The Chinese Coffee Chain Beating Starbucks

Bloomberg Audio Studios, podcasts, radio news. Earlier this week, in the middle of a hectic news cycle, I got a drink. I picked me up for a colleague, Rachel Ching. She's Bloomberg's managing editor for Global Business in Asia. So I have a very special treat for you. I got Rachel some coffee, but not just any coffee.

Wow, whe should you manage to get that? This cross bought it? Yes?

So I think you're holding a coconut latte that came from a Luckin store all the way from Sinzen here to Hong Kong. Luck and Coffee is the biggest coffee seller in China, but it doesn't have a store in Hong Kong, where we're based. So our fabulous producers arranged a special delivery of some of Luckin's most popular flavors, like their coconut latte.

Amazing. Can I actually try it right now?

Yes, hold on burgers right together.

It's like two thousand calories.

Well that aside, it's actually pretty good.

It's very good, very delicious.

I mean, I'm not a connoissan. I'm sure that coffee fancy coffee people would hate the taste, but fancy coffee people also hate Starbucks.

That's true. Rachel used to cover Luckin during its early days in twenty seventeen as a startup, and in just seven years, Luckin has outpaced Starbucks, who opened its first door in China as early as nineteen ninety nine, and today Luckin's become the dominant coffee retailer in the country. And it's done that with the mix of creative products, from its salty cream cheese and Ti latte to a popular alcohol infused coffee. I think we should try.

It, Yeah, definitely, although might be a bit late for caffeine and a bit early for alcohol, but.

You know, somewhere somewhere in the world, it's cocktail hour. But LUs, the astronomical rise was unthinkable. At one point in twenty twenty, the company was on the brink of collapse after a major accounting scandal wiped out its stock value, sending it into bankruptcy.

People really just thought, well, this company is done for. They had to close a whole bunch of stores, and people, I guess just really assumed that this company would just be fading away.

Luck And not only survived, but it staged an extraordinary comeback. Earlier this year, the company reported its fourth quarter earnings. Total sales revenue in twenty twenty three reached three and a half billion dollars in China, surpassing Starbucks for the first time.

Luck and understand the local tastes and the local behavior of consumers much better. And they have been very successful, and the global giants have been on the backfoot, you know. And whether you're talking about Nike, all Apple, all Stabucks, you know, all of these companies have been humbled in some ways in China.

Welcome to The Big Take Asia from Boomberg News. I'm wanh Every week we take you inside some of the world's biggest and most powerful economies and the markets, tycoons and businesses that drive this ever shifting region. Today on the show, how Luck and Coffee went from filing for bankruptcy to beating a coffee titan like Starbucks in China, and what It's Rocky Road says about competition in the

Which Lou founded, so lu jiang Yao was already a very successful entrepreneur, cause ink was really his most successful venua and at the time tens Yeah, Jenny was a very trusted executor of his team, and so she was really the person who came up with the original idea that there's a lack of coffee essentially in China.

In twenty eighteen, the average person in mainland China only drank about three cups of coffee a year. That's far off from at least three hundred cups per person in the US.

China is a country of tea drinkers. It is really difficult to find normal coffee when I was working and living in China, you know, you wouldn't really be able to wake up and order good coffee from a five style hotel. It's just not like something that's embedded in their everyday life.

Chien saw an opportunity. She quit her c sweet job at car Inc. To chase your dream of building a coffee empire, and her boss Lou wanted in.

How lu jangya reacted was that he was very supportive. He wished it the best of luck, and he actually invested money himself into luck In to become a co founder.

With Loo's endorsement, Luckin raised about two hundred million dollars at the end of twenty eighteen. By that time, it had already opened more than two thousand stores across China. Chan and Lou used that money to open more stores and kept the shops small and low cost, which was a very different strategy from Starbucks.

Starbucks really has this idea of they think of their cafes is what they call the third place, So it's the place between home and office. You know, lush sofas, just a really like pleasant music playing in the background.

Luck And took another approach.

Most of their stores were just tiny little kiosks, definitely not a place to lounge. Just think about, you know, the classics sort of young twenty something Chinese professional, you know, rushing to work and just really needing to wake up, just needing to grab something on the goal so that she'll be on for her first meeting. And that's what luck It is.

So it's basically I guess you can get in terms of store.

Right, but that's because they're focused was so much on mobile and takeaways.

Rachel says. Luck And also capitalized on China's largely cashless society.

So you know, you could order on the app, pick whatever I want, pay everything's on the app, right, and then you could literally just go to the store and then pick it up, or you can have delivery which would be so quick, you know, less than ten minutes. And essentially, if you didn't want to, you don't have to speak to any human being at all.

And doubling down on digitalization not only saved customers time, it also saved luck And a lot of money for them.

It was really about innovation around the back end.

Right.

They would use these digital systems to manage staff, to manage inventory. That cut down a lot in costs, a lot in labor, and a lot in turn around time.

That lean, digital forward approach help the company keep the cost of its products down. Today, the average latte from luck And costs about eleven y that's less than two dollars. Here's how Luckin's chief strategy officer, right Out Shakol describes its positioning in the market in an interview with Bloomberg in twenty nineteen.

