Luckin Coffee Inc

OTC:LKNCY

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to Luckin Coffee Second Quarter 2019 Earnings Conference Call.[Operator Instructions] Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Bill Zima at ICR for opening remarks and introductions. Please go ahead, sir.

[William Zima]

Hello, everyone, and thank you for joining us on today's call. Luckin Coffee announced its second quarter 2019 financial results earlier today. The press release is now available on the company's IR website at investor.luckincoffee.com. Today, you will hear from Charles Lu, co-founder and Chairman of Luckin Coffee; and Jenny Qian, co-founder and CEO; and Reinout Schakel, CFO and CSO.

We will be referring to a slide presentation on today's call, which can be found at the link in the press release we issued this morning and on the company's IR website, investor.luckincoffee.com.

During this call, the company will be making some forward-looking statements regarding future events and results. These statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including but not limited to statements about the company's beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. Further information regarding these and other risks is included in the company's filings with the SEC. With respect to any non-GAAP measures discussed during today's call, the accompanying reconciliation information relating to those measures can be found in the earnings release issued earlier today.

With that said, I would now like to turn the call over to Charles Lu, Chairman of Luckin Coffee. Charles, please go ahead.

[Zhengyao Lu, executive]

Okay. Thank you, Bill. And welcome, everyone, to our second quarter 2019 earnings conference call. First, I would like to congratulate the team on a strong performance during the second quarter. I'm very pleased with the progress we have made across all of our key metrics. I would also like to thank all our investors and partners for their support. China's coffee market is highly underpenetrated. With our distinguished value propositions of high quality, high affordability and the high convenience, we believe we have addressed the pain point for the China's coffee market, which would be, we have significantly increased mass-market consumption for coffee. We are very excited about our growth opportunity ahead of us and are very focused on a step-by-step execution.

And now I will turn the call over to Jenny, to discuss our second quarter in detail. Jenny, go ahead.

[Zhiya Qian, executive]

Okay.

[Interpreted] Thank you, all, for attending Luckin Coffee's first earning call after our successful IPO. It is a good [ quarter ] to have the opportunity to interact with you and discuss our performance during the second quarter. I'd like first to take this opportunity to thank all of our investors, partners and our customers for their tremendous trust and support.

Thanks to you, we have been able to rapidly expand our operations and are on track to become the largest coffee network by number of stores by the end of this year.

[Interpreted] Please, beginning with Slide 4. We are very pleased with our results during the second quarter. Net revenues from product grew around 700% compared to last year. And we experienced more normalized growth compared to our seasonally slower first quarter, which was impacted by the Chinese New Year holiday. Revenue growth were driven by a significant increase in transacting customers and increase in average number of items purchased by our transacting customers as well as higher effective selling prices. We believe this is the result of our distinguished value proposition by delivering our customers high quality, high convenience and high affordability. At the same time, we substantially reduced our store operating loss as a percentage of net revenues, as a result of: first, benefits of scale and increased bargaining power; second, operating efficiency from technology; and third, higher store throughput.

Our CFO, Reinout, will speak to this and our financial performance in more detail later. And now, I'm pleased to say we remain on track to reach store-level breakeven at some point during the third quarter.

[Interpreted] As can be seen on Slide 5, we nearly doubled our net new store openings, reaching 593 new stores in the second quarter on sequential basis. We entered into 12 new cities, in 5 new provinces. And also, you can see the breakdown of our store types. We continue to place strategic focus on the development of pick-up stores, which not only provide high convenience for our customers, but also provides us with significant cost advantages.

Finally, we remain on track to become the largest coffee network in China in terms of number of stores by the end of 2019.

[Interpreted]Please turn to Slide 6. Brand. As mentioned earlier, we completed our IPO on NASDAQ in May this year. Our brand benefited from additional awareness and global recognition. On the back of our IPO, we launched a nationwide campaign, the declaration of Luckin Coffee, to advocate the coffee culture in China, educate consumers on coffee consumption and strengthen our brand identity. Our brand [ actually ] is a combination of our -- [ are pro to ] the value proposition, and attributes like, to be confident, to innovate and to change is strengthened. Consequently, we acquired around 6 million new transacting customers during the quarter.

