Focus Analysis | Lian Coffee closes stores for the winter, Luckin Coffee continues to lose money, what happened to the chain coffee industry?

Text｜Peng Qian

Editor: Qiao Qian

Coffee chain brands are not having an easy time.

36Kr learned that the internet coffee chain brand Lian Coffee has completed a round of store adjustments around the Spring Festival, closing offline stores that are unprofitable and do not meet the brand's requirements in the early stages.

According to the Economic Information Daily, the percentage of Lian Coffee stores closed nationwide has reached 30% to 40%. In Shanghai, where the store network accounts for the highest proportion, only more than 70 stores are currently operating normally, compared with 120 stores in the region before. According to the 400 offline coffee stations that Lian Coffee has now laid out, at least 120 stores have been closed this time.

This is the first time that Lian Coffee has closed stores on a large scale due to imbalance in profits and losses since it became profitable at the end of 2017. In an interview two months ago, Lian Coffee CMO Zhang Hongji also revealed to 36Kr that the company will continue to lay out offline channels and even open large coffee shops in Beijing, Shanghai, Hangzhou and Shenzhen. At present, it seems that the existing coffee stations will face the fate of being "optimized", and the future of large coffee shops that have not yet been fully implemented is even more uncertain.

36Kr learned that Lian Coffee has had profit problems in recent months, mainly due to the decline in sales in some stores. The decline in sales is related to the intensified competition in the industry: Luckin Coffee's aggressive approach has constrained Lian Coffee, which has a conservative market strategy.

Since receiving a new round of financing at the end of 2018, Luckin Coffee has continued to adopt the strategy of "burning money for market share" and started a new round of subsidies. However, since the new round of financing of Lian Coffee has not arrived yet, it is difficult for Lian Coffee to participate in the price war, and its sales have been greatly affected. In addition, Luckin Coffee's offline stores are expanding rapidly, and now there are more than 2,000 stores, far exceeding the total number of Lian Coffee, further squeezing its market share. In 2019, Luckin Coffee will open 2,500 new stores, which may exceed the number of the big brother Starbucks.

Without the capital and traffic, Lian Coffee can only "tighten its belt": close some stores with poor operating conditions to stop losses in time, so as to ensure that the capital chain is not broken before the new round of financing arrives. Lian Coffee said that closing some unprofitable stores will help the company return to profitability in the second quarter; and the new round of financing has actually reached the final stage and will be announced before April.

Lian Coffee's troubled development is just a microcosm of the difficulties faced by the chain coffee industry. In fact, other leading players are also having a hard time, including the rapidly growing Luckin Coffee.

With 1 billion yuan in start-up funds and two rounds of financing of 400 million US dollars, Luckin Coffee has spared no effort in burning money to expand stores - Luckin Coffee has accumulated more than 800 million yuan in losses, and the losses will continue to expand. Luckin Coffee CEO Qian Yazhi also recently stated that subsidies will continue for 3 to 5 years and offline expansion will continue to accelerate.

The crazy speed exposed the problems of high costs and extensive operations. A person in the coffee industry told 36Kr that in order to quickly acquire stores, Luckin Coffee offered rents that were twice the market price and three times that of Starbucks in the same location. It also opened stores in garbage locations that no one else wanted, and there were some corruption issues.

The bigger hidden danger is that Luckin Coffee has spent a lot of money to build its business, but it has not been able to explore a clear profit model. It is a question whether the previous high order volume can be maintained after the subsidy stops. If the subsidy continues, it will need continuous capital transfusion. If the financing fails, Luckin Coffee's capital chain will face a great test.

To this end, Luckin Coffee even wants to raise new funds through an IPO. Not only has it appointed a CFO, but according to EqualOcean, investment banks have begun preparing listing materials for Luckin Coffee's IPO on the Hong Kong Stock Exchange. However, this road has now encountered obstacles. According to the Hong Kong Stock Exchange's listing rules, since Luckin Coffee has only been in operation for more than a year, it does not meet the requirement of at least three years of operating record for listing on the main board.

Looking at the entire industry, major players not only have the opportunity to catch up with the tide of consumption upgrades in the industry, but also face many problems. Previously, an executive from a well-known coffee company revealed to 36Kr that the domestic chain coffee market is a "false prosperity." For new Internet coffee brands, except for Luckin Coffee, which raised funds quickly, it is not easy for the rest of the players to raise funds.

Old players such as Starbucks, Costa and Shangdao Coffee also have their own difficulties. Starbucks China has been slow to grow, so it had to work with Alibaba to carry out digital transformation and open up its takeaway business; Costa sold itself to Coca-Cola to find a new way out; Shangdao Coffee started closing stores, and only a few of its 3,000 stores remain.

The reason why the domestic chain coffee industry gives people the illusion of "prosperity" is largely due to the high-profile development of Internet brands such as Luckin Coffee, which has attracted the attention of capital to the entire market and concealed the problems in the industry. For Chinese consumers, coffee is not a rigid product and can be replaced by tea and functional beverages. In addition, the industry also has many problems such as insufficient innovation capabilities leading to serious product homogeneity, chaotic barista training system, unscientific management mechanism and low degree of digitization. 36Kr learned from an industry insider that since these problems have not been solved, investors are actually still in a wait-and-see stage for most projects in the industry.

In addition to the "inflated" attention, Luckin Coffee has also brought greater problems to the industry. The "vicious competition" initiated by aggressive players such as Luckin Coffee is eroding this industry that should have relied on products and talent training systems to win. Starbucks, which used to be "arrogant", has to "follow the local customs" in the delivery business, passively participate in price wars, frequently promote discounts, and launch activities such as buy two get one free, free delivery, and full discounts.

The decline of the top players will have a direct impact on the direction of the industry. According to this development trend, in the end, the top players may not win by products and accurate understanding of user needs, but by capital game. A similar industry case is shared bicycles. Ofo, which relied on capital to build its empire, eventually collapsed due to the withdrawal of capital. Due to the similar development trajectory, "whether Luckin will become the next ofo" has also become the focus of attention from the outside world.

At present, it remains to be seen whether Luckin Coffee will become the next ofo, but players in the domestic chain coffee industry need to be vigilant. Excellent products and services are the fundamental driving force for the sustainable development of a brand and the ultimate choice of consumers.