China s coffee market has entered a new stage, who is upgrading and who is falling behind?

Visual China.

Text |Treasury Finance, Author |Qingfu, edJiajia.

A few days ago, data released by World Coffee Portal showed that the number of coffee brand stores in China is close to 50,000, with a growth rate of more than 58% in the past 12 months. The growth of China's coffee market is due to the incursion of domestic coffee brands, with two coffee brands, Luckin Coffee and Cudi Coffee, with net growth of more than 10,000 in the past yearThat's 13 times that of Starbucks.

As a foreign product, ten years ago, Starbucks was synonymous with middle class, Western culture and exquisite life in the eyes of Chinese people. But now, with the iteration speed of hundreds of models a year, frequent interactive social gameplay, and the best strategy of low price and volume, domestic brands such as Luckin and Cudi have kicked foreign brands such as Starbucks off the throne and won the love of young peopleNo one feels that drinking Luckin is low anymore, and going to Starbucks is very high.

Domestic coffee victory,On the one handOriginating from its own continuous improvement, it defeats foreign brands with capital, innovation and channels. On the other handIt is the Starbucks that sticks to the so-called coffee culture and never understands the needs of local Chinese consumers.

In 1986, the president of Nestlé Asia Pacific visited Dongguan for the first time to seek a way to expand its business, and Dongguan provided it with land and tax incentives, and helped it discover the origin of coffee in Yunnan, thus bringing instant coffee, the first industrialized coffee product to China. Prior to this, only people in developed areas such as Shanghai had the Xi of drinking coffee, andBecause of the lack of supply, coffee seems a little "noble". The public's early impression may only be Nestle's advertising slogan "It tastes great".

However, Nestle is only accelerating the formation of coffee product impression in China, and if it really opens the door to the mind of China's coffee commercialization market, it has to be Starbucks.

In 1991, there was no Fourth Ring Road in Beijing, and there were more manual workers flocking to the city than white-collar workers, but the lonely high-rise office building of Guomao CBD had already welcomed a "foreign" business visitor. Starbucks' first store in China, with a large latte of 19 yuan and a cappuccino of 22 yuan, for the first time, made the monthly disposable income of urban residents in China only 487 for the first time83 yuan for the Chinese,Be amazed by the unique taste of coffee.

Beijing International Trade Center in 1999. Source: Zhengzhou property market).

But it is only in this mood and high-end brand impression, because ** and Xi are hindering consumption. It was not until 2001, after China's official accession to the WTO, that the frenzied influx of foreign-funded enterprises brought a large number of overseas employees, who not only became the most loyal consumers of Starbucks China at that time, but also gradually outlined a unique landscape in the corporate market - urban white-collar workers in suits and leather shoes, entering and exiting high-end office buildings with coffee in their hands as elites in the workplace, or talking elegantly directly in Starbucks storesBecome a consumer symbol of the times.

Since then, Starbucks has firmly grasped the mental advantages of China's early middle class, starting from the core consumer group, so that this fashionable and elite beverage has started a commercial expansion that spans the century. A typical example is,Starbucks opened its first store in Shanghai, a city with coffee Xi, at the beginning of this century, and it took only 21 months to become profitable.

During this period, domestic brands only had sporadic testers in the Chinese market, such as European and American coffee led by Starbucks, Taiwanese coffee represented by Shangdao Coffee, and Korean coffee represented by Man Coffee, all of which wanted to occupy the budding opportunities in the Chinese market first. Looking back now, Starbucks' early strategy was undoubtedly very successful, introducing the unique strategy of overseas "third place" into China, echoing the development of the market economy and the environment of enterprises rising from the ground, seizing the most spending power of middle-class employees, and shaping the high-end consumer brand barrier that has been ahead of the market for more than a decade. For example, in the classic online article in 2004, "I struggled for 18 years to sit with you and drink coffee", the café mentioned was Starbucks. Obviously,Starbucks was close to the class dividing line at the time.

It is worth mentioning that perhaps the development was too smooth at that time, and Starbucks also suffered a Waterloo brought by blind expansion in the first decade of the century. At its peak in 2007, when the number of stores worldwide exceeded 15,000, it plummeted in a variety of difficulties such as over-diversification, poor service, and the breaking of the concept of a third place, forcing founder Schultz to re-emerge. Two years after the rectification, Starbucks turned a profit and made a profit for the first time in ChinaStarted another spring for the brand.

On the one handThis historical episode tells us that it is difficult for brands to ensure that their strategies for the following years are not wrong because of the advantages of the early days, because times change. On the other handStarbucks' huge success was still limited to that pinch of coffee core consumers, and it didn't seem to have the incentive to broaden its consumer base. And this has laid the foreshadowing of the counterattack and transcendence of domestic brands.