[Interpreted] We strategically launched a new product line, Luckin Tea, a series of tea-based products that can be seen on Slide 7. Tea-based products have a high acceptance rate amongst our customers and addresses a large market in China. According to Frost & Sullivan report, the tea market reached CNY 68 billion in 2018 and continues to show strong signs of growth. While there are numerous tea brands in China, most tea-based drink shops are run by small operators, which makes it difficult to consistently maintain product quality and efficient manage the supply chain. With our nationwide store network, established supply chain and a well-recognized brand, we believe Luckin can provide high quality, high convenience and high affordability.

[Interpreted] We believe Luckin Tea is a strategic product for us as it fits well with our target customers and it typically drives different consumption moments at a different time during the day. This will drive overall retention rate and increase revenue per store [indiscernible] become part of our customers' daily life, starting with coffee.

[Interpreted] Now please turn to Slide 8. On May 29, 2019, we hosted the Luckin Coffee 2019 Global Partner Conference in Xiamen, which was attended by more than 1,000 representatives from top-tier suppliers, to further deepen our existing relationships.

Luckin always holds the principle of quality first, and we developed our strategic framework called the Partners of the Blue, consisting of top-tier suppliers. Currently, we have more than 300 Blue Partners.

It is our objective to exercise more control over critical components of our supply chain by working closely together with our most trusted suppliers to ensure high quality and low cost. A good example is the joint venture agreement we recently signed with Louis Dreyfus to jointly build a roasting facility in Xiamen, China.

[Interpreted] Now please moving to Slide 9. As I am sure you are aware, we announced the signing of a memorandum of understanding with Americana on the 22nd of July for potential cooperation in the Greater Middle East and India region. We are currently in discussion with Americana, and we, therefore, do not have any further update to provide at this stage. In more general terms, we are excited about the prospect of sending our disruptive technology-enabled model outside China. And our strategy is to combine Luckin's technology, branding and supply chain with the local knowledge and the resources of local players.

[Interpreted] All in all, we are very happy with our results in the second quarter. Our rapid growth and technology-enabled business model has created barriers to entry, providing us with a sustainable competitive advantage. I look forward to updating you on our progress in the near future.

[Interpreted] Now I will turn the call over to Reinout Schakel, our CFO and CSO, to discuss our second quarter financial performance in more detail. Reinout, please.

[Reinout Schakel, executive]

Great. Thank you, Jenny. Thank you, Charles. Good evening, and good morning for everyone on the call. Thanks a lot for dialing in and listening to our Q2 results. I will discuss our financial results for Q2 in some more detail. If we move to Slide 11, you can see that our operating growth, in the second quarter, we gained momentum from a seasonally slower first quarter that was impacted by Chinese New Year holiday season. I'd highlight our average monthly items sold metric, in particular, which saw a return to a more normalized growth trend. During the second quarter of 2019, we sold nearly as many items as in full year 2018, which illustrates our rapid expansion.

Our net revenue breakdown can be found on Slide 12. Net revenue from products grew just under 700% year-over-year and 95% sequentially, driven by more transacting customers, an increase in the number of items purchased per transacting customers and higher effective selling prices, which we calculate by dividing our net revenues from products by the total number of items transacted during the period.

It is worth noting that net revenues from other products as a percentage of total net revenues increased significantly to 23.2%, our highest quarterly contribution to date as we expanded our product offering. At the same time, we further reduced our cost base and significantly reduced our store-level loss as a percentage of net revenues from products to negative 6% during the quarter from a loss of negative 75% during the same period last year. As Jenny mentioned earlier, we remain on track to reach our store-level breakeven point at some point during the third quarter of 2019.

Reduction of our store-level cost is best illustrated on Slide 11 -- 13. As you can see, we have further reduced our per cup cost to CNY 11.1 from CNY 18.1 during Q2 2018. This is largely driven by benefits of scale and increased bargaining power, operating efficiency from technology and higher store throughput. Store throughput, measured as the average number of items sold per store per day, increased to 345 items during the quarter from 292 items during the same period last year as we expanded our product offering and our transacting customers are buying our products more frequently.

Moving to Slide 14. The percentage of delivery orders organically declined to 19.8% during Q2 2019. This reinforces the fact that Luckin is a pick-up model, not a delivery model. As many of you know, we utilize deliveries strategically. As we enter new markets, we typically open centralized kitchens from where we deliver our orders to ensure high convenience from day 1. We then use the data we collect for our delivery orders to highlight areas with high demand for our products, so-called heat maps. This information allows us to more precisely identify ideal locations to open up our pick-up stores. And as pick-up store density increases in a given market, we can replicate the convenience of delivery at a much lower cost. And this also explains the further reduction of net delivery subsidy to CNY 0.8 per item during the quarter.

