Luckin Coffee: A Fascinating Turnaround Story

How Luckin Coffee became the largest coffee chain in China after near-bankruptcy

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Oct 01, 2023
  • China's coffee market is still under-penetrated.
  • Luckin Coffee's has become the largest coffee chain in China due to its competitive advantages.
  • Luckin Coffee has emerged from restructuring and SEC settlement as a better and stronger business.
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Luckin Coffee Inc. (LKNCY, Financial) was founded in June 2017. It has since become the largest coffee chain in China with more than 12,000 stores. The company’s previous management team defrauded investors in 2020, which resulted in Luckin’s delisting from Nasdaq. After the delisting, Luckin Coffee went through two years of debt restructuring, change of management team and the settlement with the SEC. Today, the company has emerged as a much better and stronger business.

Under-penetration of China’s coffee market

According to Deloitte, in 2021, the per capita annual coffee consumption in mainland China was only nine cups, much less than Japan, the U.S. and South Korea, which has per capita annual coffee consumption of 280 cups, 329 cups and 367 cups each. The per capita annual coffee consumption in mainland China is only 3.21% of Japan's, 2.74% of the United States' and 2.45% of South Korea's.


Even in Shanghai, which has the highest per capita consumption of coffee in mainland China, the current per capita coffee consumption is merely over 20 cups per year. What is more interesting is that Deloitte found that “of habitual coffee drinkers, more than 50% are constantly increasing their coffee consumption, thereby developing a coffee drinking habit. Consumers in 1st-tier cities, in particular, are becoming more dependent on coffee, and are now more likely to consume more cups of freshly brewed coffee.”


Clearly, while China still has great potential in per capita coffee consumption, the industry is far from mature.

Business models in China’s coffee market

Within China’s freshly brewed coffee market, there are mainly five types of business models: large store, small store pick-up, boutique chain, fast-food stores and convenience stores.

Starbucks (SBUX, Financial) dominates the large store segment with almost 6,600 stores. Tim Hortons have grown rapidly in China with more than 700 stores. COSTA, Peet’s Coffee and Lavazza are other major players in the large store segment. The large store model requires heavy up-front capital expenditure and high operating costs. Therefore, they charge more for their products. One cup of coffee costs between 30 yuan ($4.18) and 40 yuan for the large coffee chains.

Boutique chains focus on quality and charge less than the large chains. Major players include Manner, M-Stand, Seesaw and Arabica. These chains often feature Nordic style design and a simplified menu. These boutique shops mostly operate in tier-one and top tier-two cities. Shanghai is the most important market. Currently the biggest two players are Manner, which has more than 500 stores, and M-stand, which has almost 400 stores. Boutique chains’ customers are very sensitive to the taste and flavor of coffee. After discount, one cup of coffee costs between 18 yuan and 30 yuan.

The small store segment is very different. The shops are small and often only offer pick-up services. Both up-front capital investment and operating cost are low. Although they are branded as coffee shops, their products are often called beverage coffee because they are a combination of milk-tea and coffee. One cup of coffee costs between 9 yuan and 18 yuan. Although Luckin Coffee dominates this market, competition has picked up.

Fast-food stores mostly sell cheap to-go coffees that customers order with food. They do not really compete with the other three types of coffee shops.

Convenience stores such as 7-Eleven and Family Mart also sell cheap to-go coffees. One cup of Americano costs between 6 yuan and 10 yuan. Undoubtedly, they offer a very compelling value proposition for many consumers, but customers cannot pre-order on their smartphones.

To sum up, the Chinese coffee market has five major segments. Each segment has its own consumption characteristics and competitive landscape. Although Starbucks and Luckin Coffee both sell coffee, they are completely different businesses. Since this analysis is about Luckin Coffee, I will discuss more about the small-store segment and Luckin’s competitive advantages in this space.

Luckin Coffee’s dominance in the small-store space

As mentioned above, Luckin Coffee dominates the small-store space of China’s coffee market. Before the accounting scandal, Luckin was even more dominating. But the company had to halt its business expansion for a few months after the scandal. Luckin’s competitors, such NOWWA Coffee and Xingyunka, grabbed the opportunity and expanded rapidly. However, neither business posed serious threats to Luckin. After resuming its expansion plan, the company quickly regained market share and remains the dominant position.

The reason why Luckin can still dominate the small-store segment is that it has a few competitive advantages against its competitors.

First of all, Luckin Coffee has successfully established a brand image of young, modern and energetic. The company partnered with celebrities such as beloved Chinese singer Han Lu and winter Olympic gold medalist Aileen Gu in its advertising campaigns. Both Lu and Gu are young, energetic and successful.

Second, Luckin Coffee has a research lab of more than 60 employees. Their job is to develop and optimize different flavors as quickly as possible. This research lab enables Luckin to come up with blockbuster products such as Newer Latte, Coconut Latte and the recently launched Sauce-flavored Maotai Latte. For flavored lattes, there is clearly a first-mover advantage. Luckin’s competitors have tried to copy its coconut latte, but have not been successful. Consumers clearly have associated the drink with Luckin’s brand.

Third, because of the first-mover advantage, Luckin Coffee has occupied the best locations for its directly-owned stores. And the company's brand has attracted the best franchisees because its shops are much more profitable than competitors’ shops.

Last but not least, Luckin Coffee has built its own large and complex supply chain. This gives it an enormous scale advantage in terms of raw material and equipment procurement.

Luckin’s response to new competitors

Luckin’s moat was tested recently with the emergence of a very formidable new competitor. In November 2022, the man who was responsible for Luckin’s fraud, namely Zhengyao Lu, founded another coffee brand called Cotti Coffee to compete against Luckin. Within less a year, Cotti has opened almost 6,000 stores across China. Cotti basically copied Luckin’s playbook and started a pricing war. Cotti’s price was 3 yuan to 4 yuan less than Luckin in its early expansion stage.

The company was caught off-guard by Cotti’s rise. But on June 5, Luckin Coffee announced its own weekly 9.9 yuan coupon event, placing significant pressure on Cotti. In consumers’ mind, Luckin deserves a pricing premium over Cotti. Therefore, Luckin can constantly charge a small premium. This makes it impractical for Cotti to keep lowering the price. After Luckin’s response, Cotti is rapidly losing momentum.

Further, Luckin’s recent partnership with Maotai solidified Luckin’s lead in the game. Luckin’s Maotai Latte sold more than 5 million cups on its first day of launch and brought in more than 100 million yuan of revenue. Luckin’s partnership with Maotai is exclusive. Therefore, Cotti will not be able to copy Luckin’s blockbuster product this time.


Luckin Coffee’s turnaround is one of the most fascinating business case studies in recent years. The business restructuring and SEC settlement has made it better and stronger. With China’s growing coffee market and the company’s competitive advantages, Luckin Coffee is well-positioned to continue to grow in the next few years.


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