This is an English adaptation of a FoodBud historical article originally published on June 20, 2022.
FoodBud recently noted another tea-drink chain moving into coffee. This time it is Anhui-based Tianlala, which has launched its own coffee brand, Kaxiaodou, and was preparing to open franchising as soon as possible, with a target of 150 stores by the end of 2022.
Tianlala grew out of Bengbu, Anhui. According to information disclosed on its official website at the time, it had reached 5,900 stores.
Tea chains entering coffee was no longer unusual.
In 2021, Heytea invested in Seesaw Coffee. Heytea founder Nie Yunchen also personally invested in two coffee brands: Crow Coffee and KUDDO Coffee. Nie was the controlling shareholder of Crow Coffee, which had only three stores. KUDDO Coffee also had only a handful of stores, with Nie holding a 15% stake.
In April 2022, Shuyi Shaoxiancao took an equity stake in Changsha-based DOC Coffee, and later acquired it, becoming its controlling shareholder.
After the acquisition, DOC Coffee said publicly that it aimed to reach 100 stores in 2022. Its store network had already expanded beyond Changsha, with locations opened in Chengdu and Wuhan.
FoodBud’s view at the time was that DOC Coffee would likely move gradually toward a franchising model. Otherwise, its business synergy with Shuyi Shaoxiancao would be relatively limited.
Among tea-chain-backed coffee ventures, Lucky Cup had built the largest scale. It was previously a specialty-coffee project run operationally by Zhao Xin, with Mixue Bingcheng only acting as an investor. In 2019, after Lucky Cup struggled operationally, Mixue Bingcheng acquired it.
Lucky Cup continued Mixue Bingcheng’s strategy of targeting lower-tier markets. Its underlying bet was that coffee as a category would eventually take off in China. Lucky Cup passed 400 stores in October 2021 and exceeded 500 stores in early 2022.
According to relevant data cited at the time:
Lucky Cup’s 2022 store target was 2,000, a very aggressive figure. According to Jihai Brand Monitoring data cited in the article, Lucky Cup had 777 stores at the time.
Reaching 2,000 stores in 2022 looked difficult, but the broader coffee chain market was clearly becoming more crowded.
Coffee still had very large potential in China. In first-tier Chinese cities, annual per-capita coffee consumption was already approaching levels in Japan, South Korea and the United States, and had already exceeded Japan’s level. But across mainland China overall, per-capita coffee consumption was only nine cups per year, far below the level in first- and second-tier cities.
FoodBud’s argument was that everyday coffee consumption could be cultivated over time, and coffee had stronger habit-forming characteristics than milk tea. Tea chains such as Mixue Bingcheng and Tianlala believed there was an opportunity to build coffee consumption habits in third- and fourth-tier cities.
That was the shared bet. What remained unclear was how long the cultivation cycle would be.
At the time, coffee-chain operators in China broadly fell into two models.
The first was the space-led model, represented by Starbucks. Consumers paid a product premium partly for the store environment. In 2021, while tea chains such as Heytea were cutting prices, Starbucks continued to raise prices. The logic was that customers visited Starbucks not only for coffee, but also for business meetings, work and other space-related needs.
The second model removed the space premium, reduced store size and pushed coffee toward everyday demand.
Brands such as Manner were following this route. KUDDO Coffee, invested in by Heytea founder Nie Yunchen, and DOC Coffee, controlled by Shuyi Shaoxiancao, were also moving in this direction.
For the small-store model to work, a store needs a stable coffee-consuming customer base within roughly three kilometers to support sales. Manner Coffee, KUDDO Coffee and Guangzhou local brand JPG Coffee all started first in first-tier cities.
Luckin Coffee’s smarter move was to keep first- and second-tier city markets under direct control while opening lower-tier city markets to franchisees, letting franchisees help cultivate demand.
Lucky Cup and Tianlala’s Kaxiaodou started from lower-tier markets. Based on Lucky Cup’s store data at the time, its stores were mainly concentrated in third- and fourth-tier cities, with those markets accounting for more than 50% of the total, followed by new first-tier cities and second-tier cities.
For Lucky Cup, Kaxiaodou, DOC Coffee and similar brands, expansion into lower-tier cities meant facing the same issue: market education. Operators still had to test when the market could mature, and what methods could develop it.
Earlier in 2022, Mixue Bingcheng added coffee products in some of its stores. Some stores later removed those coffee products after a period of sales.
FoodBud inferred that Mixue Bingcheng may have been using coffee products in tea-drink stores to understand broader coffee demand, while also assessing which store locations might be viable for dedicated coffee shops.
One coffee supplier’s forecast for Lucky Cup store data suggested that if 1,000 new stores opened, the model might work in only about half of them.
FoodBud closed by acknowledging the early movers and expressing hope that more operators would enter the market and accelerate category education.
Note: Expansion targets, store counts, investment stakes and M&A details are historical figures from the 2022 source article.