Yum Brands Fully Invests in Lavazza Coffee! Stops COFFii&JOY Operations in China

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Intense Competition in the Coffee Market

The coffee market competition is becoming increasingly fierce, especially this year in the coffee sector. While some brands are entering the market, others are naturally exiting. Major cross-industry brands including Huawei, Xtep, Li-Ning, China Post, and Naobaijin are desperately rushing in.

There are also coffee brands that have been defeated in the fierce competition. For instance, the Philippine restaurant group Jollibee recently announced it will end its Dunkin' Donuts coffee business in China. Sip Coffee, which raised nearly 100 million yuan in financing, now has only one store remaining. Additionally, the coffee brand COFFii & JOY was recently announced by Yum China to gradually exit and terminate its operations in the Chinese market.

Lavazza's Expansion in China

According to media reports, in the third quarter, Yum China has already opened more than 20 Lavazza coffee shops nationwide, bringing its total number of stores in China to 78.

Lavazza is an Italian brand founded in Turin, Italy in 1895. It currently has sales in more than 80 countries worldwide, with average annual sales reaching 86,000 tons, equivalent to approximately 14 billion cups, making it one of the representative brands in the global coffee industry.

In May 2020, Yum China Holdings Limited (Yum China) and Italian coffee brand Lavazza announced a joint venture to operate Lavazza brand coffee stores in China. In September 2021, both parties announced a $200 million investment in the joint venture to accelerate the expansion of Lavazza's coffee shop network in China, with a target of opening 1,000 stores by 2025.

Currently, Yum China and Lavazza Group hold 65% and 35% shares respectively in the joint venture, which will become the exclusive distributor of Lavazza in mainland China, introducing more products from Lavazza's international market product portfolio.

As of the end of August this year, Lavazza coffee shops have a total of 22 stores in cities such as Shanghai, Hangzhou, Beijing, and Guangzhou, three times the number from the second quarter. It is expected that the total number of stores will at least double by the end of the year, with a goal of selling 130 million cups of coffee.

Strategic Shift: From COFFii & JOY to Lavazza

While fully committed to expanding Lavazza stores, Yum China also revealed in its third-quarter 2022 financial report press conference that it will gradually exit and 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 established in 2018, focusing on freshly ground, handcrafted coffee priced in the 20-30 yuan range. In its early stages, it opened stores in first-tier cities such as Beijing, Shanghai, and Guangzhou. According to the company's previous disclosures, by the end of 2020, COFFii & JOY had 42 stores. This number has not been updated since then.

Market Challenges and Strategic Decisions

In recent years, the domestic coffee market has continued to boom, and the price range where COFFii & JOY operates is currently facing intense competition. CITIC Securities Research Department pointed out in a report that the segment below 30 yuan is currently the most fiercely competitive area in the Chinese market, crowded with coffee brands. Brands like Luckin Coffee and Manner already occupy COFFii & JOY's price segment. Since COFFii & JOY did not establish strong market recognition and position several years ago, it would indeed be difficult to make a comeback now.

More importantly, Lavazza has its own brand characteristics - it focuses on traditional Italian coffee, replicating the old Italian model from store decoration style to product experience - which is scarce in today's Chinese coffee market.

Therefore, abandoning COFFii & JOY and investing energy and funds into Lavazza might be a more rewarding decision for Yum China. However, judging from the current market situation, Lavazza still needs to accelerate its store opening speed, as the current store scale is only a fraction of its target.

Image source: Internet

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