If we move to Slide 15. As mentioned by Jenny, we have invested in our brand and further strengthened our brand identity during the quarter. Our total sales and marketing expenses in Q2 '19 amounted to CNY 390.1 million versus CNY 168.1 million in Q1 2019. This represents close to 62% -- 63% of our total non-GAAP operating loss in the second quarter.

Please note that our sales and marketing expenses do not include any of our promotions or coupons, as these are already reflected in our net revenue from products.

The increase in sales and marketing expenses is predominantly related to investments in advertising, which amounted to CNY 245.4 million for the quarter from CNY 43.7 million during the previous quarter. This for us is a very strategic investment at this stage of our development, as we believe a strong brand will enable us to continue to attract and retain customers.

Now as you can see on this page, this has already resulted in strong growth of new transacting customers during the quarter. I would also like to point out that despite increased spending on sales and marketing year-over-year, new customer acquisition cost declined to around CNY 48 in the second quarter from around CNY 55 in the same period last year. This is largely due to benefits of scale, effective user engagement via our proprietary mobile app and a substantially higher number of transacting customers.

At the same time, you can see from the chart on the right that the transaction value per customer per month for each cohort generally increases as each customer cohort matures. We believe this is a result of our distinguished value proposition and our very well-recognized brand.

If we move to Page 16, you can see that we are very well capitalized. Our liquidity, which includes cash and cash equivalents and short-term investments, exceeded CNY 6 billion as of June 30, 2019. The increase in our liquidity was primarily driven by the net proceeds of the Series B investment, our successful IPO, and the concurrent placement during the quarter. We also significantly improved our rate of operational cash burn to negative CNY 375 million this quarter from negative CNY 628 million during the previous quarter.

Now this brings us to the end of the presentation. As Charles and Jenny mentioned, we are very pleased with the results achieved during the second quarter of this year. In terms of our guidance for the third quarter ending September 30, 2019, we expect net revenues from products to be between CNY 1.35 billion and CNY 1.45 billion, representing an increase of 495% and 539% year-over-year, respectively. And this concludes our prepared remarks. Operator, you can open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Tony Wang from Crédit Suisse.

[Shiyan Wang, analyst]

So congrats on the very strong set of results. So basically, I have 3 questions. First is for Reinout, I'm wondering if you can update on the recent progress and outlook for some of your key operating metrics, including store traffic, ASP, unit cost and the store rollout for the third quarter. And more specifically, I think you provided kind of strong guidance for third quarter revenue, maybe some colors on your thoughts on key drivers for Q3.

And my second question is on the retention rate. I think you didn't disclose that in the marketing deck. So maybe where you could provide some colors on the trend for the second quarter.

And lastly, I have a question on your alliance with Americana. I'm just wondering, management, if you could provide your thoughts on that partnership, including the rationale behind it, the timing and also the forms of the partnership you're looking for.

[Reinout Schakel, executive]

I think we'll let [ Mung ] translate the questions first. Maybe I can address question 1 and 2 and then I'll have [ Mung ] translate question 3. Tony, thanks for your question. And I guess, just to -- first of all, your first question on sort of the trends that we see in Q2, and I guess, also the trend that we're seeing in Q3. What we've seen in Q2 is really sort of an enhancement of the business across all the key metrics. So we saw more new customers coming in, we saw an increased number of items per customer. And also, we saw an increase in the effective selling price. And if you look at sort of the impact of that and sort of the drivers that has really been driving sort of our net revenue growth, we continue to see those increases going into the third quarter.

If you look at the effective selling price, which I think is an important driver, the reasons behind an increase of effective selling price is really a function of how we use technology and sort of dynamic pricing.

Secondly, it's also that the number of new customers as a percentage of total transacting customers is decreasing, which means that you have less dilutive impact of free cups. And then we saw a small impact also of the VAT, which was reduced from 16% to 13%, but it only has a small impact on sort of the -- on the net -- on the effective selling price. If you then look at sort of the cost improvements and sort of the per cup cost, we've seen that, again, due to scale and sort of our operating efficiency and higher store throughput, we've seen a reduction of our per cup cost. And we expect to sort of to continue to see that trend going forward. And I think that gives us a lot of confidence to give the guidance for Q3, both on the product revenue as well as on our target and our goal to reach kind of the breakeven point on store level during Q3 2019.

