Madness is the most stubborn label nailed to Lucky.

In the past second quarter, Ruixing seemed to reinforce the label again, with a net loss of 680 million yuan (RMB, the same below) to an all-time high, more than double the loss compared with the same period last year. Although the loss is under control, the loss rate is narrowing, and many indicators such as revenue, new stores, cumulative trading users, monthly active users, store operation and so on continue to improve, but the market is still extremely sensitive to Lucky's losses.Persistent losses have become Lucky's Achilles heel.

Compared with extremely sensitive market sentiment, Wall Street is quite "slow". Prior to the release of the results, a filing submitted by Lucky to SEC of the US showed that Point72, a top Wall Street hedge fund, had increased its stake in LUCKN COFFEE DRC to more than 5 per cent.

Public opinion is negative, but the power of capital is radical. When people say it is "running blindfolded", is it just a kind of perceptual cognition? How much have you learned about Ruixing's business?

Reason remains in madness

If lucky is crazy, then its madness is mainly reflected in two aspects.One is that the expansion of the store is relatively fast.The second is that subsidies regardless of cost, in the final analysis, still fall in the state of loss.As a result of huge losses, lucky these measures have been nailed to the crazy label.

However, through the second-quarter results, we can see that crazy Lucky still seems to have a trace of reason.

• More rational "expansion": store opening growth is expected to slow down

Obviously, Lucky is now more inclined to the former when it comes to growth or profit.Throughout the second-quarter financial results of the entire Chinese stock market, it is not difficult to find that under the current environment, everyone is tightening up and trying every means to cut costs and increase profits.Against this background, Ruixing doesn't seem to care about profits (losses) and is still focused on expansion.

Rui Xing, who is in a hurry, has set himself a radical goal of having more than 4500 stores by the end of 2019. By the end of 2018, Ruixing had 2073 stores, which means it needs to open another 2427 new stores in 2019 to meet its New year's resolution.

Half a year after the timeline, Lucky added less than 900 stores. In response, Ruixing management said that the guidance of reaching 4500 stores by the end of the year remains unchanged, which means that Lucky needs to open 1537 new stores throughout the second half of the year.

Overall, however, although the number of stores opened will continue to increase in the second half of the year, the pace of expansion is slowing.The Intelligence Krypton Research Institute estimates that the number of new stores opened by Ruixing will reach 639 and 898 respectively in the third and fourth quarters, corresponding to year-on-year growth of 13% and 2% respectively, compared with 78% in the second quarter.Lucky's expansion seems to be slowing down.

Thus it can be seen that even in the period when everyone turned to pay attention to profits, Lucky still put expansion in an important position, fortunately, Ruixing retained a trace of reason while expanding, otherwise it would have really become a "blindfolded run".

• More rational "burning money": improving the efficiency of subsidies

Lucky's "unlimited scene" strategy is realized by frantically burning money, and "free drink" can almost be called the first slogan to open the market for Lucky. Affected by this, the high market expense rate once became the number one killer dragging down Lucky's profit performance.

However, in the same way of spending money, Lucky's money is no longer spent blindly.Lucky's sense in spending money is reflected in the reduction of the cost of getting customers and the improvement of the efficiency of subsidies.

From the first quarter of 2018 to the first quarter of 2019, Lucky's acquisition cost per new user dropped from 103.5 yuan to 17.0 yuan. Although it rose in the second quarter of this year, it is mainly due to the temporary increase in advertising costs due to the promotion of Lucky's new tea brand Xiao Lu Tea.

On the whole, Lucky's user acquisition cost has been controlled, and whether it can be maintained continuously will be the key.

In fact, "free drink" is the reason why Rui Lucky made a crazy impression at first. However, as the most direct way to get customers, free vouchers show a trend for the better.

According to the data released by Lucky, the free subsidy for the first cup of each new customer in the composition of marketing expenses is becoming less and less. In the second quarter of 2019, the product subsidy fee for individual users (free product promotion fees / new users) was only 6.5 yuan, compared with 11.8 yuan last year and 0.4 yuan lower than the previous quarter.

This means that either more and more new users are not becoming new users of Lucky because of free coupons.Or due to the decline in the cost of a single cup of coffee, the efficiency of Rui Lucky's free subsidy for each cup is increasing.. The former shows that Lucky's brand influence is increasing, while the latter reflects that Lucky is gradually gaining the benefits of economies of scale.

From the perspective of data, the cost per cup is positively correlated with the free product subsidy for each new user, so it is speculated that the efficiency of Lucky's free subsidy is also improving with the emergence of economies of scale.

