With the slowdown in expansion and the reduction of subsidies, can Luckin Coffee "emerge unscathed" from the coffee war?

Luckin Coffee is gradually emerging from the shadow of "declining single-store efficiency."

Recently, Luckin disclosed its financial report for the fourth quarter and the entire year of 2024, showing a total revenue of 34.475 billion yuan for the year, a year-on-year increase of 38.4%; the total number of stores increased by 37.5% year-on-year to 22,340.

During the same period, the GAAP operating profit was 3.538 billion yuan, a year-on-year increase of 16.9%; the operating profit margin decreased by 1.9 percentage points year-on-year to 12.1%.

However, from an annual perspective, the "aftereffects" brought about by rapid store openings are improving, and Luckin's overall operational efficiency has improved.

Following a loss in the first quarter, Luckin's self-operated store profit margins in the second and third quarters of 2024 were both over 20%. The profit margin for self-operated stores in the fourth quarter reached 19.6%, an increase of 6.1 percentage points year-on-year.

The competition for market share in the coffee market shows signs of winding down, and at the beginning of 2025, the major players in the market are beginning to head in different directions.

On one hand, there is a commitment to scale expansion.

Kudi has launched a convenience store format and continues to strive towards its goal of opening 50,000 stores by the end of the year; Manner has also been reported to be issuing franchise intention surveys to employees.

On the other hand, there is an exit to stop losses.

Starbucks China, once a giant in the market, is considering selling its stake in its China business after experiencing a decline in average transaction value for eight consecutive quarters.

In the past year, Luckin has added over 6,000 stores, shifting its focus to improving profitability and overseas business.

After nearly two years of officially going overseas, Luckin opened its first store in Malaysia at the beginning of 2025, marking its entry into an international market outside of Singapore.

From Offense to Defense?

For Luckin, the biggest challenge in 2024 may come from the decline in single-store efficiency due to rapid expansion.

Luckin's same-store sales for self-operated stores in 2024 decreased by 16.7% year-on-year, a significant drop compared to the previous fiscal year's growth of 21%.

Luckin CEO Guo Jinyi stated at the earnings conference that the Chinese coffee market was in a phase of rapid growth and intensified industry competition in 2023. Luckin made a strategic decision to accelerate store openings comprehensively to quickly increase market share.

Regarding the decline in same-store sales, Guo Jinyi explained that the indicators experienced a phase of decline due to a series of objective factors such as the store cultivation cycle and the formation of customer consumption habits, which aligns with the company's strategic judgment.

In the first to fourth quarters of 2024, Luckin's same-store sales growth rates were -20.3%, -20.9%, -13.1%, and -3.4%, showing a trend of improvement each quarter.

In December, Luckin's same-store average daily sales growth rate turned positive for the first time in a month.

As store efficiency improves, many signs seem to indicate that Luckin intends to scale back and engage in price wars.

An early franchisee of Luckin revealed to Xinfeng (ID: TradeWind01) that Luckin is currently very strict about opening new stores. Even if there is a nearby store with a thousand cups, they are "not allowing new franchises."

"The news from the recruitment side is that it may slowly open up again in the second half of 2025," the franchisee said.

In the fourth quarter of 2024, Luckin's net new store openings numbered 997, marking the first time in nearly a year that the quarterly opening volume fell below a thousand. The year-on-year growth rate of stores was approximately 13.5%, close to the level before the price war in 2023 The preferential policies are also tightening.

At the beginning of 2025, some consumers reported that Luckin's signature drink, the fresh coconut latte, had increased from 29 yuan to 32 yuan at stores in Chengdu, Shenzhen, and other locations. The 9.9 yuan discount has shrunk from "flooding" to "precise subsidies."

Guo Jinyi mentioned at the earnings meeting that the single-cup price for Luckin in the fourth quarter was basically flat compared to the same period in 2023, with cup volume driven by the continuously growing customer demand, almost recovering to the level of the same period in 2023.

Part of the reason is the supplement of light milk tea products during the afternoon tea period, as well as the strong sales of new products like the small butter latte and apple C Americano.

The aforementioned franchisee told Xinfeng (ID: TradeWind01) that the single-cup prices at several stores they invested in increased by more than one yuan in the fourth quarter.

The combination of shrinking subsidies and outstanding performance of new products allowed Luckin to achieve a double-digit operating profit margin of 10.4% in the traditionally slow fourth quarter for the first time.

