Since parting company with Luckin, Lu founded a noodle shop and a heat-and-eat meal brand, both of which folded within a year.
Photo from CFP
By ZHAO Xiaojuan
Having been kicked out of Luckin Coffee along with sidekick QIAN Zhiya for accounting fraud, LU Zhengyao, founder of the disgraced and now-rejuvenated brand, is building Cotti Coffee, a new chain of coffee houses along with his old friend.
Veteran operator Lu knows a trick or two and has a cunning plan. He will replicate his previous success simply by… replicating Luckin.
In April 2020, Luckin announced that about 2.2 billion yuan (US$300 million) of the previous year’s sales had been fabricated. CEO Qian who had led the company since November 2017, was fired along with COO LIU Jian. In June, the Luckin board ousted Lu as chairman and shares were suspended on the Nasdaq.
Less than a year after GUO Jinyi took over as chairman and CEO of Luckin, Lu was widely rumored to be behind an attempt to unseat Guo.
Since parting company with Luckin, Lu founded a noodle shop and a heat-and-eat meal brand, both of which folded within a year.
Lu and Qian opened their first branch of Cotti Coffee last October. The speed of expansion is astonishing. Cotti Coffee has reportedly opened as many as 1,300 stores in 180 Chinese cities since then, including 80 new shops in one three-day period. Lu has previously announced plans for 10,000 stores across China by the end of 2025.
When the first Cotti opened its shutters in a shiny new skyscraper in Fuzhou, the capital city of the southeastern coastal province of Fujian last year, customers were intrigued.
The interior of the new shop, its menu and the online ordering system looked uncannily like Luckin’s. The terms Cotti offers to franchisees – between 10 and 25 percent of total sales – are also spookily similar.
Luckin has a stricter vetting process, higher operational standards and bigger revenue requirements, according to social media comments by Cotti franchisees. Cotti is offering fee holidays for new locations ranging from 50,000 to 100,000 and adding new locations as quickly as they are found.
Unlike Luckin, which owns more than two-thirds of its shops, Cotti is almost exclusively franchised. Direct ownership makes it easier to control cost and quality. But Lu is well aware that he may never find investors ready to open their checkbooks as they were five years ago, on the crest of China’s coffee startup euphoria.
With ready money less available, Cotti’s expansion must be driven by sales: Sales at any price.
It is almost impossible to pay full price for a cup of Cotti coffee. WeChat accounts and mini programs are awash with all kinds of coupons and discounts, as is every other social media app in China.
One mouth-watering deal offers an 8.8-yuan flat price for all followers on ByteDance’s YouTube-alike Douyin, China’s live-streaming central, and constant source of bargains.
That might be a flat price in most big cities, but out there in China’s county towns, a flat 8.8 yuan can look quite steep. It is the “standard price” in lower-tier cities, where it is expansion is at its most frenetic. Queues of selfie-crazed fans do not form outside stores to buy the same coffee as next door at the same price.
And Cotti may not be able to cut prices any further. It does not have the reserves nor firepower needed to wage a price war., perhaps even to defend itself. And that war may come whether Lu and Qian like it or not. It is hard to imagine Guo Jinyi’s heart is overflowing with benevolence for the new business created by someone he perhaps considers more of an enemy than a mere business rival.
To challenge Luckin, Cotti will need to align its interests with hundreds, or more likely thousands, of franchisees. In general, franchisees are interested in profits. One of the growing multitudes told Jiemian News that his costs varied between 5 to 7 yuan per cup. That is not a lot of profit at 8.8 yuan per hit.
Far from the aroma of freshly roasted riches, the disgruntled shop owner lost 10,000 yuan in his first month. He reckons that about half of his customers have become semi-regular and are holding out for the time when margins improve when the discounts are gone., but he’s not holding his breath. It is a time that may never arrive. Indeed, more punishing promotions are likely in the pipeline.
In some cities, some operators are buying up locations in bulk and sub-franchising them. The supply chain can also be tricky. Something as mundane as a coconut milk shortage caused by poor sales forecasts can easily snowball into a PR crisis and send stock prices tumbling, as many beverage chains have learned at great cost.
