Business Lessons from Luckin Coffee (瑞幸咖啡)

Business Lessons from Luckin Coffee (瑞幸咖啡)

The rise of Luckin Coffee (瑞幸咖啡) in 2018 has everything that you’d want in a good China business case. A homegrown company that has leveraged technology and other assets to build a strong brand early on.

So, what can we learn from Luckin Coffee about doing business in China?

The signature blue and white cups and brown paper bag.

Luckin Basics

Let’s start by reviewing some of the most important details about the business.

  • Truly O2O business model
  • High perceived brand value
  • Early product “virality”

Each of these areas have helped the company get more coverage in the media and open up a lot of stores quickly. To date, they have reported opening up 400+ in China. But how did Luckin find success in each area, and what can we learn from these triumphs?

Luckin Coffee proudly sponsoring the 2018 World Cup in Russia.

1. Chinese O2O Business Success

If you follow the Chinese startup scene even passingly, then you will know how Chinese companies are making the O2O business model famous. Although difficult to define, the O2O business model generally refers to the use of technology to bridge consumers and offline retail. This has been particularly successful in China, where mobile payments have made in-APP purchases dangerously easy (my earlier article on mobile payments).

We can safely label Luckin Coffee O2O because its primary service is to sell coffee to consumers using its app and deliver via a third party logistics company. Although enough time still hasn’t passed for us to know if they will be successful or not, people seem to love this type of innovation.

It’s worth noting that many have drawn parallels between Luckin and the recent rise in China’s bike sharing businesses. These companies (most famously OFO and MoBike) have recently received a lot of negative press for questionable financial performance.

Similar to OFO and Mobike, Luckin seems to be trying to scale as fast as possible. There have even been some headlines about an IPO and calling Luckin a “unicorn” company. Of course, people love to get excited about companies using technology in new and innovative ways, and the question of long-term viability still remains to be answered.

Those operating in China should be wary of the O2O business model and it’s ability to attract capital. Certainly part of Luckin’s success has been in integrating mobile payments into it’s business scheme. Even for a business as traditional as coffee, the proliferation in mobile payments give those tech-savvy a way to grab market share early.

2. Luxury Brand Value

Creating “high-status” brands has historically been very difficult for domestic companies in China. Why? There are many ways to think about it, but perhaps the simplest explanation is that since China opened up in the 20th century, foreign goods have been seen as superior to those made domestically.

However, as China’s per-capita GDP continues to grow and looks to make the transition to “Made in China 2025”, companies at home certainly have a better chance of rising in the eyes of consumers.

But can we really consider Luckin a “high-status” brand?

The strongest argument for Luckin as a “high-status” brand is their high pricing. At a little more than 20 RMB for an Americano, Luckin Coffee is quite close to their Starbucks rival who will charge anywhere from 5-10 RMB more than Luckin depending on the type of coffee.

I’ve included a screen of the menu in-app here.

Screenshot from Luckin Coffee APP detailing price.

Luckin has also made smart partnerships with celebrities in China, such as the infamous Tang Wei (汤唯). Advertisements showing her and other pop-culture darlings drinking from signature blue and white cups have helped to target a younger, more affluent demographic.

What’s the takeaway? Using price and celebrity partnerships in China is an effective way to build a strong brand. It should be noted that the celebrities chosen by Luckin seem to resonate very well with their target demographic, which is another lesson for those curious about operating in China.

3. Making Coffee Go Viral  

I probably wouldn’t be writing about Luckin’ today if it hadn’t achieved brand “virality” in the past couple of months. Seeing the coffee pop up on my news feed, office workers carrying large paper bags into work, and all of the fuss surrounding Luckin Coffee at first made me laugh. Then it made me stop and think.

Why do people care so much about a cup of coffee?

Simliar to the success of OFO and MoBike in the media, Luckin seems to have tapped into both a sense of nationalism and trendiness. In an industry where the biggest player is foreign (i.e. Seattle behemoth, Starbucks), Chinese citizens seen excited to support a Chinese coffee player.

Another more practical aspect of the business which must be mentioned is its use of vouchers to get people drinking coffee. Those who download the app can receive a free cup of coffee (excluding delivery fee). There are also ongoing buy two get one free deals and an absurd buy five get five free deal.

Chinese are proud of these innovative O2O businesses and they also get a lot of media attention. All of this created, for a couple weeks or so, a perfect storm of positive PR: people sharing pictures on WeChat, talking about it in the office, and grouping up with friends in the office to buy ten cups of coffee.

What is there to be learned from this? Using vouchers and promotional deals has the ability to make a product go viral. With so many people drinking free cups of Luckin, it made it very easy for people to snap a picture and share on their WeChat moments.

Conclusion

While there is still a lot of hype surrounding Luckin, its success in 2018 merits review and discussion. As shown in this post, it’s clear that Luckin’s team understands some of the key elements for success in modern China. However there are still many areas of concern for the company, and it will be intersting to see how they handle their business as the fervor inevitably cools down.

In a sense, Luckin Coffee represents the spirit of young China. It’s competitive, entrepreneurial, technology savvy, and all over WeChat.

In the spirit of keeping the conversation going, here are two more questions for us to think about and discuss moving forward.

Question #1 – Is the coffee industry undervalued in China?

It’s important to remember that coffee is a drug. Even though Chinese have traditionally been tea drinkers, it stands to reason that they will continue to switch over to coffee as the country develops.

Just consider Japan and Korea. They are just next door and are already heavy coffee drinkers. What kind of investments could we make using this lens? Will Chinese be willing to switch from tea to coffee for their caffeine?

Question #2 – Is Luckin the first serious domestic competitor in a market previously controlled by international players?

As mentioned above, Starbucks is the current incumbent coffee supplier in China, controlling over 50% of the market (Reuters article below). It’s not a question of “if”, but “when” a well-funded Chinese competitor will seriously go after the coffee market. Luckin has already filed a lawsuit against Starbucks, claiming that they are unfairly blocking Luckin from working with suppliers and property owners.

Technode reports lawsuit

Reuters reports on Starbucks market-share

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