Multinational giants have spent more than ten years cultivating the minds of China's first batch of large-scale coffee drinkers, and it has also created a conspicuous market opportunity. While the economic power of Chinese consumers has risen significantly, it is clearly not wise to compete directly with Starbucks in the same model. Starting from the consumption mode with Chinese characteristics, domestic brands have started a journey from micro-innovation to comprehensive innovation.

In 2014, Lian Coffee, which focuses on O2O delivery, was bornIn 2015, Schultz, the founder of Starbucks, shouted that he was optimistic about the momentum of the specialty coffee market in Chinese mainland, decided to expand the scale, and Manner was established in the same yearIn 2017, at a time when the public did not perceive the seeds of the great change, it was plantedLuckin was born in Xiamen and soon entered the Beijing and Shanghai markets.

Source: CIC Consulting. Note: Different platforms have different criteria for dividing market development stages, and only information support is the main thing here).

Under the series of actions, what exactly did the new players bring?We can get a glimpse of what happened from the ** dynamics at that time:

In 2018, China Business News Weekly published an article summarizing Luckin's business model as ".An Internet chain coffee brand that grows on a mobile phone and delivers it to a deskThis is a good reflection of the use of domestic Internet consumption Xi by Chinese brands.

In 2019, The Economist wrote an article titled "Coffee is on the Rise in China, a Tea Country", which pointed out that Chinese consumers no longer consider coffee to be a luxury, and they place orders on their mobile phones and pick them up at Luckin "kiosks"-like storesIt's as easy as buying a bottle of mineral water

Source: Luckin Coffee).

It can be seen that the differentiation that new players are looking for in the market model has actually accelerated the expansion of coffee sales and purchase channelsThe coffee market has entered the mass stage

When "easy to buy and drink at any time" has become a coffee consumption trend in the Chinese market, the business map of domestic brands is slowly unfolding. During this period, the characteristics of the Chinese coffee market can be summarized in four points:

One is capitalizationUnder the dividends of population base and middle class growth, the "domestic substitution" of the coffee market makes capital willing to bet on supporting the expansion of its store scale, marketing expansion and product innovation, thereby leveraging the growth of the brand.

Luckin is the most typical example, before its listing, it went through four rounds of financing in April 2018, a round A in July, a round B in December and a B+ round in April 2019More than $500 million, excluding capital operations in the event of a later restructuring. From its inception to its listing in 2019, Luckin has set an industry record for the speed of development. Although the financial fraud caused by the pursuit of too quick listing was exposed in the later stage, Luckin also quickly corrected it and entered a new stage after the change of management team, which is a later story.

The second is the InternetOnline and offline linkage has become a major trend. In this regard, Luckin and other native brands born in the mobile Internet era have seized many opportunities in the future. Starbucks' focus on offline space has led to a negative path dependence to a certain extent, because it focuses too much on its traditional advantages, but ignores that consumers don't all need space to carry coffee culture, which deviates from the essence of business, which we will elaborate on later.

Luckin and SF Express have strengthened offline distribution cooperation in the same city. Source: SF City).

The third is the matrix of the coffee market, each brand has outstanding characteristics, and gradually builds its own exclusive brand mentality. For example, Luckin is a cost-effective coffee chain that focuses on convenience and functionality, while Starbucks focuses on providing high-quality products and social spaces. It should be noted that in this mental division, there are also hidden differences in the future development trend of the brand, because different characteristics actually correspond to different consumption Xi, who can cover a wide range, who will have a greater advantage in market share.

Fourth, the popularization of products, including the diversification of categories and the parity of sales. In the early days of the emergence of brands such as Luckin, because of their popular and affordable characteristics and the deviation from the market image of traditional coffee, some people thought that their coffee was too cheap, poor in taste, and not high-quality enough, and even named it "brush pot water". But later, Luckin established a new coffee product narrative with product innovation, capturing the taste preferences of domestic consumers, thereby reversing the stereotype of the market and driving domestic coffee into a new stage.

Four major trends help domestic coffee counterattackStarbucks, however, remained indifferent and still stuck to its traditional business ideas. In the early days, its brand effect was strong, and it was often able to obtain good locations at low prices in shopping malls and other venues, and once established "bases" in cities of different levels in this mode to export brand value. However, in the case of domestic brands holding subversive products and expanding aggressively, Starbucks' traditional route is undoubtedly too "cold". The good way to say it is strategic determination, and the bad way to say it is to stick to prejudices and not want to break through yourself.

As a result, we saw that in the hearts of consumers, the seeds of Starbucks' loss of centrality were quietly planted in those years and exploded after the epidemic.

2022 is a year of Starbucks' well-known decline。For the full fiscal year 2022, Starbucks China saw same-store sales down 24% year-over-year, same-store transactions down 22% year-over-year, and average order value down 3% year-over-year. In the FY2023 Annual Report released in early November,:Starbucks although key business data back to growth, butThe recovery in China is still lagging behind its overall global performance, with average order value down 2%.