The market expects that Luckin's same-store sales growth rate may return to positive within 2025.

Guo Jinyi stated that in the short term, Luckin will rely on store scene coverage, product innovation, and category expansion, combined with marketing activities to attract consumer spending. In the medium to long term, as coffee consumption frequency increases, the growth in per capita cup volume will contribute to store growth momentum.

Luckin's CFO An Jing stated that Luckin expects the single-cup price in 2025 to remain the same as in 2024. As more self-operated stores mature, it is expected that the daily cup volume of stores will achieve year-on-year growth. These factors will further drive the improvement of Luckin's overall same-store sales growth in 2025.

Subsidies Will Not Stop

Another important signal released by Luckin at the earnings meeting is that there are no plans or intentions to raise prices, and the 9.9 yuan coffee promotion will continue.

Since 2024, the futures price of coffee beans has continued to rise and is still at historically high levels.

In response, Guo Jinyi stated that Luckin's investment in the entire industry chain, scale, and efficiency advantages will to some extent offset the impact of cost increases.

At the end of 2024, Luckin signed a memorandum of cooperation with the Brazilian Export and Investment Promotion Agency to expand coffee bean procurement cooperation to 240,000 tons over the next five years.

Its domestic roasting capacity is also gradually being established.

Luckin revealed that by the end of 2025, it will form an annual self-owned coffee roasting capacity of 100,000 tons to ensure its coffee bean raw material supply.

According to feedback previously obtained by Xinfeng (ID: TradeWind01) from the industry, the rise in coffee bean prices has not significantly impacted the costs of most large chain enterprises, but has objectively affected the industry's expectations for the duration of the price war.

The research report from Ping An International believes that the continuous rise in coffee bean prices is expected to trigger major players in the industry to collectively reduce promotional efforts and maintain profitability through price increases. In the long run, this is beneficial for improving industry concentration and the competitive environment.

However, competitors like Kudi and others still exist, and Luckin will not directly abandon its low-price strategy.

Guo Jinyi stated at the earnings meeting that he has noticed that tea beverage companies have been going public recently, foreseeing that market competition in the ready-to-drink beverage industry will further intensify, and Luckin's market penetration advantage may face challenges.

Coffee shops in high-tier cities have become overly dense, and Luckin's future expansion may focus on franchise stores in third-tier cities and below, competing head-on with more tea beverage brands By the end of 2024, Luckin Coffee will have a total of 7,749 franchise stores, accounting for 34.7% of the total number of stores.

In the fourth quarter of 2024, Luckin's revenue from franchise stores was 2.046 billion yuan, a year-on-year increase of 16%. Among them, the profit sharing from franchise stores reached 234 million yuan, with a year-on-year increase of over 80%.

An investor familiar with the coffee industry told Xinfeng (ID: TradeWind01) that after the sales of milk tea gradually increased in the fourth quarter, Luckin's store performance in the northern sinking market improved significantly.

However, Luckin still increased its subsidies for stores in a "preemptive" manner.

At the beginning of 2025, Luckin announced its latest support policy for franchisees: reducing the supply prices of 86 items, including coffee beans, coconut milk, and milk, with a price reduction of up to 16.8% for coffee beans.

In addition, a tiered subsidy system was implemented for low-income stores: when a store's monthly gross profit is below 40,000 yuan, the brand will ensure a single cup profit of 5 yuan through subsidies.

Similarly, when the store's monthly gross profit is between 40,000 and 50,000 yuan, the subsidy will ensure a single cup profit of 4.5 yuan; when the gross profit is between 50,000 and 60,000 yuan, the subsidy will ensure a single cup profit of 4 yuan; and when the gross profit exceeds 60,000 yuan, the subsidy will ensure a single cup profit of 3.5 yuan.

"This rapid expansion of Luckin's second 10,000-store process has led to many legacy issues. Some franchisees have high store construction costs, resulting in a long payback period," said the investor.

In the investor's view, the new subsidies launched in 2025 are aimed at alleviating these costs through raw material price reductions. "The ideal situation is to reduce the payback period of over 20 months to around 16.8 months."

"The actual effect of this round of subsidies will need to wait until the next quarter for conclusions, but it has already boosted franchisee confidence and adjusted investor expectations," the investor stated. "It can be understood as a proactive response to potential market concerns about the high operating costs of franchise stores."

At this stage, Luckin has ample cash flow to support its stores.

As of the end of 2024, Luckin had approximately 5.9 billion yuan in cash, compared to 3.8 billion yuan in the same period of 2023.

