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

Fierce Competition in the Coffee Market

Coffee market competition is growing fiercer, especially this year. While some brands enter, others naturally exit. Cross-industry giants including Huawei, Xtep, Li-Ning, China Post, and Naobaijin have all rushed in.

Other coffee brands have been beaten in the fight. The Philippine restaurant group Jollibee, for example, 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 left. And the coffee brand COFFii & JOY was recently announced by Yum China to be gradually exiting and ending its operations in the Chinese market.

Lavazza's Expansion in China

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

Lavazza is an Italian brand founded in Turin in 1895. It currently sells in more than 80 countries, with average annual sales of 86,000 tons, equivalent to roughly 14 billion cups, making it one of the flagship names in the global coffee industry.

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

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

As of the end of August this year, Lavazza coffee shops numbered 22 in cities such as Shanghai, Hangzhou, Beijing, and Guangzhou, three times the figure from the second quarter. The total is expected to 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 going all in on Lavazza, Yum China also said at its third-quarter 2022 earnings call that it will gradually exit and end the operations of its coffee brand COFFii & JOY in China, while continuing to develop its two other coffee businesses: K Coffee, which focuses on speed and convenience, and the authentic Italian coffee Lavazza.

COFFii & JOY was established in 2018, focusing on freshly ground, handcrafted coffee priced at 20-30 yuan. In its early days it opened stores in first-tier cities such as Beijing, Shanghai, and Guangzhou. By the end of 2020, according to earlier company disclosures, it had 42 stores. That number has not been updated since.

Market Challenges and Strategic Decisions

The domestic coffee market has continued to boom, and the price band where COFFii & JOY operates is now fiercely contested. The CITIC Securities research team noted in a report that the segment below 30 yuan is the most competitive area of the Chinese market, crowded with coffee brands. Luckin Coffee and Manner already occupy COFFii & JOY's price band. Since COFFii & JOY never built strong recognition or a clear position several years ago, a comeback now would indeed be difficult.

More importantly, Lavazza has its own character: it focuses on traditional Italian coffee and recreates the old Italian model from store decor to product experience, which is rare in today's Chinese coffee market.

So abandoning COFFii & JOY and putting energy and money into Lavazza may be the more rewarding decision for Yum China. Judging by the current market, though, Lavazza still needs to speed up store openings, since its current scale is only a fraction of its target.

Image source: Internet

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