In the 2023 annual report of Yum China, the country’s largest restaurant operator which runs KFC, Pizza Hut and Taco Bell franchises, one line of the CEO’s letter caught people’s eyes: 

“At KCOFFEE, with competitive coffee prices averaging below RMB9.9, we sold over 190 million cups in 2023, a 35% year-over-year increase.”

Those who follow Momentum Works insights would know that coffee in China is now a red ocean:

In the mass market, Luckin Coffee expanded to 16,000 stores by the end of 2023, was profitable, and focused on killing off rival Cotti Coffee, which had >7,000 stores, leaving Mixue’s Lucky Cup Coffee in the crossfire. 

At the premium end, leading player Starbucks faces intense competition from handcrafted coffee brands including M Stand, Peet’s, Manner, Seesaw and many other emerging brands.

YUM China, which outgrew its global counterpart Yum! Brands, identified coffee as a key growth engine a long time ago. For a number of years, KCoffee was used to increase store sales during non meal hours (e.g. afternoons).

In 2018, Yum China launched a separate coffee concept called “COFFii & JOY”, with a tagline “A trendy & handcrafted specialty coffee brand for the young”. Its espresso based coffees were priced at CNY20-33 (US$2.7-4.5), almost the same as Starbucks. 

The store design was modern and ‘trendy’ as well, with probably one problem – it really does not have bring any association with Yum China’s popular and well known brands: 

COFFii & JOY also tried new brand concepts, such as collocating with gaming company Netease’s unmanned new retail store (consumers were very confused).

YUM China realised that COFFii & JOY was not working out, and closed all the 36 stores in eight cities in 2022. 

However, in the annual report of that year, the company reiterated that it is “committed to making coffee a meaningful part of our business”. Aside from COFFii & JOY, Yum China also operated a joint venture with Italian brand Lavazza running its cafes in China – with similar price levels. 

As we mentioned in our Coffee in Southeast Asia report, it is difficult to beat Starbucks in its own game. What many premium coffee brands will see a certain percentage of Starbucks’s scale as the ceiling. 

KFC, however, found its renewed Mojo in KCoffee. The new KCoffee concepts are collocated with KFC, instead of being a counter of the latter. In many places, KCoffee simply becomes the only brand name visible from the store front. 

Anyway, consumers will recognise the colonel right? Below is a KFC/KCoffee store in a tier4 city in eastern China we recently visited: 

This strategy is much smarter – KCoffee now leverages on two things: 1) the brand recognition and location of KFC; and 2) a more educated market by all the other coffee brands. 

It also found the right market positioning. Remember the CEO’s letter to investors quoted at the beginning of this article? “competitive coffee prices averaging below RMB9.9” – this is even below Luckin’s levels. In addition, with vouchers and discounts through its membership programme, many users have reportedly been able to buy a cup of americano at RMB6 (US$0.8) consistently.

The company has also invested heavily in product innovation. Maybe not to the same level of Luckin (which launches >100 new products each year), but KCoffee also has its own Coconut Lattes, such as “Pineapple Coconut Latte”: 

Consumers voted with their wallet – hence the 190 million cups sold in 2023. One consumer we spoke to told us – all others being equal, a key reason why he kept going back to KCoffee was “Who else is open at 6am in the morning, with a good breakfast to go along with a good cup of freshly ground coffee?” 


Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].