Luckin Coffee: from filing for bankruptcy to outselling Starbucks in China

Luckin Coffee, headquartered in Xiamen, a port city in southeastern China, was established in 2017 and quickly grew as a domestic rival to Starbucks in China.

However, its rise was derailed in 2020 when investigations revealed that around 2.2 billion yuan ($337.31 million), or half of its 2019 sales, had been falsified, Reuters reported.

The scandal led to its delisting from Nasdaq and subsequent filing for bankruptcy protection in the U.S. in 2021. While many believed it was over for the firm, it has remarkably rebounded in its home market of China.

By 2022, Luckin had surpassed Starbucks in the number of stores across the country. The next year, it reported an annual revenue of 24.9 billion yuan (US$3.48 billion), beating Starbucks’s China revenue of $3.16 billion for the first time, according to Fortune.

It now firmly sits at the top of China’s coffee market with over 21,000 stores nationwide as of September.

In the third quarter, its total sales surged by 41.4% year over year while its quarterly revenue reached $1.452 billion, Business Insider reported.

A Luckin Coffee and Starbucks store side by side in Hangzhou, Zhejiang province, East China, Feb. 25, 2024. Photo by Sipa USA via Reuters

Luckin Coffee’s rapid growth is fueled by its hybrid operating model, which combines self-operated stores with franchise partnerships to reduce capital demands. This strategy allows it to expand fast and achieve high store density, with outlets in almost every neighborhood, according to Forbes.

It operates a grab-and-go model, where customers order from the app and pick up their orders at the store, unlike Starbucks’ focus on creating cozy spaces for socializing.

Luckin further distinguishes itself with its competitive pricing, selling coffee for $1.4–2.75 per cup by leveraging significant discounts and smaller store layouts.

In contrast, Starbucks coffee in China generally starts at $4.1, a price point that has turned away consumers amid a tough job market.

The American coffee giant, which entered China in 1999, is facing slumping sales and growing competition from local brands in the market, its second largest globally with nearly 7,600 stores as of September.

During the quarter ending September 29, Starbucks experienced a 14% decline in comparable store sales in China, primarily due to an 8% drop in average ticket size and a 6% decrease in transaction volumes.

Its global comparable store sales and total sales also fell by 7% and 3%, respectively.

Other than Luckin, it has many other rivals in the market, including coffee chains Cotti Coffee and Manner, and even Chagee milk tea brand.

A Starbucks coffee shop in Yunnan Province, China in May 2023. Photo by Huy Tung

Brian Niccol, who just became Starbucks’ CEO in September, has been shaking up the company’s leadership, including at its China arm, in a bid to steer the business back on track.

The firm has said it was seeking help in China to improve its declining sales, the South China Morning Post reported on Thursday.

It has reportedly considered selling a stake in its business and has assessed interest from prospective investors, including private equity firms in China.

Starbucks stores in China have also been taking a page out of Luckin’s playbook by offering discounts and mobile ordering services.

The company is making its most popular coffee choices more accessible to consumers through 30% discounts or two-for-one coupons, all while keeping its listed prices intact.

Nonetheless, this growing reliance on discounts could eventually push the company into a price war, something that its China CEO claimed in January it had no intention of engaging in.

But Luckin’s success was driven by more than just discounts. It has taken digital innovation beyond simply accepting online orders, and has integrated automation and digital management into its operations. Its system can, for example, detect and dispatch orders when certain ingredients are running low, according to Bloomberg.

This allows Luckin stores to operate with minimal staff, effectively reducing costs. Their new employees can also be trained in just two to three days, a stark contrast to the weeks required for Starbucks staff, according to industry insiders.

The chain frequently introduces new creative beverages, such as the brown sugar boba latte inspired by Taiwanese bubble tea. This has been a driver for its sales growth.

These innovations have transformed Luckin from a budget-friendly copycat to a market trendsetter and leader, prompting some consumers to question whether Starbucks’ higher prices are justified.

"Luckin Coffee is one of the great turnaround stories in Chinese business history," Shaun Rein, founder of China Market Research Group, told Financial Times.

Years after getting delisted, the Chinese coffee chain is now looking to bring its affordable beverages to the U.S. market, with plans to target cities with significant populations of Chinese students and tourists.

"Many people thought they were dead, but underlying the fraud was a company with great technology and decent coffee at a competitive price," Rein said. "Now, it is coming after Starbucks on its home turf.