On your second question in relation to the retention rate, yes, that is right, we are not disclosing, at this point in time, the retention rate specifically. What we are showing -- and if you go back to Slide 15, you can see that we are actually showing you the transaction value per customer throughout all the cohorts, which obviously is a function of the number of items each transacting customer purchases as well as the retention rate. And as you can see, we see a continued trend of the transaction value per customer increasing, which is now around CNY 70 per month per customer for our older cohorts, which obviously is a reflection of a positive trend of our key metrics. I think if you look at sort of the retention rate vis-à-vis what we disclosed in the IPO prospectus for Q1, there is no material changes in the retention rate.

For the third question, I'll pass it on to Jenny and Charles to comment on that.

[Zhengyao Lu, executive]

[Interpreted] I will translate for Charles. So first of all, thank you, Tony, for the question. With regard to disclose more detail on the collaboration, due to the restriction on the confidentiality clause, we are unable to identify the detail of the next step. But however, the overall direction, we'll be -- we'll provide our technical expertise, industrial system and also our leverage of our brand equity to work with Americana and use their local resources to develop the business.

With regard to why we identify Middle East as the region for our next expansion, it is actually driven by the identification of a really excellent partner first. We believe that our model and also our technology and know-how is applicable to anywhere in the world. However, the first excellent partner that we have identified is Americana. That's why we start with Middle East, that is the region. And we believe that when we are able to disclose more detail, we will let everybody know. Thank you.

[Shiyan Wang, analyst]

[Foreign Language]

Thank you, Reinout, and congratulations again on the results.

[Reinout Schakel, executive]

Thank you, Tony.

[Zhengyao Lu, executive]

Thank you, Tony.

[Zhiya Qian, executive]

Thank you, Tony.

[Operator]

Your next question comes from the line of Lillian Lou from Morgan Stanley.

[Lillian Lou, analyst]

Charles, Jenny and Reinout, congratulations on the good result. I have 3 questions. First of all, a follow-up question regarding the quarter guidance on product revenue. Trying to understand a little bit more about the management thought behind it, how to achieve such revenue. For example, what the store level -- store counts, and the target -- customer acquisition target, product -- ASP, and also the item, if any color on these metrics will be really helpful for us to further understand the business trend for the next quarter. So this is the quarter guidance.

And the second question is also in terms of the second quarter result. Is there any breakdown or the trend -- comment on the trend in the freshly-brewed items, i.e., how much percentage of coffee contribution to the revenue trends are during second quarter? And also any expectation to third quarter?

And lastly is marketing expense budget. Any guidance toward to the third quarter, especially, I think, with the launch of the tea drink, and also there are a lot more promotion and marketing activities going on with new brand ambassador. So just to trying to, again, understand about the budget on this.

[Reinout Schakel, executive]

Great. Thanks, Lillian. Maybe I will kick it off and Charles and Jenny will supplement on the first and the second question. I think Jenny will take the third question on the tea initiative and for the rationale. I think when it comes to kind of the guidance that we've given on sort of product revenue, obviously, we have a relatively good visibility on sort of the trends that we're seeing not only in Q2, but also in Q3. I think in terms of sort of the key metrics, where I can give some guidance, I think store rollout is going to be sort of in line with kind of what we had projected for the full year on a sort of a run rate basis. So we will see -- continue to see store openings in line with what we have communicated previously. If you look at sort of the number of customers that we have been acquiring in Q2 and also the beginning of Q3, you'll see that the number of customers continues -- the number of new customers that we attract continues to be very, very strong. And I think lastly, when you see the increase of the effective selling price despite the fact that we've launched a buy-ten-get-ten-free offer in combination with the launch of the tea, which Jenny talk more about, you still see that sort of the effective price is holding up quite well. And so we expect that to ultimately continue to increase over time, normalized sort of for one-off promotions. So I think that these are, obviously, kind of the key variables.

Lastly, I'll say, in terms of the number of items we sell per transacting customer, we've seen this increase quite materially, as we discussed earlier in Q2, particularly after the launch of the tea product, and we are expecting to launch more products in Q3. We also anticipate that, that will further increase the number of items that we're selling per transacting customer, which then obviously leads to kind of the product guidance that we've given during this call and also in the earnings release. So we have relatively high confidence on reaching those targets.