Compared to the uncontrollable advertising effectThe subsidy of free products, on the one hand, can win customers more directly, and on the other hand, it can enjoy the benefits of reduced costs brought about by the scale of the company. Isn't it a more rational way to spend money?

In view of this, although Lucky burns money, the money is not burned blindly, and the underlying business logic of "burning money for flow" which has been criticized by the outside world no longer seems to be tenable.

Lucky is not "childish"

It took less than two years for Ruixing to go public, and its expansion strategy seems too young for the secondary market. But looking at the pace of Ruixing's expansion, we can see that Ruixing is not "childish". It actually makes the company more mature by constantly changing its business model.

Shutting down kitchen stores, reducing leisurely stores and devoting more energy to express stores have been the key measures of Lucky in the past two quarters. As of Q2 in 2019, the proportion of cache stores increased to 93% from 29% in the first quarter of last year.

By comparing the functions of three lucky stores, we can find outAt the beginning, there is an essential difference between the kitchen store-based business model and the present business model, that is, who bears the distribution cost.

The takeout kitchen is the main layout model adopted by Ruixing in its early development, and it is also the most economical type of store, but it has great limitations in its expansion strategy-- the cost of implementing the contract is high. In order to attract new users, Ruixing had to pay high subsidy costs. At the beginning of 2018, the delivery fee accounted for 42% of the total revenue.This shows the drag of delivery fees on the profitability of the company.

For this reason, the adjustment of store structure has become the most important way to solve this problem. Self-pick-up stores are more laid out in the corner of office buildings and shopping malls, on the one hand, we can reduce the proportion of takeout orders and save distribution fees, on the other hand, we can be closer to the consumption scene, which can promote the brand to a greater extent.

By using self-extraction instead of delivery, Ruixing's pressure on distribution costs continued to reduce until it dropped to 20% in the first quarter, 19.8% in the second quarter, and 0.8 yuan in a single delivery subsidy.

By adjusting the store structure, Ruixing not only effectively reduces its own profit pressure, but also continues to cultivate users' new consumption habits. Since takeout began to be popular, supermarkets, florists and other goods have been delivered to their homes, and users' consumption habits have changed from "going shopping" to "buying back." under such a background, Rui Xing has done the opposite. Cultivate users' habit of "going to pick up goods".

This model is very similar to the express cabinet. However, compared with the criticism of express cabinets, users are relatively tolerant of Lucky. From the perspective of users' repurchase behavior, the longer the users, the more money they spend on lucky, which may mean that users are forming habits.

Starbucks Corp stole the teacher in the opposite direction, and Rui Xing "paved the way" for others.

Lucky every step forward, there is a little shadow of Starbucks Corp.

Ruixing uses a "dimension reduction attack" method to accelerate the expansion of cache stores with lower costs, and the war with Starbucks Corp will focus more on the number of stores. But the question is, the number of lucky stores > the number of Starbucks Corp stores, is it equal to Lucky's market share > Starbucks Corp's market share?

In fact, while Rui Xing regarded Starbucks Corp as an opponent, it also aroused Starbucks Corp's vigilance and began to fight back. Therefore, before the answer to the above question was born, Starbucks Corp first thought of a way to make this question lose its premise-not to be surpassed by Lucky in the store index. Starbucks Corp's approach is to copy Ruixing's business model, not only to continue to provide consumers with the "third space" coffee consumption scene, but also to swallow Ruixing's coffee takeout and store share.

After jointly launching the "special star delivery" service with ele.me, in July this year, Starbucks Corp opened the world's first "brown fast" concept store in Beijing's financial street, focusing on online orders and store pick-up / delivery services. directly to the Standard Rui Lucky Express Store-this store even opened less than 20 meters from Ruixing Express Store, full of gunpowder. In addition, the online retail business has also been raised to a higher strategic position by Starbucks Corp, and the "digital innovation" department responsible for online retail has been split into separate units, which is no longer a marginalized business of Starbucks Corp in the past.

Starbucks Corp CEO Kevin Johnson once said bluntly, "you drink coffee, not a coffee shop." Ruixing's small store cannot be compared with the full service offered by Starbucks Corp's store. Nowadays, it seems more appropriate to describe Starbucks Corp's move as "the cafe you drink (service and environment), but also coffee (cost-effective and convenient)".

Starbucks Corp turned against the wind, which also caught Rui Xing by surprise.This may show that Rui Xing's hard work to find out the format of the cache store actually does not have the core competition barrier. After Lucky has developed the consumption habit of placing orders online and picking it up at the store, these users are likely to flow to Starbucks Corp. Even any other coffee shop that provides this service has made wedding clothes for others.

