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COTTI COFFEE: From rapid rise to operational backlash

The coffee industry in China has experienced rapid expansion in recent years, with over 50,000 new stores opening annually. While Luckin Coffee currently holds a dominant position in the market, the emergence of new players like COTTI COFFEE (库迪咖啡) is expected to intensify competition and challenge its supremacy.

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A new chapter: COTTI COFFEE’s journey from Luckin’s shadow

Luckin Coffee, established in 2017 by Lu Zhengya, former Chairman, along with the core team led by Qian Zhiya, former CEO, witnessed rapid growth, culminating in its listing on the US stock exchange within just two years. However, this triumph was overshadowed by controversy in January 2020 when a prominent short-selling firm accused Luckin Coffee of financial misconduct. Luckin later admitted to wrongdoing and was subsequently delisted from the US stock exchange, leading to the removal of Lu Zhengyao and Qian Zhiya from the company.

In the face of these obstacles, Lu Zhengyao and Qian Zhiya teamed up once again to establish COTTI COFFEE. On October 22, 2022, the two previously mentioned figures announced the much-anticipated opening of COTTI COFFEE’s inaugural store via WeChat. Rather than distancing itself from its Luckin roots, the new coffee brand proudly acknowledges its connection in its backstory, noting that it was established by Qian Zhiya, Luckin Coffee’s founder, along with key members of Luckin’s original team. Impressively, just within a year after its conception, COTTI managed to rank third in China in terms of the number of stores.

top 3 coffee chains in china
Data source: GeoQ, designed by Daxue Consulting, Top 3 coffee shop chains in China by number of stores in 2023

Close quarters: COTTI’s approach to location strategy

The brand strategically places its stores very near its main rival, Luckin Coffee, intending to draw customers away from its competitor. On average, COTTI shops are only 241 meters away from Luckin outlets, while the distance between COTTI and Starbucks and Manner coffee shops is over 400 and 500 meters, respectively. Additionally, Luckin and COTTI share the common aim of expanding into smaller cities.

Cotti coffee
Data source: GeoHey, designed by Daxue Consulting, Distance distribution between COTTI and other coffee brands in China

From low-price campaigns to e-sports collaborations

In response to limited consumer awareness and preference for cost-effective options over taste, COTTI implemented a low-price strategy. Starting on May 11, 2023, the Chinese coffee chain launched the “Summer Ice Drink Season, RMB 9.9 a Day” promotion across approximately 5,000 stores until July 30. Customers were provided with 9.9 RMB all-day drink coupons to generate excitement, increase brand recognition, and draw in new clientele.

Brewing success: COTTI COFFEE’s World Cup campaign of 2022

In the year when COTTI COFFEE was first established, in 2022, the coffee chain made headlines by sponsoring the Argentina national football team during the 2022 World Cup, led by Messi. This move garnered attention on Chinese social media, boosting the coffee chain’s visibility. COTTI capitalized on this by launching a limited-edition coffee inspired by the team, which quickly gained popularity on platforms like Xiaohongshu. Netizens eagerly anticipated watching the World Cup while enjoying the special coffee. Following Argentina’s victory, COTTI’s popularity surged, and the brand continued its support for sporting events like the 2022 Chengdu Marathon, strengthening its connection with its audience.

cotti coffee x argentina football team
Source: Weibo, COTTI sponsoring the Argentina national football team

Leveraging IP collaborations to reach a wider consumer pool

On February 28, 2023, COTTI collaborated with the popular Chinese mobile game Honor of Kings for a co-branding initiative. The partnership involved incorporating elements from five beloved characters in the game into limited-edition coffee products, blending the characteristics of both brands.

With around 145.1 million monthly active users during the 1st quarter of 2023, Honor of Kings boasts extensive reach and popularity. Recognizing this, Luckin Coffee’s rival strategically partnered with the videogame to target its youthful audience, aiming to capture their interest. Li Yingbo, co-founder and CMO of COTTI COFFEE emphasized the brand’s dedication to maintaining a trendy and youthful image while introducing innovative product concepts aligned with the preferences of its target demographic.

Cotti x Honor of Kings
Source: Weibo, COTTI COFFEE in China‘s partnership with Honor of Kings

Brand engagement: COTTI COFFEE’s Douyin marketing

COTTI COFFEE mainly promoted its brand through Douyin, alongside other platforms such as Xiaohongshu, Weibo, and WeChat. Moreover, by teaming up with more than 10 Key Opinion Leaders (KOLs) and professional players from the Honor of Kings esports scene significantly enhances product visibility.

