How Luckin Coffee surpassed Starbucks to become China's largest coffee chain.

Founded in 2017, Luckin Coffee competes with Starbucks through its low-price strategy, franchising, and app-based purchasing.

In June 2023, Chinese coffee giant Luckin Coffee reached the milestone of 10,000 stores domestically, surpassing Starbucks (USA) to become the largest coffee chain in the country. As of the end of the second quarter, Luckin Coffee had 10,829 stores, while Starbucks had 6,480 locations.

Luckin Coffee was founded in 2017. Starbucks, on the other hand, has been present in China since 1999. China is currently Starbucks' second-largest market after the United States.

"Luckin's expansion in China is tremendous. It's becoming increasingly common to be able to buy a Luckin drink for $2, or even less after discounts," Jianggan Li, founder and CEO of technology research firm Momentum Works, told CNBC.

China has a long tradition of tea drinking. However, in recent years, coffee sales have been steadily increasing, particularly in urban areas and among younger generations.

Inside a Luckin Coffee store in Beijing on September 4th. Photo: Reuters — Inside a Luckin Coffee store in Beijing on September 4th. Photo: *Reuters*

According to research firm GlobalData, coffee sales in China are projected to grow by 8.7% annually between 2022 and 2027. In the second quarter, Luckin Coffee opened 1,485 new stores, equivalent to more than 16 stores per day. Of its nearly 11,000 locations in China, over 7,000 are self-operated and more than 3,600 are affiliated, according to the company's financial report.

This coffee chain also expanded to Singapore in March. To date, they have 14 stores there. Monthly customer transactions reached 43 million in the second quarter.

"Luckin is expanding rapidly thanks to its business model – a combination of self-operation and franchising," Li explained. Vivian Leung, an office worker in Guangzhou, said there are at least two Luckin Coffee stores within 50 meters of her apartment.

"Franchising unlocks rapid growth because you don't have to invest capital. Luckin stores are densely packed. Every area has at least one location. Luckin stores are also smaller than Starbucks," said Rahul Maheshwari, an investor in Asia who previously worked for an investment fund in Beijing, China.

Meanwhile, Starbucks stores globally are all managed in-house. In the quarter ending July 2nd, the American coffee chain opened 588 new stores, only 40% of Luckin's openings.

"Models that require significant investment in assets will be more expensive to operate and slower to scale," Momentum Works noted in a report.

Luckin's business model involves purchasing through an app and picking up items at the store or having them delivered to your home. Therefore, the company doesn't have cashiers. The stores are also smaller. As a result, Luckin has lower operating costs and can "break even" quickly, Maheshwari said.

The pricing strategies of the two brands also differ. A cup of Luckin coffee costs 10-20 yuan (US$1.4-2.75), thanks to aggressive promotional policies. Meanwhile, a cup of Starbucks coffee costs at least 30 yuan.

"Luckin targets the mass market. Their prices are completely different from Starbucks. But the quality is considered much better than many other budget brands," Li said. Leung also rated Luckin coffee as "delicious and affordable."

Luckin is also actively collaborating to promote its brand. Last week, they partnered with the renowned Chinese liquor company Kweichow Moutai to launch a coffee with a liquor flavor. On its first day alone, Luckin sold 5.4 million cups. Moutai is a premium Chinese liquor.

Shawn Yang, director of the Blue Lotus Research Institute, said this is a strategic move. "Luckin is expanding its customer base by leveraging the names of iconic Chinese beverages, such as Moutai and Coconut Palm," he said.

They also included a variety of localized drinks on the menu to suit the Chinese market, such as black sugar bubble tea, cheese milk coffee, and coconut milk coffee.

"Luckin Coffee plays a crucial role in expanding the coffee market in China, thanks to its products that appeal to local consumers," Maheshwari said in a recent post.

Luckin listed on the Nasdaq (US) in May 2019. The company was valued at $3 billion in less than two years after its launch, becoming the first company since the dot-com bubble of 1999-2000 to achieve this.

However, three years ago, Luckin was delisted from the Nasdaq after an accounting fraud scandal. Prior to that, they stated they were conducting an internal investigation and discovered that COO Jian Liu had inflated revenue by 2.2 million yuan in 2019. Liu and Luckin's CEO, Jenny Zhiya Qian, were subsequently fired. As a result of this, Luckin agreed to pay a $180 million fine to the U.S. Securities and Exchange Commission (SEC) to settle the accounting fraud allegations.

In February 2021, Luckin filed for bankruptcy protection in the US to restructure. Their stores remained open for business. A year later, they announced they had "completed their restructuring and were exiting bankruptcy."

"We will continue to strengthen internal governance while improving our product lines," CEO Guo Jingyi said at the time. Guo was appointed CEO of Luckin Coffee in July 2020.

In the second quarter of 2022, despite China still implementing strict Covid-19 control policies, Luckin reported a profit for the first time. For the entire year of 2022, the coffee chain also made a profit of 1.16 billion yuan (US$168 million). Revenue increased by 67% compared to the previous year, reaching 13.3 billion yuan.

Ha Thu (according to CNBC, Caixin Global)

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