Tims China's Yongchen Lu: How to Sell 58 Million Bagels? | An Exclusive Interview with 36Kr

Author | Xie Yunzi

Editor | Zheng Huaizhou

Cover Source | Provided by the enterprise

With the resurgence of the "9.9 yuan" price war, the Chinese chain coffee industry has once again entered an adjustment period.

According to previous media reports, in the just-passed 2024, more than 45,000 coffee stores disappeared in the Chinese coffee market.

In such a general environment, Tims China - this coffee brand from Canada, pins its hopes of breaking the deadlock on warm food, especially the "star product" Bagel.

"If the Bagels we sold were stacked together, they could reach the height of 3,700 Oriental Pearl Towers."

When introducing the product, Lu Yongchen, the CEO of Tims China, vividly made an analogy for 36Kr, from which the popularity of the company's Bagel products can be seen.

At this time, Lu Yongchen is re-examining the changes in the temperature of the Chinese coffee market in order to better adjust the direction of Tims' efforts.

Also along with the ups and downs of the entire industry, in the past year, Tims, which has been relatively conservative in store expansion, has taken the lead in initiating a series of reforms within the company. These include the divestiture of the fried chicken brand Popeyes, the elimination of inefficient stores, and the improvement of the franchise system.

In October last year, Tims, which officially entered the era of 1,000 stores, announced the new brand proposition of "Fresh is Delicious, Healthy and Low Burden". After re-anchoring the "healthy diet" track, Tims focused on the lunch scene, hoping to increase the sales period of Bagels.

The development of Tims in the Chinese market has also officially shifted to an exploration of brand differentiation and a vigorous stage of promoting small store franchises.

Lu Yongchen, CEO of Tims China

The following is the live record (with some deletions) of the conversation between 36Kr and Lu Yongchen, CEO of Tims China.

Selling 58 Million Bagels

36Kr: Tim Hortons has been in China for 6 years. Has your state of mind changed?

Lu Yongchen: It has transitioned from the aggressiveness of a disruptor to the precipitation of a long-termist. Previously, Tims has been expanding rapidly. Now, it is more focused on brand differentiation, and this change has become more evident after the brand strategy adjustment last year.

36Kr: Is Tims' differentiation reflected in the warm food business?

Lu Yongchen: Tims is originally a brand with a warm food gene. In 2019, when we opened our first store in China, it was defined as a warm food café.

36Kr: Bagels are more like a new category in China.

Lu Yongchen: In the second year of entering China, Tims decided to promote Bagel products in the Chinese market. This decision also caused considerable controversy within the company. After all, at the initial stage of the brand, cultivating a new category requires a great cost.

But I have always been optimistic about the potential of Bagels. A viable product only needs to conform to consumer demand and be supplemented by continuous market education to grow into a popular category. In terms of production technology, Bagels are boiled first and then baked, which is lower in oil and calories than ordinary bread and has more chewiness. These all conform to the consumption trend of pursuing health in the Chinese market.

36Kr: Starbucks, Nayuki, and Bawangchaji have also successively launched Bagel products.

Lu Yongchen: Tims' advantage lies in "made-to-order". We have also made localized improvements to the Bagels, making the products more fluffy and adding raw materials that Chinese consumers like. In order to promote this new product, Tims has also invested a lot of marketing costs, launched a "9.9 yuan" promotion for a period of time, and also invited Yang Yang as the spokesperson.

In 2022, the sales and repurchase rate of Tims' Bagels "snowballed". Up to now, Bagels have become the most popular product of Tims, with a cumulative sales volume of more than 58 million, which can stack up to the height of 3,700 Oriental Pearl Towers. We are also glad to see the development of the Bagel category in the Chinese market. As a leading brand, Tims can also gain more market share in the continuously growing market.

36Kr: This year, Tims has also started to enter the lunch market.

Lu Yongchen: In the past few years, Tims has been focusing on breakfast, hoping to meet consumers' needs for breakfast that is "fast, cost-effective, and delicious" through the product combination of "a cup of coffee and a Bagel". This year, we are targeting the lunch scene, hoping to increase the sales period of warm food products such as Bagel burgers. Tims also hopes to cultivate the habit of Chinese consumers having lunch in cafes through continuous market education.

