SHANGHAI – After revelations of accounting fraud at the Luckin Coffee chain emerged in 2020, many believed it was over for the company seen as China’s answer to Starbucks.
Today, Luckin has not only survived but also staged an extraordinary comeback as its cut-price lattes attract more customers. It beat Starbucks to become the country’s biggest coffee retailer last year.
Once derided as a cheap imitation of the Seattle-based giant, it is now being emulated by other Chinese chains and even Starbucks appears to have taken a page or two from its playbook.
Luckin’s rebound shows there is still growth to be found in an economy grappling with deflation and a property crisis. It also presents a lesson on how global giants, if not careful, can quickly find themselves on the back foot in the world’s second-largest consumer market. The latter has become more complex and localised than in the previous era of fast and easy growth.
For Mr Zang Zhongtang, former senior vice-president at Luckin, it validates a growth story thrown into doubt by the company’s scandal.
“Most people thought it was going to die,” said Mr Zang, who quit in 2020 although he was not involved in any wrongdoing. “Obviously, it was wrong and unlawful to fabricate data. But you still have to acknowledge the great design that was its business model.”
The key plank of that model is labour-saving automation and digitisation which cut costs and turnaround time. Such tech-enabled efficiency is still the driving force behind Luckin’s rapid growth and ability to undercut Starbucks, noted Mr Zang.
The company’s focus on cashless, takeout kiosk counters – originally designed to save costs – paid off during the Covid-19 years as strict lockdown policies restricted in-person exchanges.
Post-pandemic, the chain’s 9.9-yuan (S$1.88) coffees have become even more popular among younger Chinese who do not have the time or budget to lounge at Starbucks.
Luckin’s recent growth to more than 18,500 stores, roughly double from a year earlier, was also led by a push beyond mega cities like Shanghai and Shenzhen into the vast hinterland where Starbucks has not yet ventured.
To entice greater swathes of China’s tea-drinking population to try coffee, Luckin developed drinks catering to local preferences for sweet and milky beverages.
Luckin over-the-counter shares have risen more than 12 times from their lows following the scandal, although they are still 63 per cent lower than their 2020 highs on Nasdaq.
The shares were recently weighed down by a quarterly loss on expansion costs and heavy discounts.
Starbucks has often shrugged off its competitor’s threat. As recently as January of this year, it appeared to dismiss Luckin’s low prices as a temporary phenomenon.
“You see an influx of mass-market competitors focused on fast store expansion and low-price tactics to drive trial. This will shake out over time,” Ms Belinda Wong, who oversees Starbucks in China, told analysts.
Yet, the US company has begun to struggle. For the quarter through March, sales in China fell 8 per cent from a year earlier, compared with a 42 per cent surge at Luckin.
After a slowdown in the United States and China, Starbucks also issued a profit warning. It was so shocking that founder Howard Schultz weighed in from retirement.
His suggestions included revamping its mobile ordering and payment system – Luckin’s strong suit. Chief executive Laxman Narasimhan told analysts on an earnings call that Starbucks is playing the “long game” in China.
Luckin’s latest growth, though, is not just about automation or discounts. Frequent launches of inventive drinks like brown sugar boba latte, a take on Taiwanese bubble tea, have also helped to bolster sales.
Coconut latte, a combination of creamy, coconut-flavoured milk with coffee that was launched in April 2021, has been its biggest hit so far, accounting for around 70 per cent of sales at some stores.
Its menu also lists concoctions like salty cream cheese and tea latte. New, limited-time items are introduced periodically to drum up interest, especially on social media.
Last year’s roll-out of an alcohol-infused latte in collaboration with Chinese spirits brand Kweichow Moutai created a buzz on platforms like TikTok and Xiaohongshu, China’s equivalent of Instagram.
To win back customers, Starbucks has recently begun giving out discount coupons more frequently, according to analysts and local customers, even as the company said it is not interested in entering a price war.
It also rolled out its own version of boba drinks in the US, where it is also encountering a slowdown.
Luckin, however, faces a growing number of home-grown competitors including KFC-operated KCoffee which sells cups of coffee for as low as five yuan to those buying monthly discount cards.
These days, its biggest threat may be Cotti, which was started by Luckin’s disgraced co-founders Lu Zhengyao and Qian Zhiya in 2022 and already has 7,000 stores nationwide.
The company appears to be using the original Luckin playbook by expanding through cash-burning marketing campaigns, analysts said. Brazenly, its shops display banners saying “Luckin’s founders treat you to coffee”.
Since early last year, it has been offering some drinks for as low as 8.8 yuan. BLOOMBERG
