How Luckin overcame bankruptcy and took over China's Coffee market in 6 years.

Luckin Coffee: A Story of Rise, Fall, and Resurrection

Meteoric Rise through Innovative Strategies

Luckin Coffee, a Chinese coffee chain, emerged as a formidable challenger to global giant Starbucks with a unique blend of strategies that fueled its rapid ascent.

Digital-First Approach

• App-Based Ordering: Luckin's core strategy revolved around its app-based ordering system. Remarkably, 91.3% of its stores were compact kiosks with minimal seating, encouraging customers to order via the app and swiftly collect their coffee.
• Operational Efficiency: The app-centric model streamlined operations, freeing baristas from cash handling duties, allowing them to focus solely on coffee preparation.

Aggressive Expansion

• Cost Savings: Luckin's choice of small kiosks over traditional cafes significantly reduced operational costs, facilitating rapid expansion.
• Strategic Store Placement: Luckin's expansion was characterized by placing stores strategically, often near Starbucks locations, to tap into the existing coffee market.
• By October 2018, the company had opened 1300 stores, surpassing the number of Costa Coffee stores to become the second-biggest coffee brand in China.

Pricing and Marketing Tactics

• Discounts and Promotions: Mirroring strategies from ride-hailing and bike-sharing sectors, Luckin employed heavy discounts and social media marketing to attract consumers.
• Luckin enticed new customers with complimentary coffee offers and provided up to 80% discounts to their existing clientele.?
• On Average, the price of an Americano at Luckin sold at approximately $1.4, in stark contrast to Starbucks' similar offering priced around $4.5.

The Downfall: Scandal and Missteps

Luckin's story took a dramatic turn when financial irregularities surfaced, leading to a catastrophic fall from grace.

Accounting Fraud

• Sales Fabrication: The company was rocked by a scandal involving over $300 million in fabricated sales, severely damaging its reputation and trust among investors.

Pricing Strategy Backfire

• Lack of Customer Loyalty: A major flaw in Luckin's strategy became evident when it became clear that customers were primarily attracted by low prices rather than brand loyalty or coffee quality.
• Unsustainable Discounts: Heavy discounts, including up to 80% off for existing customers, resulted in an unsustainable business model, with the company spending significantly more than it earned. In 2018, for every $1 of coffee sold, the company incurred expenses of $3.
• Impact of Price Increase: A subsequent price increase led to a drastic drop in sales, revealing the lack of customer retention and loyalty. When Luckin increased price in 2019, sales dropped on average 30% per store from 353 to 244 daily sales.?

Revival and Transformation

Post-scandal, Luckin's new management team embarked on a remarkable turnaround journey, repositioning the brand and achieving profitability within three years.

Product Innovation

• Boba Coffee Innovation: A serendipitous creation, the Brown Sugar Boba Latte, became a turning point for Luckin. By experimenting with unconventional ingredients, Luckin attracted a broader customer base, especially those new to coffee.
• Expanding Drink Offerings: The innovative approach by mixing different all kinds of ingredients that are not traditionally used to make coffee drinks with coffee, that strategy expanded Luckin's market, making it more appealing to a wider demographic.The exceptional popularity and the absence of comparable options allowed these novel drinks to accomplish what seemed unfeasible before: Luckin managed to hike prices while also boosting sales. The debut of their hit product, the Newer Latte, in September 2020 is a prime example. Priced at 18 Chinese Yuan, which is 2 Yuan more than their classic latte, it still achieved remarkable success. In its first week alone, it accounted for 29% of the total drink sales, despite its higher price point.

Strategic Marketing and Brand Repositioning

• Focused on brand marketing instead of performance marketing and positioned itself as a young, professional, fashionable, and healthy brand.?
• Targeting Young Consumers: Luckin shifted its focus to the youth, leveraging social media platforms popular among this demographic.
• Celebrity Endorsement: An endorsement deal with freestyle skier Aileen Gu significantly boosted Luckin's appeal to younger customers, surpassing Starbucks in popularity among this group.

Franchising and Expansion

• Dual Store Strategy: Luckin adopted a dual approach - company-operated stores in high-tier cities and franchising in lower-tier cities, allowing rapid expansion with reduced risk. By end of 2022, 2,500 stores was under franchise model accounting for 23% of company’s total revenue.?
• Innovative Franchising Terms: Luckin distinguishes itself by not imposing initial joining fees or yearly franchise fees. Instead of the traditional model of collecting royalties based on the franchisee's gross merchandise value, Luckin's approach focuses on gross profit. They only receive a portion of the gross profit when it surpasses a specified minimum threshold.

Luckin's unique franchising terms, which were more favorable to franchisees, contributed to the rapid increase in the number of franchised stores.

Pandemic as an Unforeseen Advantage

• Benefiting from COVID-19 Restrictions: The pandemic unexpectedly favored Luckin's business model. With most Starbucks stores in malls facing restrictions, Luckin's pickup and delivery model, primarily based in office buildings and campuses, saw increased demand.

Luckin Coffee's remarkable recovery is a testament to the swift and transformative potential of a business once deemed irrecoverable. While some may attribute Luckin's initial success in product development and the unforeseen benefits from the pandemic to sheer fortune, attributing their revival solely to luck would be an oversight. In reality, a combination of critical elements played a pivotal role in this extraordinary turnaround.

The new management's commitment to establishing robust business fundamentals, the strategic implementation of marketing initiatives, and the astute decision to adopt franchising were all vital components of this complex success story. Luckin's journey is a compelling reminder of the power of effective leadership and strategic decisions in business. It demonstrates that with a skilled team and a stroke of luck, remarkable achievements are feasible, as evidenced by Luckin Coffee's ability to not only rebound from scandal and rebuild its tarnished business but also to challenge and surpass a powerhouse like Starbucks within a few short years.