[Zhiya Qian, executive]

[Interpreted] So first of all, our brands is our very key asset, important to continue to cultivate brands in China and also to strengthen our brand identity as well as to advocate to customers. Therefore, we largely increased our spending on sales and marketing. Also taking the opportunity of IPO, we do a lot of content, for example, the deceleration of Luckin Coffee, to -- strategically to increase our brand awareness and the popularity among our customers. So for the second quarter, our advertising expense has increased to CNY 245 million. So compared to first quarter, which is CNY 43.7 million, and also the second quarter of year 2018, which is CNY 104 million.

Actually, we want to emphasize here, the increase in advertising expenses is not to drive online traffic, but also mainly to do branding and advertising to build up our brand awareness and popularity.

So here, we want to emphasize the key changes compared to the first quarter. The -- first of all is the spending on [ focus in ] India, which right at around CNY 114 million. The second is the daily interaction from the key opinion leaders and also the new media communication, which is CNY 7.5 million. And also, we launched WeChat location-based services, which is around CNY 7 million. That's almost the [ mandatory ] we invest in the branding and advertising. But here, we want to emphasize that the total customer acquisition costs increased a bit to CNY 48.1, but that is actually not made to drive the online CapEx, but also to do the branding and spreading our brand awareness among our customers.

So for the following quarter, actually, there is no specific guidance on marketing expenses, but we do strategically spend money on branding and marketing for this following third quarter.

[Reinout Schakel, executive]

Lillian, let me just also come back.

[Zhengyao Lu, executive]

Reinout, you want to add something?

[Reinout Schakel, executive]

No, I want to address the second question but -- yes, I want to address the second question but you go first Charles, please.

[Zhengyao Lu, executive]

[Interpreted]I would like to first supplement some of my comments on our brand building. So we recognize that the marketing expenses in the second quarter have increased. This is because as we target to have -- to reach the store-level profitability, after that, we actually realized it's essential to increase our marketing expenses in order to build up our brand equity. So that's why moving towards the third quarter company profitability in the next year, we will work our best to improve our customer base and also to build up more brand equity. I would also like to emphasize that we prefer not to spend our marketing expenses on subsidizing customers. Instead, we want to spend more on marketing and also to -- on the KOL as well.

[Interpreted] So this is all because of -- yes, this is all because of the spending on the ambassadors and also the other promotional activities.

Advertisement, yes.

[Reinout Schakel, executive]

Thank you, Charles. Lillian, let me also come back to your second question around sort of the trends between freshly brewed and other products. I guess, first, if you look at Q2, you'll see that we sold sort of roughly 63 million items, freshly brewed, and about 20 million other products. If you look at the growth year-on-year, you see that the other products have been increasing faster than the freshly-brewed drinks, that's really because during the year, we've introduced a number of non-freshly-brewed items.

Going forward, I think with the launch of tea, the fruit tea, which is part of the freshly-brewed category, we'll see that growth balancing out again, where I think the freshly-brewed drinks and other products will probably grow in sort of a similar type of level Q-on-Q, because we also will introduce new products into the other products category, where we, as we discussed earlier, I think we really want to have new products regularly to keep our customers excited and make sure we find the right products for our customers.

[Lillian Lou, analyst]

Charles, Jenny and Reinout. Just very quick follow-up, I think, on the second question. Is there -- is it possible to give us a little idea of the revenue contribution from coffee in particular, in terms of the trend in last quarter and going forward?

[Reinout Schakel, executive]

Yes, if you would take out -- if you would look at coffee versus non-coffee in the last quarter, you'll probably see that we're getting closer to the 50-50 percent that we have anticipated by the end of this year. We're not quite there yet but I think that's the trend that we're seeing. And that's really a function of obviously introducing products that are relatively popular, including the deer tea, and we do continue to expect that ratio to go to maybe 50-50 by the end of this year.

[Operator]

[Operator Instructions] Your next question comes from the line of Eric Gonzalez from KeyBanc.

[Eric Gonzalez, analyst]

I just have 2 questions here. The number of new customers is fairly strong at nearly 6 million. The active customers, though, was maybe a little bit light at 6.2 million just in terms of retention. So can you bridge that gap for us? Was customer retention a little short of your expectations? Or was this a function of maybe being less promotional in the quarter as you drove the ASP and your costs -- ASP higher and costs lower?

