China Restaurants: Luckin/Chagee initiation feedback; addressing key investor questions

Research evidence excerpt

China Restaurants: Luckin/Chagee initiation feedback; addressing key investor questions

Goldman Sachs China Restaurants

Q1: Competition and price dynamics

Competition in coffee market

With multiple leading freshly made tea players entering the fast-growing freshly made

coffee market, we are seeing investor concerns on stepped-up competition. However,

we note that: 1) the expansion and pricing remains largely rational, and coffee is a

supplement to the stores instead of the major contributor. For Guming, which stands out

in coffee roll out, the company targets for 20%/25% coffee contribution in 2026-27E;

the coffee coupons offered by the brand are also disciplined, i.e. one Rmb9.9 coupon

per week, compared to Cotti’s aggressive full menu Rmb8.8-9.9 campaign in 2023-early

2026; 2) coffee scale of freshly made tea players remains relatively small, compared to

when Cotti entered the market (aggressive store expansion, and Luckin’s scale is smaller

compared to today). Based on our estimation, if we assume 20% coffee mix (for stores

introducing coffee machines) for Guming in 2026E, it translates to Rmb8bn coffee GMV,

or low teens of Luckin’s scale (vs. Cotti’s GMV reached 17% of Luckin’s as of 2023 per

CIC). The progress of coffee roll out for other freshly made tea brands remains

meaningfully behind that of Guming. 3) Store location wise, the competition between

Luckin and freshly made tea brands is not head-to-head, given Luckin’s stores are high

tier city skewed (16%/44% stores located in tier 1/tier 1+new tier 1 cities, compared to

Guming at 3%/16%).

Meanwhile, we note Cotti, which had fierce competition in store expansion and pricing

with Luckin in 2023-24, has seen pressure YTD. On store expansion, Cotti has turned to