Prologue
In the highly competitive coffee market, a fierce price war erupted with the introduction of the ¥9.9 (~1.37USD) coffee, leading to dramatic changes for two major players: COTTI Coffee and luckin Coffee. Over the span of a year, this aggressive pricing strategy have caused COTTI’s slowing down in its pace of expansion, while luckin Coffee also saw its profits plummet, transitioning from profitability to significant losses.
By Xu Qing | Edited by Jin Za
COTTI: as if it’s playing against the whole world
COTTI is determined to win against Luckin Coffee. The relationship between the two companies runs deep—COTTI’s founder, Lu Zhengyao, was once the founder of Luckin Coffee. In 2020, Lu was forced out of the company amid allegations of falsifying operational data, leaving with a sense of resentment. The battle with Luckin began from the very first day COTTI was established. In addition to poaching talent from Luckin, COTTI aggressively priced its products at 9.9 yuan to attract Luckin’s customers, rapidly expanded its store presence, and strategically positioned many of its outlets right next to Luckin’s locations. COTTI employee Song Jia mentioned that the company internally assesses prime locations based on the following criteria: “High foot traffic doesn’t count, low rent doesn’t count, but proximity to a Luckin outlet does.”
No one at COTTI can escape the shadow of Luckin Coffee. The name Luckin is frequently mentioned in COTTI’s offices. Luckin’s financial reports are essential reading for the executives, who gather every three months in the meeting room to discuss Luckin’s scale and profits. A junior R&D staff member at COTTI remarked, “Just a few days into the job, I had already tried almost all of Luckin’s products.”
The meeting titled “How to Continue the Business Battle” took place in May, just as the peak season for beverages was about to begin, and also at a crucial point when COTTI launched its aggressive pricing strategy at 9.9 yuan to challenge Luckin. A senior executive in charge of COTTI’s supply chain revealed that one month into the conflict, the average daily sales volume per store nationwide reached about 310-320 cups, with over a thousand new stores opening each month—arguably the fastest expansion rate in the entire coffee industry.
However, six months later, the situation took a drastic turn.
an unsustainable business model
As the summer of 2023 came to an end, COTTI’s average daily sales per store began to decline significantly, dropping from about 270 cups in October to 150-160 cups by February. Although winter typically marks the off-season for the coffee and tea beverage industry, a decrease by half is far from normal.
Due to the low sales volume, a significant number of COTTI’s franchisees opted to close their stores––over 800 stores closed in just a few months, with even more franchisees looking to transfer ownership. Facing reduced sales, COTTI initiated substantial layoffs and halted its expansion plans. The company also implemented severe cost-cutting measures, such as downsizing the annual meeting and reducing reimbursements. During a high-level strategic meeting in early 2024, COTTI’s founder Lu Zhengyao emphasized the need for heightened “risk awareness,” indicating a shift in focus due to pressing business challenges.
the game has no winner
Despite COTTI facing operational challenges, one might expect Luckin to capitalize on these issues. Instead, Luckin also found itself in crisis, recording a net loss of 71.42 million yuan and an operating profit margin of -1% in the first quarter of 2024. This downturn occurred after Luckin had only just achieved profitability in the first quarter of 2022, recovering from a severe financial fraud scandal.
It wasn’t easy for Luckin, at all:
Luckin employed three main strategies: (i) significantly reducing full-time staff in favor of part-time workers, (ii) substituting expensive raw materials with cheaper alternatives, and (iii) closing unprofitable or poorly performing stores to slow down expansion. Despite these efforts, achieving profitability was as challenging as revitalizing a failed construction project. However, the introduction of popular new products like Coconut Latte accelerated Luckin’s progress toward profitability.
But, when COTTI joins the game, this recent return to losses for Luckin is likened to a student who improves from failing to barely passing, only to fall back again. This oscillation between profit and loss underlines the central insight that in a market where competitors focus more on outmaneuvering each other than on sustainable growth strategies, there are no real winners. Both COTTI and Luckin, locked in a destructive battle, exemplify how such cutthroat competition can lead to a no-win situation, damaging all parties involved and stunting potential growth.