Observation+ | Luckin Coffee is not the next ofo, and the coffee industry has not yet entered a reshuffle period

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Internet coffee brands are having a hard time. According to media reports, the proportion of Lian Coffee stores closed nationwide has reached 30% to 40%, and Luckin Coffee is also facing a trend of increasing losses. Is this the price of their previous crazy expansion? Will Luckin Coffee become the ofo of the coffee industry? Has capital overestimated this industry?

Observer of this issue: Hu Han, co-founder of AI Finance

36Kr: Recently, Lian Coffee has closed stores nationwide, and Luckin Coffee has accumulated losses of more than 800 million. Is this the price paid for the rapid maturity and crazy expansion of the Internet coffee industry by capital?

Hu Han: Maybe it’s not accurate to say the price. There are two views at this stage. One is that the company burned too much money before and can only shrink now, so now is the price it must pay after crazy expansion. I hold another view. Whether it is Lian Coffee or Luckin Coffee, they are facing the stage of educating users and the market by burning money to expand in the early stage. According to this logic, the current contraction is likely to be the end of the staged battle in the education market. Considering the cost, they must now do more refined operations.

36Kr: The strategy of burning money to expand at any cost is not new. Didi, ofo, and Mobike all used the same capital strategy. Some people say that Luckin Coffee is likely to be the ofo of the coffee industry. Do you agree with this statement?

Hu Han: I agree in part. From the external characteristics, they do have highly similar strategies, such as quickly acquiring users through high subsidies, occupying the market, and expanding the traffic pool. This was a common operating methodology in the early days of mobile Internet. Luckin Coffee was the first to apply the marketing methods of Internet platforms to the retail-oriented coffee industry, so many people think it is the ofo of the coffee industry.

However, from another perspective, Luckin is essentially a retail company that sells coffee products. Its business logic is completely different from that ofo. The model of shared bicycles is to own the hardware and then rent it out. Historically, few mature companies have used this business model and succeeded. Therefore, after spending a large amount of money to buy traffic in the early stage, once subsidies are no longer provided, it may immediately fall into a vicious circle of losses. However, in the coffee industry, whether it is the average customer price or the classic product sales model, it is theoretically still profitable to cancel subsidies. This is a relatively mature business model, but it is supplemented with Internet marketing and promotion methods, so there are obvious differences in business logic between Luckin and ofo.

36Kr: In December last year, Luckin Coffee completed its B round of financing, with a post-investment valuation of 2.2 billion. Can the secondary market still bear Luckin's valuation?

Hu Han: It depends on how you define Luckin Coffee. From a broad perspective, if Luckin Coffee is still a company that sells coffee products using the Internet methodology, it is essentially still a new coffee retail company, and its valuation should not have much room for imagination. Because essentially, the core competitive advantage of a coffee company still lies in your product and brand premium. The reason why Starbucks is so large is that after a long period of hard work, it has a brand premium. A coffee that costs 12 yuan can be sold for 40 or 50 yuan, and people may not think it is expensive when consuming in the store. The continuous subsidy strategy will not achieve the accumulation of Starbucks in the short term. Therefore, if the secondary market defines Luckin Coffee as a traditional coffee retail company that started with the Internet method, its ceiling may not be particularly high.

36Kr: What impact might the integration of Internet coffee brands have on the entire industry chain?

Hu Han: It may make the entire domestic coffee consumption market space larger. For example, it was hundreds of billions in the past, and it will reach trillions in the future. Internet coffee brands are likely to become the first pioneers of the Chinese coffee industry. The first challenge they face is how to bring coffee from a niche beverage to the mass consumer market.

When the market is developed, more heavyweight players may intervene, which will drive traditional coffee brands such as Starbucks to transform and upgrade. This is similar to KFC in the early years, which was positioned as high-end Western food. However, as Chinese consumers gradually developed the habit of consuming Western fast food and there were more and more local players in China, KFC had to adjust its sales strategy and expand to lower-tier cities. Therefore, these players are still in the early stages of market development, and it is very likely that they will not be the ones to reap the rewards in the end.

36Kr: If these Internet coffee brands want to get out of the predicament and explore a clear profit model, what should they do?

Hu Han: The most important thing for Internet coffee brands in 2019 is to make up for their shortcomings.

The first problem is insufficient product capabilities. Coffee is a consumer product. People consume it for its taste and real experience. If the core taste cannot keep up, it will definitely not be able to grow in the future. This is also why people have more doubts about Internet coffee.

The second is supply chain upgrades and brand value accumulation. The reason why Starbucks can sell at such a high price is that it has accumulated a lot of brand culture elements. At present, these Internet coffees in China are far from being accumulated to that level. Essentially, it is because of the lack of core product strength, and also lacks brand culture accumulation and understanding of the entire culture and market. Now they are just letting the market know themselves through early subsidies. What they need to do next is to improve their product research and development capabilities, improve the level of supply chain and brand culture connotation, etc.

36Kr: For Luckin Coffee, they have spent a lot of money to build their business, but now they are not stable and are in a precarious situation. Do you think capital has overestimated the Internet coffee industry?

Hu Han: I don’t think that capital has overestimated this industry, but I am a little worried that these brands will not survive until the industry really explodes. As I said just now, when coffee becomes a mass consumer product, it is likely that more giants will enter, and there may also be a rising star. At present, if investors and investment institutions are taking a wait-and-see attitude towards them, it is also because everyone has learned their lesson and is worried that their money will be used to help the later big players educate users.

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