Luckin Coffee and the New Retail Era

The coffee e-retailer is riding high from digitization and explosive growth. But several red flags indicate this might be an unsustainable business model

When Starbucks entered China with its first store in Beijing in 1999, its mission to convert a traditionally tea-drinking nation seemed like a moonshot. Over two decades later, the franchise is dominating the coffee chain industry with a market share of 80.7% by the end of the 2016–17 fiscal year. Figures from the International Coffee Organization indicate that coffee consumption in China is set to grow at an annual rate of 15–20% — and expected to double by 2022.

These changes will inevitably attract new entrants. Luckin Coffee (瑞幸咖啡), which went public today under the ticker symbol ‘LK’, has rapidly become a key competitor to Starbucks in China. In its prospectus (F-1 filing), Luckin states its central objective is to become the largest coffee company in sheer number of stores by the end of 2019; from its F-1:

China’s coffee market is highly underpenetrated. Inconsistent qualities, high prices and inconvenience have hampered the growth of the freshly brewed coffee market in China. We believe that our model has successfully driven the mass market coffee consumption in China by…