Rui Xing Coffee Shattered Fairy Tales: From Business To Capital

The aftermath of "earthquake" caused by Rui Xing coffee has not yet subsided.

On the morning of April 10th in Beijing, the suspension of the NASDAQ listed Rui Xing coffee has been changed from "waiting for release news" to "more information requested by the company".

Since April 7th, Rui Xing coffee has been suspended. The stock price stays at $4.39. In January 17th, more than two months ago, the stock price had reached a maximum of $51.38.

In April 2nd, Rui Xing coffee announced that after the audit of 2019 annual report found problems, the board of directors set up a special investigation committee. It found that during the two quarter to the fourth quarter of 2019, the company forged the transaction volume of 2 billion 200 million yuan, and the related costs and expenses increased accordingly.

Because the listing time of Rui Xing coffee is May 2019, which means that all the public achievements after its listing are all false. For a time, the public was in an uproar. Since its establishment, all doubts have erupted overnight.

In fact, from the beginning of its founding, Rui Xing coffee ran all the way in doubt and praise. But shortly after they announced that they had surpassed Starbucks as China's first chain coffee shop, a short report and a fraud announcement broke down the growth fairy tale.

A short campaign launched by the trust crisis on China's stock market is coming.

In the three years of Rui Xing's crazy expansion, there are few questions about its "coffee market fairy tale" story. Even their own investors and various industry analysts believe that there is a doomed fast growing coffee market in China.

? ? ? ? In such a coffee market, an enterprise that is holding the "burning money expansion" mode of the Chinese Internet industry is a match made by those who are struggling to find the "next draught". It is too late to find the defects of their own business models. A chicken feather came down.

All the marketing logic of Rui Xing coffee is based on a fairytale ideal that China's coffee market will continue to expand rapidly. Gan Jun photo

Coffee market fairy tale

All the market logic of Rui Xing coffee is all built on a fairy tale ideal. China's coffee market will continue to expand rapidly.

In the prospectus of Rui Xing coffee, they describe the Chinese coffee market in this way: "China's rising urbanization and disposable income have been and are expected to continue to be the main engine of growth in its coffee industry, and more and more Chinese people are beginning to consume more coffee in their daily lives.

"However, compared with the developed countries including other East Asian countries and regions, China's coffee market is still highly underdeveloped. The average coffee consumption is relatively low, mainly for non newly made coffee. Despite the increasing demand of Chinese consumers, quality instability, high prices and inconveniences are the key factors that impede the growth of fresh coffee consumption in China. As these pain points are gradually resolved, we expect coffee consumption to accelerate in China. "

This argument has also been supported by the analytical institutions. According to the Frost&Sullivan report, the number of coffee cups consumed in China has increased from 4 billion 400 million cups in 2013 (3.2 per capita) to 8 billion 700 million cups in 2018 (6.2 per capita), and is expected to increase further to 15 billion 500 million cups (10.8 per capita) in 2023.

In the main business of Rui Xing coffee - fresh brewed cup coffee, it is reported that the proportion of Chinese cup coffee consumption to total consumption is only 25%, while the consumption of cup coffee in Taiwan, the United States and Japan is 83.3%, 80.7% and 63.1% respectively.

The agency believes that the low penetration rate of Chinese brewed coffee is mainly due to unstable quality, high price and inconvenience. As these pain points are gradually resolved, the consumption of fresh per capita coffee in China is expected to be 5.5 cups by 2023.

In the Rui Xing prospectus, institutional research shows that only 26% of people are willing to purchase more than 30 yuan of coffee. That is to say, there is a fertile market that can be built in the middle and lower price range of Starbucks.

In short, the market saturation is low and the room for growth is large, which makes everyone think that this is a blue ocean that will emerge the next draught. But from the fact that the final lucky money fraud can be seen, the fairy tale of "coffee market" may not be so reliable.

"According to the sales volume in the announcement of Rui Xing coffee, the consumption per capita of Chinese coffee will not be 4 cups / year." A coffee market practitioner pointed out to reporters: "if they are as good as they say, China's per capita coffee consumption is almost 20 cups or so, so the market is really huge."

At the same time, the market is not as blue as it is. In fact, there were giants like Starbucks, Costa and others who had already taken a firm foothold in China. After that, competitors like tea and tea compete for the caffeine demand of Chinese consumers.