36Kr: What is the proportion of warm food sales in Tims, and has the average customer unit price increased?

Lu Yongchen: The proportion of Tims orders containing warm food has increased to more than 50%, and it will continue to remain at this level or even higher. The average customer unit price has been stable at around 30 yuan.

36Kr: The gross profit margin of light food products is much lower than that of coffee. Will this affect the overall gross profit margin level?

Lu Yongchen: The gross profit margin of food is indeed much lower than that of beverages. Generally, the light food sold by chain coffee brands is directly imported from the factory. Most of Tims' light food is made in the store, and only raw materials are purchased from the factory. This enables some of the processing costs and labor costs required for light food to be shared with the store. Moreover, the business model is not a simple mathematical problem, but also depends on the combined effect of the products.

For example, customers who buy coffee alone come to the store for consumption 1 to 2 times per week on average, while customers who buy "coffee + warm food" will increase their consumption frequency to 2 to 3 times. Compared to the gross profit margin of individual products, Tims is more concerned about how to keep customers buying continuously - this is the real moat of profits. Currently, Tims' comprehensive gross profit margin is close to 70%, which is also a healthy level in the industry.

Tomato Coffee, Popular?

36Kr: The coffee flavors of various brands are becoming more and more similar.

Lu Yongchen: The barrier to coffee is not high. Once a flavor syrup is developed by the factory, it will be widely used in the market. This is also the reason why Tims hopes to create brand differentiation.

If Starbucks educated the Chinese market on the perception of Italian coffee and American coffee, Tims' main fresh-brewed coffee has a milder and lighter taste, which more restores the original flavor of coffee. Recently, McDonald's China has also upgraded its freshly brewed coffee to fresh-brewed coffee, which is sufficient to show that consumers love fresh-brewed coffee.

36Kr: Has the new product launch rate increased?

Lu Yongchen: Tims' new product launch frequency has always been to introduce a new product every 2 to 3 weeks. Compared with launching new products, we pay more attention to the precipitation of core products. An excellent catering brand mainly relies on regular products to make profits. We hope to precipitate products that users really remember and have a brand imprint. In addition to the Bagel and Fresh Brewed Coffee categories, Tims will also invest in the research and development of maple sugar flavors.

36Kr: How many members does Tims China have?

Lu Yongchen: By the end of 2024, the number of members exceeded 24 million.

36Kr: Are there any impressive user insights?

Lu Yongchen: We are also rethinking whether in the process of product research and development, the weight ratio of individual consumers should be increased, especially the 25% of the minority population who are particularly sensitive to taste, rather than relying solely on the average taste to make judgments.

Take Tims' recently launched Tomato Americano as an example. This product has caused controversy on Xiaohongshu, but people who like tomatoes really like it. With the increasing curiosity of more and more consumers, the audience of this product is also increasing.

36Kr: What will be the coffee preferences in the Chinese market in the future?

Lu Yongchen: Whether it is fresh-brewed coffee or American coffee, I believe that black coffee, especially iced black coffee, will become the mainstream. With the enhancement of health awareness, consumers will need the "grease-cutting" function of black coffee and fruit coffee when paired with food. In order to make black coffee less bitter, brands will also add various fruit flavors. In recent years, the market for fruit coffee has grown rapidly and has occupied a large market share.

36Kr: Is the healthy trend the reason why Tims China divested the fried chicken brand Popeyes?

Lu Yongchen: Cartesian Capital made this adjustment in the hope that Tims can focus more on the brand itself and optimize the balance sheet at the same time.

36Kr: What are the plans for Popeyes?

Lu Yongchen: Before the completion of the transaction, Tims China has optimized the brand positioning, supply chain, and store location of Popeyes. In the Chinese market, Popeyes already has more than ten stores, and the brand has basically been established. In the future, more investment is needed to achieve economies of scale.

About 9.9 Yuan: Cannot Go Against Customer Demand

36Kr: What do you think of the 9.9 yuan price war?

Lu Yongchen: The phenomenon of 9.9 yuan in the coffee industry will always exist. At this stage, the situation of the price war is more moderate than expected, and the entire industry is becoming more rational.

36Kr: In terms of warm food, Tims also has a great discount. Is this also a disguised participation in the price war?