Douyin live streaming is pivotal for converting potential customers and showcasing product features in real-time. It boosts engagement, product promotion, influencer collaborations, and market research, facilitating COTTI COFFEE‘s direct sales and brand growth. This strategy led to impressive results, with new products generating over RMB 30 million in Gross Merchandise Value within two weeks. Additionally, the brand garnered 3.3 million orders and 345 million short video views.

Cotti, Luckin, and Starbucks compared

COTTI COFFEE targets a demographic ranging from low to medium income, appealing particularly to a younger audience. Their strategy revolves around offering low-priced coffee and leveraging robust social media marketing to engage with their clientele effectively.

Luckin Coffee also caters to a low to medium-income bracket but focuses on white-collar workers. Their approach involves extensive product research and development, continuously introducing new offerings to stay competitive. As of December 2022, Luckin Coffee launched a total of 65 new products, approximately twice the number introduced by Manner and Costa, and higher than COTTI and Starbucks, which introduced 51 and 47 new products respectively.

On the other hand, Starbucks positions itself as a premium brand, targeting customers with higher incomes. Their emphasis lies in providing premium quality products and creating exceptional store ambiance and customer experiences, setting them apart in the market.

Cotti coffee vs Luckin vs Starbucks
Source: Daxue Consulting, Comparison between COTTI COFFEE, Luckin Coffee, and Starbucks in China

COTTI COFFEE’s struggle: Franchisee criticism and operational challenges

After a year of rapid growth, COTTI faces backlash from franchisees over delayed payments and reduced salaries, sparking criticism on platforms like Xiaohongshu and Douyin. Instead of addressing root issues, COTTI penalizes franchisees and terminates contracts with dissenting employees. The fundamental problem lies in inadequate supply chain and operational capabilities, leading to inconsistent product availability and discontent among franchisees and consumers. For instance, Cotti’s frequent supplier changes can lead to product shortages during transition periods. This has resulted in declining store performance and fewer new openings. Cash flow issues exacerbate the situation, with expenses outweighing revenues and heavy reliance on franchisee funding.

Deeper dive: COTTI COFFEE’s shifts to liquor sparks criticisms

Following Luckin’s footsteps, COTTI COFFEE also collaborated with Moutai. On December 11, 2023, the coffee chain announced the launch of two funds in collaboration with Moutai Charity Foundation: the Moutai Bulao Liquor (Hua Zhijiu 花之久) Youth Employment Fund and the Moutai Liquor (谷之欢  Gu Zhihuan) Rural Revitalization Fund. These funds correspond to two new products of Moutai Health Liquor Company (茅台保健酒公司), exclusively sold by COTTI COFFEE. The partnership between COTTI COFFEE and Maotai’s health wine division aims to boost brand visibility and sales by leveraging Maotai’s influence. However, pushing franchise stores to sell high-priced Maotai health wine has sparked a backlash from franchise owners, who already face supply chain issues and feel neglected in favor of liquor sales. Moreover, critics doubt the effectiveness of this strategy as the Maotai liquor products are priced at RMB 599 per bottle, mismatching with COTTI’s target consumer base.

moutai x cotti
Source: Baidu, designed by Daxue Consulting, COTTI COFFEE’s collaboration with Moutai

COTTI COFFEE’s rise and challenges in China’s Market

  • The rapid expansion of the Chinese coffee industry, witnessing over 50,000 new stores opening annually, has led to intensified competition, particularly against Luckin Coffee.
  • COTTI COFFEE emerges as a formidable competitor, founded by former Luckin Coffee executives Lu Zhengyao and Qian Zhiya, strategically positioning its stores near Luckin outlets.
  • COTTI’s marketing strategies encompass low-price campaigns, collaborations with popular brands like Honor of Kings, and leveraging social media platforms such as Douyin for effective brand engagement.
  • COTTI COFFEE targets a demographic ranging from low to medium income, appealing particularly to a younger audience, in contrast to Luckin’s focus on white-collar workers and Starbucks’ premium positioning.
  • However, challenges faced by COTTI COFFEE include franchisee criticism over delayed payments, operational issues leading to inconsistent product availability, and backlash over its shift towards selling high-priced liquor products.