Going Abroad to "Grab Money"

As contradictions in the domestic market tend to ease, Luckin has significantly accelerated its overseas expansion since the fourth quarter of 2024.

In December 2024, Luckin opened five stores in Hong Kong, covering the core business districts of Hong Kong Island, Kowloon, and the New Territories. In January of the following year, Luckin officially entered the Malaysian market for the first time using a franchising model, opening its first two stores.

These stores will be operated locally by Global Aroma Sdn Bhd (referred to as "GASB"), a subsidiary of the Malaysian listed company Da Zi Industrial, with Luckin providing brand authorization, technology, and supply chain support.

The authorization period granted to GASB is 10 years, with the right to apply for two consecutive five-year renewals, and a request for an extension of no more than one year after the expiration.

According to information released by Da Zi Industrial to local media, they hope that Luckin's stores in Malaysia will quickly reach 200 within two to three years, a number considered to be the breakeven point for profitability Public information shows that Dazhi Industrial was founded in 1983, with its main business including the manufacturing and sales of fertilizers.

The parent company, Dazhi Group, is a well-known diversified enterprise in Malaysia, owning a total of 7 listed companies involved in various industries such as chemicals, real estate, and consumer goods, possessing significant capital scale and management experience locally.

In August 2024, a subsidiary of Dazhi Group, Hextar Group of Companies, reached a strategic partnership agreement with the Hong Kong-listed company Tan Zai International (2217.HK) to support the localization of this rice noodle brand.

However, there were previous reports indicating that Luckin Coffee initially approached its partner, Malaysia's Success Food (BJ FOOD), which is also the operator for Starbucks in Malaysia.

“Luckin's choice reflects its current emphasis on the loyalty and stability of its partners,” said an investor familiar with the coffee industry.

Sources close to Luckin indicated that the company will not follow the domestic price war and rapid expansion strategies in its overseas ventures, nor will it seek to quickly eliminate local brands, but rather prefers cautious expansion, aiming for long-term coexistence with multiple brands and establishing brand recognition.

“This cautious attitude may also lead to existing excellent locations being seized by other coffee brands willing to expand overseas,” the investor stated. “But it won't be Kudi.”

As one of Luckin's largest domestic competitors, Kudi announced its overseas expansion just four months after Luckin. Compared to Luckin's cautious layout, Kudi's overseas strategy is closer to a “multi-point flowering” approach.

According to official disclosures, Kudi has currently expanded its business to 28 countries and regions worldwide, including the United States, Canada, Japan, Indonesia, and Dubai, with a total of over 2,000 overseas stores.

“Without achieving widespread profitability in existing stores, Kudi's aggressive promotion of the convenience store model has left some overseas investors with the impression that its strategy is not focused enough,” the investor noted.

The investor told Xinfeng (ID: TradeWind01) that some of Kudi's early overseas franchisees were parents of students studying abroad, rather than professional investors.

Previously, Kudi mentioned in its overseas recruitment information that it could assist franchisees in need by referring them to immigration agencies and could help solve international school enrollment issues for their children.

It remains unclear whether Kudi's strategy of “replicating” the low-price route from the mainland will be effective overseas.

However, it has already encountered difficulties in some markets.

In November 2024, Kudi was reported to have closed all its stores in South Korea, marking the failure of its first overseas market exploration.

In contrast, Luckin's product pricing in Singapore ranges from 6 to 8 Singapore dollars per cup, which is similar to Starbucks. As of the end of 2024, Luckin has opened 51 stores in the Singapore market but has yet to achieve profitability.

In addition to higher labor and rent costs, part of the reason lies in the constraints of store size.

Singapore, known as “坡县，” has a total area of 733 square kilometers, about one-eighth the size of Shanghai, and has attracted large chain enterprises such as Starbucks and The Coffee Bean & Tea Leaf, as well as many local brands with lower pricing Under the background of limited store numbers and the difficulty of establishing supporting large warehouses in the supply chain, the overseas business of chain brands struggles to achieve economies of scale.

Guo Jinyi once said: "In the global coffee market, China is a market for picking up money, while overseas is a market for grabbing money." Compared to the Chinese market, where penetration rates are still increasing, the overseas market, where coffee drinking habits have matured, may already be an indisputable red ocean.

If new advantages cannot be established in cost structure and consumer experience, the path for coffee brands to go overseas will still be fraught with difficulties