Luckin Coffee is the fastest growing coffee chain and a major competitor of Starbucks in China. From advertising and technology to IPO, Luckin is making a big impact in the Chinese coffee market.
In this article, we will discuss Luckin Coffee, a company that has opened nearly 7,000 coffee shops in just 5 years, becoming the largest coffee chain in China (Starbucks opened 6,000 points in more than 20 years).
About us briefly
About us briefly: Hello everyone! My name is Misha Kuzmin from Scont.io. We use video camera monitoring to increase sales and improve customer service for over 100 customers. Our service costs 99 $/month, can be implemented in 2–3 days and has a free trial period. We work with Dodo Pizza, Coffee Way, Real Bakery and many others.
About Luckin Coffee
Luckin Coffee is one of the leading players in the Chinese coffee industry with about 7,000 coffee shops. Luckin Coffee positions itself as a technology company with a focus on online sales. The company places great emphasis on coffee enthusiasts and actively promotes other coffee and non-coffee beverages. Luckin Coffee has different formats of trade: from full-fledged cafes to islands. The company is publicly traded. But let’s go through everything in order.
Background and strategy
The driving force behind Luckin Coffee’s rapid growth is the trend of coffee consumption in China. The country is rapidly becoming a coffee-drinking nation, with consumption growing at an astounding 15% per year, compared to the global average of 2.2%.
In addition to external factors contributing to the company’s growth, Luckin Coffee’s mission has allowed it to open so many locations by:
- Offering good coffee and food like Starbucks.
- Providing a wide network with proximity to customers like 7-Eleven.
- Organizing an attractive selection of inexpensive products like Costco.
- Providing a technological, all-in-one shopping platform like Amazon.
Despite tea being dominant in China, coffee is becoming a popular drink as a western symbol of status and prestige, as well as a beloved after-dinner drink. Coffee consumption in China has been rapidly increasing, particularly in major metropolises.
Killer of Starbucks
So ambitiously positioned itself the company Luckin coffee at the opening of the first coffee shops in 2018. And it was justified.
In the first days, Luckin offered a number of free cups of coffee and discount coupons in combination with relatively low prices, similar to coffee in the store. The company served coffee for about $3.50 a cup, while the average cup at Starbucks cost $4.80.
The picture shows that the margin cost, which is included in the final retail price of Luckin coffee, is higher than that of Starbucks. However, the costs for the location are significantly lower. This significantly affects the product and business margins overall.
In order to attract more than 40 million customers, mainly young people in second and third-tier cities in China, where tea and instant coffee dominated, Luckin coffee sold at a loss. To cover expenses, the company actively attracted investments and financing.
As of the second quarter of 2022:
👉🏻 7,195 coffee shops have been opened (to remind you, Starbucks in September celebrated the opening of its 6,000th store).
👉🏻 total revenue after taxes is 3,299 million yuan (≈ $456 million).
👉🏻 average monthly number of customers making purchases is 20.7 million people.
Luckin coffee has opened about 1000 more coffee shops and four times faster than Starbucks. Let’s figure out why this has become possible.
Fast delivery and cheap coffee
By working with SF Express (a first-class delivery company in China), Luckin Coffee guarantees customers delivery of orders within 30 minutes if the order is placed only through the app.
As for the price, the company regularly launches promotional campaigns such as “Buy 5, Get 5 Free” and also monthly vouchers for coffee lovers, reducing the average price of Luckin coffee to 20 yuan (2.77 dollars) or less.
In 2017, Luckin Coffee attracted customers’ attention with an offer where one cup of coffee could be exchanged for downloading their app. By collecting customer data in this way, Luckin can adapt their marketing strategies to offer promotions and discounts and personalize each customer experience. Although this is now a standard practice for any coffee shop.
When customers paid through the Luckin app, the company invited them to join WeChat.
By using social networks, fast delivery, cheap coffee and loyalty, Luckin Coffee has found its first 20 million customers.
Coffee like people
Unlike Starbucks, which positions itself as a “third place” where visitors feel the comfort of their own home or workplace, Luckin Coffee offers a completely different concept and formats.
👉🏻 Pick-up store and delivery kitchen
Minimalist coffee shop format (also offers delivery), which usually has low rental and finishing costs, allowing the company to quickly expand with less cost.
These formats make the product more accessible to consumers, combining quality, price and convenience. The company invests the most resources in the Pick-up store and delivery kitchen format.
Luckin opens delivery kitchens to expand its customer reach. Sometimes the company “enters” a new city or area first in the form of delivery kitchens, as they are cheaper to launch and maintain.
👉🏻 Express and popMINI
Luckin believes that everyone in China will be able to drink a cup of high-quality coffee at any time and in any place. That’s why they’re opening additional formats EXPRESS and popMINI.
