In the realm of investments, due diligence is widely hailed as the guiding principle, involving the scrutiny of data and research to gauge potential returns. While this holds true in many cases, there are exceptions, and coffee stands out among them. The expansive coffee industry, driven by its undeniable appeal to aficionados, crafts a narrative where the market’s allure is as rich and invigorating as a meticulously brewed cup.
Whether it’s Starbucks’ premium spatial experience or Luckin Coffee’s rapid expansion model, investors have perennially been captivated by the vast potential of the coffee industry. It is, therefore, no surprise that, in recent years, they have taken an interest in Manner Coffee too.
About Manner Coffee
Established in Shanghai in 2015, Manner Coffee stands as an outlier among prominent coffee chains such as Starbucks, Luckin, or Cotti Coffee. It neither emphasizes a unique spatial experience nor attempts to allure consumers with highly discounted prices or overly ambitious product combinations, such as milk-tea infused coffee drinks. Manner is a seemingly fuss-free boutique coffee brand, offering classic coffee drinks that provide value for money, typically priced between RMB 15–20 (USD 2–2.7) per cup.
In October, Manner announced its imminent milestone of opening its 1,000th store, surpassing the target set for the end of the year. This achievement is noteworthy for three significant reasons.
First, Manner opened only three stores in its initial three years of operation, from 2015 to 2018—all situated in Shanghai.
Second, Manner’s growth from three stores to a thousand coincides with a period dominated by major players like Starbucks, Luckin, and Cotti in the coffee industry, particularly in China.
Third, and perhaps most importantly, Manner’s approach to boutique coffee appears to have found a viable middle ground, offering a balance between premium coffee experiences (like Starbucks) and cost-effective options (like Luckin).
Boutique coffee as the middle ground
For context, prior to Manner, boutique coffee had never managed to contend with other coffee heavyweights due to its inherent lack of scalability.
Maintaining the essence of “boutique” poses a constant challenge for these brands, spanning various areas.
Concerning roasting methods, most coffee chains adopt a low-cost blend and employ a dark roast approach to meet quality benchmarks. In contrast, boutique coffee shops typically impose stricter requirements for bean quality. For instance, Starbucks sets its defect rate threshold for coffee beans purchased from Yunnan at 8%, while Manner insists on a defect rate below 3%.
Manner also employs semi-automatic coffee machines that require a higher skill level from baristas, whereas Starbucks, Luckin, and most other non-boutique chains generally use fully automatic machines. To accommodate this, until 2021, Manner exclusively hired experienced baristas trained to operate its machinery, with salaries exceeding those of their counterparts in other brands.
So, the looming question arises: if Manner doesn’t cut corners on ingredient and manpower costs, how has it achieved rapid growth and profitability? The answer is quite simple: Manner keeps its stores small and utilizes a direct sales model. Using this business model, an average Manner store can sell over 500 cups of coffee per day, with certain stores capable of selling up to 700 cups. The net profit per store can reach RMB 57,000 (USD 8,000), with a net profit margin of 23.75%.
While Luckin initially had a per-cup cost of around RMB 28 (USD 4), later lowering it to RMB 13.3 (USD 1.8) in 2019, it operated at a loss for five years before claiming to achieve profitability for every cup sold earlier this year. In contrast, Manner’s per-cup cost is around RMB 11 (USD 1.5), achieving profitability for every cup without compromising on bean quality.
In 2020, Manner’s revenue ranged between RMB 200–300 million (USD 28–42 million), with a net profit margin of over 10%. All of its Shanghai stores were found to be profitable. Claims even surfaced that the initial investment for a Manner store is only RMB 300,000 (USD 42,000), with the potential to break even in just over three months. In comparison, Luckin’s initial breakeven period was around two years.
Having proven to be a lucrative business, it is little wonder why Manner has become alluring to investors, catapulting its single-store valuation to USD 12 million, triple that of Starbucks and approximately 27 times that of Luckin.
