What should you do when a raging opponent like Lucky suddenly arrives in your territory?

(Peng Qian / tr. by Robert Taylor)

Interview: Peng Qian and Yang Yafei

"you have to think we're dead. If we are dead, we can look at things more clearly, but if you still think you are alive, then you have no way to live. "

Wang Jiang, founder of Lian Coffee, repeatedly said this to Zhang Hongji, a partner in the company in 2019.

"everyone knows that we are actually standing on the cliff at some point, and even according to the company commander (that is, Wang Jiang), we have fallen." Zhang Hongji to 36Kr HoldingsDescribe the days when you hit rock bottom.

The moment of danger occurred in early 2019, after the war with Lucky. At that time, even the vitality of coffee was greatly damaged, and there was the most serious paper loss since starting a business. When the company faces great difficulties, Wang Jiang and CEO Zhang Xiaogao, who are hidden behind the scenes, jointly lead round C financing, which gives investors the confidence to continue to inject capital, and is also accountable to cooperative suppliers and employees. This "renewal money" costs a lot of money, reaching 200 million yuan, which is also the largest sum of money in the history of coffee financing.

In fact, Lian Coffee, which makes "take-away coffee", has always regarded "coffee as a slow business" since its establishment in 2014, opening only about 30 small coffee shops a year. Until LUCKN COFFEE DRC, a rival of the same model, was born at the end of 2017 with a huge amount of capital and advertising, opening 2000 stores in a year and a half.

If you were Lian Coffee, fight or not at that time?

Zhang Hongji, who comes from a business background, is a typical man in the northwest. He is neither convinced that Lian Coffee was overtaken by the latecomer Rui Xing in a very short time. "my product is better, the flow system is more effective, the performance-to-price ratio and efficiency are higher, the user's repurchase is obviously better, the income ability is stronger than him, and all the data in the single store are better, why not fight?"

Zhang Hongji took the initiative to ask Wang Jiang and Zhang Xiaogao for war, which was soon approved by the two. In order to support Zhang Hongji in the war, the Lian Coffee team launched the B+ round of financing in March 2018. Because its founder Wang Jiang founded the flight housekeeper, as an angel investor invested in Meituan, UC browser, e-driving and other companies, has a strong appeal in the capital market. This round of company coffee raised 158 million yuan, plus it made a profit at the end of 2017, and there is still money left on hand, and even coffee raised a total of 200 million yuan in combat military expenditure.

In an interview with 36Kr Holdings after LUCKN COFFEE DRC's listing, Lu Zhengyao also admitted that Lian Coffee and the strategic capital that might stand behind it were Ruixing's biggest "imaginary enemy" on the road to expansion, so Lu Zhengyao prepared more than $200m at the beginning of his entrance to launch a price war at any time.

In the end, Lian Coffee paid a heavy price for the war. The war between the two sides lasted from the beginning of the second quarter of 2018 to the beginning of the fourth quarter of 2018. In three quarters, Lian Coffee not only lost all its financing, but also founder Wang Jiang came out for the first time, raising 206 million yuan to save lives to pay for it. From a financial point of view, the price paid by Lian Coffee for this war has reached nearly 400 million yuan, which is almost the sum of the funds it has raised since its inception.

If we can start all over again, is it inevitable to be destroyed by LUCKN COFFEE DRC, who suddenly broke into the market, or is there another way to go?

The struggle for the throne

In the field of take-out coffee, Lian Coffee, as the first company to develop the market, once owned the whole blue ocean.

It almost found this blank market from zero: because many customers in Shanghai have "purchasing agent Starbucks Corp""the demand for even coffee was originally for this purpose in the distribution business. A source told 36Kr Holdings that in 2014, Starbucks Corp sent market researchers to Shanghai to inspect the "takeout coffee" business. Starbucks Corp concluded that it is more feasible to launch a takeout business in first-tier cities such as Shanghai, China. In the end, Starbucks Corp did not implement the plan, but even coffee was moved. Moreover, with the "purchasing agent Starbucks Corp" distribution service, Lian Coffee accumulated hundreds of thousands of user data from mid-2014 to mid-2015 alone. Even the coffee team increasingly felt that the deal would work.

