In Luckin Coffee’s latest 2023 Q4 report, the company revealed that it opened 2,975 stores in Q4 – almost 1,000 stores every month.
The report also unveiled that Luckin has overtaken Starbucks in terms of sales in China. But is Starbucks genuinely their primary competitor in China? If not, who holds the title of Luckin’s main competitor in China?
In this episode, we are joined by our in-house coffee expert, Weihan. Together, we dive into:
- The rationale and methodologies driving the rapid expansions of both Luckin and Cotti;
- Luckin’s success in digitalisation and data collection, as well as the feasibility of other brands replicating such a model;
- Some key considerations for coffee (or F&B) brands as they expand out of China into Southeast Asia.
Tune into the full episode here:
Also available on Apple Podcasts.
Featured materials:
Coffee in Southeast Asia, Momentum Works
Sip, Innovate, Repeat: Immersive Workshop, Momentum Academy
We did a poll with 1,300 community members on Luckin’s performance in Singapore, TheLowDown
Luckin’s latest Singapore outlet mirrors its China stores, TheLowDown
“Disgraced” Luckin founder started a new coffee chain in China, TheLowDown
[AI-generated transcript]
[00:00:00] Sabrina
Hello everyone, and welcome to Episode 63 of the Impulso podcast. So today, Jianggan and I are joined by Weihan, author of our Coffee in Southeast Asia report. Because we’re going to be talking about Luckin Coffee. Recently, Luckin released their Q4 results and just some highlights. From the earnings, so their revenue grew about 91 percent from the previous year, but the growth of single store sales, as well as profits seems to have slowed down.
And of course, what was interesting to most of us was that in Q4 last year, Luckin actually opened about 2, 975 stores.
[00:00:40] Jianggan
That’s like a 1000 stores per month.
[00:00:43] Sabrina
Per month. Yes. So why do you think they’re opening so many stores?
[00:00:46] Jianggan
Oh, because they can.
[00:00:48] Sabrina
Just because you can doesn’t mean you should
[00:00:50] Jianggan
No I’m pretty sure that many people want to open like 1000 stores a month or expand fast as scale or whatever.
But I mean, this is what we saw in lots of startups in the past, right? I mean what was that name? Flash coffee.
[00:01:04] Sabrina
Yes. So fast as well.
[00:01:06] Jianggan
They had like, I mean. They opened pretty fast, I mean a few hundred stores of course different from Luckin still, but they were still opening stores pretty fast.
And then you realize that when you scale up, all the problems start piling up. You choose at the wrong location your supplies can’t catch up, and can’t train your people well enough, the processes are not there, etc. And they become very hard for them to manage.
That’s the thing with lots of F&B, right? So that’s the part about they can. The other part is probably they have to.
[00:01:36] Sabrina
Why do they have to, I mean, I think we know why they have to. So they have a lot of competitors in China now, right? So when Luckin first started, I think they were one of the first few like mass coffee players in China.
But now of course we see competitors like Cotti , Cotti has about 7,000 stores now. They only started
[00:01:55] Jianggan
Yeah Cotti’s recently celebrating the 7,000 store mark. They’ve been around for like slightly over a year.
[00:02:02] Sabrina
Yeah. Almost a year. Yeah. And that’s also Lucky Cup, right? It’s the Mixue’s Coffee.
[00:02:07] Jianggan: Oh. I spoke with some friends at Mixue in China and they said, you know what ,Mixue has what, 36,000
[00:02:14] Sabrina
36,000 thousand.
[00:02:15] Jianggan
Stores of bubble tea and ice cream. And they wanted to get into the coffee category for expansion. And it said, we’re very ambitious about that. And Mixue’s Lucky Cup is actually selling coffee at 8. 8 yuan. 1. 3 dollars a cup, which is really cheap. And they want to expand that. And then they found themselves in a price war between Luckin and Cotti. So obviously, these are not only players that you have Manner, you have M Stand, you have Peet’s, you have all these different players which have been expanding very aggressively in China.
But I think Luckin probably only sees Cotti as the real competition there.
[00:02:56] Sabrina
Their main competitor.
[00:02:57] Jianggan
I think historically that they have been sort of telling people that they’re competing against Starbucks, right?
[00:03:02] Sabrina
Yes. And in their results, their sales for the year of 2023, actually surpassed that of Starbucks in China.
