Luckin Coffee surpasses Starbucks with subsidies? No, Starbucks may be the winner.

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Luckin Coffee (Luckin Coffee) is a coffee delivery brand that has become popular in China, probably the fastest in history. It only started trial operation in January 2018. Relying on the heavily subsidized and convenient APP delivery business model, coupled with viral media marketing, Luckin Coffee became the most famous coffee brand in China overnight.

In addition to the brand, Ruixing has expanded very fast, opening more than 2073 stores in just one year, selling 89.68 million cups of coffee to 12.54 million consumers, and officially claiming that the repurchase rate is more than 50% in three months. it is generally believed that Lucky has indirectly brought up the trend of coffee culture in China.

Lucky CEO Qian Zhiya even said that at the current rate of expansion, Luckin Coffee, who was founded more than a year ago, is expected to overtake Starbucks, which has been "deeply cultivated" in China for 20 years in 2019, forcing Starbucks to respond in a conference call (Earnings Call): "it is unlikely to be surpassed by Lucky." ── currently has 3700 outlets in 158cities in China, with a growth rate of about 18% compared with 2017.

Although Starbucks responded calmly to Ruixing's threat, there was a lot of pressure in the short term. Last year, it began to work with Alibaba (Alibaba) to break the 20-year-old brick-and-mortar store strategy in China and began to launch delivery services.

Luckin Coffee's rapid expansion is accompanied by round after round of foreign fundraising. since its establishment in January 2018, it raised $200m in round An in July of the same year, valuing it at $1 billion; in less than half a year, Lucky raised another $200m in round B in December, valuing it to $2.2 billion, while rival Starbucks now has a market capitalization of about $78 billion.

What's more, in mid-January 2019, Luckin Coffee was already planning an IPO listing in Hong Kong, which is a unique Chinese business legend. It only took more than a year for a valuation from 0 to 2.2 billion US dollars. This week, Lynn will talk about China's hottest Luckin Coffee and discuss how it has risen in China.

Luckin Coffee is a typical Chinese-style capital support company.

Luckin Coffee does not open physical stores, relies on the sales of mobile phone APP to drive down the cost of physical stores, and delivers coffee to consumers by other ways. Although the unit price is cheaper than Starbucks, coffee is not a shoddy and cheap product. I subjectively think it tastes better than Starbucks.

In order to attract consumers quickly, Luckin Coffee is very aggressive in getting new customers, using the promotion of "free 50% discount coupons for the first cup of new customers" and offering discounts or buy one get one free from time to time.

This is almost half-bought and half-given away, in order to attract a large number of consumers in a short period of time, many people enjoy free coffee with a fresh mentality, and then spread through word of mouth: "there is free coffee to drink."

With low price and quality alone, it is difficult to stand out in the huge Chinese market, and commercial background is also an important factor. Coffee culture in China is still in its infancy, and the public still has a sense of freshness to coffee.

In addition, the key to Luckin Coffee's success lies in actively investing in the marketing budget, not only targeting white-collar workers in the office, but also showing no mercy in public exposure: consumers can see Luckin Coffee's relevant reports on many well-known online platforms, coupled with word of mouth that there is free coffee ── within a short period of time, the delicious, cheap and fashionable Luckin Coffee trend has swept China's takeout coffee market.

Luckin Coffee relies on this business model to rapidly expand the store market, from only 500 stores in May last year, to 1000 in October, to more than 2000 in December. Behind such rapid expansion, there are a lot of subsidies and money. Can't help but wonder: how fast is Luckin Coffee burning money?

How fast is the money burning? The financial statements reveal some clues

Luckin Coffee of China has not yet released the official financial statements, and we need to wait for the release of more detailed documents before we can come to a final conclusion. The information in the article is only a corollary made up of collecting public information: the financial information is from Luckin Coffee's B-round business plan obtained by CareerIn. Let's take a look at the hidden messages. In order to simplify the article, I will try to describe it with the results.

Luckin Coffee accumulated revenue of 375 million yuan in the first nine months of 2018. Due to subsidies, the gross loss was 433 million yuan, and the net loss was as high as 857 million yuan. As Luckin Coffee subsidizes the economy, the effective indicator should not be revenue, but operating costs, which are as high as 808 million yuan. These are costs within nine months and can effectively reflect the actual amount of coffee Luckin Coffee sends to consumers.

Let's take a look at Luckin Coffee's price, which can be divided into 21 yuan, 24 yuan and 27 yuan (RMB, the following are the same). If 24 yuan is used as the median, the revenue in the past 9 months is 375 million yuan. It is estimated that Luckin Coffee received only 15.64 million cups of coffee, but spent as much as 808 million yuan in operating costs. what happened?

