When Luckin Coffee was established in 2017, it immediately posed a threat to Starbucks with its competitively priced coffee and mobile ordering capabilities. This year, Luckin Coffee has achieved a formidable feat by surpassing Starbucks in store numbers as they have now opened 10,000 outlets in China, compared to Starbucks’ 6,480. This makes them the largest coffee chain brand in the country, with the U.S.% being the only country where Starbucks remain the biggest coffee chain.
In June, Luckin Coffee accomplished a major milestone in the Chinese coffee market: its nationwide expansion had allowed it to surpass Starbucks as the largest coffee chain brand in the country, reaching 10,000 stores. Founded in 2017, Luckin Coffee entered the industry as a challenger to Starbucks, offering more affordable prices and mobile ordering. Starbucks had previously established their second-largest market in China, boasting 6,480 stores across the mainland at the end of the second quarter. But Luckin Coffee's 'aggressive' expansion enabled it to reach 10,829 stores at the end of June. Momentum Works' founder and CEO Jianggan Li notes that enticing discounts allow many people to purchase drinks for $2 or less from Luckin Coffee.
In China, tea has customarily been the beverage of choice, yet in the past few years, coffee sales have been on the rise, particularly in cities and among younger professionals. Statistics from GlobalData report that the amount of coffee sold in China has the potential to expand at a yearly rate of 8.7% from 2022 to 2027. Compound annual growth rate (CAGR) is a tool for calculating returns on investments, enabling the assessment of yearly returns over a predetermined duration.
Luckin Coffee opened 1,485 new stores in the quarter ending June 30, amounting to around 16.5 per day. Of the 10,829 stores in China, 7,181 are operated directly by the company and 3,648 are partnership stores. The coffee chain extended its reach to Singapore in March, and has put up 14 stores there as of yet. According to the company, cumulative transacting customers exceed 170 million, with an average of 43.07 million monthly transacting customers in the second quarter. Li, from Momentum Works, said that Luckin's quick expansion could be attributed to its operating model, which involves both self-operated and franchised stores. On the other hand, all of Starbucks' stores are owned and operated by the company and they do not offer franchises. In the same quarter, Starbucks opened 588 new stores, significantly fewer than Luckin's count. Vivian Leung, who lives in Guangzhou, pointed out that she can find at least two outlets of Luckin Coffee within a 50 meter radius from her apartment.
Rahul Maheshwari, an early-stage investor in Asia, explains that franchising enables rapid expansion as one does not need to invest a huge amount of capital. He adds that the density of Luckin stores is very high, and they are located in almost every neighborhood. Maheshwari explains that Luckin has been successful due to its affordable pricing and the quantity of available products, which surpasses that of many low-end brands. Moreover, Luckin stores are much smaller compared to Starbucks.
Momentum Works reported that the asset-intensive model is costly to manage and enlarges gradually.In comparison, Luckin's model lets clients order through their app and take away their orders from the store, unlike Starbucks which offers a comfortable environment for customers to socialize and work.Because of this, Luckin has reduced operational expenses and can be ''balanced within a year'' said Maheshwari.
Luckin and Starbucks have different pricing strategies; with a cup of coffee from Luckin costing 10 to 20 yuan, or about $1.40 to $2.75, due to its discounts and offers. Alternatively, a cup of coffee from Starbucks is priced at 30 yuan or more - around $4.10. Li stated that Luckin has a mass market appeal due to its lower price, and higher quality than many of the low end brands. Guangzhou native Leung commented that Luckin Coffee is "delicious and affordable". The company is looking to partnerships to further its success - for example, last Tuesday, it released a new drink with Kweichow Moutai, a Chinese liquor maker, resulting in 5.42 million Moutai alcohol-infused lattes being sold in just the first day.
Moutai, commonly referred to as maotai, is a high quality distilled Chinese liquor considered to be the "national liquor of China." As reported in a 2022 Brand Finance study, it is the most valuable spirit brand in the world, valued at $42.9 billion. According to Shawn Yang, managing director at Blue Lotus Research Institute, this success is attributed to the strategy of providing premium products to offset the perception of them being "cheap" at an average cost of 9.9 yuan per cup. As Yang further commented in an article, Luckin Coffee capitalizes on the popularity of legacy Chinese brands such as Moutai and Coconut Palm. Other products that have been tailored for the Chinese market include brown sugar boba latte, cheese latte, and coconut latte. Maheshwari recently noted in a blog post that Luckin Coffee has played an integral role in expanding the coffee market in China by offering products that appeal to the tastes of Chinese customers.
In June 2020, Luckin Coffee was delisted from the Nasdaq stock exchange following an accounting scandal. Luckin had announced previously that an internal investigation had revealed its then Chief Operating Officer, Jian Liu, had fabricated sales of around 2.2 billion yuan ($314 million) for much of 2019. Consequently, Liu and Luckin's former CEO Jenny Zhiya Qian were fired. When Luckin listed on the exchange in May 2019, it had experienced a public valuation of $3 billion, making it the first company since the 1999-2000 dotcom bubble to do so. In order to settle the accounting fraud charges, Luckin agreed to pay a penalty of $180 million to the U.S. Securities and Exchange Commission. Filing for Chapter 15 bankruptcy in New York in February 2021, Luckin announced the successful completion of restructuring its financial indebtedness and emerging from bankruptcy proceedings last April. Guo Jingyi, appointed CEO in July 2020, remarked in a press release that the company would aim to improve its governance, internal controls, product, and service offerings. In 2022, despite Covid-19 restrictions, Luckin achieved full-year operating profitability for the first time under Guo's leadership.
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