So I think Luckin’s sales was about us 3. 4 billion, whereas Starbucks in China was about us 3. 16 billion. So they surpassed, but it actually doesn’t seem like Starbucks is their main competitor because they have very different value propositions, right? I would think Cotti is.
[00:03:31] Jianggan
I was in China recently, right? That’s during the Chinese New Year period. So what I do realize is that Starbucks in major cities, big cities are quite empty. But probably because people have gone to their hometowns for New Year and they’ll go to like the small towns and Starbucks and all the coffee stores are full because. You know, people are home for their, for Chinese New Year and they don’t want to spend time with their family for too long. Yeah. So they go to Starbucks to hang out with friends. So it’s all packed, I don’t think that Luckin and Starbucks are operating in very different markets.
Starbucks, I mean, one drink in China costs like 28, 30 Yuan. That works out to be 4 to 5 dollars and Luckin historically they’re trying to sell at 19.9 Yuan, but because of competition from Cotti, and in many cases they’re selling it at 9.9, which is what, 1.4 dollars, so it’s actually quite cheap so, but I do think that historically they used Starbucks as a benchmark for a reason, right? And we’re trying to sell a story of coffee to, Like US investors or investors in the US market and you tell them that, okay, well in China and a coffee market and of course people would try to get their head around about what exactly you are trying to tell, right? But if you said that, okay, we are benchmarking against Starbucks, which has shown some initial attraction in China, and this is how we are better than them.
Then that becomes a story that people can digest.
[00:04:54] Sabrina
Makes it more relatable to the investors as well, because they probably, if they’re not in China, they would know what other coffee chains there are, right?
[00:05:01] Jianggan
And of course a lot of investors, they will probably not have the energy to do detailed study about each of the business that they’re investing in.
[00:05:08] Sabrina
So Luckin has also gone overseas. I think in 2023, they have about. 30 stores in Singapore. Do you think you’ll be going anywhere else now?
[00:05:16] Weihan
Definitely, but I think if you were to look at Southeast Asia, right, there are two main categories of coffee that people drink here. One is the traditional coffee and usually these are the ones that retail at very, very affordable prices.
And then you also have the more modern coffee. And then this is where many of the familiar coffee chains fall under. So you have players like Starbucks, you have Coffee Bean, but you also do have like local players that are doing relatively well in this market. And then you have Luckin in Singapore, who is already facing a lot of competition in just this one small market.
So imagine it going overseas, the competition will be intense.
Maybe not as directly as what they’re facing in China with Cotti and also to a certain extent Lucky Cup, but in Southeast Asia, they are faced with many, many different local and international brands who are trying to capture this growing modern coffee market here in Southeast Asia.
[00:06:19] Jianggan
So basically they’re converting the consumption from traditional coffee to modern coffee. Because overall we look at actually the coffee bean consumption in the region, it’s not growing as much, right? Yeah. So, which means that so for modern coffee to grow, I mean, what do you pretty much have to tap into the young audience or try to convert some of the people who have been going to the traditional stores?
So actually, I mean, people always talk about, you know, competition, people always talk about whether it’s sustainable but at the end of the day we look at competition is what exact age do you have over your competitors to allow you to capture a bigger market share, especially when we think about say Red Ocean, right, you have so many competitors, what exactly is the age?
What do you think?
[00:06:59] Weihan
I think at least in Southeast Asia, what Luckin is strong in is a lot to do with the tech and the use of data in terms of all the operations, but you don’t see this as much in Southeast Asia. So back then, when Flash was here, they market themselves as a tech enabled coffee chain, but then you see that most of that tech enabled things, it’s just they have an app and then they actually do not
push it as much for their consumers to actually adopt it. But Luckin is like, they have an app, but they force everyone to download. And this really tracks the data of all the consumers and help them to optimize and do certain R&D help to do the operation side.
So I think that is an edge that Luckin has over a lot of the competition in Southeast Asia. Or in fact I would say that. Globally as well, because a lot of coffee chains, their focus is on customer experience, their focus is on the taste of the coffee itself, but for Luckin, they’re focused more on, I want to do this efficiently. I want to put tech in as much of it so that I can capture every single detail about my customer. And then from then decide how I should move forward with all my expansion, with all my operations and so on and so forth.
[00:08:15] Sabrina
Are there any companies that like Luckin force customers to download the app to order drinks?
Are they the only one?
