogant, and the staff doesn’t provide any service. Our communication is based on Q&A, which is really exhausting.”

In response, Li Yingbo, Chief Strategy Officer of Cotti Coffee, told TiPost App  that the current development speed is “slightly higher than expected.” Cotti’s initial development framework was built according to the scale of thousands of stores. Currently, Cotti adjusts its overall growth plan dynamically every month.

This concentrated explosive growth may lead to the concerns of the market. Among the many doubts, the focus is mainly on profitability.

As Li Yingbo explained, during the Cotti Coffee Carnival in March, the daily cup volume of Cotti’s overall stores exceeded 400 cups. In his opinion, this is a reasonable and achievable level of cup volume.

However, differences always exist. According to TiPost App’s observation, the daily cup volume of some Cotti franchisees still remains at around 100-200 cups.

Regarding this gap, Li Yingbo believes that analysis needs to be conducted from two major directions: cost structure and operations.

Different cities have different consumption capabilities; different stores have different cost structures; different operational capabilities determine different revenue situations. “For a large number of franchisees that just opened in April, the operation of their stores is still in the initial adjustment period, and there is still a lot of room for fine-tuning in the cost structure. After about a month of adjustment, store operations will enter a relatively stable state.”

In Li Yingbo’s view, China’s business format is highly complex. The Cotti team always observes the surrounding environment dynamically when selecting locations, rather than defining location standards forcibly based on 300 meters or 500 meters. This way, high-quality location resources will not be missed. “Our only KPI indicator is store profitability. As long as the store makes money, regardless of the number of stores or profitability, it will naturally move forward.”

As a key member of Luckin Coffee founder and former chairman Lu Zhengyao’s team, Li Yingbo previously worked at Ogilvy and participated in the marketing subsidy war of Shenzhou Car Rental and Luckin Coffee. He has rich practical experience in operating subsidies to acquire customers and social marketing. He joined the tongue technology founded by Lu Zhengyao in September 2021 and served as CEO of Tongue Heroes.

Rapid expansion, winning by quantity, looking back at the franchise myth created by Tongue Heroes, perhaps it can help us understand Cotti’s expansion strategy – in less than 4 months, the intention to sign up for franchisees of Tongue Heroes reached 6,000, and the company also planned to land 3,000 stores within 5 months.

However, whether past experience can help Cotti establish a foothold in the fiercely competitive coffee market is still unknown.

Selling one cup for a loss?

According to the internal push information of Cotti Feishu, the Wuhan Yintai Creative City store has been the top seller in Hubei Province for three consecutive months and the second in national orders for two consecutive months, with a maximum number of more than 1500 cups.

This is a direct-operated store that is well known to many Cotti franchisees. The mall is positioned as youthful, and many well-known emerging brands have achieved good results here. Cotti’s store is located on the basement level, facing two subway lines interchange stations. It is rumored that the monthly rent may be as high as 50,000 yuan, and Luckin Coffee is also located on the second floor, posing a potential threat.

Ajiu has visited this store and was amazed by its impressive performance, but this exciting model store still didn’t convince him. As a former milk tea shop owner, Ajiu knows well that behind this performance lies extremely high operating and basic costs, which is not something that a newcomer like him, who lacks a coffee industry foundation, can easily replicate.

Ajiu did the math and calculated that if 40 cups were sold in the fastest hour and the shop operated for 10 hours a day, only 400 cups would be sold. In his county-level city in Hubei, maintaining this average daily sales performance requires good site selection skills to obtain corresponding customer flow, while also controlling rental costs.

The experience of Sun Xiaobei, a Cotti franchisee in Bengbu City, confirms Ajiu’s concerns. In his Douyin video, he claimed that since the launch of the 8.8 yuan Douyin coupon activity at the end of February this year, Cotti has been paying franchisees a settlement price of 7 yuan per cup, “basically selling one cup for a loss.”

Fortunately, starting from April, Cotti adjusted its subsidy policy and settled all orders below 9 yuan at 9.5 yuan. At the recent franchisee policy optimization briefing, Cotti also provided a subsidy of 10 yuan for franchisees with two stores, but the subsidy for the same franchisee cannot exceed three stores.

However, to achieve long-term and stable profitability, costs still need to be calculated carefully.

A certain Luckin franchisee told TiPost App that the average production cost of Luckin products is basically maintained at around 7 yuan, and the cost of some products can even reach 8-9 yuan. If it is an online order, the price may rise to 7.5 yuan when taking into account the cup holder and paper bag.