As a result, Lian Coffee changed its role from a distribution operator to an independent coffee brand: in May 2015, even Coffee launched Meituan and ele.me, becoming the first coffee brand in China to provide takeout services, and even Coffee's first Coffee Box store opened offline. Coffee box is a typical small shop with an area of about 30 square meters and only two or three staff. Its structure is highly similar to the Pick-up Store (cache store) opened by LUCKN COFFEE DRC later.

Due to the early entry into the industry, Lian Coffee has won himself a free development period of up to 3 years. For a long time, take-out coffee is in a state of no one's interest, even coffee is not much competitive pressure. Zhang Hongji recalled: "even though Starbucks Corp is like a mountain in front of Chinese players, we live comfortably because we are the first brand players to make take-out coffee and are not on the same track as them."

But three years later, the appearance of LUCKN COFFEE DRC broke the stability of Lian Coffee. The opponent's lightning speed of development has never been seen before, even coffee has not had time to make any reaction, has been surpassed by the opponent. Subsequently, Lian Coffee all in price war, and lucky to start a contest.

In this process, even coffee changed from profit to loss.

Before Ruixing started the price war, Lian Coffee was supposed to make money. Even Coffee has calculated the profit model of take-out coffee. Corresponding to the three main costs of product hard cost, manpower store rental and distribution performance, the conclusion is that a single cup income of about 25 yuan can be profitable.

But Lucky's entry challenged the model. Is the "25-yuan model" of even coffee similar to that of the taxi market at that time? As the pioneer of China's ride-hailing market, Yidai car-hailing also took a high-end but small-scale road, which was able to settle accounts at first, but was eventually defeated by DiDi Global Inc., who is larger, lower per unit cost and cheaper. An easy example is right in front of us, and the founder Zhou Hang is an old friend of Wang Jiang, the founder of Coffee.

As a result, Lucky entered the game, even coffee deviated from the original track, in the store shape, product pricing, marketing strategy and other aspects of Ruixing. "We were already red-eyed at that time," says Zhang Hongji.

First of all, in order to compete for market share, Lian Coffee stores and teams have expanded rapidly: throughout 2018, Lian Coffee added 300 small coffee shops. And in order to improve the brand image, this batch of new stores are selected for the flow entrance, increase the equipment, increase the area-- the cost of the store immediately increases.

The number of people has also increased. A Lian Coffee employee once described to 36Kr Holdings the company's expansion in 2018: "the office on the 18th floor of the Shanghai headquarters rented an extra floor." He added that basically every department has expansion, but it is still dominated by the market and offline stores.

Zhang Hongji told 36Kr Holdings that store expansion was the biggest cost of Rmb200m in combat military spending, accounting for 20 to 30 per cent of the total.

LUCKN COFFEE DRC also fought back quickly. "in the second quarter of 2018, everyone thought that Ruixing was robbing a store with Starbucks Corp, but it was actually robbing us. As long as we liked which store, Ruixing would pay twice or even triple the price regardless of the price." Zhang Hongji recalled to 36Kr Holdings.

Then there is even coffee joining the price subsidy war. At the height of the war (that is, from the end of the third quarter of 2018 to the beginning of the fourth quarter of 2018), the average price of Lian coffee, which originally sold for 25 yuan, was reduced to 14 yuan or 15 yuan per cup by means of subsidies. During the same period, LUCKN COFFEE DRC pressed it to about 5 yuan and sprinkled a coupon with a discount of 18%.

In order to rationalize higher pricing than Lucky, it is also to differentiate from Lucky. Even coffee has increased its investment in product research and development, and its cost has increased by at least 30%. On a split, the cost of the increase comes mainly from raw materials such as more sophisticated and expensive coffee-making machines, higher-cost Yega coffee beans and imported cold chain milk from New Zealand. For example, at this time, even the core equipment for making coffee is purchased from Eversys. According to a coffee industry entrepreneur, the brand's fully automatic coffee machine sells for more than 100,000 yuan.

This means that while the cost of each item is increasing, even the revenue per cup of coffee is still falling. The profit model that had been maintained was no longer established at this time, and even coffee suffered a large loss.

