How Luckin Coffee Surpassed Starbucks in China's Coffee Market

Introduction

Luckin Coffee’s remarkable turnaround and success in surpassing Starbucks in China’s coffee market is a story worth exploring. Despite facing a major scandal in 2020, Luckin managed to make a miraculous comeback in just three years, revolutionizing the coffee industry in China with its unique business strategy.

Luckin Coffee’s Remarkable Turnaround

• Luckin Coffee, China’s largest coffee chain with over 9000 stores, faced a major scandal in 2020 due to fabricated revenue, leading to a 97% drop in its share price and bankruptcy.

• Despite the scandal, Luckin has managed to turn its business around and recently posted four-year profits, making a miraculous comeback in just three years.

• Luckin’s unique business strategy focused on app-based ordering, self pick-up or delivery-only stores, and lower-cost structures, allowing them to offer high-quality, affordable, and convenient coffee.

• However, their aggressive pricing strategy led to enormous losses, with a net income margin of minus 193% in 2018, as they were selling coffee at unprofitable prices to acquire customers.

• While Luckin aimed to eventually raise prices and turn a profit, most customers were attracted solely by the low prices, not the quality of the coffee, resulting in unsustainable business operations.

Larkin’s Turnaround Success: From Struggling to Profitable Venture

• When Lucken raised prices in 2019, many customers driven by low prices stopped purchasing, leading to a decline in sales volume.

• Lucken’s management fabricated sales figures to create the illusion of profitability, but in reality, they were losing more money.

• After the accounting fraud was exposed, the company’s leaders were ousted and Lucken seemed destined for demise.

• The new management team orchestrated a remarkable turnaround, transforming the struggling business into a profitable venture within three years.

• Lucken focused on increasing profits through cost reduction and revenue growth.

• They implemented measures to reduce expenses, such as by stopping aggressive store expansion, closing underperforming stores, discontinuing unprofitable side businesses, and cutting spending on sales and marketing.

• They scaled back the level of discounts offered to customers and effectively raised prices in 2020.

• Lucken turned to ingenious ways of increasing revenue, such as product innovation.

• They introduced a game-changing coffee drink, brown sugar Boba latte, which resonated with young Chinese consumers.

• Recognizing the opportunity, management began investing heavily in product R&D to create additional popular drinks.

• Lucken’s extraordinary revenue growth can be attributed to product innovation and the creation of new popular drinks.

• The company’s turnaround success was a result of a strategic combination of cost reduction and revenue growth.

Luckin’s Growth Strategy and Marketing Tactics

• Luckin’s innovative coffee beverages, including jam cream flavored milk, fruit syrup, and fresh fruit, were developed to cater to Chinese consumers who are new to coffee and not accustomed to its bitterness.

• These new drinks expanded Luckin’s customer base beyond traditional coffee drinkers, allowing the company to raise prices while increasing sales volume.

• The success of Luckin’s bestsellers, such as the newer latte and coconut milk latte, demonstrated the effectiveness of pricing new beverages at gradually increasing prices.

• Luckin’s ability to continuously introduce new drinks into the market, averaging one new product every three days, far surpassed competitors like Starbucks, thanks to its agile R&D process.

• Luckin shifted its marketing strategy to focus more on brand advertising and targeted young consumers, associating the brand with traits like professionalism, youth, fashion, and wellness.

• The company’s endorsement deal with freestyle skier Eileen Guo, who gained national fame after winning three medals at the Winter Olympics, further strengthened Luckin’s brand image among young consumers.

Luckin Coffee’s Success Factors

• Luckin’s decision to represent China over the US during the 2022 Beijing Winter Olympics garnered significant media coverage and made the athlete a beloved figure in China.

• Luckin leveraged this fame through strategic marketing on their app, ads, and social media, cultivating a young, professional, fashionable, and healthy brand image.

• Asean survey results showed Luckin surpassing Starbucks as the preferred coffee brand among the younger generation in 2022, marking a dramatic shift in consumer preference.

• Luckin’s effective marketing strategy, despite a 60% cut in advertising spending, enhanced its brand image and contributed to revenue and profit growth.

• New management at Luckin implemented a franchising business model, with company operated stores in higher tier cities and franchise stores in lower tier cities, leading to rapid expansion and revenue growth.

• By offering unconventional franchise terms, such as no upfront fees and royalties based on gross profit, Luckin attracted franchisees, resulting in rapid store expansion and revenue increase.

Starbucks’s Expansion Strategy in China

• Starbucks made a strategic decision to operate 100% of its stores in China, without any licensed stores, driven by the belief that China will surpass the U.S. to become the largest market in the future.

• The acquisition of their partner’s 50% stake in the Chinese joint venture in 2017 for $1.3 billion allowed Starbucks to have complete autonomy with business decisions in China.

• Despite a planned opening of 9,000 additional stores by 2025, equivalent to opening one new store every nine hours, Starbucks still couldn’t keep up with Luckin’s incredible pace of opening one new store every two hours, especially in lower tier cities.

• Luckin’s dominance in lower tier cities is attributed to their franchise model, with franchise stores representing a third of all Luckin stores, enabling them to overtake Starbucks as the largest coffee chain in China.

• The pandemic heavily disrupted Starbucks’s third space concept, while Luckin’s self pickup and delivery model thrived, leading to contrasting same-store sales growth with Luckin consistently outperforming Starbucks, especially during the pandemic.

Conclusion

Luckin Coffee’s innovative approach, dynamic growth strategy, and effective marketing tactics propelled it to surpass Starbucks as the preferred coffee brand in China. By focusing on cost reduction, revenue growth, and product innovation, Luckin achieved a remarkable turnaround and solidified its position as China’s largest coffee chain.

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