Is it really impossible to make a profit?

The industry always likes to use "blindfolded running" to describe Rui Xing. Lucky's growth path is like a runaway horse, expanding crazily regardless of loss. But now, Ruixing, who stands on the secondary market stage, is beginning to be examined by the capital market, and the former Ruixing who "does not consider profit" is gone forever.

"Lucky's losses are in line with expectations and will continue to subsidize for three to five years, without considering profits at present," Qian Zhiya adhered to the strategy of strategic losses until the day of listing on NASDAQ. But in its results for the second quarter of 2019, Ruixing began to mention a word-break-even.

Lucky cannot lose money endlessly. After all, it has to consider making a profit.

• The upcoming break-even point of the store

Lucky expects its stores to break even by the third quarter of this year, while in the past second quarter, Lucky achieved phased results, with a store operating loss of 55.77 million yuan, down 31.7% from 81.71 million yuan in the same period last year, and the store gross loss rate dropped to 6.4%.

According to the number of stores corresponding to the quarterly store operating loss (store operating loss / number of stores), it can be found that the operating loss of Q2 Ruixing in 2018 is 131000 yuan while the operating loss of Q2 stores is nearly 3000 in 2019. The operating loss of Ruixing single store is only 19000 yuan.

This shows that with the increase in the size of users and the number of orders, the operating efficiency of Lucky's stores has been greatly improved, and economies of scale have begun to play a role. It is expected that with the turn of store gross profit margin, Lucky's overall loss situation will also be gradually alleviated.

To put it bluntly, Ruixing is in the business of coffee and food. in terms of this business model alone, the cost can be divided into two parts, the first part is fixed cost, and the second part is variable cost. The so-called fixed cost refers to the fixed expenses such as the rent of the store, coffee equipment, personnel and so on, as well as the variable cost which is constantly changing due to coffee sales.

This business model is one of the most typical economies of scale, and the increase in the number of orders and the size of users will effectively dilute fixed costs, so Lucky's madness is not blind.。

• There is still enough room for profit.

Starbucks Corp as a mature coffee shop, although there are some differences in business model, it can still be used as a natural reference for lucky. Through observation, we can see that on the current basis, Lucky's various costs still have a lot of room for optimization.

Comparing the expenditure efficiency of the two companies in terms of material costs, store rents and depreciation costs, we can find that Lucky has 10% room for improvement in the first two items, and 5% room for improvement in depreciation costs. Starbucks Corp, as a coffee company mature enough, has matured in store management.And the "newborn calf" lucky due to the expansion period, more new stores mean that its current profitability is not the embodiment of the ultimate ability.

However, after the mature stage, Rui Xing is not unable to catch up with Starbucks Corp. For example, Ruixing pick-up store occupies a small area, which can significantly reduce rental costs, which means that Ruixing has more than 10% room for improvement in store rents and other operating costs.

In addition, the lower pricing is also the reason why Lucky is slightly less profitable than Starbucks Corp.However, with the gradual enrichment of the variety of products, the company can have more pricing power and improve its product structure by issuing some high-margin products. On August 19th, luckin coffee released its peripheral products: 39000 limited edition antlers accompanied by straw cups, as well as classic lucky coffee cups. Compared with coffee and snacks, the prices of the surrounding products are obviously higher, with the two products priced at 139 yuan and 58 yuan respectively. In addition to the launch area, Ruixing also has new products such as deer tea.Through the trial of these new products, Ruixing can differentiate the pricing of goods, some are responsible for making money, some are responsible for getting customers, and the company still has cards that can be played.

From this point of view, the day when Lucky will make a profit is not a long way off.

Lucky to be able to get to today, nothing more than two points: differentiation competition, and barbaric expansion. This kind of play can occupy a certain market in a short time and initially cultivate the consumption habits of users. But in the long run, with the follow-up of established coffee shops in the business of cache stores, the disadvantages of Lucky's business model without higher barriers will gradually emerge, and once users' consumption habits are formed in the future, it is very likely to lose and become users of other coffee brands. Therefore, Lucky also needs to find new business barriers to continue to cultivate user loyalty.

In order to occupy the market quickly, Ruixing is constantly expanding its store and striving for customers to get it. With this high investment, losses do last for a period of time, but it is also a stage that startups must go through in the early stages. As long as we can get through this stage smoothly, Lucky's ability to make a profit is not a long way off.

To borrow the words of Li Hui, a lucky investor:Lucky did run, but it was definitely not blindfolded.