Founded in 2017, Luckin Coffee entered the Chinese coffee scene to challenge Starbucks through affordable coffee options and mobile ordering.
China is Starbucks' second-largest market after the US.
In June, Luckin Coffee reached 10,000 stores in China, overtaking Starbucks as the country's largest coffee chain brand after rapid nationwide expansion this year.
By comparison, Starbucks operated 6,480 stores in mainland China at the end of the second quarter.
Chinese coffee giant Luckin Coffee reached 10,000 stores in China in June, overtaking Starbucks as the country's biggest coffee chain brand after rapid nationwide expansion this year. Founded in 2017, Luckin Coffee entered the Chinese coffee scene to challenge Starbucks through affordable coffee options and mobile ordering. China is Starbucks' second-largest market after the US.
Luckin Coffee grew to 10,829 stores in China at the end of June, overtaking Starbucks as the country's biggest coffee chain brand, following what one analyst calls an "aggressive" expansion. By comparison, Starbucks operated 6,480 stores in mainland China at the end of the second quarter. “They are very aggressive in expanding stores and in China it is very common to buy a Luckin drink for $2 or less after deep discounts,” said Jianggan Li, founder and CEO of technology research firm Momentum Works.
Luckin stores are also smaller in format compared to Starbucks, which has much larger stores.
China is traditionally a tea-drinking market, but in recent years coffee sales have been rising steadily, especially in urban areas and among younger professionals.
China's global coffee sales will increase at a compound annual growth rate (CAGR) of 8.7% between 2022 and 2027, according to analytics firm GlobalData. CAGR is a measure of investment return, which takes into account the yield on an investment at an annual rate over a specified period.
Aggressive expansion In the quarter ended June 30, Luckin Coffee opened 1,485 new stores, averaging 16.5 new stores daily. Of the 10,829 stores in China, 7,181 are independent and 3,648 are partner stores, according to the company's earnings transcript.
The Chinese coffee chain expanded to Singapore in March in its first international foray and has opened 14 stores in the city-state so far, according to a CNBC check.
Customers with cumulative transactions exceeded 170 million, while the average number of customers with monthly transactions reached 43.07 million in the second quarter, according to the company.
“Luckin was able to expand so quickly because of its operating model – which includes independent stores and franchises,” said Li of Momentum Works. Meanwhile, Starbucks stores around the world are company-owned and the American coffee chain does not franchise operations, according to its website.
Instead, it sells licenses to operate. In the quarter ended July 2, the company opened 588 new stores — about 40% of Luckin's count.
Vivian Leung, an office worker based in Guangzhou, said there are at least two Luckin Coffee outlets within 50 meters of her apartment.
“Franchising unlocks very fast growth because it is not necessary to invest so much capital. Otherwise, you will always be limited in your growth. The density of Luckin stores is so high that there is a store in almost every neighborhood,” said Rahul Maheshwari, an early-stage investor in Asia.
Previously, he worked in Beijing at a Chinese venture capital firm and as general manager of a Chinese app. “Luckin stores are also smaller in format compared to Starbucks, which has much larger stores,” Maheshwari said.
Luckin found mass market appeal. In terms of price, it is already different from Starbucks. In terms of quality, it is still better, compared to many of the budget brands.
“As you can imagine, the asset-heavy model is expensive to operate and slow to scale,” Momentum Works said in a report.
Luckin operates a take-away model, where customers place orders on the app and pick up their orders in-store, unlike Starbucks, which offers a cozy environment for people to work and socialize.
As a result, Luckin has lower operating costs and can “break even within a year,” Maheshwari said.
Mass Market Appeal Luckin and Starbucks have different pricing strategies. A cup of Luckin coffee costs 10 to 20 yuan, or about $1.40 to $2.75. That's because Luckin offers huge discounts and offers. Meanwhile, a cup of Starbucks coffee costs 30 yuan or more – that's at least $4.10. “Luckin has found mass market appeal. In terms of price, it is already different from Starbucks. In terms of quality, it is still better compared to many of the low-end brands,” said Li.
According to Guangzhou resident Leung, she said Luckin Coffee is “delicious and affordable.”
Luckin also seeks collaboration and partnerships to raise its brand profile. Last Tuesday, the company launched a new drink with Kweichow Moutai, a Chinese alcoholic beverage maker famous for its “baijiu,” or white liquor made from rice grains.
The Chinese coffee chain said it sold 5.42 million alcohol-infused Moutai lattes on the first day of its launch.
Moutai, sometimes called maotai, is a premium distilled Chinese liquor and has been nicknamed “China’s national liquor.”
Moutai topped the list of spirits brands worth $42.9 billion, according to a 2022 study by valuation consultancy Brand Finance.
Shawn Yang, managing director of Blue Lotus Research Institute, said it was a strategic move to "offer premium products to offset the low-cost feeling of 9.9 yuan per cup."
“Luckin [has expanded its] customer base by leveraging the influence of traditional Chinese brands including Moutai and Coconut Palm,” Yang said in a report.
Other localized hits in the Chinese market include boba latte with brown sugar, as well as cheese latte and coconut latte.
“Luckin Coffee played an important role in deepening the coffee market in China by introducing products that would cater to the Chinese customer,” Maheshwari said in a recent blog post.
Making a comeback? Three years ago, Luckin was delisted from the Nasdaq stock exchange in June 2020 following an accounting scandal. I
This came after Luckin announced in April of that year that an internal investigation found that then-COO Jian Liu fabricated sales of about 2.2 billion yuan ($314 million) for much of 2019.
Liu and former Luckin CEO Jenny Zhiya Qian were later fired. The company was first listed in May 2019.
It reached a public valuation of $3 billion less than two years after its launch, becoming the first company since the dot-com bubble of 1999-2000 to achieve this. Luckin agreed to pay a $180 million fine to the U.S. Securities and Exchange Commission to resolve accounting fraud allegations.
In February 2021, Luckin filed for Chapter 15 bankruptcy in New York.
The company announced in April last year “the successful completion of the restructuring of its financial debt and the exit from bankruptcy proceedings”.
“We will do our best to continually improve our governance and internal controls and improve our product and service offerings,” CEO Guo Jingyi said in a press release at the time.
Under Guo, who was appointed CEO in July 2020, the company recorded a full-year operating profit for the first time in 2022 despite Covid restrictions.
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