(Yicai Global) Jan. 16 -- Coffee Box, one of China's two biggest internet-based coffee brands, last month announced plans to open about 50 physical stores in major Chinese cities, but its capital chain is now reportedly under pressure as product quality falls.

Coffee Box's strategy to open bricks-and-mortar outlets is about visibility, an unidentified official at Shanghai-based Lianxiang Business Consulting, its operator, told state-run China Internet Information Center. But orders have fallen sharply at most of its physical stores in Beijing, Shanghai and other tier-one cities, insiders claim, adding that this has led to delays in payments to coffee bean suppliers, causing tension in the firm's capital chain. Its product quality is also said to be dodgy now.

China's coffee wars have attracted much attention over the past year as Seattle-based Starbucks sped up its market expansion by joining forces with Alibaba-backed online food deliver Ele.me to launch a takeout service, while homegrown rival Luckin Coffee lost more than CNY800 million (USD118.3 million) in the first nine months of 2018. Some observers expect the full-year figure to be much higher.

Set up in 2014, Coffee Box won users by initially providing deliveries for Starbucks and other well-known brands through social messaging app WeChat. It began building its own coffee brand in August 2015 and secured a total of CNY208 million through two rounds of fundraising, public data show.

Coffee Box has generally been making profit in its 400-plus coffee shops in Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou, the official said, adding that the first ones have also done well in various cities. Its growth last year topped the sector, he added.

Declining Orders

Still, a former Coffee Box employee told China Internet Information Center that the number of daily orders is now very small, even for stores located in downtown areas, falling from 200 or 300 every day last May and June to just dozens. Even some outlets in Beijing had only around 50 daily delivery orders, according to Yicai Global's on-site observation at the end of December. The number of daily orders at shops in Shanghai's central district has also fallen to just a few dozen, reaching 100 only after great efforts and input, the ex-staffer said.

The company has postponed payment to bean suppliers, who should have been paid about half a year ago, due to falling sales and revenue and cash flow issues. The payment cycles for syrup, other raw materials and packaging have also been delayed, the former employee claimed. Meanwhile, faced with intense pressure at different levels, Coffee Box is quietly reducing the cost of coffee beans, machines and other core items, Yicai Global learned from company sources. 

Coffee Box claims to use 'high-level beans from a single origin,' but actually it also uses many washed Robusta beans from India, which are a kind of more low-end produce. The firm has also replaced the syrup it previously used with a cheaper one, the sources said.

Coffee Box rejected such claims, saying the coffee machines used by all physical stores are fully-automated units imported from Switzerland, and the coffee beans used for Americano, Latte and other regular coffee products are ones that won top prize from the International Institute of Coffee Tasters. The fresh milk from the ecological ranch with a shelf life of 14 days, the syrup, butter and many other raw materials have recently been upgraded, as well. 

When asked by China Internet Information Center about its alleged delayed payments and ongoing issues regarding its capital chain, the firm did not directly deny it, merely stating that it is actively planning a scale expansion this year and claimed it has also formed long-term stable partnerships with all of its suppliers.