36Kr Exclusive Interview | Lian Coffee CMO Zhang Hongji: The larger market of the coffee industry comes from incremental growth, not stock

Author | Peng Qian

Editor | Changle

The boundaries of coffee consumption are being broken.

The rise of new retail and the gradual integration of online and offline have added new scenarios to the coffee industry and brought new incremental markets. Takeaway channels, social sharing platforms, and smart self-service coffee models (using the Internet of Things, intelligence, big data, cloud platforms and other technologies to enable users to consume coffee in multiple scenarios) are all meeting the needs of coffee consumers in fragmented scenarios.

Specifically, the emergence of "new retail coffee" in the mobile Internet era, such as Lian Coffee and Luckin Coffee, is gradually breaking the offline sales model and single scene built by traditional coffee brands, bringing new development opportunities to the coffee industry.

Their rise shows that coffee consumption patterns are changing, and changes in consumption patterns usually become industry standards. Based on this change, giants such as Starbucks have had to make up their minds to start the road of takeaway and cooperate with Alibaba Group to launch new digital stores in China.

However, it should be noted that although the consumption pattern of coffee is changing and the online channels have a significant effect in diverting traffic, offline channels are still very important.

Among Internet coffee brands, Lian Coffee, which was established four years ago, is one of the longest-lasting and longest-lived ones. At the end of 2017, Lian Coffee had already achieved profitability. As of 2018, Lian Coffee had established 400 offline coffee workshops.

Just recently, Lian Coffee also made a major offline expansion plan: it will open more than 50 large "coffee box" coffee shops in the five major cities of Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou at the beginning of next year. Currently, the 10 coffee boxes in Hangzhou have entered the trial operation stage, and the Beijing Wangjing SOHO flagship store will also open this month.

Lian Coffee CMO Zhang Hongji recently accepted an exclusive interview with 36Kr, in which he talked about the entrepreneurial story of Lian Coffee and also made some new judgments on the development of the industry.

The following is the full interview, with some omissions.

From purchasing on behalf of others to self-operation

36Kr: When you were doing coffee delivery, you already had big clients like Starbucks, so why did you still choose the self-operated model?

Zhang Hongji: I started to do purchasing on behalf of others in 2014, hoping to verify whether the coffee delivery model would work. After a year, I had hundreds of thousands of user data, so I thought this business could succeed.

36Kr: How is the strategy of the self-operated model developing?

Zhang Hongji: By the end of 2017, we had 100 offline coffee shops, all of which had achieved profitability. This year, the entire coffee market has become even hotter, and after achieving small-scale profitability, we have also accelerated our development speed. So far, we have 400 coffee shops , mainly in Beijing and Shanghai, supplemented by Guangzhou and Shenzhen.

We will open 50 to 60 large coffee shops around the beginning of next year in five cities: Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou, of which Hangzhou is our first entry.

36Kr: 400 coffee shops should be able to meet offline demand, so why spend so much money to open large coffee shops?

Zhang Hongji: Many users drink our coffee, but they generally report that they cannot see our brand logo, even though we have opened many small coffee stations offline.

36Kr: You had built your own logistics before, why did you give up later?

Zhang Hongji: We made the decision to give up in April 2017, and all of our business was merged into Meituan in May. The main reason was that our scale had grown, and our self-built logistics platform could not handle it, so we had to give up. This decision was actually very painful, but we knew in our hearts that we could not build a socialized logistics system like SF Express.

36Kr: How is the sales situation now? What is the repurchase rate?

Zhang Hongji: The highest daily average of a single store is 1,200-1,500 cups. During the big promotions in the third and fourth quarters of this year, the average daily average of each store exceeded 1,000 cups. Many customers buy dozens or even hundreds of cups directly. Because we have a coffee warehouse, we can store them and give them to others through social media such as WeChat, so the repurchase rate is very high.

Profitable, why not participate in price war?

36Kr: Luckin Coffee has gained market share through its subsidy strategy. How about you? Is the subsidy strong?

Zhang Hongji: This year's subsidies are larger than before because the competition is more intense. After all, we can use this to increase our scale in the short term. However , we did not provide subsidies for big promotions like Double Eleven and Double Twelve this year because of competition. We knew that other brands would definitely do big promotions, so we did not do it because we wanted to stabilize cash flow. The most fundamental reason for not doing big promotions is to upgrade products, which is a disguised price increase, so it is the opposite of big promotions.

36Kr: Lian Coffee was founded four years ago, earlier than Luckin Coffee, but it is not as prominent as Luckin Coffee in terms of discussion and exposure. Does it not plan to engage in large-scale marketing?

Zhang Hongji: We still consider ourselves a startup.

36Kr: What is Lian Coffee’s core competitiveness?

Zhang Hongji: It’s still the product. We are currently ranked in the top two in the domestic specialty coffee market. We have invested a lot in the specialty coffee category, such as switching milk to cold chain fresh milk (7 to 14 days). The shelf life is very short, so we need to make careful calculations.

36Kr: How do you achieve such precise calculations?

Zhang Hongji: We spend a lot of money on data centers , and we have brought in some offline partners and experts from traditional industries to work on supply chain and quality control. They know everything in the field, have accumulated a lot of experience, and have strong in-depth capabilities. Now we are also digitizing these experiences, which is the new retail we are doing.

36Kr: How did Lian Coffee lower the price of its specialty coffee products? Is the demand so great? How do you stimulate sales?

