In the five years since Luckin Coffee was founded, its chequered experience is worthy of more than one business school case study. It started out helping to convert a population of tea drinkers into coffee addicts. That seemingly huge success took a dramatic turn in 2020 when the company was found to have fabricated more than $300 million of sales. It was delisted from New York in the same year, while agreeing to pay $180 million to settle charges from the US Securities and Exchange Commission.
“At that time, the consensus was that the coffee start-up, which set the record for the fastest listing in just 18 months since it was founded, would face a brutal bankruptcy and liquidation, and eventually be annihilated by the competition,” Sohu Finance recounted.
Two years on from its near-death experience, the company wants investors to know that it is back in rude health. Last week Luckin announced that it has finally achieved a goal it set out to do five years earlier: surpassing Starbucks. Luckin did so in terms of network size as it now has 6,000 outlets in China, which is 500 more than the US coffee giant.
Better yet, revenue in the most recent fiscal year reached Rmb7.9 billion ($1.2 billion), an increase of 97.5% from 2020. Operating losses also narrowed nearly by half to Rmb540 million.
“Almost everything about Luckin – apart from the name – has changed over the past two years,” Guo Jinyi, who took over as chief executive in July 2020, two months after it was delisted, told the Financial Times. “The business approach, the operation, the team, the company culture – which was responsible for the financial problems – have all changed.”
Luckin initially positioned itself as a rival to Starbucks in China through its focus on app-only sales from stores with little or no seating.
It now claims to have poured more resources into market research in order to adapt to Chinese consumers’ changing taste. A range of new drinks have been released and more importantly, every time Luckin introduces a new concoction, it hires food bloggers to share their tasting notes and help the launches to trend online.
Raw coconut latte, which is made with fresh coconut milk and espresso, is a big hit that consistently sells out. The hugely photogenic cherry blossom latte was another success: a pink coffee topped with sugar sprinkles made to look like cherry blossom petals.
“In 2021, Luckin launched a total of 113 new drinks, of which the hugely popular raw coconut latte has achieved monthly sales of over 10 million cups,” TMT Post wrote. “The emergence of hit products is hardly a coincidence. It requires insight into the new generation of consumers and their preferences. The company also needs a deep understanding and application of consumer data for product innovation.”
Sales campaigns of the past often concentrated on generous subsidies for its coffee drinks. Luckin now tries to drive sales by increasing the average customer spend. For instance, when a customer puts in a morning order for a latte on the app, there’s an option to add a green tea swiss roll for just Rmb8.9, when the regular price is Rmb15. And to boost customer loyalty, Luckin offers free coffees on birthdays and other special occasions.
Guo has also been working to streamline the chain’s operations in an effort to stem losses. Outlets are now restricted to no more than three full-time employees, for instance, with other staff hired as part-time labour to reduce overhead. Salaries for staff are taken directly from sales of the store. The strategy gives managers an extra incentive to eliminate unnecessary headcount and retain the best talent, one company insider told Entrepreneur magazine.
Luckin’s redemption story comes at a time when Starbucks has been plagued by negative press in the China market. In February the US coffee giant was in the headlines after a staffer at a Chongqing outlet chased away several police officers who were eating their lunch boxes outside. In December, it also had to offer a public apology after a newspaper alleged that two of its stores were using expired ingredients.
In February, Starbucks reported that its same-store sales shrank by 14% in its fiscal first quarter, with analysts pointing out that the decline was mainly due to stiffer competition in China, the chain’s second largest market.
Luckin has ambitions to expand further, although no longer at the breakneck pace of its previous growth plan. The competition is not standing still either. Another domestic coffee chain Manner already has 400 stores around China, for instance, with the majority in ‘new-first-tier cities’ such as Chengdu, Hangzhou and Wuhan.
Luckin is even hoping to relist its shares in the US, after liquidators formally filed to close a recent settlement with holders of $460 million of its convertible notes. It hopes it can convince investors that it has reformed its ways. Will they give it a second chance, just as China’s consumers have?
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.