What is even more disturbing to the coffee executive team is that according to the information they have received, there is a five-fold difference in the number of offline stores and a ten-fold difference in subsidy input between the two offline stores in Shanghai, but the real average number of individual stores is about the same. "according to our understanding, the two sides are fighting a price war, but they actually want to compete viciously." Zhang Hongji believes that although he is not calm, he is still calculating the cost of coffee. Rui Xing is not at all, and he has already lost his mind.

"so from our point of view, at that time (at the end of 2018) we thought they were already 'counterfeiting', but the paths before and after 'counterfeiting' were different. At first, Rui Xing was willing to spend 5 yuan to 'fake', but later began to change the number. " Zhang Hongji analysis: "this is because the pressure is not the same, at first only we give the pressure, they can also get it, to the back was listed and financial reports."

Although he realized that something was wrong, even Coffee still took a chance on the final outcome of the war and wanted to recover from the decline. In December 2018, 36Kr Holdings reported exclusively that Lian Coffee would increase the format of large cafes for the first time. In early January 2019, Lian Coffee opened 10 large cafes in Hangzhou.

In Ruixing crazy expansion, in fact, as the "third space", Starbucks Corp such offline stores although also affected, but not fatal. In fact, Starbucks Corp did not join the price war from beginning to end. According to Starbucks Corp's financial report, from the third quarter of 2018 to the second quarter of 2019, when the competition for takeout coffee was the fiercest, Starbucks Corp's same-store sales in China decreased from 6% per quarter to basically no growth.

Lian Coffee once summed up that Rui Xing "killed us strategically and rubbed Starbucks Corp tactically". To put it simply, it is a price war with Lien Coffee, but it is only a public relations war with Starbucks Corp.

Compared with Starbucks Corp's situation, it seems feasible to open a large offline brand store. And, "can big stores further enhance brand awareness?" Zhang Hongji confessed to 36Kr Holdings what he thought at that time. But the plan soon became unsustainable. The reason is that when there is something wrong with the business logic of the distribution network (small shop) itself, there is no point in opening a big store, and the two are symbiotic.

There is no winner.

At the end of 2018, Lian Coffee was the first to cease fire, and the most direct manifestation was to close shops and lay off staff.

Between January and February 2019, Lian Coffee launched a "close shop and stop loss" program: close most stores in Shanghai and Beijing and withdraw from Shenzhen and Hangzhou. As for the news of "Lian Coffee withdrawing from Beijing" in the first half of 2020, Zhang Hongji explained to 36Kr Holdings that it was actually continuing to close stores that had not been closed before.

At about the same time, Lian Coffee emailed the core team that the company had decided to withdraw offline and close all stores except Shanghai coffee box lab. Ordinary employees talk and communicate one-on-one by store managers. Many employees had expressed their reluctance to the manager of their store and were even willing to take a pay cut to allow the company to keep the store, but even coffee was unable to support the operation of the offline store at that time.

Even coffee is not the worst player who is still alive.

"after nearly a year of war, the coffee track has at least one delivery line, which has actually been destroyed by Lucky." Zhang Hongji also described the tragedy to 36Kr Holdings at that time. "when we had a hot relationship with Ruixing, the two neighboring cafes, all single cafes and uncharacteristic small chain coffee brands, actually sold out 778%."

Almost all of these fresh grinding cafes are small businesses, often only a single store or a dozen stores, "in peacetime", there is no big problem to survive, but lucky to fight a big price war, directly cut off their survival. The reason is simple: the amount of the cup was sucked away by the big players.

The current coffee mill was supposed to be a slow offline business with heavy assets, but when lucky came and capital poured in, the whole industry began to rush. A large number of coffee brands are planning aggressive offline expansion: players who used to be single cafes opened more than a dozen stores within a year, with small chains of coffee in more than a dozen stores relying on medium-sized coffee, while medium-sized chains targeted 1000 stores. Take fisheye Coffee as an example. In January 2019, fisheye Coffee received tens of millions of yuan A round financing jointly invested by Qingliu Capital and Huachuang Capital to accelerate the expansion of stores.

Many small chain coffee brands have also begun to join the price war.

"fisheye coffee has a very good tone. I haven't hung up for many years, and then I finally got the chance. But they started to give away their first cup in 2018 for free, and this is the first time I think there is something wrong with fisheye. " One founder of the coffee brand thought so, adding: "this is kidnapped by capital and has to complete the KPI."