[00:08:22] Jianggan
I think many tried. So, I think they’re probably the only one which absolutely has no other choice. I mean, aside. I remember in Cotti in most stores that I’ve been to. You can still pay using other means. You can still order at the counter. I do suspect You mean in Singapore there’s this Cotti store, which was opening at the carcass of a flash coffee in the city link mall. And initially, when they first opened, they said, okay, download the app and we have that. You have the discount and blah, blah, blah, blah. But, recently, I think I walked past a few days ago, they started accepting credit card and pay now. So I think the, probably the reason is that Luckin stores in Singapore operated by Luckin. So they can say that, okay, we sacrifice the single store sales for the objective of acquiring customers for, Luckin as a whole, as company, right?
For Cotti is probably, because Cotti is mostly franchised, and a franchise would say that, oh, I have this customer who is in front of me, and he can’t buy coffee because he doesn’t want to download the app. Should I take this customer? Should I not take this customer? So I think the incentives are very different.
So, and then you have kopi kenang, you have Foray Coffee from Indonesia, which both have operations in Singapore now, and if you observe, they have apps, but most people still go to the counter to order. So that’s the actual sort of behavior of consumers in Southeast Asia, right? So back to what Weihan, you were saying that.
Luckin would have significant advantage of tech because nobody else can actually achieve what they are doing, but can they translate that into a real, like, you know, market share advantage? That’s a question which needs to be proven. So back in China so they’re opening like 1000 stores a month, right? So I do think that the speed is also because they want to kill off competition, especially Cotti because who are the founders of Cotti?
[00:10:10] Weihan
They’re basically the founders who
got kicked out of Luckin.
[00:10:14] Jianggan
So basically Luckin, yeah Luckin founders who were kicked out because of the accounting scandal.
So they know Luckin inside out, they built the first foundation of Luckin, so they know how to build this business and that’s why they are, and they feel unfulfilled. That’s why they are starting Cotti so that makes Cotti a formidable competitor for Luckin. And I do think that the drag in single store sales and the rush to open so many stores is because they are planning a defensive against Cotti but it seems that they are not killing off Cotti at least as of yet, Cotti is still opening new stores and we have lots of news reports about Cotti franchisees complaining about this, complaining about that, but Cotti is still expanding. So the question is how would this settle, right?
I mean, Luckin will probably continue this expansion so that they can have all the corners covered. Those are more I went to in what was that in Shenzhen in December, I saw like three Luckin stores. By side, but on different sides of the mall. So basically they try to occupy the retail space and make it really accessible.
And of course, blocking others from accessing that space. If you look at Cotti so when I first started, and of course how does Luckin decide where to open your stores? So they buy lots of data and they process lots of data to see that, okay, where can I have a store that have enough sort of consumer traffic, have enough users nearby and the users which fit my profile?
And Cotti initially, when it started, we just look at, okay, what can I find? What can I find Luckin? I just opened a store nearby. So I tap into the money they have spent. And I think that probably forces Luckin to.
[00:11:53] Weihan
Buy all the store piece so Cotti can’t be mixed in.
[00:11:56] Jianggan
Yeah, to plug the holes.
And I think they will only slow down store opening once they can feel that they are killing off Cotti, which is uncertain, right? So. Cotti’s challenged is that because of a cunning scandal the founders can’t get institutional money because no institution would want to invest in them. So they need to rely on the franchisees while bringing their personal money. So I don’t know, but this is a fascinating battle to watch.
[00:12:23] Sabrina
I think, yeah, like you guys mentioned Luckin is mostly self operated, right? And Cotti actually uses franchises. And that’s probably why we see. Cause both of them have expanded into Southeast Asia. Luckin is more conservative with about 30 stores in Singapore and Singapore is the only country they are in, whereas Cotti is in Singapore.
They are in Indonesia. Philippines, Malaysia
[00:12:44] Jianggan
Everywhere. They’re in Thailand. I think they’re in Korea, Japan, Canada, and Hong Kong.
[00:12:50] Sabrina
Canada? That’s far. Because they use a franchise model, right? This allows them to expand.
[00:12:54] Jianggan
Lots of ethnic Chinese in Canada. Many of them. So there’s like waves of migration from China to Canada before Hong Kong handover.
And then now with lots of people trying to seek residence in there.
[00:13:05] Sabrina
And we also see Canadian coffee coming into Singapore, right? Tim Hortons opened last year.
[00:13:10] Jianggan
Have you been there?
[00:13:12] Sabrina
The queue is too long
[00:13:15] Jianggan
So the queue is too long is a good thing. That means they’re popular. Or it means that they really need to do something about the operations.