Manner Coffee’s meteoric rise
Manner Coffee’s expansion began in 2018 after it secured funding from Capital Today, Temasek, and ByteDance. The company subsequently completed several more rounds of financing, raising funds to fuel its rapid expansion across the country:
- October 2018: RMB 80 million (USD 11.2 million) in a Series A funding round from Capital Today, Temasek, and ByteDance.
- December 2020: RMB 100 million (USD 14 million) in strategic financing from H Capital and Coatue Management.
- February 2021: An undisclosed amount of funding in a Series A+ funding round from Temasek. Manner Coffee’s valuation reached USD 1.3 billion.
- May 2021: A nine-figure USD sum in strategic financing from DragonBall Capital, a subsidiary of Meituan. Manner’s valuation exceeded USD 2 billion following the completion of this round.
With the backing of these investors, Manner accelerated its store openings both in Shanghai and nationwide, embarking on an ambitious expansion phase from 2022 to 2023. In March 2022, Manner launched over 200 new stores in ten cities, spanning Shanghai, Beijing, Hangzhou, Chongqing, Wuhan, Nanning, Haikou, Shenzhen, Chengdu, and Suzhou. This elevated its total number of stores in China to 384.
Significantly, over half of Manner’s stores are located in Shanghai, with the majority of the remaining outlets situated in Beijing, Guangzhou, and Shenzhen. Manner’s presence extends across various locations in Shanghai, from shopping centers to subway transfer corridors, reflecting its massive footprint in the city.
As the city with the highest number of coffee shops globally, Shanghai boasts a rich culture of coffee consumption. According to an analysis conducted by the research division of Minsheng Securities, Shanghai’s per capita consumption far exceeds the national average. This is one of the primary factors that has attracted both local and international coffee chain brands.
Entering the next phase of growth
If Manner’s claims of reaching 1,000 stores prove true, it would mark the first instance of a coffee chain in China achieving this milestone without resorting to a franchising model—an unprecedented feat. In comparison to other boutique coffee brands, Manner’s scale dwarfs that of Seesaw Coffee (139 stores), M Stand (437 stores), and Peet’s Coffee (180 stores). Other brands seeking growth have resorted to franchising, as seen with Algebraist Coffee.
However, whether Manner has indeed opened 1,000 stores has little effect on the overall health of its business apart from being an innocuous distraction. The more critical consideration lies in Manner’s strategy for future growth.
Relatedly, a challenge that Manner will likely need to address is something no other boutique coffee brand has successfully achieved: conquering the rural areas of China. According to 36Kr, which referenced data from GeoHey, Manner has covered 15 provinces and 29 cities nationwide as of June 30, 2023. Despite entering nearly 50% of China’s provinces, its city coverage rate is only around 8%. 88% percent of its stores are located in the top five cities, with Shanghai having the densest distribution, constituting approximately 56% of the total.
Statistics from Canyan Data paint a similar picture, estimating that approximately 73.9% of Manner’s stores are located in China’s first-tier cities. In contrast, Starbucks and Tims have distributed their stores more widely within and across cities. Only 14.43% of Starbucks’ stores and 27.9% of Tims’ stores in China are situated within Shanghai—significantly lower than Manner’s percentage.
In defense of Manner’s strategy to focus on the Shanghai market, the city is not only the brand’s home ground but also a coffee market with ample room left for development. While Shanghai’s per capita coffee consumption rate is already much higher than the national average, it is still significantly lower than mature coffee markets like Japan, South Korea, and the US. Moreover, due to its emphasis on operating a quick-service model that demands high efficiency while reducing the need for larger store areas, Manner can be more flexible when selecting new store sites in Shanghai.
Part of Manner’s appeal may also stem from its pricing strategy. According to Canyan Data, the average Manner consumer spends around RMB 21.76 (USD 3), while Seesaw’s average customer spends around RMB 33.98 (USD 4.75). Affordably priced boutique coffee, which Manner offers, is appealing, especially in first-tier cities, new and old. As customer awareness of boutique coffee is already relatively high in such areas, some Manner stores can reasonably achieve sales of over 400 cups per day. According to an analysis by Zheshang Securities, Manner’s average daily income per store is around RMB 7,000–8,000 (USD 980–1,120). Assuming the higher end of this range, and with a net profit margin of 23.75%, each Manner store’s net profit is around RMB 57,000 (USD 8,000) per month. That equates roughly to a payback period of less than 12 months.