Zhang Hongji: In fact, people have misunderstandings about the production and price of specialty coffee. In the past, they were all independent shops with very small quantities, small workshop-style, and small scale, with only a dozen or twenty at most. Lian Coffee is wholesale, and we do all the procurement, operation dataization, and machine production ourselves, such as going directly to the raw material site to purchase Yirgacheffe specialty coffee beans. In this way , the supply chain is optimized as a whole, efficiency is increased and costs are reduced. In addition, since our users buy in batches, the availability is also high. Because it is cheaper, the frequency has increased, and many users buy 100 cups at a time. Reducing costs has stimulated sales.

The bigger market comes from the incremental rather than the existing

36Kr: What changes have taken place in the coffee industry this year? Why is it so popular? Is it driven by capital?

Zhang Hongji: The coffee industry has changed a lot in 2018, and new retail has begun to become a trend in the industry. As the consumer base continues to expand, coffee has also reached a turning point in its historical growth.

Moreover, the differentiated competition in the industry is becoming more and more obvious. Head players, specialty players, wealthy players, and store players have begun to occupy differentiated markets with their respective advantages and form barriers.

The ofo incident has been very popular these days. As users, we observe that what is the biggest difference between the shared bicycle and coffee industries? In fact, the shared bicycle industry only has a difference in color. Everyone has not really formed differentiation, but is driven by capital, so it is a life-and-death struggle. The coffee industry seems to be driven by capital, but in fact the industry is upgrading internally.

36Kr: How do you say internal upgrade?

Zhang Hongji: The consumption pattern of coffee is changing, and changes in consumption patterns usually become industry standards. Starbucks has already made enough products and scenarios, assuming that Starbucks is ours. Add takeout and social media group buying, and we will create a closed loop centered on individuals. No matter when and where, I want to have a cup of coffee. In this way, user needs are activated, and takeout brings more consumption scenarios. More consumption scenarios also mean market growth. In fact, the larger market comes from the increment rather than the stock. For example, when coffee becomes a medium for interpersonal communication, it is an incremental market.

36Kr: Social networking brings many new possibilities to Internet coffee brands. Will social networking bring about fundamental changes to the industry?

Zhang Hongji: Socializing can drive scale, but the definition of socializing is very important. It can be a heavy intersection or a light chat online to share orders. There may be 100 ways to socialize, and the scenes will be different. Among them, coffee can form a chemical reaction and touch people's emotional nerves. There are physiological differences, but the greater difference is the psychological difference.

36Kr: The sinking market is very hot, but many people in the industry say that coffee is not suitable for the sinking market. What do you think?

Zhang Hongji: No. Different things are said at different times. Before Pinduoduo's rural e-commerce, no one knew that the potential of the sinking market was so great.

Until now, the demand for instant coffee is still greater than that for specialty coffee and chain coffee, which shows that the main driving force is the sinking market. Decades ago, instant coffee was very popular in Shanghai, but it is no longer popular now. This is the historical effect brought by time. And as platforms such as Meituan and Ele.me penetrate deeper and deeper, even coffee will be brought into these new markets. It is only a matter of time.

This time is also accelerating. Although coffee is a slow category, it took 30 years for good brands to penetrate the market, such as Starbucks, but the industry is now accelerating. However, we cannot expect to create a brand in a few months.

Luckin Coffee's rapid expansion has caused more pain for Starbucks

36Kr: There is a voice outside that Luckin Coffee’s existence has threatened Starbucks, so Starbucks started to do takeout. Do you agree with this statement? Why? Do you think Luckin Coffee’s subsidy model is promising?

Zhang Hongji: I agree halfway. In fact, when we were doing Starbucks purchasing on behalf of others in 2014, they were already considering doing takeout, but Luckin Coffee expanded very quickly, which hurt Starbucks even more.

36Kr: It’s true that the market is huge, but the competition is also fierce. Where are the opportunities for Lian Coffee?

Zhang Hongji: If coffee grows two to three times in the next 10 years, that will be Starbucks' opportunity. If it grows a thousand times, then a brand like ours will have a 50% growth opportunity.

36Kr: Coffee has only existed as a beverage in China for more than 20 years. Due to the deep-rooted tea culture and the impact of new beverages such as milk tea and fruit tea, the market itself is not large. Most of the market is still firmly in the hands of Starbucks and Nestlé. In this case, are there many opportunities for entrepreneurs?

Zhang Hongji: In fact, many people in this industry have not studied the categories clearly. They are more focused on chasing volume and new products.

For entrepreneurs, the biggest advantage of coffee is that it can stand the test of time and has a relatively stable culture and standards. Once you drink coffee, you will become a heavy user, stable, long-term, addicted, and difficult to replace. The more popular tea culture is milk tea and beverage tea. Loyalty is not high, and taste and popularity are iterated quickly.

The biggest disadvantage is that it is difficult to form a habit. Because of the taste, sweetness is the natural taste that humans pursue, but bitterness requires adaptation. After adapting, you will continue to follow it, and it will become something that is difficult to quit.

36Kr: When do you think the coffee market will explode? In what form?

Zhang Hongji: If we continue to develop the coffee market in the next ten years, it will grow at least 200 times. But it should be noted that the growth of more than 200 times in the next ten years does not mean 20 times a year. Maybe 80% of the tasks will be undertaken in the last three years. All the players now have a chance, but whether you do the right thing at the right time is particularly important.