But according to Li Yingbo’s calculations, the average cost of Cotti’s products, including a cup of coffee with milk or other innovative flavors and external packaging, can be controlled at around 5.5 yuan.

According to the “Order Commodity Details” data obtained from the Cotti Union Business Backend by TiPost App, the “theoretical cost” of a cup of Pure Australian White is 6.34 yuan, and the “theoretical cost” of Coconut Latte is 7.52 yuan, both exceeding the average cost of 5.5 yuan.

Regarding the gap between them, Li Yingbo said that the average cost of 5.5 yuan is the overall average cost of the products and cannot be directly compared with high-cost products such as milk coffee. On the other hand, the precise operation ability of the union in terms of loss and store operation efficiency also determines the level of average cost.

For a brand that has only been developed for 7 months, it is indeed not easy to quickly settle accounts. However, with the rapid expansion and the halo brought by the former Luckin team, Cotti still has a considerable attraction in the market.

According to the TiPost App survey, many Luckin union businesses have also stepped into the Cotti camp. For them, this is an experimental defense measure- if I don’t open, others will, so I might as well occupy more locations myself.

However, there are still many novice beginners without any catering experience.

Is the average cost per cup 5.6 yuan or 7 yuan?

Calculating based on an average daily sales of 400 cups, should you hire 3 or 4 people?

How to settle Meituan takeaway orders?

What to do if a takeaway order with a total price of less than 13 yuan loses money?

Can the minimum order amount for takeaway orders be set by oneself?

How to check the daily gross profit?

In the face of fierce market competition, on the one hand, the inexperienced union businesses are massaging their own egos, “the business that makes a profit as soon as it opens, it’s not our turn to do it as ordinary people”; On the other hand, the experienced union businesses are worried, “Luckin is struggling to sell at 9.9 yuan, and Lao Lu’s policy is just nonsense”.

This kind of entanglement and tearing is spreading everywhere.

In the WeChat group of affiliate businesses, a group member shared Kudy’s new policy – starting from May 11th, all activities including new store promotions, new customer acquisition, and new customer download App coupons will be suspended and replaced with a daily 9.9 yuan voucher for any drink on the Kudy App. Group members discussed this news, some worried that “Lao Lu won’t invest more money” and “Are the investors planning to withdraw after milking us dry?”, while others remained steadfast, “It doesn’t say they’re canceling the 8.8 yuan and 9.9 yuan promotions, don’t speculate, Lao Lu has a broader vision.”

In response, Li Yingbo stated that the 8.8 yuan promotion on Douyin will continue for a long time, and the 9.9 yuan promotion is an exclusive offer for App users. This change in promotional strategy does not substantially affect Kudy’s overall sales volume.

Li Yingbo divides store revenue into two main parts: one is price-sensitive customers who focus on value for money and use many coupons during the purchasing process; the other is customers who prioritize convenience, and are accustomed to purchasing directly on the mini-program without using coupons. Currently, the ratio of these two types of consumers is about 5: 5. Based on this calculation, the average revenue of a store can be controlled at around 11-12 yuan.

“We don’t think this is so-called low-price marketing. Under the current price range, affiliate businesses can still make money. We think this is a reasonable and sustainable business practice.” In response to market doubts about Kudy’s ability to generate revenue and financial situation, he further stated that although Kudy has not yet initiated an IPO listing plan, it has already formed a very complete development and financial plan with sufficient funds.

Seizing the market through new media

If Luckin Coffee’s success was representative of the traffic 1.0 era through WeChat fission, Kudy’s rapid growth now validates the explosive power of traffic 2.0 represented by Douyin.

Using the 8.8 yuan voucher for any drink, 9.9 yuan promotion, and inviting new customers with free coupons as a means of attracting traffic, Kudy has achieved impressive results through frequent exposure in short videos and live broadcasts. According to information released by Douyin’s life service observation on May 2nd, Kudy Coffee’s GMV exceeded 30 million within two weeks of payment, with an order volume of over 3.3 million, and a short video exposure of 345 million. During the “Heartbeat New Day” event on Douyin, it topped the food rankings in over 20 cities, with over 3,000 self-employed salespeople in a single day.

In Long Zhen’s view, this use of discount coupons is also an attempt to replicate the success of Luckin Coffee — cultivating user habits of ordering through a mini-program. Not only does it save a lot of platform fees, but it also keeps users on their own channels.

Long Zhen believes that Cotti is actually betting on two things now: on the one hand, by quickly opening stores to expand its scale, making it impossible for competitors to “block”; on the other hand, although the coffee market is large and scattered, the location of offline stores is limited. If only one coffee shop can survive in an office building, then Cotti can occupy it and other brands cannot enter.