According to the reporter's inspection, China's per capita 86mg intake of caffeine per day is similar to that of other Asian countries. 95% of the caffeine intake is from tea, which means that most consumers in China rely on coffee products to absorb caffeine. Such a channel is "very narrow". In other words, the coffee market is very small, and there is relatively limited room for growth under the competition of tea.

Therefore, the most optimistic situation is that Rui Xing is only forcing a possible future forward to the present realization. In this process, there must be variables that people can not detect. In the case of large-scale burn subsidies can not be achieved in this process, the choice of fraud has brought a fatalistic color.

In Rui Sheng coffee's own announcement, the number of counterfeiting is 2 billion 200 million yuan, while the current revenue is only 2 billion 900 million yuan, and the proportion of counterfeiting is as high as 75.8%. In the short report of muddy water, the 11260 hour store traffic monitoring video shows that the sales volume of each store in 2019 is at least 69% and 88% respectively in the third quarter of 2019 and the fourth quarter of 2019. Before, this kind of fraud has already begun.

In this process, Rui Xing did not attempt to break through: on-line fawn tea, then independent fawn tea, hoping to make breakthroughs in tea drinking; developing Rui Xing coffee's peripheral products, selling fruit juice, snacks and light food; in 2020, Rui Xing coffee even sold several yards of products on its APP.

These measures look very good, greatly expand the lucky imagination, but it is difficult to make up for the huge gap between their own fragile business model and the great coffee dream.

Business model is unsustainable

Whether it's a quick expansion or a frantic subsidy to attract users, the essence of Rui Xing's coffee expansion is actually no difference from many China Internet Corporation in the past: burning money. However, the conclusion of Rui Xing coffee is that it is a "disruptive new retail mode with technology as the core".

In almost all public occasions, chairman Lu Zhengyao and CEO Qian Zhi ya have spared no effort to publicize the superiority of this model to the outside world.

Compared with the traditional mode, the first feature of Rui Xing is 100% no cash register. All sales processes are carried out on APP. In addition, all consumption is concentrated on APP, which allows Rex to collect consumer behavior habits through backstage data, and provide data support for updating and updating their products.

These data not only provide guidance for Rui Xing in terms of management, but also provide many data that traditional chain catering enterprises can not provide in the process of Rui Xing listing. These refined data can enable us institutional investors to quickly understand a Chinese coffee industry, which greatly promotes the financing and listing process of Rui Xing.

The second characteristic is the store mode mainly based on fast take shops.

Among the stores of Rui Xing coffee, one is an excellent shop with different themes, the other is a takeaway based kitchen store. The main part of the store is a store with few seats and small space in offices and other places.

The main strategy to choose fast take shops is that in the early stage of Rui Xing's preparation, through investigation, it is known that 70% of the coffee consumption in China is the form of coffee takeaway. However, the traditional open shop mode can not meet the needs of convenience and sex price ratio of high quality coffee consumption for this group of people.

The third characteristic lies in the application of new technologies.

The sensors in the machine can monitor the state of the machine in the background. Once the problem occurs, the machine can automatically send the repair order. The sensors in the refrigerator can monitor the raw material temperature in real time to ensure the taste and freshness of the products. In inventory, we can use large data to manage the supply of the stores in real time, so as to ensure the efficiency of the supply chain.

In the traditional mode, all these matters require the manager to operate. Therefore, the development of the traditional coffee industry is restricted by the number of qualified shop managers and can not be expanded in a short time.

These features add up to a nearly perfect business model: data collection can make decisions highly efficient and forward-looking; fast picking stores have greatly reduced the rents and operating costs of individual stores; the application of new technologies has made coffee shop's human cost pain point solved.

"In fact, in the coffee industry, no matter how advanced your equipment is, you still need people's operation. Actually, there is not much savings in labor costs." The coffee industry said, "the rapid expansion of the background, will increase a lot of equipment, rent and other capital investment, need a lot of money to fill."

As an enterprise that relies mainly on coffee beverage sales, Rui Xing coffee needs to increase its sales volume and users to demonstrate the feasibility of its business model.

But so far, Rui Xing's strategy is to use more discounts to attract more consumers. Discount level is the key driver of price sensitive users. When the company increases its product discount, the user will increase the expenditure; when the company wants to raise the price by lowering the discount level, the user's activity will decrease.

