Cotti Coffee, China’s 2nd largest coffee chain by store count, celebrated its 2nd anniversary last week. To mark this occasion, Cotti announced the opening of its 10,000th store, in … Doha, Qatar.
To date, the 2 year old company has, most through franchise, expanded into 28 countries and territories. It claims to be the 4th largest coffee chain in the world, after Starbucks, Luckin Coffee and Dunkin.
On the occasion, Cotti Coffee launched a new, ambitious initiative aiming to bring the store count from 10,000 to 50,000 by the end 2025.
According to Cotti, this will be achieved through embedding Cotti outlets in convenience stores, F&B stores, as well as large retail spaces with considerable consumer foot traffic.
Cotti said it had already signed up more than 50 retail, F&B and convenience store brands for this initiative.
Luckin is not killing Cotti, at least not yet
Luckin Coffee, China’s leading coffee chain with 20,000+ stores, has in the past two years focused a lot of attention to try to kill off Cotti.
The reason was simple: Cotti was founded by Luckin’s original founders, ousted because of the accounting scandal. They built the original capabilities of Luckin and knew Luckin inside out, making them formidable adversaries.
Luckin shares are publicly traded (albeit in the over-the-counter). Cotti, on the other hand, will find it very hard to raise money from institutional investors because of the founders’ background of accounting scandal.
Therefore, Cotti has to constantly instil confidence in franchise partners, who effectively fund Cotti’s expansion. Cotti also needs to do the same with suppliers, getting them to provide longer credit terms.
Luckin has been trying to break precisely that confidence. For example, wherever there is a Cotti Coffee outlet nearby, Luckin customers will get RMB9.9 vouchers much more frequently compared to customers with no Cotti nearby. It is an attempt to squeeze Cotti’s franchisees, hoping that they would bleed and eventually give up.
It seems, at least for now, Cotti has managed to withstand the pressure of Luckin and that of the market.
Cotti’s 5 key achievements
In the internal letter marking the 2nd anniversary, Cotti CEO Qian Zhiya summarises five key achievements of Cotti (which, again, tries to instil confidence):
1. The number of stores has exceeded 10,000, ranking fourth globally, with operations spanning 28 countries and regions (below: Cotti store in Hawaii);
2. Store profitability has improved, with 97% of stores consistently registering positive cash flow over the past five months, and a cumulative store closure rate of only 3.6% over two years;
3. The global supply chain base in Anhui province has become fully operational, enabling the company to continuously reduce costs while ensuring product quality and stable supply (below, Cotti production facility);
4. The brand has been upgraded with a focus on core customer needs, introducing the slogan “Good coffee comes from quality ingredients,” and a new brand logo that is younger and more stylish;
5. With a complete focus on products, campaigns such as the “Fruit Coffee Season” and “Million Coffee Masters” have gained wide customer recognition, leading to a sustained improvement in product reputation.
When will China’s coffee war be over?
One thing that many industry participants and observers are guessing is: when will these belligerent coffee chains stop the aggressive and seemingly incessant competition?
Starbucks will release its financials soon, and it is widely expected that the new CEO, Brian Nicool, will eventually do something about its China operations which have experienced double digit revenue drops in previous quarters of the year.
Peet’s Coffee, which only entered China in 2017 and currently has more than 150 stores, continues to expand. So are venture-funded domestic players Manner and M Stand, both starting from successful single stores in Shanghai.
Meanwhile, Luckin and KCoffee by KFC are still major participants of the price war.
The dynamics of the coffee market in China remains, well, dynamic. It would take much more than one major player to shift it to a more stable phase.
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