Shortly after being listed on the Nasdaq stock exchange, Chinese unicorn luckin coffee announced at a May 29 conference at its headquarters in Xiamen that it aims to open 10,000 shops by the year 2021, and it signed strategic agreements with six heavyweight international partners, including Louis Dreyfus Company (LDC), Schaerer, CJ Corporation, Ueshima Coffee Co., MONIN, and DHL, thereby establishing its Blue Partner Alliance.
Luckin opened 2,370 stores as of March 2019, and it plans to expand to 4,500 stores by the end of this year. Is it possible, though, for the company to open another 5,500 outlets in just two years? Luckin’s non-executive chairman, Lu Zhengyao, describes at the conference the expansion plans as luckin speed, which he says is about to run wild, but not blind. Luckin is not just announcing lofty goals to the public, but a number backed by a carefully considered rationale.
First, luckin’s technology is driving its growth. Founder Qian Zhiya has pointed out that the chain’s business model is to fundamentally change the industry’s transaction structure through innovation and the application of advanced technology, thereby significantly reducing transaction costs. At the same time luckin hopes to provide customers with high quality, convenient, and affordable products through in-depth cooperation with top suppliers in various fields. The key is to connect customers and suppliers through efficient sales channels and distribution platforms.
Its technology-driven business model differentiates luckin from other players in the traditional food and beverage industry. Sensors are installed on every coffee machine and refrigerator, and the performance of each appliance is closely monitored to ensure that any issues can be quickly corrected. Luckin uses a tremendous amount of data to figure out how to retain customers, set effective pricing, arrange staff shifts, order supplies, and dispatch delivery orders.
The chain’s next advantage is its low operating costs. A single cup of luckin coffee sold for RMB 13.3 in 2019 Q1. Whereas the price of the coffee itself accounts for a small portion of the total, the larger expense comes from operational costs. By lowering the latter cost, luckin is able to outcompete its competitors. It sets up small pick-up locations, which allow it to spend less money renting retail space for physical stores. Also, cashier-less ordering processes lower staff costs. The app-based customer experience allows for more targeted promotions based on purchase histories and less advertising spending. Furthermore, increasing demand gives luckin leverage to negotiate better deals with suppliers, and wider store coverage cuts its delivery costs.
Supply chains play another important role in helping luckin’s expansion. The company only partners with industry leaders, a strategy it hopes will allow it to optimize its supply chains. In establishing the Blue Alliance, luckin moved to bring big international players into the Chinese food and beverage market on a grand scale.
In the short-term, suppliers will be happy to work with luckin. The company said that partnering with Schaerer and Franke, two coffee machine makers, allowed the two companies’ 2018 sales to exceed those from the previous five years combined. Moreover, luckin recently signed an agreement with supplier Mitsu Foods for around 22,000 tons of coffee beans next year, one of the largest coffee bean orders in history.
On its IPO filing report to the SEC, luckin mentioned the risk of depending on only a couple suppliers, and it understands how critical it is to secure relationships with its anchor partners. In the long-term, supply chain management will be a core area luckin should focus on. Suppliers don’t want to miss the opportunity to grow with the company, but they don’t want to work with another Chinese brand that grows quickly but unsustainably. Luckin needs to show its suppliers that it can achieve sustainable profitability and that it can and will be able to pay off its debts.
Luckin is exploring further controlling its supply chain. In April, it formed a joint venture with agricultural merchant and processor LDC to construct and operate a coffee roasting plant in China. As part of the deal, LDC agreed to purchase USD 50 million worth of shares from luckin.
At the conference, Frost & Sullivan’s global consumer industry expert Cai Shijie said that, according to a survey, only about 26% of Chinese consumers are willing to buy a cup of freshly brewed coffee for over 30 yuan. The unwillingness to spend more has limited the development of the Chinese coffee market. New retail coffee chains, led by luckin, provide consumers with provide consumers with high-quality coffee at competitive prices and drives coffee consumption.
Through its efforts, luckin is ready to take over the market. Facing such stiff competition, Starbucks launched a pick-up service called StarbucksNow on May 21.
Within two years of its founding, luckin is no longer a startup or a follower. Coffee drinkers the world over will pay attention to this rising star. Perhaps 10,000 stores is just the beginning.
（Top photo from Luckin)