[00:13:20] Sabrina
I think it’s both yeah, yeah. It’s one cause they are new and there are brand that people know. So there’s a lot of hype around it too. They are quite slow.
[00:13:29] Jianggan
Have you tried their coffee? It’s very sweet to me. And they sell this, like. Sandwich melts, or whatever they call it, with cheese in it.
Oh, it’s fairly tasty. It’s fairly tasty.
[00:13:40] Sabrina
I’ve only had the donuts. Because somebody brought them into the office. So I tried it.
[00:13:45] Jianggan
And Tim Hortons also has an app, and it’s nowhere near the levels of Luckin. In fact I think part of the team, Yorlin, Nanette, et cetera, they’re planning for the next iteration of our, sip, innovative, repeat innovative workshop, which basically look at the different business models of different coffee chain players to see how corporates can learn about innovation from hyper competitive market.
So they have been regularly like looking at the updates of different coffee stores and stuff. But one thing to notice is that As we said just now, right? Everybody tries to be tech enabled. Nobody reaches Luckin’s level and it’s, you go to Luckin you don’t see a coffee grinder and a coffee maker separate.
No, it’s integrated. Yeah. You go to Luckin, you don’t see a what do you call that? Do they use oven or microwave? Microwave, right? To heat up the food.
[00:14:35] Sabrina
Most places it’s microwave some is oven.
[00:14:38] Jianggan
So Luckin gives you cold snacks. which doesn’t look very good, but it probably helps them with efficiency. Right? Because every time you put something out there, it’s extra time it’s extra like space that the people need to do. I do think I don’t know. There was this question that somebody was asking us that I mean, how can Luckin hire people? In Singapore where labor there’s clear like service labor shortage.
[00:15:00] Sabrina
I think it would be good to work at Luckin. Let’s compare working at Luckin to working at Starbucks. Yeah. If I work at Luckin, I just have to learn how to press the button or the coffee machine. Yeah. If I work at Starbucks, I have to learn how to do like latte art, how to work the espresso machine.
[00:15:16] Jianggan
How to work with like the 3 billion different types of drink combinations.
[00:15:20] Sabrina
Yeah.
[00:15:20] Jianggan
How to engage with customers.
[00:15:22] Sabrina
Yeah, you have to remember all the different drinks, you have to call the names, you have to clear tables sometimes because they are sitting. Luckin is you just press a button, press a few buttons.
[00:15:31] Jianggan
So it’s easy and it’s still kind of nice brand and a clean working environment.
I think for most service staff, I mean, working for a cafe is better than working in a restaurant. I mean, all restaurants are oily, greasy, angry customers and stuff. And for Luckin, everything is handled by the app. You just need to make the coffee and make the coffee fast.
[00:15:52] Sabrina
They don’t need as much manpower either.
Yeah. Because most of the things are automated, right? Even their ordering and everything.
[00:15:58] Jianggan
Yeah, yeah, they don’t have to worry about ordering. You don’t have to basically be the cashier as well.
[00:16:02] Sabrina
Yeah. They don’t have to keep track of inventory themselves as well, right? Because it’s all automated.
[00:16:07] Jianggan
It’s all automated. And it’s sort of data tracked and orders made automatically. That I think also contributes to their ability to open 1000 stores. Because just think about from a planning point of view, if it’s not automated, I mean, if each store has a store manager and I can make the order and say, Hey, I need like, I don’t know, 50 bags of coffee for the next few days.
That one needs at least 60, 70 bags. It’s hard to coordinate.
[00:16:31] Sabrina
Yeah. And in terms of staff training as well, I think one of the things you mentioned in our sip, innovative, repeat is that for Luckin, it takes them half a day to train a new staff for Starbucks. The training is like two or three days.
So that could be one of the reasons why it’s so easy for them to open like a thousand stores in a month, because it’s pretty easy to find staff to help you manage.
[00:16:52] Jianggan
I think the business model is fascinating. It’s so we see lots of people trying to copy nobody’s actually able to copy that to the full extent, whether that business model can be effective adapted outside China, outside Singapore. It’s still a work in progress, so it’s interesting to observe how that’s doing and, but I do think that there are also like interesting lessons that people can learn from it.
[00:17:13] Sabrina
So thank you guys for tuning in to another episode of the Impulso podcast. We hope you guys enjoyed today’s episode.
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