The strategy sounds simple, but execution is full of conflicts and obstacles.

Initially, Cotti targeted non-first-tier cities, opening in places where the milk tea environment was good. This differentiated market positioning, with brand attributes closely related to Luckin Coffee, became the foundation for Cotti’s rapid expansion.

But this clearly cannot satisfy Cotti’s team’s ambitions. Whether it is to establish brand awareness or to create future market patterns, first-tier cities are markets that cannot be abandoned.

This also determines that Cotti’s short-range confrontation with Luckin Coffee is inevitable.

Luckin Coffee, which started in first-tier cities, has now become the industry leader with thousands of stores. Whether it is Beijing, Shanghai, Guangzhou, Shenzhen, or many provincial capitals, Luckin has already occupied enough favorable terrain, and Cotti needs the firepower and sacrifice of its vast joint venture partners to stand firm.

This will inevitably provoke Luckin’s counterattack. Starting from April 1st, Luckin Coffee launched the “9.9 Anniversary Celebration” and claimed that the event would last until the end of 2024 at least. And people also found that Luckin’s low-price activities mainly focused on stores near Cotti, which really scared off many potential Cotti joint venture partners who were hesitant.

Despite the conflicts and challenges, Long Zhen believes that Cotti’s model is still on the right track. With a payback period of about one and a half years, Cotti can already stand firm in third- and fourth-tier and even more sinking markets. With the popularization of coffee and the halo of former Luckin founders, Lu Zhengyao and Qian Yaze, Cotti, which has taken a part of the milk tea market, can already survive in the vast Chinese market. However, the war in first- and second-tier cities and provincial capitals is still uncertain.

For a brand, expanding first and then contracting is a very healthy development model. Using rapid expansion to quickly establish a reputation and supply chain foundation, and then contracting, streamlining, and improving internal skills, this is a normal development path for a brand.

It’s just that in the process of brand expansion, some people inevitably have to pay the price of casualties.

Can Cotti become the next Luckin?

However, it is too arbitrary to say that early participation will definitely lead to failure. After all, Luckin has given the opposite answer before.

After the departure of the Lu Zhengyao team, Luckin officially opened up joint ventures from January 2021. This is also an important step for Luckin to quickly occupy the sinking market today. With the significant increase in monthly active users, the continuous increase in product prices, and the market feedback being positive, early franchisees have started to open second and third stores one after another, becoming the most loyal and benefited group in the Luckin system.

Nowadays, after experiencing the primitive growth, Cottian has also gradually begun a similar transformation.

On the one hand, it encourages old joint venture partners to open second or even third stores, and promises that such joint venture partners can enjoy the policy of settling orders below 10 yuan at 10 yuan; on the other hand, the audit of new joint venture partners is becoming stricter, and the investment promotion window is gradually narrowing.

More importantly, the commission adjustment model.

In the past, Cottian’s commission model for the monthly gross profit of joint venture partners was divided into two types: model one was no commission below 20,000 yuan, 10% commission for 20,000-30,000 yuan, 15% commission for 30,000-40,000 yuan, 20% commission for 40,000-80,000 yuan, and 25% commission for the part above 80,000 yuan; model two is 10% commission for below 30,000 yuan, and 15% commission for above 30,000 yuan.

According to joint venture partners, Cottian cancelled commission model two on April 30.

According to Long Zhen’s calculation, when the monthly gross profit is below 80,000 yuan, there is not much difference in the income of joint venture partners between the two commission models. However, when the profit exceeds 80,000 yuan, the gap between the two will quickly widen. Moreover, once the future price war stops and the unit price increases, more and more joint venture partners will reach the 80,000 profit threshold, and the commission form of model one will bring more profits to the brand.

However, based on the current income situation of Cottian’s joint venture partners, it may still require patience to increase the commission for top joint venture partners to improve the overall income of the brand.

“All the problems that Cottian currently encounters are basically brought about by the rapid expansion of scale.” Li Yingbo said that the Cottian team has always been adjusting the overall structure and coping strategies, discovering and solving problems at the fastest speed.

This is a sprint, but also a gamble.

With similar strategies and tactics as Luckin, but the market environment is no longer the same as the year when Luckin was listed on Nasdaq in 2019. Whether Cottian’s ship can smoothly pass through the narrow door and withstand the test of the market may still require more funds, time, and confidence to support.

(This article was first published on the TiPost App, author: Xie Xuan)

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