---
title: "The coffee industry pushed to the extreme"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/206910341.md"
description: "The coffee industry continues to face a price war, impacting both Luckin Coffee and Starbucks. Luckin Coffee's revenue is growing but losses are increasing, while Starbucks is experiencing a decline in revenue. Coffee consumption in first-tier and second-tier cities is approaching the level in the U.S. market, but still lags behind the Korean market. Luckin Coffee is attracting more franchisees through franchising and subsidies, while maintaining a high-speed store opening pace. The coffee industry may have the opportunity to attract bubble tea consumers. Overall, the profit margins in the coffee industry are continuously being squeezed, competition is intensifying, and the price war is still ongoing"
datetime: "2024-06-21T11:07:52.000Z"
locales:
  - [zh-CN](https://longbridge.com/zh-CN/news/206910341.md)
  - [en](https://longbridge.com/en/news/206910341.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/206910341.md)
---

> Supported Languages: [简体中文](https://longbridge.com/zh-CN/news/206910341.md) | [繁體中文](https://longbridge.com/zh-HK/news/206910341.md)


# The coffee industry pushed to the extreme

Yesterday, the Manner coffee shop incident sparked heated discussions, with multiple related keywords trending.

Since last year, when Luckin and Kudi started a price war at 9.9 RMB, Luckin's stock has dropped by 35%, previously dropping over 50%, while Starbucks has dropped by 12.8%, both hitting their lowest points in a year. The industry's changes over the past year can be seen from the stock prices, indicating that the coffee price war is still ongoing, with no clear winner for now. The hardest hit in this price war are the workers.

**I. Hard on Luckin, Hurt Starbucks**

Although in the past year, the per capita coffee consumption and penetration rate have seen the largest increase, and it was also the year when Luckin was most in the spotlight, industry profits have been continuously squeezed. As profits decrease and competition intensifies, in order to survive in the elimination round, companies are cutting costs more rigorously, leading to situations where stores have fewer staff, a significant increase in orders, and high-intensity work that overwhelms the employees.

Data shows that the coffee consumption in first-tier and second-tier cities has approached the mature consumption level of the U.S. market, but there is still some distance from South Korea.

Kudi has attracted more franchisees by offering double subsidies through full franchising, and has opened 6500 stores in just one year.

In Q1 of this year, Luckin added a net of 2342 stores compared to the previous quarter, bringing the total to 18,590 stores. Although the coffee industry may have reached a plateau, Luckin is still rapidly expanding its stores, possibly due to strategic considerations for early positioning, which also increases the cost for Kudi to follow suit in opening stores.

As for how much potential the lower-tier market has and how many stores Luckin can open, these numbers are unknown. However, there is a possible trend that may emerge from the coffee industry's price war, which is the opportunity to attract some bubble tea consumers to start consuming coffee, as coffee priced at 10-15 RMB is cheaper compared to the average 20 RMB bubble tea.

Under the influence of the price war, **in the first quarter of this year, Luckin's revenue increased by 41.5% to 6.28 billion RMB, with a net loss of 83 million RMB. The operating profit margin dropped from 15.3% in the same period last year to -1%.** The operating profit margin of self-operated stores has dropped to 7% on a month-on-month basis, far below the normal level of over 20% during regular operations.

Luckin Coffee, entangled by Kudi, has returned to losses, while Starbucks is also affected.

As of the interim report for the 24th fiscal year, Starbucks' revenue was 128 billion RMB, a year-on-year increase of 3.2%, with a net profit of 12.8 billion RMB, a year-on-year increase of 1.8%.

The number of stores in the Chinese market has increased from 6,243 to 7,093. Despite the increase in stores, revenue in the Chinese market has decreased from 763.8 million USD to 705.8 million USD, with same-store sales declining by 11%, transaction volume decreasing by 4%, and average customer spending decreasing by 8%.

Starbucks' same-store sales in the Chinese market dragged down the same-store sales of the entire international business unit by 6%. Apart from the Chinese market, Starbucks' revenue in regions such as Japan, Asia Pacific, and Latin America is growing. Same-store sales in Starbucks' U.S. market decreased by 3%, transaction volume decreased by 7%, but average customer spending increased by 4%.

According to Starbucks' guidance, revenue growth for the 2024 fiscal year is expected to be in the low single digits, lower than the previous forecast of 7-10%. It is expected that same-store sales in China will decline by single digits, falling short of the previous expectation of single-digit growth.

Regarding price wars, Starbucks executives stated that they believe coffee and tea shops offering low-priced beverages have intensified competition, but Starbucks still has no intention to participate in price wars.

However, it is worth noting that although Starbucks executives say they will not participate in price wars, in recent times, Starbucks has already introduced single cup prices of 19.9 RMB through various e-commerce channels, and even through participation in activities, the lowest single cup price is approaching 10 RMB. Starbucks' prices in the Chinese market are continuously declining.

**II. When will the turning point appear?**

The current coffee industry is a familiar storyline, as long as an industry is large enough, it attracts companies to enter and start grabbing market share regardless of profits, focusing on revenue scale first, leading to damage to the profits of each company, and ultimately eliminating all but the top 3 companies with the largest market share. This storyline has been seen frequently in recent years, from the initial e-commerce grocery shopping to the current solar energy industry, new energy vehicles, not to mention the fiercely competitive tea beverage industry.

However, in this extreme internal competition, it also brings certain investment opportunities, focusing on those that survive in the end.

For example, the current situation of Luckin Coffee, although the price war has hurt Luckin's profit capabilities at the moment, it is still expanding against the trend by expanding through the recruitment of franchisees, which is one of the decisions made by industry leaders to squeeze out competitors.

For Luckin Coffee, the current focus is on maintaining its own cash flow level, enduring the decline in Kudi's profit capabilities, and the rapid expansion model cannot keep up with Luckin's pace Luckin Coffee may be able to hold on, but for investors, tracking this data is very difficult because Luckin Coffee's management team communicates very little at performance meetings, with official responses and minimal disclosure of more company decisions.

Therefore, although there is a scale advantage now, it is difficult to predict how long it will take to reach a turning point, making it even harder for investors to hold on.

When there are some marginal changes, the stock price has a lot of elasticity. For example, last week, on June 12th, KFC indicated that they were prepared for a price war for 3 years, but did not rule out the possibility of ending it early. In addition, starting in the first quarter, Luckin Coffee has already begun to reduce the extent of the 9.9 yuan price war discounts on some products and stores. With these two pieces of news intertwined, the stock price rose by nearly 30% in the past 7 days, but it is still at a low point for the past year.

**III. Conclusion**

So, assuming optimistically that there will be some changes in the price war next year, coupled with a reduction in store expansion expenses, if Luckin Coffee returns to the profit level close to nearly 3 billion last year, giving it a valuation of 15 times PE ratio as a traditional catering stock leader, that corresponds to a market value of 45 billion.

In fact, it is not much different from now, which also means that the market's expectations for Luckin Coffee will actually be higher, and a profit of 3 billion will be neutral. WIND's median profit forecast for 2025 has already reached the level of 4.2 billion.

If it can reach this profit level next year, perhaps the competition in the price war next year has already ended. However, currently, the industry's profit outlook is still not optimistic, and with Starbucks entering the market, the price war is actually intensifying

### Related Stocks

- [Luckin Coffee Inc. (LKNCY.US)](https://longbridge.com/en/quote/LKNCY.US.md)
- [Starbucks Corporation (SBUX.US)](https://longbridge.com/en/quote/SBUX.US.md)

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