How Luckin Coffee Overtook Starbucks to Become China's Largest Coffee Chain

Founded in 2017, Luckin Coffee competes with Starbucks with a strategy of low prices, franchising and in-app shopping.

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. By the end of the second quarter, Luckin Coffee had 10,829 stores. Meanwhile, Starbucks had 6,480 locations.

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

“Luckin’s expansion in China has been tremendous. It’s becoming more common to get a Luckin drink for $2, or less after discounts,” Jianggan Li, founder and CEO of technology research firm Momentum Works, told CNBC.

China is a traditional tea-drinking market. But in recent years, coffee sales have been rising, especially in urban areas and among young people.

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

Coffee sales in China are expected to grow 8.7% annually from 2022 to 2027, according to research firm GlobalData. Luckin Coffee opened 1,485 new stores in the second quarter, or more than 16 a day. Of its nearly 11,000 locations in China, more than 7,000 are independent-operated and more than 3,600 are affiliates, according to the company’s financial statements.

The coffee chain expanded to Singapore in March, now with 14 stores there. Monthly traffic reached 43 million in the second quarter.

“Luckin expanded quickly because of their business model — both self-operated and franchised,” Li explained. Vivian Leung, an office worker in Guangzhou, said there were at least two Luckin Coffee stores within 50 meters of her apartment.

“Franchising unlocks rapid growth because you don’t have to invest capital. Luckin stores are dense. There’s at least one in every neighborhood. Luckin stores are also smaller than Starbucks,” said Rahul Maheshwari, an Asia-based investor who used to work for a hedge fund in Beijing.

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

“The asset-heavy model is more expensive to operate and slower to scale,” Momentum Works noted in a report.

Luckin’s business model is to buy through an app and pick up in stores or have it delivered to your home. So it doesn’t have cashiers. The stores are also smaller. As a result, Luckin has lower operating costs and “can break even” quickly, Maheshwari said.

The two brands’ pricing strategies are also different. A cup of Luckin coffee costs 10-20 yuan ($1.4-2.75), thanks to heavy promotions. Meanwhile, a cup of Starbucks coffee costs at least 30 yuan.

"Luckin targets the mass 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 has also been aggressively promoting its brand. Last week, it partnered with the famous Chinese liquor brand Kweichow Moutai to launch a liquor-flavored milk coffee. Luckin sold 5.4 million cups on its first day of launch. Moutai is a premium Chinese liquor.

Shawn Yang, director of Blue Lotus Research, said the move was strategic. “Luckin is expanding its customer base by leveraging iconic Chinese beverage brands like Moutai and Coconut Palm,” he said.

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

“Luckin Coffee has played a key role in expanding the coffee market in China, thanks to its products that are suitable for domestic customers,” Maheshwari said in a recent post.

Luckin listed on the Nasdaq (USA) in May 2019. The company was valued at 3 billion USD less than 2 years after its launch, becoming the first company since the 1999-2000 dotcom bubble to achieve this.

However, three years ago, Luckin was delisted from the Nasdaq after an accounting fraud scandal. They previously said that they were conducting an internal investigation and discovered that COO Jian Liu had inflated revenue by 2.2 million yuan in 2019. Liu and Luckin CEO Jenny Zhiya Qian were later fired. As a result, Luckin agreed to pay a $180 million fine to the US Securities and Exchange Commission (SEC) to settle the accounting fraud allegations.

In February 2021, Luckin filed for bankruptcy protection in the United States to restructure. Its stores remained open for business. A year later, it announced that it had "completed its restructuring and is emerging from bankruptcy."

“We will continue to strengthen internal management and improve our 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's continued strict Covid control policies, Luckin reported its first profit. For the whole of 2022, the coffee chain also made a profit, with 1.16 billion yuan ($168 million). Revenue increased 67% compared to the previous year, to 13.3 billion yuan.

Ha Thu (according to CNBC, Caixin Global)

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