Even Starbucks Corp can't take it lightly. Starbucks Corp has basically expanded at a rate of about 500 stores a year in China over the past decade, but only between the end of 2018 and early 2019, Starbucks Corp opened nearly 1000 stores, twice as many as in previous years. Since then, Starbucks Corp's store expansion rate returned to normal.

Convenience stores and fast-food chains have also joined the rush. Take the whole family convenience store as an example. In an interview with 36Kr Holdings at the end of December 2018, the head of the family's (China) coffee business revealed that sales are expected to double to 100 million cups in 2019. The group has also raised its coffee category to the strategic height of "the family's new growth engine for the next decade", and plans to open independent guest cafes in nine major cities, including Beijing, Shanghai and Guangzhou. But the plan has not yet landed.

All players have become radical, but can the market really grow with it? Can Chinese people really develop the habit of drinking coffee quickly?

In retrospect, even Coffee Zhang Hongji believes, "it doesn't matter whether it's a price war or a race to open a store. the most terrible problem is that two out of 10 people drank coffee, and after the battle, only half or one person was added." it's not right to be divided by others. " This means that burning money can not get new demand, players are still competing for the market stock.

When the market cannot support so many coffee shops, and a large number of shops are opened and then closed, the fate of grass-roots employees is also a problem. A person in the coffee industry once told 36Kr Holdings: "most of Ruixing's offline team is outsourced (the cost of recruiting these people is not included in the headquarters cost), and many people in other industries are poached to work as baristas." After losing their jobs, these people will go to milk tea shops, work as security guards, deliver food, and even fail to find jobs in large numbers. "

Not only that, life has become difficult for coffee suppliers behind it.

Jim, who works as a manager in a large domestic coffee supply chain, once told 36Kr Holdings: "between 2018 and 2019, there was a serious disorder in the field of ground coffee. Lucky's entry makes the whole industry out of breath, too much capital is invested in the coffee industry, the structure of the industry formed over the decades, as a result of the influx of capital, has undergone rapid changes. "

Before LUCKN COFFEE DRC barged in, the domestic coffee procurement business was not big, mostly small batches and multiple purchases. In order to receive sudden large orders such as Lucky, suppliers need to expand their capacity. This is bound to require a large amount of new money to pay for the purchase of raw materials and the expansion of manpower due to the surge in orders, and suppliers with no crisis awareness and handling experience may even invest blindly and borrow a lot of money.

"they will only think how many orders I give you and how much money you apply for from me each month. On the surface, suppliers seem to be greatly favoured," says Jim. But in fact, players such as Lucky are prone to public bidding and price comparisons, and coffee suppliers who have been doing slow business have never seen such a scene. The relationship between brands and suppliers has also changed from equality to strength and weakness.

The risks are intertwined. For example, brands are favored by the capital side in a very short time, but they may soon be poorly managed and abandoned by the capital side. Or, the management may send its own team to replace the original supplier. As long as there is one of the above risk factors, suppliers can lose all their money in an instant.

365 days of reflection

After LUCKN COFFEE DRC's financial fraud broke in April 2020, many people asked Lian Coffee team: "if this had happened earlier, would you still have closed all offline stores?"

This is also everyone's question: can we still do the business of taking out freshly ground coffee after Ruixing leaves the market?

It took Lian Coffee a whole year to figure out this answer. In 2019, Wang Jiang, who had not been seen for a long time, returned to Lian Coffee to preside over the overall situation. He hosted at least three secret meetings and reflected with the core team on many changes that had taken place over the past year or so.

Wang Jiang believes that the essential question is whether the current "take-out freshly ground coffee" can still make money. Zhang Hongji further explained: "in essence, the difference between 2017 and 2018 is that the income per cup has changed fundamentally." the unit price of even coffee has dropped from 25 yuan to 15 yuan.

But even after Ruixing left, even the coffee thought that the take-out coffee line could not be opened. Because the remaining destructiveness of Lucky is reflected in the fact that the price band originally maintained by the delivery freshly ground coffee category has been destroyed.

