Luckin Coffee Part I
Luckin Coffee and My Experiences in China Coffee Industry
Dear readers, I hope this message finds you all in good spirits!
Today’s post is an excerpt from my presentation at a Hong Kong investor community last week, where I discussed Luckin Coffee and my experiences in the China coffee industry.
For those who are not yet familiar with Luckin Coffee - Luckin is the largest coffee brand in China, a seven-year-old company with over 20,000 stores in China and Singapore. If you look back at its earlier history, it is a successful turnaround story.
Today, I want to share my learnings from the coffee industry in China, highlighting what Luckin Coffee has done right and my thoughts on the competition.
I. First, the history of China's coffee industry is relatively short and still in its early stages.
A background story - Starbucks opened its first store in Beijing (Beijing Guomao Store) in 1999, which is only about 25 years ago. The coffee industry has maintained an industry growth rate of over 20% in recent years.
Globally, per capita coffee consumption in mainland China is 16 cups, Taiwan is 209 (13x), Hong Kong 250 (16x), Japan 279 (17x), and the United States 388 (24x).
However, this is not the whole story.
The development of coffee in different cities in China also shows progressiveness. In first-tier cities like Shanghai, the average daily consumption of freshly brewed coffee has reached c.50 cups, but if we look at lower-tier cities, it is still in single digits.
Another discussion on this topic is whether coffee can become mainstream in a place with a deep tea drinking culture (today China's tea consumption is still much higher than that of coffee).
Japan and Taiwan are more relevant references than the United States and Europe. If you look back at the history of tea vs. coffee consumption in Japan and Taiwan, you will find that although coffee started later, long-term coffee consumption will surpass tea.
II. Another feature of the coffee business is the increase in consumption frequency. If we look at the "coffee drinking years" x "coffee consumption frequency", as the coffee drinking year increases, annual consumption frequency for first 5 years increases at a pace of 10-15%.
The same playbook also holds true for Luckin Coffee.
A one-sentence summary of Luckin Coffee’s success is the core point of the book "The Innovator's Dilemma" by Harvard professor and businessman Clayton Christensen:
Leaders focused on the high-end market cannot meet the needs of the mass market, and when new players appear, satisfying the rapidly growing mass market with more value for money products services through innovations, a new industry leader will emerge.
This is exactly what Luckin Coffee did, by providing tasty, cost-effective, and convenient coffee services to meet the rapidly growing mainstream coffee market in China.
And it played out well.
Today's snapshot of Luckin:
Has over 20,000 stores in China and Singapore, with the second largest number of stores in the industry. Starbucks and Cotti (founded by Luckin's former founder) have around 7,000 stores each, about 1/3 of Luckin.
Luckin has a high brand on par with Starbucks and leads other coffee players.
Good unit economics: single store operating profit margin 15-20%, v.s. Cotti Coffee breakeven to low single digit.
Both operating profit and net profit turned positive starting from 2022.
Luckin was featured on the CCTV news (China Central Television), with the title "Decoding the Powerful Moats Behind the 20,000 Stores of Luckin Coffee".
Specifically, what has Luckin done right?
I will discuss three core reasons today.
I. First, Luckin has found its product-market fit in the mainstream coffee market.
Comparing the prices of Luckin with Starbucks and Costa Coffee, Luckin's price is around c.RMB 13 / USD 1.8 (after discounts price), which is half or even less than half the price of Starbucks and Costa Coffee.
Furthermore, why can Luckin maintain lower prices while ensuring stable quality and profitability for its stores?
This is mainly due to two innovations.
Luckin uses a small store model, which saves a lot of space compared to traditional coffee shops. The standard store area of Luckin is 30-40 square meters v.s. 180-200 square meters of a standard Starbucks store.
Secondly, Luckin is the first brand in the industry to use fully automatic coffee machines on a large scale, which enhances employee efficiency while reducing reliance on professional baristas, enhancing product consistency, and helping stores to expand rapidly.
II. The second point is that Luckin's product innovation and taste localization have been very successful.
If we look at Luckin's bestsellers, there are no Americano or black coffee; they mainly feature milk coffee (lattes) . In discussions with friends in the coffee industry, they believe that Luckin's product focuses are essentially flavored milk coffee, rather than Americano or Espresso.
My version of the magic formula is:
Coffee + Milk + X (Everything that consumers like)
Why is this so? History can provide us with some clues.
About a thousand years ago, during the Southern Song Dynasty in the Jiangsu and Zhejiang regions, milk had already become a common accompaniment in people's daily lives.
About a hundred years ago, a newspaper headline during the late Qing Dynasty featured an advertisement for fresh milk from local farms.
In a nutshell:
Compared to coffee, the Chinese have a longer history of taste familiarity and taste memory with milk.
I believe this is one of the fundamental reasons why the bestsellers look like this.
So under this Coffee + Milk + X concept, what interesting products are there?
Coffee + Milk + Real Moutai.
Last year, Luckin launched the Moutai Latte.
Single-day sales of over 5 million cups first day after launch, with sales exceeding RMB 100 million.
You may have heard that Moutai is a luxury that you can drink.
And the product sold out immediately upon launch.
Many people inquired about its taste - one meme describes it as tasting like "old grandpa's breath."
Personally, I find it acceptable to taste a hint of Moutai, but I probably wouldn't repurchase it.
III. The third point is digitalization. Digital applications are present in all aspects of Luckin. For example, the following image shows Luckin's mini-program interface.
Luckin's mini-program provides an end-to-end complete experience, from coffee selection and personalized coffee to checkout.
From the perspective of product functionality and experience, it is user-friendly and smooth for a comprehensive mini-program like this.
As the most trafficked coffee mini-program, it has 80 million visitors each month.
Over 95% of Luckin's sales come from its own app and mini-program, providing a stable and long-term proprietary user base and a gold mine for user data.
The accumulated user data can further assist new stores in intelligent site selection and improve user marketing:
For example, the product recommendations on the coffee selection interface are personalized for each individual, including frequently ordered SKUs based on your historical order records and new SKUs that may be liked based on your multidimensional data.
Luckin can also conduct A/B tests on new product formulas (e.g. How much Moutai should be added to the Moutai latte), product names and product images, and etc.
Due to length constraints, I will discuss the competition in the second part. Please stay tuned.
As always, thanks for your reading and I hope you enjoy it.