In the lower-tier markets, however, it remains to be seen if Manner can achieve similar results. While its products are priced competitively against similar options, it is unclear if there are sufficient boutique coffee consumers in these markets to generate the demand needed for Manner’s business model to succeed.
Unite and build, don’t divide and conquer
From a customer acquisition perspective, Manner differs from Luckin, which relies on a combination of celebrity endorsements, money-burning subsidies, and franchising. Instead, Manner aimed to attract customers by strategically locating its stores in high-traffic areas, often in close proximity to each other.
In densely populated areas, it’s not uncommon to find Manner stores situated within 500 meters of one another. For instance, in Shanghai’s Xujiahui business district, encompassing the subway station, the connected Grand Gateway Shanghai building, and nearby office buildings, there are a total of four Manner stores. Similarly, at the IAPM shopping mall in the Xuhui district, Manner has stores on both the basement level and the third floor.
This strategy mirrors approaches employed by brands beyond the coffee industry, such as Mixue Bingcheng. The primary objective is clear: market dominance. Assuming that the products can generate sufficient demand, increasing the brand’s density in a specific area enables it to shape purchasing habits and foster customer loyalty, particularly among those who frequent the area. This rapid market penetration establishes a first-mover advantage and enhances overall profitability.
Will boutique coffee lose its appeal?
Three years ago, boutique coffee chains like Seesaw and M Stand found success selling coffee at prices higher than Starbucks. However, with brands like Cotti entering the fray, the trend is shifting toward offering coffee at highly affordable prices.
In the case of Cotti, it once sold coffee at an incredibly low price of RMB 1 (USD 0.14) per cup, pursuing its vision of opening 1,000 stores in three years. Cotti outperformed its own expectations, opening over 4,000 stores in just half a year. Lucky Cup persisted with Mixue’s overarching strategy of keeping prices low, offering iced Americanos for just RMB 5 (USD 0.7), conquering small towns with a total footprint of over 2,500 stores.
The prevailing theme in China’s coffee race seems to have shifted toward serving coffee as affordably as possible, often at the price point of RMB 9.9 (USD 1.4). Luckin and Cotti are leading this initiative, frequently distributing vouchers for their customers to purchase coffee at this price point.
Beyond price, another rising trend in the coffee industry is weight-friendly options, with brands like G7 Coffee, AGF Coffee, and Baoji Dujiaoshou leading the pack with black coffee-based drinks.
Luckin has emerged as the temporary winner amidst these changing trends. In 2022, its total net revenue reached RMB 13.29 billion (USD 1.86 billion), with an annual operating profit of RMB 1.15 billion (USD 160.9 million), marking its first profit since its establishment. It is also the first time its revenue has exceeded the RMB 10 billion (USD 1.4 billion) mark.
In Q2 this year, Luckin set new historical highs in both net revenue and operating revenue, reaching RMB 6.2 billion (USD 867.4 million) and RMB 1.17 billion (USD 163.7 million) respectively, surpassing Starbucks. In September, Luckin set a record with its alcohol-infused latte product developed in collaboration with Kweichow Moutai, selling 5.42 million cups of the drink in a single day, with sales exceeding RMB 100 million (USD 14 million).
How the performance of Luckin and other rivals will influence the future outlook of Manner remains uncertain. What is clear at this point is that Manner, given its branding and business model, must remain consistent in certain aspects, preventing it from resorting to the same strategies undertaken by the likes of Luckin and Coffee. Maintaining the quality of its coffee while pricing its products at the same level as its competitors will likely result in losses. Meanwhile, its categorization as a boutique coffee chain also prevents Manner from attempting overly ambitious product experimentation.
While Manner can savor its successes for now, the road ahead for the company remains in flux. What has become increasingly certain, however, is that for today’s Chinese consumers, in the face of absolute low prices, the origin of coffee beans and the aroma of coffee roasting may no longer prove to be as significant.