Starbucks has apparently adjusted its strategy in the face of competition from domestic brands. So, what about the overall situation of the industry?According to iiMedia Research, the market for freshly ground coffee has grown after the epidemic, with a year-on-year increase of 36% to 119.1 billion yuan in 2022 alone. The obvious contrast of one rise and one drop can be seenThe final differentiation between domestic brands and multinational giants has finally begun.

On August 1, 2023, Luckin released its second-quarter earnings report, and its quarterly revenue surpassed Starbucks China for the first time, which is regarded as a landmark eventAfter more than 20 years in China, Starbucks was finally defeated by domestic brands

As mentioned earlier, Chinese consumers not only no longer see coffee as a luxury product, but are also voting with their spending power, lowering the profile of the coffee market and moving towards nationalization. Looking back at the above ** report, we know that the popularization of coffee in the Chinese market has been open for several years, and it is now a critical period of nationalization.

It stands to reason that since the potential market is fully opened, in order for the scale to continue to expand, it is necessary to keep the brand active. But perhaps it was the first diversity failure more than a decade ago that made Starbucks reluctant to change, or perhaps the excessive focus on its brand cultureStarbucks has always been in a corner of the country and consumes brand equity, naturally, it is difficult to compare with the domestic coffee who are trying to seize the market.

For example, in terms of food delivery, Starbucks and Alibaba discussed food delivery cooperation from 2017 to 2018, due to delivery quality issues and concerns about the dilution of the concept of a third place — but in realityTakeaway should be considered from the perspective of consumers in demand and break through its own limitations.

Starbucks is not always a good thing in business. Source: Time Weekly).

In terms of new products, Starbucks is a complete "conservative", attaches too much importance to the so-called coffee culture, and launches dozens of new products a year, which is completely incomparable to the efficiency of hundreds of new products a year such as Luckin. It's good to be focused, butWhether the business is coffee-oriented or consumer-oriented, presumably anyone knows the answer.

Starbucks is obviously trying to achieve the effect of "both want and want", but everyone knows that consumer Xi will always force companies to break conventions. The sooner the old and the new come, the greater the probability of seizing market opportunities. The limitation is that there is too much emphasis on being yourself, but forgettingConsumer preferences and Xi in this era are changing rapidly。It is important to know that using the thinking of the third space to make products can naturally only obtain the upper limit of the third space, while using the thinking of FMCG to make products will grasp the consumption trend wave after wave and have an immediate opinion.

In turn, with reference to the development history of the industry, it will be easier for us to understand why domestic brands represented by Luckin can surpass traditional international giants in recent years.

After encountering a storm halfway,Luckin is fastTransform the development modelIt has started high-frequency innovation in marketing, products, and experience, which not only stimulates and meets the changing needs of young consumers.

Needless to say, at the product level, from the sales resilience of 300 million cups of raw coconut latte sold in two years in the early days, to the miracle of popularity of sauce-flavored latte all over the country this yearThe value of Luckin's products can be reflected in the ability of product strength, which is reflected in the appeal of innovative tastes. Snow Lake Capital has a statistic that the product richness of Luckin reaches 1 of Starbucks7 times, in today's era of changing consumer trends,Diversity is a clear advantage

Source: Luckin Coffee).

At the marketing level, Luckin only relies on a joint means to swipe the screen several times a year. Among them, some operational details of Luckin reflect its deep understanding of marketing, such as when it co-branded with MoutaiLuckin can take advantage of the trend to use topics such as "Luckin responds to whether you can drive a co-branded latte drinking Moutai" to expand the discussion, and greatly extend the life cycle of popularityand engage consumers in the social arena. This point, in fact, shows the appeal of its brand itself, which is in contrast to some brands that can only do basic co-branding.

Finally, at the experience level, unlike Starbucks' traditional route of selling the sense of elitism under the banner of the third space, Luckin cares more about the popularization and popularization of coffeeThe 9 yuan thanksgiving feedback activity can be regarded as a typical case of high-quality affordable coffee promoting consumption equality. When the barriers to taste are removed, coffee has the ability to integrate into consumer lifestyles, and this is precisely the key way to cultivate a future core audience in the domestic marketImplant the brand into the scene and life, and then form a positive cycle of high-frequency consumption to promote innovation

Source: Luckin Coffee).

With frequency and innovation, there is a greater possibility of explosive models. Luckin has now made coffee an everyday drink, building a new mindset that is different from what it used to be. Perhaps at some point in the future, this kind of mental differentiation will become the key to the end of the coffee market competition.

At this stage, we cannot say for sure how the Chinese coffee market will end. But one thing is for sureOnly by continuous innovation can we truly release the vitality of consumption。For Chinese consumers, whose thinking and interests are constantly jumping, it may be a kind of arrogance to remain the same. Only by daring to break through can we win long-distance running.