What does the Lavazza coffee store push say about China's market?
Yum China is expanding its Lavazza coffee store network in China while phasing out its COFFii & JOY brand there. The company opened more than 20 new Lavazza cafes in the third quarter, bringing its China total to 78, with a stated goal of a thousand stores by 2025. COFFii & JOY will gradually cease operations in the Chinese market.
Lavazza, founded in Turin in 1895, sells in more than 80 countries and moves about 86,000 tons of coffee a year, roughly 14 billion cups. Yum China and Lavazza set up a joint venture in May 2020. The retreat comes as competition intensifies, with cross-industry players entering and brands such as Jollibee's Dunkin' Donuts coffee business and Sucai Coffee pulling back.
Competition in China's coffee sector is becoming increasingly intense. On one side, cross-industry giants such as Huawei, Li Ning, and China Post are rushing to enter the market, while on the other, some brands are quietly bowing out. Yum China has recently made frequent moves: on one hand, it is going all in on the Italian coffee brand Lavazza, planning to open a thousand stores by 2025; on the other hand, it has announced that it will gradually terminate the operations of its COFFii & JOY in the Chinese market. What market logic does this advance-and-retreat strategy reflect? Can Lavazza, outside the most fiercely competitive price band, break through with its authentic Italian DNA? This article sorts out the full picture of the events and the considerations behind them.
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Competition in the coffee industry is becoming unprecedentedly fierce. This year's coffee track has not yet fully unfolded, and where some enter, naturally others exit. Cross-industry giants such as Huawei, Xtep, Li Ning, China Post, and Brain Platinum have all poured in, trying to grab a share.
At the same time, some brands have also lost out in the battle. Philippine restaurant group Jollibee recently announced the end of its Dunkin' Donuts coffee business in China; Sucai Coffee, which once raised nearly 100 million yuan, is now struggling to survive with only one store left; and COFFii & JOY, the coffee brand under Yum China, was recently announced to gradually withdraw and terminate operations in the Chinese market.
According to media reports, Yum China opened more than 20 new Lavazza cafés nationwide in the third quarter, bringing its total number of stores in China to 78.
Lavazza is a coffee brand from Italy, founded in Turin in 1895. Its products are currently sold in more than 80 countries around the world, with average annual sales of 86,000 tons, equivalent to about 14 billion cups, making it one of the representative brands of the global coffee industry.
In May 2020, Yum China Holdings, Inc. and the Italian coffee brand Lavazza announced the establishment of a joint venture to operate Lavazza-branded coffee stores in the Chinese market. In September 2021, the two sides announced an injection of US$200 million into the joint venture to accelerate the expansion of Lavazza's store network in China, with the goal of opening 1,000 stores by 2025.
At present, Yum China and the Lavazza Group hold 65% and 35% stakes in the joint venture, respectively. The joint venture will become Lavazza's exclusive distributor in mainland China, introducing more products from Lavazza brand's international market product portfolio.
As of the end of August this year, Lavazza coffee shops had opened 22 stores in Shanghai, Hangzhou, Beijing, Guangzhou, and other places, tripling in number from the second quarter. It is expected that by the end of the year, the total number of stores will at least double, with the goal of selling 130 million cups of coffee.
While making every effort to expand Lavazza stores, Yum China revealed at its fiscal 2022 third-quarter earnings conference that it would gradually withdraw and eventually terminate the operations of its coffee brand COFFii & JOY in the Chinese market, while continuing to develop its other two coffee businesses—K Coffee, which focuses on speed and convenience, and authentic Italian coffee Lavazza.
COFFii & JOY was founded in 2018, focusing on freshly ground handmade coffee, priced in the 20 to 30 yuan range. In its early days, the brand opened stores in first-tier cities such as Beijing, Shanghai, and Guangzhou. According to data previously disclosed by the company, COFFii & JOY had 42 stores at the end of 2020, and the figure has not been updated since.
In recent years, China's domestic coffee market has continued to heat up, and competition in the price band where COFFii & JOY operates has already become quite fierce. CITIC Securities Research Department pointed out in a report that in the Chinese market, below 30 yuan is currently the most crowded price range, packed with coffee brands of all kinds. COFFii & JOY's price segment has already been occupied by brands such as Luckin and Manner, and the brand failed to build strong market recognition and status in its early days, so turning things around now would likely be extremely difficult.
More critically, Lavazza has a distinct brand identity, focusing on traditional Italian coffee, and replicating the old-school Italian model from store decoration style to product experience—which is precisely what is scarce in China's coffee market today.
Therefore, abandoning COFFii & JOY and putting energy and capital into Lavazza may be the choice with higher returns for Yum China. However, judging from the current market situation, Lavazza still needs to accelerate its store-opening pace, since the current store scale is still only a fraction of its target.
Image source: Internet
The above content is compiled by CoffeeHunters, a coffee news website.
