How Luckin Coffee overtook Starbucks in China

Chinese coffee giant Luckin Coffee hit 10,000 stores in China in June, surpassing Starbucks as the most important coffee chain brand within the country following rapid nationwide expansion this yr.

Founded in 2017, Luckin Coffee burst onto the Chinese coffee scene to challenge Starbucks through reasonably priced coffee options and mobile ordering. China is Starbucks’ second-largest market after the U.S.

Luckin Coffee grew to 10,829 stores in China at the top of June, surpassing Starbucks as the most important coffee chain brand within the country following what one analyst calls an “aggressive” expansion. Compared, Starbucks operated 6,480 stores in mainland China at the top of the second quarter.

“They’re very aggressive in store expansion and in China, it is rather common to purchase a drink from Luckin for $2 or less after heavy discounts,” said Jianggan Li, founder and CEO of tech research company Momentum Works.

China is traditionally a tea-drinking market, but over the previous couple of years, coffee sales have been increasing steadily, especially in urban areas and amongst younger professionals.

China’s overall coffee sales will rise at an 8.7% compound annual growth rate (CAGR) from 2022–2027, in response to analytics firm GlobalData. CAGR is a measure of investment returns, which takes into consideration what an investment yields at an annual rate over a specified period.

Within the quarter ended June 30, Luckin Coffee opened 1,485 recent stores, averaging 16.5 recent stores every day. Of the ten,829 stores in China, 7,181 are self-operated and three,648 are partnership stores, in response to the corporate’s earnings transcript.

The Chinese coffee chain expanded to Singapore in March in its first international foray and has opened 14 stores within the city-state thus far, in response to a CNBC check.

Cumulative transacting customers surpassed 170 million, while average monthly transacting customers reached 43.07 million within the second quarter, in response to the corporate.

“Luckin was in a position to expand so fast due to its operating model — which incorporates self-operated stores and franchises,” said Li of Momentum Works.

Meanwhile, Starbucks’ stores worldwide are company-owned and the American coffee chain doesn’t franchise operations, in response to its website. As a substitute, it sells licenses to operate. Within the quarter ended July 2, the corporate opened 588 recent stores — about 40% of Luckin’s count.

Vivian Leung, an office employee residing in Guangzhou, said that there are at the least two Luckin Coffee outlets inside 50 meters from her apartment.

“Franchising unlocks very fast growth since you do not have to place that quantity of capital. Otherwise you’ll at all times be limited from growth. The density of Luckin stores is so high where there is a store in almost every neighborhood,” said Rahul Maheshwari, an early-stage investor in Asia. He previously worked in Beijing at a Chinese enterprise capital firm and as a general manager with a Chinese app.

Luckin found mass market appeal. Price sensible, it’s already differentiated from Starbucks. Quantity sensible, it’s still higher, in comparison with most of the low end brands, said Li of Momentum Works.

“Luckin stores are also of a smaller format in comparison with Starbucks, which has much larger stores,” said Maheshwari.

“As you may imagine, the asset-heavy model is dear to operate and slow to scale,” said Momentum Works in a report.

Luckin operates a grab-and-go model, where customers order from the app and pick up their orders at the shop, unlike Starbucks which offers a comfortable environment for people to work and socialize.

Consequently, Luckin has lower operating costs and might “break even inside a yr,” said Maheshwari.

The Chinese coffee chain said that it sold 5.42 million Moutai alcohol-infused lattes on the primary day of its launch.

Moutai, sometimes called maotai, is a premium distilled Chinese liquor and has been dubbed the “national liquor of China.”

Moutai topped the list of spirits brands with a worth of $42.9 billion, in response to a 2022 study by valuation consultancy Brand Finance.

Shawn Yang, managing director at Blue Lotus Research Institute, said it was a strategic move to “offer premium products to offset the sense of cheapness from 9.9 yuan per cup.”

“Luckin [extended its] customer base by leveraging the influence of legacy Chinese brands, including Moutai and Coconut Palm,” said Yang in a report.

Other localized hits with the Chinese market include brown sugar boba latte, in addition to cheese latte and coconut latte.

“Luckin Coffee has played a crucial role in deepening the coffee market in China by introducing products which might suit the Chinese customer,” said Maheshwari in a recent blog post.