Luckin Coffee was founded in 2017, yet has already established more than 3000 wholly-owned shops in China. The coffee chain successfully completed its IPO in the US this March, only 18 months after the founding of the company, raising $561 million. You may have never heard the name, but it is quickly becoming a key competitor in the ~$10 billion Chinese Coffee retail industry, and threatens the current leading player, Starbucks.
To differentiate themselves from Starbucks, Luckin Coffee self-describes as a Coffee-Network or Coffee Technology Corporation. In its prospectus, the word “technology” appears 88 times, followed by the third most used word “network”, which appears 79 times.
Technology is clearly the key to its operations. Luckin states that AI enables them to analyse their customers’ behaviour and select better services and products tailored for each individual based on big data. The Luckin Coffee app also plays a major part in their operations. In fact, all purchases of Luckin Coffee are made through its apps (iOS, Android and Wechat’s built-in-apps), and no cashier can be found in any of its shops.
As opposed to the company itself, the founder of Luckin is probably more famous. Zhiya Qian, the former COO of CAR (China Auto Rental), is known for leading the “subsidy war” in China’s car rental industry and won a large market share for the company. She strongly believes that her success in the car rental industry can be replicated in the fast-growing Coffee retail industry.
The inner logic of this marketing model is simple. The initial approach is characterised by the use of large amounts of subsidies to break into an industry, in order to build customer loyalty and seize market share with rapid expansion. Having achieved this, the company makes use of “internet thinking” and reduce subsidies to turn losses into gains when most of the other competitors are no longer competitive. Luckin is still in the first stage, as it is still quickly opening more shops and offering huge discounts such as 81%-offs, and pricing the cost of a cup at around 1 euro to attract customers (while the general price per cup is between €4 and €6). The money burning strategy is no doubt doing its job, but the problem is how long can it last?
In the financial statements from the prospectus, for the three months ended 1st March 2019, Luckin’s total revenue reached $713 million. However, the net loss is $110 million higher. This financial data is a dangerous signal that the speed of growth of the company might not be able to justify the money they have been burning in a foreseeable period of time. Data shows that if Luckin continues losing money at this rate, the company’s cash flow will be in severe danger and may not survive for another two quarters. This may be one of the reasons driving this start-up to rush to hold an IPO. Despite its financial state, Luckin still holds a positive attitude towards its strategy, claiming they will not slow down the rapid chain growth and will continue subsidising its products.
Last month, reporters found some Luckin Coffee shops have started to sell “convenience store food”. Meanwhile the company updated its business scope, adding clothes, shoes, hats etc to its product line. Is this a sign that Luckin Coffee is transforming into a comprehensive new retail chain to save its cash flow? The answer will be seen in no time.