The company understands that consumers should not have to stand in line for a cup of coffee. That’s why it integrates an app-based ordering system and equips Schaerer vending machines with face recognition technology (how it works https://youtu.be/icu3Lys3NKU)
👉🏻 Elite andRelax formats
Flagship elite coffee shops with well-designed dining rooms. Designed to meet the needs of customers for offline communication and relaxation.
Luckin opens such formats to increase brand awareness. As of March 31, 2019, full-fledged cafes made up 4.6% of the entire network. Cafes are usually spacious and have an area of more than 120 square meters.
The graph below shows the ratios of cafe types.
Different ways of using various coffee shop formats
Kitchen stores are specifically designed for delivery services.
The Express format is used in various out-of-home scenarios, including workplaces, campuses, and service stations.
Pick-up points of the format meet the needs of business people on the go who want to quickly drink a cup of coffee. To speed up the process of getting coffee, Luckin has simplified the customer’s ordering process.
Order through the app > go to the nearest store > get the QR code > scan it and enjoy your drink (no need to wait in line or for the drink to be prepared)
The menu of Luckin coffee
The Luckin coffee menu can truly be considered successful. The company places a top priority on high-quality coffee. With select coffee beans from Arabica and experienced barista teams, including two who have been regional world champions according to WBC (World Barista Champion), the company aims to provide Chinese consumers with the experience of fresh-roasted coffee.
For three consecutive years, the brand’s coffee blend was awarded a gold medal at the International Coffee Tasting event, organized by the International Institute of Coffee Tasters (LIAC) in Italy.
The company sold over 24 million cups of “Coconut Cloud Latte” since its launch in April 2022 until the end of the second quarter.
The menu also has many other drinks.
In 2018, Luckin Coffee signed strategic cooperation agreements with coffee machine manufacturers Schaerer and Franke, syrup provider Fabbri 1905, the world’s largest milk cooperative Fonterra, and coffee bean seller Mitsui & Co. This allowed for the creation of the “Blue Partner” strategic alliance to improve coffee-based products.
In July 2019, Luckin Coffee released a new strategic product, “Xiaolu Tea,” which quickly became a popular drink after its launch across the country.
In addition to selling coffee-related products, Luckin Coffee also sells products from partner companies and acts as a marketplace. In addition to pure coffee, they also sell some breakfast items and other food products.
In addition to coffee-related products, Luckin Coffee also sells products from partner companies and acts as a marketplace. In addition to pure coffee, they also sell some breakfast and other food products. Also, other completely unrelated products are sold, for example, Air Pods from Apple.
Thus, the app is not only a platform for ordering, but it also becomes a full-fledged marketplace to increase overall revenue per customer.
Being a business customer, you can apply for a vending machine that Luckin Coffee will install in your office. This also creates a B2B revenue stream for Luckin Coffee.
Marketing
Luckin Coffee actively uses influence marketing. In 2021, agreements were signed with young actress Tan Son Yoon and idol-star Lelush.
In this advertisement, Lelush tried new drinks from Luckin coffee, namely iced latte with salt and cheese, Boba latte with brown sugar, iced latte with coconut milk and meteor latte. The slogan of the campaign for 2021 is “YYDS” — an acronym made up of the first letters of each word in the phrase yǒng yuǎn dī shén, which means “Greatest of all time.”
The 2022 Winter Olympic Games champion Eilin Gu was shown as the face of the Luckin coffee brand.
In internet advertising, the promotion of the WeChat mini-program is mainly used. The company actively spends money on location-based services (LBS) to promote its online platform, attracting coffee shop audiences and nearby areas.
Luckin demonstrates the culture and values of its brand through effective communication, and consumers identify with the brand.
Trade mark
The “Luckin” trade mark symbolizes luck, bringing joy and happiness to the lives of Chinese people. Milu, the endangered species of deer, is the brand’s calling card. In China, it is known that without human intervention, Milu, like Luckin coffee, would not survive. The font and blue color are associated with Facebook, which enhances the perception of Luckin as a high-tech brand and increases its recognition.
Technology
Traditional coffee industry has a problem of insufficient convenience of consumption. Luckin coffee customers can make orders through mobile phones and then deliver them through convenient and efficient channels, so that they can receive the ordered goods in relatively short terms.
The diagram below illustrates the involvement of technology in all business processes of the company.
The company uses Hybrid MultiCloud and Blockchain technology to improve business operations. The first was officially launched in June 2022, which allowed for support of 5–10 million orders per day.
The technology of Big-data is used for analyzing purchase records, creating customer profiles, and obtaining information about the preferences of various consumers. By learning about customer habits, Luckin coffee can accurately understand customer preferences and place various advertisements, provide personalized menus, and increase the chances of purchase.
