How Luckin Coffee surpassed Starbucks to become the largest coffee chain in China

Founded in 2017, Luckin Coffee competes with Starbucks with low prices, franchising and in-app purchases.

In June 2023, Chinese coffee giant Luckin Coffee reached the milestone of 10,000 stores in the country, surpassing Starbucks (USA) to become the largest coffee chain in the country. As of the end of the second quarter, Luckin Coffee had 10,829 stores. Meanwhile, Starbucks has 6,480 locations.

Luckin Coffee was founded in 2017. Starbucks has been present in China since 1999. China is currently Starbucks' second largest market after the US.

"Luckin's expansion in China is terrible. Buying a Luckin drink for $2, or cheaper after discounts, is increasingly popular," Jianggan Li - founder and CEO of technology research firm Momentum Works said on CNBC.

China is a market with a tradition of drinking tea. But in recent years, coffee sales have been increasing, especially in urban areas and among young people.

Inside a Luckin Coffee store in Beijing on September 4. Photo: Reuters

According to research firm GlobalData, coffee sales in China will increase 8.7% per year in the period 2022-2027. In the second quarter, Luckin Coffee opened 1,485 new stores, equivalent to more than 16 stores per day. Of nearly 11,000 locations in China, more than 7,000 are self-operated stores and more than 3,600 are affiliated, according to the company's financial statements.

This coffee chain also expanded to Singapore in March. To date, they have 14 stores here. The number of monthly transaction customers reached 43 million in the second quarter.

"Luckin expanded rapidly thanks to their business model - both self-operating and franchising," Li explains. Vivian Leung - an office worker in Guangzhou - said there are at least two Luckin Coffee stores within 50 meters outside her apartment.

"Franchise unlocks fast growth, because you don't have to invest capital. The number of Luckin stores is dense. Every area has at least one location. Luckin stores also have a smaller area than Starbucks" , said Rahul Maheshwari - an investor in Asia. He used to work for an investment fund in Beijing (China).

Meanwhile, Starbucks stores globally are self-managed. In the quarter ending July 2, the American coffee chain opened 588 more stores, only 40% of Luckin.

"Models that require heavy investment in assets will be more expensive to operate and slower to scale," Momentum Works commented in a report.

Luckin's business model is to buy products through the app and pick up items at the store, or have items delivered to your home. Therefore, this company does not have a cashier. Stores also have smaller areas. As a result, Luckin has lower operating costs and "can break even" quickly, Maheshwari said.

The pricing strategies of the two brands are also different. A cup of Luckin's coffee costs 10-20 yuan (1.4-2.75 USD), thanks to strong promotional policies. Meanwhile, a cup of Starbucks coffee costs at least 30 yuan.

"Luckin targets the affordable market. Their prices are completely different from Starbucks. But the quality is considered better than many other low-cost brands," Li said. Leung also rated Luckin coffee as "delicious and affordable".

Luckin also actively cooperates to promote the brand. Last week, they collaborated with famous Chinese liquor company Kweichow Moutai to launch a wine-flavored milk coffee. On just the first day of launch, Luckin sold 5.4 million cups. Moutai is a premium Chinese wine.

Shawn Yang - Director of Blue Lotus Research Institute said this is a strategic move. "Luckin expands its customer base by leveraging the names of iconic Chinese drinks, such as Moutai and Coconut Palm," he said.

They also include a variety of localized drinks to suit the Chinese market, such as brown sugar pearl milk coffee, cheese milk coffee, and coconut milk coffee.

"Luckin Coffee plays an important role in expanding the coffee market in China, thanks to products suitable for domestic customers," Maheshwari said in a recent post.

Luckin listed on Nasdaq (USA) in May 2019. The company was valued at $3 billion less than two years after its launch, becoming the first company since the 1999-2000 dotcom bubble to achieve this.

However, 3 years ago, Luckin was delisted from Nasdaq after an accounting fraud scandal . Previously, they said they were conducting an internal investigation and discovered that COO Jian Liu falsely inflated revenue by 2.2 million yuan in 2019. Liu and Luckin CEO Jenny Zhiya Qian were then fired. Because of this incident, Luckin agreed to pay a fine of $180 million to the US Securities Commission (SEC) to settle accusations of accounting fraud.

In February 2021, Luckin filed for bankruptcy protection in the US to restructure. Their stores remain open for business. A year later, they announced that they had "completed their restructuring and were exiting bankruptcy".

"We will continue to strengthen internal management and improve product lines," CEO Guo Jingyi said at the time. Guo was appointed CEO of Luckin Coffee in July 2020.

In the second quarter of 2022, despite China still applying strict Covid control policies, Luckin reported a profit for the first time. For the whole year 2022, this coffee chain is also profitable, with 1.16 billion yuan (168 million USD). Revenue increased 67% year-on-year to 13.3 billion yuan.