And then the second question is, as it relates to guidance, the growth is still fairly impressive at 60% at the midpoint, but perhaps it's a little bit light relative to expectations. That said, your profitability in the second quarter was really impressive, as was the decline in our per cup cost. So I'm just wondering about the flow-through from that quarter-over-quarter growth in terms of your ability to narrow the losses in the third quarter at both the restaurant and the operating profit level. So in light of this, whether you think -- whether you're going to reach positive restaurant-level margin in the third quarter? Or you're still looking just to achieve the positive margins at some point during the quarter?

[Reinout Schakel, executive]

Thank you. Do we want to translate this question or shall I get started?

[Unknown Executive]

Sure.

[Foreign Language]

[Reinout Schakel, executive]

Thanks, Eric, for your questions. And I think maybe just sort of addressing your first question first. So I think what we've seen in the second quarter and what we are actually very happy with is, first of all, the number of new customers that we have acquired is probably slightly higher than we had anticipated, close to 6 million. If you look at the number of kind of transacting customers, the average monthly transacting customers, that has been increasing 40% quarter-over-quarter, which is probably in line with our expectations. And then very importantly, you also see that sort of the GMV per customer per month continues to increase, which really indicates the fact that people are buying our products more and more often as they mature, as their cohort matures. At the same time, we have been able to effectively increase our effective selling price. And again, we do that through dynamic pricing, making sure that we can give the right price to the right customer, and I think, therefore, also you see that sort of the impact on the retention rate has been very minimal, in line with our expectations. So I think if you look at sort of the metrics, and you look at them side by side, I think we're very happy with the progress that we've made in Q2 not just on revenue, but also on the cost side. On the cost side, continuing to decrease the per cup costs, even though we have included in the freshly-brewed cup cost also the sale of tea, which has a slightly higher per cup cost. And yet, we're getting very, very close to our target for the end of this year.

So I think overall, we're very happy with kind of the combined impact of the customer acquisition, customer frequency and the selling price as well as the overall cost reduction that we've seen in Q2.

Now in relation to your question around sort of growth and guidance. Again, I think we continue to see a strong trend of sort of increase in number of customers. We continue to see an increase in the number of items per transacting customer. We're obviously also in a market where we see that sort of the impact of trade war on economy is starting to get felt in China. I think with our model, high value, high affordability, high convenience, and particularly, the affordability becomes very, very important. I think we are, to some extent, shielded from what's happening in the broader economy, but obviously, that's something that we have to take into account. More importantly, the way we think about sort of our growth trajectory in relation to getting to our profitability, as Charles mentioned, for us, it is very, very important to continue to invest in customer acquisition, continue to invest in promotions around sort of the tea launch, because we do not want to forfeit growth at the cost of the profitability. Obviously, we have to balance, ultimately, our profitability and growth targets. I think we've done a good job on sort of getting very, very close to our store-level profitability. We've got high confidence of reaching that store-level profitability during Q3, but obviously, we don't want that to be at the cost of acquiring new customers. And I think that's the balance that we have to make. And that's also -- the guidance that we've been giving is effectively based on that sort of balancing between those various aspects.

[Eric Gonzalez, analyst]

So are you suggesting that maybe the better-than-expected profitability was maybe not the strategy there, and we could see a reversal of that in the third quarter, like as we go for more customer acquisition? I'm just trying to figure out what the balance looks like going forward.

[Reinout Schakel, executive]

Yes. I think the balance will -- and again, we won't be giving guidance on longer-term customer growth or pricing. I think what you should expect from us is that quarter-over-quarter, we'll continue to improve on store-level profitability. And you will also expect us to improve quarter-over-quarter in number of transacting customers and the number of items per transacting customer. For us, we are obviously very focused on both items, but we're not going to sort of prioritize one over the other. It's difficult to give further guidance on that point on this call.

[Operator]

Your next question comes from the line of Yiqin Wang from CICC.

[Ruochen Lv, analyst]

Ruochen from CICC. And congratulations on the result, and I also have 3 questions. The first question is, have you got a number of stores we already opened in Tier 1 cities, like Beijing and Shanghai? And how many stores do you expect to open in maximum in Beijing and Shanghai?

And the second question is that can you share with us the expected profitability of your Luckin Tea product? I mean the normalized profitability, because I think the cost of the Luckin Tea would be a little bit higher because it's more labor intensive and the raw material cost might be a little bit higher.

