In April 2020, Luckin Coffee, a local coffee chain in China, admitted that it had made financial fraud in fiscal year 2019, which had inflated a lot of coffee sales and total revenue.
Founded in 2017, Luckin Coffee is the fastest unicorn company in the world coffee market. It has opened more than 4,500 coffee shops in China in three years, opening up the Chinese coffee market with a cup of freshly ground coffee priced from 8 yuan(about $1.2).
Subsequently, the financial fraud was exposed, although the number of stores of the company is real, but the sales of coffee is not.
The financial fraud that shocked the world has once again tarnished the reputation of Chinese companies in the international market. But oddly enough, Luckin Coffee rebounded quickly after the outbreak, while other coffee companies without financial fraud are gradually closing their stores in China.
COSTA, for example, closed many of its stores in China in September 2020 and tried to co-operate with local supermarkets and convenience stores. Coffee Box, another local coffee chain previously seen as a competitor to Luckin, announced that it would close all its stores and sell instant coffee and beans in the form of e-commerce.
Why is that?
This may be based on two facts: 1. Luckin is not a pure coffee enterprise; 2. The rise of milk tea has curbed China’s demand for coffee.
Luckin seems to have realized a long time ago that coffee cannot continue to grow
Do Chinese people like coffee?
The answer is clear: they didn’t like it in the past.
Will Chinese people like to drink coffee in the future?
The answer seems not so clear, and all the signs seem to suggest that tea culture has greatly hindered the popularity of coffee in China.
In Luckin’s early financing story, it tells the story that China’s coffee market will exceed the total size of one trillion yuan.(about $150 billion) This story deceives not only investors, but also many other Chinese coffee companies into believing that coffee has a bright future in China.
But Luckin seems to have realized that this is not true from a long time ago.
According to Luckin’s own report, they began financial fraud in April 2019 and continued until the release of the short report at the end of 2019. During the these months, Luckin’s market action is to start selling snacks and groceries in April and launch deer tea in September.
According to Luckin’s last financial report in 2019, their non-coffee SKU(Stock Keeping Unit) accounted for 45% of their total revenue. If the figure were higher, it could tell its investors that it was no longer a coffee company. Unfortunately, the financial fraud was revealed, and the non-coffee SKU revenue seen in the short report may account for only 6% of the total income.
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Luckin’s emphasis on non-coffee revenue in its bogus financial statements seems to suggest that the company has realized that coffee cannot be a business that continues to generate revenue growth.
Its goal seems to be to use free or 62% off coffee to attract consumers to offline stores and then sell light meals, snacks, desserts and sundries to them.
This strategy is feasible, and both McDonald’s and KFC in the Chinese market have tried it and achieved success. Since most Chinese consumers are not used to the bitterness of American coffee, when they get a cup of coffee during afternoon tea time, they are more likely to buy some snacks.
When the financial scandal broke, Luckin failed to really succeed in its business outside coffee. But in the past six months, that seems to be changing.
According to previous reports, Luckin released more than 150 new products in the first half of 2020, most of which were not coffee. Meanwhile, Lukcin announced at its mid-year conference that the company would make a single store profit by 2021.
This is embarrassing for other coffee brands that followed Luckin into the Chinese market, as the company that initially judged that the Chinese coffee market was about to take off no longer relied on coffee to make money.
Fictional Chinese coffee market
Judging from the data, the growth of China’s coffee market may be fictional.
In many reports on the coffee market in China, you will see a take-off curve. In that curve, the coffee of the past had a flat line in China, but by 2018 it began to become almost perpendicular to the line of the past, but that curve was as unreal as Luckin’s financial statements.
In these market analyses, the same statistical method is used: they calculate the market size of Chinese coffee through a series of calculations on the consumption of coffee beans in China.
As China’s coffee bean consumption increased from 117,000 bags in 2003 to 3.25 million bags in 2019, the compound growth rate is about 25.7%. (provided by the United States Department of Agriculture, it is calculated from three objective data of China’s coffee bean imports, exports and self-production.)