Lu Yongchen: Tims' "Full and Satisfied Card" is a discount for "drinks + meals", which is for the education of the warm food market. Whether the company continues to participate in the price war? I think we should still focus on the brand's differentiation and clearly understand customer needs. In the current economic environment, consumers have a higher expectation for cost performance. You cannot do things that go against customer needs, but you also need to consider cost control. Only with a sound operation can the enterprise have a long-term future.

36Kr: In the past two years, the price of coffee beans has increased significantly.

Lu Yongchen: The cycle of coffee beans has always existed. The key is how to digest the increased costs. Currently, our cost control ability is very strong, and Tims' procurement scale is also very large. There are still many other costs that have not been digested and amortized through scale advantages. For example, the store side can improve efficiency through digitization, and the rent in the past two years is much lower than in previous years. We can also ensure the stability of the store's gross profit margin by increasing the SKU of light food.

36Kr: Previously, some media reported that more than 45,000 coffee stores disappeared in the Chinese coffee industry in 2024.

Lu Yongchen: Last year was a transitional year. The market has entered an adjustment period from a period of rapid expansion. The reason is that the growth in coffee supply exceeds the growth in demand. Currently, everyone is opening stores cautiously, shifting from simple scale expansion to refined operations and looking for new growth points, such as the low-tier market and special channel layouts.

36Kr: Has Tims' store opening strategy in the Chinese market changed?

Lu Yongchen: Around New Year's Day this year, we have opened 57 new stores. Tims will maintain a net store growth of 20% annually and will also continue to close underperforming stores.

36Kr: How do you determine that a store needs to be adjusted?

Lu Yongchen: In the early stage of brand development in 2021, Tims signed many large stores. These large stores have very high rents and have basically completed their missions. In the future, we will gradually close these stores with high rents and low store efficiency. Of course, not all loss-making stores will be closed. To consider whether to close or retain a store, it depends on the density of stores in the business district and also takes into account the feelings of customers. We also hope to achieve regional profitability and form a healthier store network through the combination of stores.

36Kr: In September 2023, Tims China also opened up franchises.

Lu Yongchen: In fact, in 2019, Tims has already started city franchises in China, and later introduced large enterprises such as Sinopec for KA franchises. In the past year, Tims has also opened more than 200 franchise stores. With the increasingly improved franchise system, the franchise efforts will be expanded in 2025, and single-store franchises will be an important direction for Tims' development.

36Kr: What is the ratio of franchise and directly operated stores currently?

Lu Yongchen: 4:6, which is also a relatively healthy state.

"The Most Intense Period Has Passed"

36Kr: How much does it cost to franchise a Tims? How long can it really make a profit?

Lu Yongchen: The store types of Tims franchise stores are mostly between 20 and 80 square meters. Including decoration, equipment, franchise fees, and the first batch of material fees, the upfront investment for a Tims store is around 600,000 to 700,000 yuan. If the rent is controlled, the fastest store can recover the upfront investment in 8 months, and the payback period for most franchise stores is two to three years.

36Kr: Previously, Tims divided store types according to the store area.

Lu Yongchen: Since last year, Tims no longer distinguishes store types according to the original "Golden Maple, Red Maple, Swift Maple, and Smart Maple", but has transformed into a new model of "made-to-order handcrafted counter". Consumers can also see the entire process of product production through the visual counter.

Up to now, the company has completed the transformation of 648 stores. Among all Tims stores, the store type with an area of 50 to 100 square meters is the most, and most stores have 10 to 20 seats to ensure a comfortable dine-in environment for customers. In the future, small store types with a higher return on investment and several dozen square meters will become the mainstream for our store expansion. Of course, for the first store in a city, Tims will still be presented in the form of a large store or flagship store.

36Kr: Is promoting small stores to better adapt to low-tier cities?

Lu Yongchen: We currently have more than 1,000 stores distributed in more than 80 cities in China, and the proportion of stores in first-tier cities is nearly 40%. Tims' future store opening strategy will still mainly focus on encrypted stores in first- and second-tier cities.

36Kr: Tims has already opened stores in Weifang, Shandong, and Hengshui, Hebei.

Lu Yongchen: I have always believed that the Chinese coffee market is driven by supply to stimulate consumption. Although the coffee penetration rate in the low-tier market is increasing, it still requires a longer market education.