End to coffee price war on horizon

A fierce price competition has been raging in China's coffee market for the past two years, with the entry of Cotti Coffee serving as a key catalyst for the battle.

Cotti launched its first store in October 2022, leveraging on an aggressive low-price strategy to attract customers and drive foot traffic — a move designed to lure potential franchisees to join the Cotti network.

In February 2023, Cotti took the price war to the next level, introducing a nationwide all-products price of 9.9 yuan, which it vowed to maintain for the next three years.

Facing this relentless onslaught from Cotti, Luckin responded in kind. In April 2023, Luckin launched a 9.9 yuan per cup promotion at locations near Cotti's stores. By June, Luckin had expanded this discounted offering to all of its locations across China.

Luckin, which operates a predominantly company-owned store network, has been bearing the brunt of the pressure from its aggressive discounting strategies, as each low-priced cup of coffee sold directly eats into the company's profit margins, said Zhu Keli, founding director of the China Institute of New Economy.

The price war, which escalated a year ago, has taken a toll on Luckin's financial performance. The company reported a net loss of 82.3 million yuan in the first quarter of 2024 after a consecutive six-quarter streak of profits.

The company has now dialed back the intensity of its 9.9 yuan promotional campaigns, allowing it to return to profits in the second quarter, registering a net profit of 871 million yuan.

In the third quarter, Luckin reported a net profit of 1.3 billion yuan, with a net profit margin of 12.8 percent — a decline from the 13.7 percent recorded in the same period a year earlier.

Luckin's decision to raise prices can be seen as a key move to regain control over its profitability, which had come under significant pressure due to the industry-wide price war, said Zhang Yuguang, chief analyst in the food and beverage sector at Kaiyuan Securities.

Several factors have contributed to this shift in Luckin's approach, Zhang said.

The company's extensive network of over 20,000 stores has left little room for massive expansion by its competitor Cotti, which currently operates only 8,723 stores, less than half of Luckin's footprint. Furthermore, Cotti has halted its shop-in-shop franchising model, indicating a slowdown in its pace of expansion, Zhang said.

According to reports by Bloomberg recently, Starbucks has been evaluating potential interest from investors in its Chinese operations, while similar strategies have been adopted by other global brands, including McDonald's Corp, Zhang said.

The potential for Starbucks to reconfigure its Chinese business could provide Luckin with an even more favorable market landscape, allowing the company to exercise greater pricing power, Zhang said. "Luckin's price hike is a clear signal that the company is shifting its focus from aggressive market share expansion to building a more sustainable business model," Zhang said. "This transition could pave the way for a more stable and profitable future for the company."