At this rate, after a series of calculations, by 2025 or 2030, we will be able to get a trillion yuan of the total size of the China coffee market. The main differences among the reports are whether coffee beans are used to make more expensive freshly ground coffee or cheaper instant coffee.
That sounds good, doesn’t it?
There is a fetal mistake in this calculation: it assumes that all the coffee beans in the Chinese market are used to make coffee. But in fact, in the past few years, China’s milk tea, baking, snacks and other food industries are also growing rapidly, and the “coffee flavor” in these industries need to use coffee beans too.
According to USDA, there has been no large-scale increase in coffee bean consumption in the Chinese market since 2017. This actually means that there may be fewer coffee beans are used in the coffee field.
China’s coffee market is not growing, but declining.
Starbucks and COSTA, two of the world’s best-known coffee chains, prove this in China: Starbucks is still growing slowly and continuously, but COSTA closed many of its stores in China in 2020.
This is because Starbucks’ growth in China does not depend on coffee.
Chinese business analysts generally believe that Starbucks’ business growth in China is driven by gift cards, Frappuccino, Teavana, good-looking cups, moon cakes and Zongzi. In addition, many Chinese Starbucks consumers do not like to drink Starbucks coffee, they just like to work and take pictures in Starbucks.
Frappuccino once contributed 15% of Starbucks’ global annual revenue, which will only be higher in China. Frappuccino should not be counted as coffee, it is more like China’s new milk tea.
These are not available in COSTA and independent cafes, so they fail faster than Luckin.
Why is coffee not widely popular in the Chinese market?
Coffee as a drink is not pleasant, its refreshing function can be replaced by an energy drink, and its taste can only be understood by “adults”. When the spending power of a market that has no tradition of drinking coffee begins to increase, coffee is not at all on the same starting line as other drinks-coffee lags behind other drinks.
Japanese coffee market data are used in many articles predicting the Chinese coffee market to prove that “tea culture does not affect people’s coffee drinking.”
But this is because there has been no milk tea revolution in Japan since 2016.
The only possible chance of success of coffee is that it is as addictive as tobacco, alcohol and betel nuts: a potential consumer may not drink coffee for a long time and may become a habitual consumer once he drink first cup coffee. And coffee does not have as serious health problems as other addictions.
However, in the face of the new style of milk tea, which was born in 2016, coffee is hardly addictive.
We have written about what is the new type of milk tea, which greatly expands the range of ingredients that can be used for milk tea, including all kinds of fruits, different flavors of sugar, all kinds of biscuits, and even traditional Chinese food Tangyuan.
In the new style milk tea, sugar, salt, fat and caffeine are pushed to the peak, and they contain even more caffeine than coffee. This makes milk tea effective in preventing people from becoming addicted to coffee.
In the eyes of addicts of the new type of milk tea, milk tea is like weed while coffee is just a cigarette.
Take a specific question: do people miss coffee or milk tea during the epidemic?
In a report released by Data100, coffee consumption decreased 23% at the beginning of the COVID-19 outbreak, almost one of the worst-affected foods. But in the middle and later stages of the epidemic, only 18% of people planned to increase coffee consumption.
This shows that many people have completely given up coffee in the epidemic, while tea has performed much better in this set of data: it fell by 9% during the outbreak, but increased by 22% after the outbreak.
At this point, another controversial thing that has to be mentioned is the cultural significance of coffee, which involves the first acquisition and retention of coffee as a beverage category.
Many white-collar who now enjoy coffee in first-tier cities grew up watching Friends, the Big Bang Theory or Silicon Valley when they were students. Coffee and coffee cups are props in the hands of actors like mobile phones in these American TV series, and this potential cultural influence will make post-80s and 90s more willing to try the first cup of coffee and put up with the unpleasant taste at first.
But for the Generation Z, which grew up watching domestic TV dramas and TV dramas, this cultural symbol was replaced with milk tea. Trying coffee is not a desirable thing, and saying “too delicious” against your conscience after the first sip of coffee does not become an identity.
For Generation Z Chinese consumers, coffee is no longer cool.