In fact, in addition to Starbucks Corp with a strong brand power to maintain the price belt, other players are stuck in the quagmire of price war. Even McDonald's CorpSuch catering giants are not immune. In the third quarter of 2018, McDonald's Corp officially launched the freshly ground coffee takeout business, and the cheapest coffee was only 9.9 yuan. In addition, McDonald's Corp launched various preferential activities in its stores, including buy three get one free.

This means that a large number of users have decided that they can drink 10 yuan of freshly ground coffee, but the take-out coffee in this price range must be "selling more and more at a loss." At least in a short period of time, it is not easy for most Chinese users to return to the 25-yuan price range that can be "profitable per cup".

It's not impossible to do it. Starbucks is still sticking to the lucky mode of "express", but it does not reduce prices and charges for express delivery. The new brand may be able to take Xi Cha as an example: it supports the pricing of about 30 yuan on the basis of good products and good taste, and can sell well at the same time.

Or just get rid of the delivery cost to drive down the price. Lian Coffee said that its previous delivery costs mainly included delivery fees and packaging fees (packaging bags filled with insulation, ice bags and other temperature-controlled consumables). During the last kilometer performance delivery process, even coffee had to pay 7 yuan to 9 yuan, which accounted for nearly 40% of its cost per cup. If you cut this part, you can reduce the price.

At present, for example, manner, priced at 15-20 yuan, Huamao Tesla, Inc. in BeijingThe business of putting up a small face of freshly ground coffee next to the store is not bad; the store cost of McDonald's Corp and the convenience store is even lower, and the 10-15 yuan arrival coffee business is still being done.

Outside the lucky battlefield, few people have noticed that the field of fine instant coffee with a unit price of 2-8 yuan is actually growing rapidly. The person in charge of Tmall coffee blending category once said, "Tmall's entire coffee market, sales increased by 50% to 60% during the epidemic, and achieved more than 100% growth after the epidemic." Among them, the fastest growth rate is the "boutique instant products", with sales growth of more than 1000% compared with the same period last year.

A coffee industry executive once told 36Kr Holdings that as early as 2018, Lian Coffee considered buying the supply chain factory used by the boutique instant coffee "three and a half". However, even coffee was in a very complex competitive environment at that time, and project leader Zhang Hongji was not resolute enough to push forward internally. As soon as he loosened his hand and lost the opportunity for cooperation, Zhang Hongji said frankly, "I regret it very much."

The revelation of the success of three-and-a-half meals is that in the face of Lucky's situation, maybe changing a track can lead to a new path.

Lian Coffee, who "died once", is now pressed for time. It is busy closing stores, raising money to repay suppliers' debts, paying severance payments for employees, and finding a new way to live with China Petroleum & Chemical Corp.Its easyJet Group cooperates to set up a joint venture "EasyJet Coffee" to open "EasyJet Coffee" in gas stations.

A well-known secret in the retail industry is that although convenience stores are difficult to make money, convenience stores in gas stations are easy to make because of their convenient location. This is another clear proof of the so-called "location, location, location" golden rule of offline stores. And the cafe next to the gas station naturally occupies this location.

But it also means that the core resources are in China Petroleum & Chemical Corp's hands. The core operating team of the original even coffee will all be transferred to "easy Coffee", with China Petroleum & Chemical Corp easy Jie Group as the major shareholder and even Coffee as the minority shareholder.

Wang Jiang also has new thoughts on competition. The desire to win has made Lian Coffee violate the objective law of the development of the industry. "for China, although the coffee market is a big slope (total consumption is large), it is also a long slope (slow business). But in order to win, Lucky and a series of players, including coffee, regard it as a short slope. " Wang Jiang said to 36Kr Holdings.

For Rui Xing, the most direct consequence of violating the law is that he is unable to get feedback from the market, but if he wants to get the results of listing and capital, he has to carry out the illegal action of "fraud". In the end, Ruixing comes to NASDAQ.While Lian Coffee lost all the money raised in the past six years and was forced to give up the take-out coffee track.

Lucky was a mess when it crossed the border, but it also left a legacy to the industry: city dwellers are used to using App and Mini Program to place orders for drinks. Something new may grow on this soil, but it will no longer be the fruit of Lucky or even coffee.