Worse still, Rui Xing has so far no similar Starbucks membership procedures and points system, which means that users will not benefit from frequent consumption, but those who consume less marginal users will get a bigger discount, that is, "big data kill".

This means that users can continue to subsidize them to get sales, or sacrifice sales for a higher single cup income. If they can not get both of them, the market share of Rui Xing's "horse racing enclosure" will not bring sustained revenue to the company, and this business mode is doomed to be unsustainable.

According to the prospectus issued before the launch of Rui Xing coffee, the total net revenue of Rui Xing coffee was 478 million 500 thousand yuan (US $71 million 300 thousand) in the first quarter of 2019, with a net loss of 551 million 800 thousand yuan (about US $82 million 218 thousand). 2018 the total net revenue was 840 million 700 thousand yuan (US $125 million 300 thousand), a net loss of 1 billion 619 million yuan (US $241 million 300 thousand), of which the marketing cost was RMB 749 million. The net loss as of December 31, 2017 was 56 million 371 thousand yuan.

That is to say, on the eve of the establishment of the Rui Xing coffee company, a total of 2 billion 227 million 200 thousand yuan has been burned.

Profit puzzle

After listing, Rui Xing coffee is confident of its future profits.

The three quarterly report in 2019 showed that the company achieved a revenue of 1 billion 542 million yuan (US $216 million) in the third quarter, an increase of 540.2% over the previous year, a net profit loss of 532 million yuan, and a 9.6% increase in the loss margin, but it was the smallest loss in the past four quarters.

From customer data, the first three quarters of Rui Xing coffee participated in trading customers totaled 30 million 700 thousand, an increase of 413.4% over the same period. Monthly sales of 44 million 200 thousand pieces of goods, an increase of up to 470.1% over the same period. It is worth noting that Rui first declared profit at the store level, that is, excluding marketing costs, achieving a profit of 186 million yuan and operating profit margin of 12.5%.

Because of financial fraud, this profit estimate is no longer a reference, but it can still be judged from other successful examples.

First, the Starbucks model.

Over the past 20 years, Starbucks has successfully built a high-end coffee brand in China and made the concept of "third space" popular among people through the sale of coffee. Therefore, compared with the competitors, Starbucks's products are priced higher, but still can achieve greater sales, thereby achieving profitability.

This is also the only large chain coffee brand that can make profits in the Chinese market.

Although Rui Xing's smaller store space and more advanced equipment can save a lot of store rental costs and operating costs, its store revenue and gross profit are only 17% and 11% of Starbucks's. At the same time, long time low price and small storefront strategy also makes Rui Xing brand positioning different from Starbucks, unable to copy this mode.

Rui Xing coffee itself did not become the second Starbucks's intention at all. The management of the company has repeatedly stressed that Rui Xing has to make coffee that everyone can afford. Compared with Starbucks, Rui has taken a completely different way of expansion, and business logic is totally different.

Secondly, it is a convenience store model, such as the whole family, 7-11 or even Sinopec, Yi Jie, and other companies that can use existing stores and employees to sell coffee. Therefore, they only need to buy coffee machines and raw materials, and train their existing staff for coffee sales without having to pay extra rent and labor costs.

Although the sales volume is much smaller, because of the larger profit margins of coffee sales, this mode can achieve a similar level of return on investment to Starbucks to a certain extent. As a special coffee shop, Rui Xing's sales of light coffee and other non drinking coffee products are very small. From the perspective of single shop profitability, it is also impossible to achieve the same profit level as these convenience stores.

Finally, the mode of chain milk tea shop. In China, chain stores such as COCO, such as a little bit of tea shops, are comparable to Rui Xing in terms of their price and store size. However, the market size of tea drinking is much larger than that of coffee, and its profit rate is higher than that of coffee.

In 2019, Rui Xing coffee entered the market through the development of deer tea products and independent fawn tea shops. However, due to competition between tea and coffee under certain circumstances, increasing the tea product line is not necessarily equivalent to the growth of sales volume.

From the comparison of the above three models, it is not hard to find that Rui Xing is actually on the way of third modes: through small stores and high sales, to achieve the ultimate profit. This means that Rui Xing coffee has to increase sales and prices at the same time, and the worst is to stabilize one of them to enhance the other.

However, on the one hand, China's coffee market is not as full of growth as Rui imagined. On the other hand, Rui Xing's user price sensitivity is high, raising prices will reduce user activity, and profits will not come to an end.

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