And the third question is that we saw in the news that you are also opening -- launching vending machines in some of the cities in China. So can you give us some color on the progress of the vending machines?

[Zhiya Qian, executive]

[Interpreted] So we are working back to first question on the store footprint. First of all, our count of stores in the Tier 1 cities are [ shaped ] around 1,000 already. And we see a lot of potential opportunities in those Tier 1 cities, because according to the Frost & Sullivan report, we now -- now in China, per capita coffee consumption is around 6 cups. Even though in those Tier 1 cities, it's just around 15 cups. So we see there's a large space to grow in the Tier 1 cities. But also we not only just focus on the Tier 1 cities, but also in other tier cities. So we see -- because of our high-quality, high-convenience and high-affordability business model, we can actually expand our stores nationwide.

[Zhengyao Lu, executive]

[Interpreted] So Charles just added, not only because of the potential consumer demand in those cities because -- and also, we highly rely on our heat map and order data, which are also applied based on our technology-driven business model. For example, in Beijing, Shanghai, one good example is the first store we opened in the lobby at our company building. So currently, we already achieved around 1,000 items per day. So we can see, for example, companies with around 2,000 and 3,000 employees working in the building will have a lot similar demands on our items. So in the long term, we see a lot of opportunities and growing space both in the Tier 1 and other tier cities.

And for the third question, which is about the testing of our -- which is about the question on the vending machine. So first of all, this is still during the testing phase. So currently, we cannot be able to communicate further detail during this call.

But in general speaking, we believe with the rapid rising demand for coffee and for other products, we see a lot of other areas we could expect to grow our business where we expect strong demand for our products. For some of those locations, which we cannot open -- justify to open a store there, we will enter this with a much more cost-efficient point of sales. Those locations, for example, a small office building, gas station, a railway station. So those are the opportunities that we could enter with our vending machines. But currently, during -- we're still in the testing phase, we cannot provide further details. But we will update you and the market later if we have the update.

[Reinout Schakel, executive]

And then just coming back on your second question around the tea product. I guess, first of all, for us, tea, as Jenny mentioned, is a highly strategic product launch. We see a big market, we see a high acceptance rate with our customers. And we think that with our model, the supply chain, our branding and value proposition, we're obviously very well positioned to capture a big share in that market.

Now for us also, it's strategic because it drives different consumption moments. Again, it fits well with our target customers. And we're very excited about the tea product.

Now your question around specific profitability, it's something that we won't be able to provide details on, but in general, you will see that sort of the GMV per product for tea will be higher than the average GMV for freshly brewed. So it's contributing, to some extent, to the increase in GMV for the freshly-brewed products. At the same time, as we mentioned, the per cup cost for freshly brewed is probably slightly higher than what you see for the freshly-brewed cost of coffee.

Overall, the margins will not be that dissimilar, given those 2 factors.

[Operator]

Your next question comes from the line of Billy Leung from Haitong International.

[Ka Wai Leung, analyst]

Charles, Jenny, Reinout, congratulations on a very solid set of results. I also have 3 questions. The first question is related to your new product. So just wondering, after releasing some of the new products, for example, our fruit tea, have we seen any changes in terms of our customer group? Have we seen, for example, more females or different age groups? That's my first question.

My second question is also on new product. Can the management share some color on -- in terms of upcoming products for the next 2 quarters in terms of time line, et cetera?

And the last question is related on outside of China expansion. I think it's quite exciting we are going to Middle East and India, which has very similar consumer behavior than China. I'm just wondering if management sees any other areas geographically which also share very similar behaviors in -- with China and has the potential coffee market as well.

[Zhiya Qian, executive]

[Interpreted] I will first translate the first question by Jenny.

So actually, the tea product target customers do match our [ investing ] customer group. Yes, we see more female customers and more customer with lower ages, but there's not significant change. One of the main reasons, because now we're still selling our tea product based on our business model, which is mainly the pick-up stores located in the office buildings. So the main customers are still the office workers around the building. So there's not significant change on our customer group.

But we see the difference -- differentiating of the consumption moment for coffee and for tea. For coffer product, it's mainly concentrated in the morning time. And for the tea product, it's mainly -- it's around the afternoon. So we see there's a differentiating of the consumption moments, which also, in total, kind of drive our [indiscernible].

