China and coffee chains will always bring to mind the financial scandal around Luckin Coffee, which dominated the business pages in early 2020. Now a new kid on the cafe block, Cotti Coffee, is putting the froth back into the country’s hot beverage scene.
The brainchild of two former Luckin executives, Cotti was launched just over a year ago. Luck certainly seems to be with the company: In its early days it managed to bag a deal to sponsor the eventual winners of the Qatar soccer World Cup, Argentina.
Credit: Cotti Coffee via Douyin
These days, Cotti’s website and social media are awash with brand and celebrity endorsements and collaborations, such as with the Frida Kahlo Corporation, Swedish oat-based drink company Oatly, Tencent’s Honor of Kings, and even actress Fan Bingbing’s younger brother, the entertainer Fan Chengcheng.
This week, we take a look at how Cotti Coffee got started in the industry, what it is offering to compete with the current coffee chain champions, and where it could go from here.
BUSINESS IS BREWING
The world is drinking ever more coffee, and Chinese consumers are no exception. Total in-store sales of coffee in China are expected to reach over 220 billion yuan (just over $30.3 billion) by 2028, three times the expected level this year, according to estimates from market research firm, Mintel.
“Initially, coffee consumption in China was primarily driven by young white-collar professionals in tier one cities,” says Mengxi Jiang from China-focused market research group Daxue Consulting. But now, China is also seeing “consumption expand to lower-tier cities, with older consumers also beginning to embrace [coffee].”
The two founders of Cotti (a spin on the Italian word ‘biscotti’), Lu Zhengyao and Qian Zhiya, served respectively as chairman and chief executive of Luckin before being ousted amid the 2020 scandal.
While Cotti’s online branding is not wholly secretive about its links to Luckin — the company website makes it clear that Cotti was founded by Qian and “Luckin’s original core team” — Lu is not mentioned by name. His name has appeared in some of Beijing’s courts however: he was fined several times in 2021 for financial misconduct outside of his slip ups as Luckin chairman.
For [Cotti] franchisees, having former Luckin Coffee executives on board is viewed positively, as they bring valuable experience in team management and digital operations…
Mengxi Jiang from China-focused market research group Daxue Consulting
Despite Beijing courts also imposing spending limits on Lu, it appears that the coffee pot has not run completely dry. At the company’s launch it had 200 million RMB (over $29.7 million), according to Cotti’s official website.
Li Yingbo, Cotti’s chief strategy officer, has stated that over half of the company’s core team had jumped ship from Luckin, according to an interview with Chinese language business publication, 21st Century Business Herald.
Cotti has grown quickly: after opening its first store in an office block in Fuzhou, southeastern China, the company already has 5,000 stores across the country.
“Given the rapid growth of the coffee market, opening a coffee shop has become an attractive investment opportunity,” according to Daxue’s Jiang, who says some franchisees are drawn to Lu Zengyao’s “business aura”.
“For franchisees, having former Luckin Coffee executives on board is viewed positively, as they bring valuable experience in team management and digital operations from their time at Luckin,” suggests Jiang.
With its “Drink Cotti, Feel Younger” branding, and dedicated online presence, the company is deliberately targeting China’s youth. Cotti’s low-cost lattes consistently beat out other competitors, costing as little as 8.8 yuan (around $1.20) during social media campaigns. This spring, the total value of Cotti products sold throughout a two-week ‘festival’ on social media platform Douyin surpassed 35 million yuan (almost $4.8 million).
Cotti also boasts China’s largest roasting facility in eastern China’s Dangtu county, producing 45,000 tonnes of coffee per year — the same amount of coffee that China consumed in total, in 2006, and 15 percent of China’s 2022-2023 consumption levels, based on figures from the United States Department of Agriculture.
FRANCHISE FOUNDATION
While Cotti does operate some of its own stores, it has to thank its numerous franchisees for rapidly expanding the company’s physical presence across China. Anyone can become a Cotti franchisee — to open a Cotti store within a larger location, like a mall or a train station, requires a one-time fee of 138,000 RMB (just under $18,900), and Cotti will even provide all of the employees required to kickstart daily production.
But according to Chinese tech industry analyst Ed Sander of Tech Buzz China, this franchise model is one of Cotti’s weaknesses.
For an individual to open up a standard Cotti store requires an investment of over 300,000 yuan (just shy of $41,000), but if it is unsuccessful at turning a profit, this is of little risk to Cotti while the franchisee has to swallow the cost.
“As Luckin did before Cotti, it is impressing people with its breakneck speed of opening stores, even faster than Luckin did. But I personally think they are building a house of cards that will collapse when loss-making stores need to close down,” says Sander.
Franchises that report less than 20,000 RMB (around $2,700) in gross profits per month, are not required to pay any service fees to Cotti, as per its website. If Cotti continues to slash prices and offer promotions on social media, reaching that profit level could be tricky. And as new stores open up, the success of one location could be stifled by competition not from another chain, but from another Cotti franchise.
Whether or not Cotti’s current model is sustainable is not a simple yes or no question, according to Daxue’s Jiang. “The main issues raised by franchisees are two-fold: While daily foot traffic is decent, it barely breaks even financially, and some consumers only make purchases when they have discount coupons.”
COFFEE TO GO… GLOBAL?
Rather than focus solely on establishing their China business, Cotti has already begun to expand internationally, and is not just using social media to push products, but also to attract franchisees.
According to a recent press release from Cotti, its stores are now open in South Korea, Indonesia, Japan, and Canada, totalling over 5,000 individual locations globally. Its journey into Southeast Asia is set to continue with outlets planned in Vietnam, Thailand, and Malaysia.
While a recent company press release claims that Cotti is currently the “world’s fifth-largest coffee brand,” experts like Sander reckon that this hype could die down relatively quickly.
“I won’t be surprised if in a year from now we will read about Cotti’s collapse and Lu and Qian will get away with it again.”
Ella Apostoaie is an editorial associate at The Wire. She is a 2021 graduate of Wellesley College, where she majored in East Asian Studies, with a primary focus on Chinese history and politics. Ella grew up in Norwich, England and is now based in the Boston area.