According to relevant reports, Luckin Coffee sold at least 20 million cups of coffee in nine months in 2018, which is obviously out of line with the revenue of only 375 million yuan in nine months. The average unit price of coffee is only 18.75 yuan. If the average price is based on the discount after marketing activities, this is a reasonable figure.

However, the operating cost of 808 million yuan has led to serious problems. The cost of coffee is more than twice the revenue. The average unit price of a cup of coffee is actually not low. How can the gross profit be negative? Normally, commercial coffee beans can't be that expensive.

The reason behind this is that Luckin Coffee gives free coffee to customers, and the cost of free coffee is included in the operating cost, which will cause the operating cost to be much higher than the operating income ──. The above data confirm that "Luckin Coffee continues to give free coffee to new customers."

The reason why Luckin Coffee's repurchase rate is more than 50%.

Finally, Luckin Coffee said that the buyback rate is more than 50%. This is because of the marketing method of "new customers have the first cup free and give 50% discount coupons": new customers take the free coffee and buy it at half price for the second time. After pushing up the repurchase rate, the original customer has a high chance of not buying.

The way that new customers can buy 1.5 cups of coffee at one time at a price of 0.5cup ── can increase the number of new customers and the repurchase rate at the same time, but it is tantamount to sending money to customers, and it has nothing to do with the operating ability of the enterprise itself.

An enterprise that delivers coffee everywhere for free and spends a lot of money on fame, of course, every time you go to a city, you can attract a large number of consumers: everyone is here to get free coffee, no matter what your quality is, there is free coffee, of course, there is no threshold, it is not difficult to achieve "giving" nearly 90 million cups of coffee a year, but the supply chain behind Luckin Coffee should also keep up.

To put it bluntly, at present, Luckin Coffee is just a capital enterprise that runs stores everywhere and delivers free coffee. Those exquisite figures are deliberately thrown out with capital: "the first cup for new customers is free, and 50% discount coupons are given." how perfect this strategy is to strike a balance between sales volume and buyback rate! In fact, it is completely unknown whether Ruixing's coffee brand can attract customers back, and only if he stops subsidizing can he really test Luckin Coffee's corporate value.

Lucky money can hold up for another half a year, seeking the release of IPO listing.

Judging from the fund-raising situation of Lucky, A round raised 200 million US dollars, due to the lack of public information, in order to get a rough estimate of data, here we assume that Luckin Coffee's operation is simple. All income and expenditure are carried out in cash, lost 130 million US dollars (860 million RMB) in 9 months, and should have little cash left in December, so we raised another 200 million US dollars in round B.

While the store market continues to expand, the number of stores in September is 1099, with a monthly loss of nearly US $27 million. By 2019, when the number of branches reaches 2000, the rate of burning money will certainly be faster, and the monthly loss may reach more than 1.5 times (as a subjective rough estimate, there is no reference value). According to this estimate, the cash on hand will last until the listing plan of ── Luckin Coffee in mid-2019 is imminent.

Although Chief Executive Luckin Coffee said that Ruixing would conduct another round of financing in the first half of 2019, there has been no successful news yet. According to the inertia of Chinese companies, this representative is still in the negotiation stage and has not yet reached a final conclusion. If the financing is not successfully obtained, then Luckin Coffee can only seek to be listed in mid-2019 to ensure the next round of funds.

The substitution of the catering industry is too high to rely on subsidies for economic monopoly.

The truth is always cruel, when most of the discounts in the catering industry are over, customers will look for more fresh brands, unlike the platform industries that can slowly recover from the market once certain industries monopolize access or specifications, such as racquet, DiDi, Uber and so on.

The strategy of subsidizing monopoly does not apply to the catering industry with low threshold. Even if it monopolizes the market, once it stops, there will be competition among new brands. Now Luckin Coffee's data is just a tool to appease investors and attract the next round of capital. ── catering industry does not have a monopoly market.

However, Luckin Coffee's model is not without advantages. The strategy of subsidizing money burning has quickly opened up China's coffee market. Consumers who were not used to drinking coffee in the past gradually began to develop the habit of ordering coffee takeout after they came into contact with Luckin Coffee, changing the habit of drinking only tea in the past. ── China will only start drinking coffee in the future.

If Luckin Coffee finally ends the subsidy, the coffee market returns to normal, and brands begin to compete with each other, but the overall size of the market has grown several times, maybe Starbucks will be the ultimate beneficiary and winner.

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