[Interpreted] The second question on the upcoming products. Actually, our strategy, we will continue to launch new products because our position of our brand is be part of everyone's life. The total SKU for our menu will be limited to around 100, among which 25 to 30 coffee products will not be changed. As for the other SKUs, we will continue changes based on the sales data and also based on the new demand from the customers. So we will continue to launch new products to satisfy our customer needs and also to -- based on -- to take advantage of our mature supply chain to product more -- better quality product to our customers.

[Zhengyao Lu, executive]

[Interpreted] Okay. First of all, we do not have a list of what our next geographic area to expand. As I mentioned, we are more driven by the identification of partners who will have the super local expert resources. We are currently under the exploration stage of collecting data and investigating the model of the numbers of the customers in different areas. And our strength is more focused on know-how and IT technologies. And we will keep exploring different opportunities and also partners. Once identified, we will have more actions, and we'll update everyone.

[Interpreted]

And there is one news that we can share. Actually, [ it's with ] the Middle East partners. We are actually talking to different potential partners in other regions, and we will update the public once we have other significant progress.

[Operator]

Your next question comes from the line of Vincent Yu from Needham & Company.

[Shenghao Yu, analyst]

Charles, Jenny and Reinout, congrats on the great quarter. My first question is on the store expansion in lower-tier cities as well. So can you share more insights on, one, like per store volume, which is like numbers of items sold per store in lower-tier cities compared with the first-tier cities? And second, effective pricing, considering the pricing sensitivity. And three is, the store opening and operating cost in these newer, like lower-tier cities.

And my second question is on per-store CapEx. So coffee, like coffee beans expiration date is way longer than the fruit tea, so are we going to see some increase in storage equipment for these raw materials per store?

[Unknown Executive]

[Foreign Language]

[Shenghao Yu, analyst]

[Foreign Language]

[Zhiya Qian, executive]

[Interpreted] So first of all, I will translate the points -- several points Jenny's given here. So first of all, for our tier -- so given higher pricing sensitivities in Tier 2 and Tier 3 markets, we feel we are better positioned versus other competitors. And because we'll provide our value proposition, high convenience, high quality and high affordability to our customers, so we expect to gain market shares in those kind of tier cities.

In general speaking, the CapEx compared in the second-tier and third-tier cities compared to the first-tier cities, there are not that big difference. Even though the lower-tier cities have lower rental and the lower employee costs, but that has been offset by the slightly lower volume. So based on that, we didn't see a big difference for our lower-tier cities.

Also for -- was the question mentioned by Vincent, because our key products, whether there will be more investment in the new machines, but actually, currently, our tea production will not require new machines. We can totally base on our current machines to produce our tea products.

[Reinout Schakel, executive]

Maybe I'll add to that. I think, [ obviously, ] one -- and that's also why tea for us is a strategic product, because we think the tea consumption in lower-tier cities will be quite strong.

In terms of -- and I'm generalizing here because it does differ from city to city also, depending on when we enter that city, but as Jenny mentioned, I think, first of all, pricing, the pricing strategy is effectively the same. So the retail price will not be different in Tier 1, Tier 2 versus Tier 3. But obviously, our pricing strategy has been also looking at the client behavior, you'll see that sort of the volume that you see in lower-tier cities will be slightly lower than in Tier 1 cities, the coffee consumption. But overall, the pricing strategy is not dissimilar. And then we look at the per cup cost, as Jenny mentioned, you see that we have lower rental, lower labor cost, but it is somewhat offset by the fact that we have lower volumes in those Tier 2 and Tier 3 cities, so the per cup cost is also not that dissimilar. So when you're thinking about sort of your margins and your contribution margins, Tier 1 versus Tier 2 versus Tier 3, on a relative basis, it is not that dissimilar.

[Operator]

Ladies and gentlemen, unfortunately, we have ran out of time for any further questions. I would like to hand the conference back to the management team for closing remarks. Please continue.

[Reinout Schakel, executive]

Yes. Look, maybe on behalf of Charles, Jenny and myself, again, thanks a lot for joining the call. We are excited to bring you along with our journey. We're very much looking forward to keep you up to date on sort of the progress we're making quarter-on-quarter. And again, we thank you for dialing into this call.

[Operator]

Ladies and gentlemen, this concludes our call today. You may now disconnect.

[Portions of this transcript that are marked

[Interpreted] were spoken by an interpreter present on the live call.]