If you look at the product, it's a premium product.

If you look at the price, it's a mass market price, and that's where I think our model is unique because we can do both.

After an IPO in twenty nineteen that raised more than half a billion dollars, Luckin's growth accelerated, and within three years of its launch, it was operating about forty five hundred stores in China, from top cities like Shanghai and Shinzen to more remote places like Shinjug. But its success wouldn't last long.

So in twenty twenty, Muddy Waters, which is cousin blocks short selling firm, put out a tweet saying that they had received a whistle blower report on how Luckin was fabricating transactions and that really just everything just unravel from that.

After the whistleblower report, the US Securities and Exchange Commission investigated and charged Luckin with defrauding its investors and fabricating transactions to inflate its revenue. In the wake of the investigations, Luckin's shares plunged. At its IPO, Luckin was valued at nearly three billion dollars. About a month after the fraud allegations came to light, the company's value tumbled to about seven hundred million dollars, and in twenty twenty one, Luckin filed for bankruptcy.

Everybody left this company foot dead, so it did seem like, you know, the end of the luck And story.

But it wasn't.

After the break, Luckin bounces back. After an accounting fraud scandal, luck and Coffee was on the edge of collapse. It filed for bankruptcy in New York in February of twenty twenty one and agreed to pay a one hundred eighty million dollar penalty to settle the case with the US Securities in Exchange Commission, But shortly after someone stepped in with a helping hand.

David Lee is the chairman of Centurium Capital, very close to the founder, lu Jung Yao. He was one of the original investors in the Ka Inc rental startup that made Lose Fortune.

David Lee's admiration for Luckin's founder. Lu Jung Yao was well known in the industry, and he believed in Luckin's business model. Lee's private equity company, Centurium Capital, doubled down on its investment in the coffee chain. It stepped in with two hundred and forty million in twenty twenty one, which helped clear Luckin's legal fees and fines. Luckin also

Centriium also put in its own people to help luck and turn things around, closing down stores, hiring executives, and also very importantly helping Luckin put in a franchise system which allowed it to expand stores easily and quickly.

With Centurium steering the ship, Luckin emerged from bankruptcy in April twenty twenty two, just fourteen months after filing for protection, and its small stores were ideal as China adjusted to COVID measures.

COVID in China was pretty much a really bad thing for all consumer businesses because China was so strict about COVID. You know, they just these huge lockedouts. But then what was quite interesting was that its business model really insulated it from the worst of COVID, you know, these bad bones, contactless mobile payment, these kinds of takeout where you didn't have to talk to another human being.

It was actually perfect for covid.

Luckin took its new lease on life and went even bigger. On top of cementing its business strategy and setting itself apart from competitors, the company released new best selling items. The coconut latte we tried earlier, for example, accounts for around seventy percent of sales at some stores, and its alcohol infused Malti lat sold five point four million cups on the first day of its launch, bringing in nearly

I think they were just really smart with innovating around the local consumer tastes and doing these like really catchy, consumer friendly collaborations, right. So the Maltai thing, they just always go viral with new things, right, and that's just so important in the really competitive Chinese consumer market, Like are you able to get attention?

Luckin's now grown to more than eighteen thousand stores across China. That's roughly double from twenty twenty three. Starbucks, in comparison, has just over seven thousand, and last year, Luckin opened more stores than Starbucks has ever done in China.

You know, Starbucks is kind of facing a broader challenge, a broader struggle. They're not just struggling in Chinay're struggling around the world as well. Earlier this year, Starbucks issued a profit warning that was so bad that found out how It Shelts was technically retired, wrote this letter and put it on LinkedIn. Talked about things that stop us needs to do better. One of them was mobile ordering and payment, which exactly the thing that Luckin and Chinese companies do so well.

Starbucks isn't the only competitor chasing after Luckin's success. After found Lu and Chin were forced out of the company, they went on to start a rival chain in twenty twenty two called Kadi. Their brand already has nearly seven

I think that is the question around Luck, and now that it's become so successful with the expansion, and now that it's come back from the brink, is is the Luck and brand strong enough? Is the more to the Luck and brand than just being cheap and being everywhere? Right, because being cheap and being everywhere is a game that lots of chains can play. Is that brand loyalty or

For now, Lucking is still the company to beat in China while it continues to launch new stores and new drinks like that alcohol infused Maltai latte, and they're still packing up punch.

Maybe put the ice maybe a bit too much.

Ice doesn't taste very alcoholic, And it's just the fragrance of it, like it's you can smell it from here, yeah, but actually you don't taste it.

No, well, I feel it a little bit now.

It's definitely a light bud going on already.

It's very.

This is The Big Take Asia from Bloomberg News. I'm wan ha. This episode was produced by Young Young, Naomion and Jessica Beck. It was mixed by Blake Naples and fact checked by Eddie Dwan and Carmeli Argana. It was edited by Aaron Edwards and Rachel Chang, additional reporting from Danielle Away. Our senior producers are Nami Shaven and Kim Gettelson. Our senior editor is Elizabeth Ponson. Nicole Beemster Bower is our executive producer, and Sage Bauman is Bloomberg's head of Podcasts.