The information system can send orders to suppliers and central warehouses through the collected data on consumers for forecasting, in order to connect consumers, suppliers, and central warehouses of businesses and ensure uninterrupted deliveries.
Scandal of fraud
In May 2019, Luckin went public on the Nasdaq, where technology companies trade, with a valuation of $5 billion. In this way, the path from founding to listing on the stock exchange took only 1.5 years.
On January 31, 2020, private investment company Muddy Waters Research and its director Carson Block published a 89-page report, alleging that Luckin Coffee had falsified financial and operating figures. The report stated that they had analyzed video footage of 620 Luckin Coffee locations (a total of 11,260 hours!)
The guys from Muddy Waters obviously did not know about the Scont.io service. There, everything is analyzed through cameras automatically and output in convenient reports :). Employees receive personalized reports and recommendations for improving their work directly in Telegram. And managers receive consolidated reports for all their retail outlets.
On April 2, 2020, Luckin Coffee announced that an internal investigation revealed that its chief operating officer, Jian Liu, fabricated the company’s sales in 2019 by “about RMB 2.2 billion” (310 million US dollars).
On April 8, the US stock market suspended trading of all Luckin shares due to the initiation of an fraud investigation.
In mid-April 2020, American investment bank Goldman Sachs announced that it would seize and sell Luckin shares belonging to company chairman Lu Zhengyao and held as collateral by the bank after the company announced default on its credit with the bank of $518 million.
On June 29, 2020, Luckin Coffee suspended trading on Nasdaq and filed for delisting. The fall in share price went from $50 to practically $1. After changes in the company, Luckin Coffee shares continued to trade on the stock exchange.
Franchise
Luckin Coffee announced at the beginning of 2021, after a series of scandals, that it is resuming its retail partner recruitment program and accepting franchise applications.
The company does not charge royalties from partners, but franchisees will have to pay:
- An advance investment deposit of CNY 350,000 to 370,000 (approximately $50,000)
- Repair costs of CNY 110,000 to 130,000
- Production equipment costs of around CNY 190,000
- A deposit of CNY 50,000
The application is available for:
- People between the ages of 25 and 45;
- Candidates without criminal records, debts, and unpaid loans;
- The candidate has a space for a coffee shop of at least 30 square meters.
It should be noted that Luckin Coffee comprehensively supports its franchisees. The company provides:
- Brand support: the headquarters requires partners to use the Luckin Coffee trademark, unified design and packaging.
- Technical support: the headquarters has a team of professional and technical staff.
- Service support: the company helps with the implementation of new products and equipment, conducts monthly inspections of work and management, provides information communication and customer service center feedback.
- Operational support: the headquarters provides franchisees with comprehensive and systematic marketing guidance and training.
- Marketing support: the headquarters has a full team for social media promotion.
- Individual business plan: Luckin Coffee Management Center develops individual investment plans for each partner.
- Subsequent operational support.
Competitors
Despite the new momentum from Luckin, the Chinese coffee market in 2022 and 2023 is different from what it was in 2018 or 2020. Now the market is not only represented by well-known foreign giants such as Starbucks or Illy, but also by a rapidly growing number of professional networks of branded coffee shops that attract loyal customers among China’s urban middle class.
While Luckin has long relied on extravagant marketing expenses and excessive discounts to drive its growth, the new generation of Chinese coffee brands are directly satisfying the tastes of young consumers.
One example of a local Chinese coffee brand that could complicate Luckin’s long-term plans is the Shanghai-based company Manner.
One of the key competitive advantages of Manner is its technological innovation, which allows it to compete in a digital environment by providing more attractive design and strong collaborations.
Thanks to funding in 2021 from companies such as Singapore’s Temasek, Bytedance, and Meituan’s venture arm, Manner can now boast an impressive valuation of 4.5 billion dollars.
But Manner is just one of many local networks that are attracting a new generation of coffee lovers. International specialty chains such as Blue Bottle and Japanese % Arabica are also entering the Chinese market.
Сonclusion
In conclusion, based on what was written, the following elements seemed key to the success of Luckin coffee:
- Hitting the market trend;
- Large investments at the start, without which such aggressive marketing and operating at a loss at the start would not have been possible;
- Strong marketing: from simple “buy 5, get 5 free” to attracting celebrities and aggressive promotion on social networks;
- Advanced technological platform that allows for narrowly segmenting millions of customers and ensuring uninterrupted deliveries on all cycles;
- Good coffee and menu, along with the right focus on customers;
- The right approach to finding locations for coffee shops. Luckin successfully chooses locations and attracts online traffic, spending less on expensive rent. I hope you enjoyed it, it was useful and interesting.
About us briefly
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