Crazy subsidies, who is paying for the franchise risk of Kudi Coffee?

By orchioo Oct20,2022

Recently, there was a warning post about entrepreneurship on Xiaohongshu.
Someone has advised to withdraw from joining Kudi Coffee, but the poster stated that the construction of Kudi Coffee cannot keep up, such as the delay in reporting coffee machine repairs and not providing feedback. Even the joint venture (also known as the franchisee) that invested 600000 yuan has the suspicion of being “delayed” in the process. In addition, there are many “migrant workers” in the Little Red Book who complain about Kudi Coffee’s delayed salary every month.
On the one hand, it is creating a “growth myth” through crazy store expansion, and on the other hand, it is being “discouraged” by entrepreneurs and workers on social platforms. What is wrong with Coodie Coffee?
1、 Coffee enters the low-priced stage, and brands join the “chaotic competition” with franchisees
In the beverage industry, Kudi has adopted a “low-priced model” to expand crazily, and the speed of its expansion is indeed fast. However, for many franchisees, if they want to do low-priced drainage with the brand, they must be prepared to accompany them.
It is understood that Kudi Coffee’s current expansion adopts a joint venture model, which does not charge fixed fees for joint venture partners (which can be understood as franchise fees) except for decoration, equipment, raw materials, and other expenses. Instead, it draws a percentage from the gross profit margin.
According to media sources, with an initial investment of over 200000 yuan (including deposit, equipment, decoration, cabinet advertising, design, etc.) and store rent (depending on location), a 30 square meter Kudi coffee shop can be opened.
At the specific operational level, the first two months of the new store of Kudi Coffee can adopt a custody mode, with the store manager trained and dispatched by Kudi. During this period, the joint venture will not participate in operational decision-making. At the end of the two months, the joint venture can apply for self operation. This measure has indeed provided a testing ground for many entrepreneurs who focus on the coffee track but have no industry management experience, and has firmly “grasped” the psychology of startups.
However, despite the policy’s excitement, after the price war, Kudi’s joint ventures (franchisees) had to first consider whether they could make money.
On social media, some practitioners have already started to “focus” on Kudi coffee, as its price advantage allows it to sell 400 cups of coffee per day, making sales very attractive. But when it comes to the joint venture, considering the initial costs and excluding subsidies, the joint venture owner can only make a net profit of 217 yuan per day, which is too long compared to the nearly 500000 yuan invested.
Industry insiders also pointed out that the current price of Kudi has increased to twelve or three yuan. Although the price has increased, it is an undeniable fact that the cup volume of Kudi has decreased. Yesterday’s joint venture policy optimization meeting of Kudi also confirmed this conjecture. After the price increase, Kudi’s national sales decreased by 5% -10%. The person pointed out that if high sales cannot be maintained, then Kudi’s joint venture (franchisee) may face the dilemma of “selling more and losing more”.
Especially at present, the price war in the coffee industry has begun to show signs, with Tims Coffee, Nova Coffee, CoCo, Lucky, and others participating. If in the future, Cudi’s cup volume cannot increase due to price increases, franchisees will be in a dilemma. Without accompanying the franchisee, their initial investment will be completely wasted; Continue to accompany, but there is no expectation of profit.
So, at the joint venture policy optimization meeting, Kudi Coffee also released a new policy of “franchisee subsidy”, which encourages franchisees to open second stores. For franchisees with more than two stores, the subsidy will be increased from 9.5 yuan/cup to 10 yuan/cup.
2、 Can franchisees make money by providing crazy subsidies?
For franchisees, whether raising the subsidy standard to 10 yuan can make money or not still requires us to carefully study this round of Kudi’s “new policy”.
It is understood that Kudi Coffee relies on franchisees’ funds for subsidies. From over 7 yuan and over 9 yuan before, it has now risen to 10 yuan, which indirectly indicates that the previous subsidy standards may not be profitable for franchisees. The subsidy of 10 yuan this time is only for Coody franchisees with more than two stores.
So can the current 10 yuan subsidy make money? Let’s calculate the accounts.
According to Kudi’s calculation, the cost of a single cup of coffee includes 6 yuan for materials, 2 yuan for labor, 1 yuan for rent, and 0.2 yuan for water and electricity, adding up to less than 10 yuan.
So, with a subsidy of 10 yuan, theoretically there will be no loss, but don’t forget that there is also no consideration for the amortization and depreciation of initial investment. If platform commissions are included, 10 yuan obviously cannot guarantee profitability.
According to the new policy for franchisees in Kudi, a subsidy of 10 yuan is only applicable to franchisees who open two stores, and those who own one store will still receive a subsidy of 9.5 yuan. Practitioners who have joined many drinks have also expressed doubts about this. If 10 yuan per cup of drinks can make money, why do brands still need subsidies?
An analyst from the catering industry in Shanghai also told “Bullet Finance” that in the tea and coffee race, it is naturally a good way for brands to cooperate with franchisees. But there are several points that need to be taken into account: firstly, the brand’s funding chain needs to be guaranteed, and the supply chain and channels also have a system to provide efficient feedback; Secondly, franchisees can recognize the reality of joining and calculate their accounts clearly.
So it seems that Kudi has not made franchisees realize the reality.
3、 Who will pay for the franchise risks?
Coffee brands rely on franchisees to rapidly expand, especially in the vast county market. Can joining a coffee shop earn money? Can hundreds of thousands of coffee machine equipment and store investments be recouped as expected? Actually, Kudi Coffee did not provide a clear answer.
At present, investors are still hesitant to join and there are no new franchisees coming in. In order to ensure rapid expansion of the number of stores, Kudi can only choose to mobilize old franchisees.
However, at present, it is difficult for franchisees to guarantee profitability in any store, which is still pulling franchisees to continue investing. Isn’t it true that the more investment they make, the more losses they make?
Especially, each franchisee only provides subsidies for three locations to participate in, and the storefronts cannot be replaced. Why not all stores can participate? Behind this is probably also a “big debt” for Kudi, with some primary market insiders speculating that Kudi’s headquarters may not be able to afford subsidies for too many stores.
On the one hand, from the current state of Mr. Lu, it is unrealistic to use his business reputation or founder’s story to attract large-scale financing, and long-term subsidies are difficult to achieve; On the other hand, the product strength of Kudi Coffee is relatively weak, and many coffee and tea brands have their own long-term hot selling products. Currently, Kudi does not have any hot selling products that can hit the market to maintain cup volume.
The primary market insider also stated that the coffee track has entered the Red Sea market, and Kudi Coffee has attracted more investment from franchisees and delayed the payment of part-time wages, which indirectly reflects Kudi’s current predicament in the capital chain.
If the joint venture (franchisee) follows the brand, the path to profitability is endless, and no one will pay for their risks in the future; Once the franchisee wavers, it will be a significant impact on Kudi, which has a small self operated territory.

By orchioo

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