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Speaker 1: Hi, Big take Asia listeners. It's Wanha here. Happy New

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Speaker 1: Year from Hong Kong. The team is taking a break

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Speaker 1: this week, but we want to share a fun episode

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Speaker 1: from earlier this year to spice up your holiday season.

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Speaker 1: It's about the Chinese coffee shop chain Luckin, and how

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Speaker 1: it went from filing for bankruptcy to beating Starbucks in China.

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Speaker 1: When we first published this episode in July, Luckin didn't

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Speaker 1: have any shops in Hong Kong, but the company has

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Speaker 1: since expanded here and word is it's looking to grow

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Speaker 1: in other overseas markets, including a launch in the US,

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Speaker 1: so watch out for new Luckin shop near you. Here's

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Speaker 1: the episode Happy Listening.

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Speaker 2: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 1: Earlier this week, in the middle of a hectic news cycle,

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Speaker 1: I got a drink a pick me up for a colleague,

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Speaker 1: Rachel Chang. She's Bloomberg's managing editor for Global Business in Asia.

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Speaker 1: So I have a very special treat for you. But

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Speaker 1: I got Rachel some coffee, but not just any coffee.

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Speaker 3: Wow, we should you manage to get that? This is

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Speaker 3: a cross bought it?

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Speaker 1: Yes, So I think you're holding a coconut latte that

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Speaker 1: came from a Lucking store all the way from Shinzen

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Speaker 1: here to Hong Kong. Luckin Coffee is the biggest coffee

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Speaker 1: seller in China, but it doesn't have a store in

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Speaker 1: Hong Kong, where we're based. So our fabulous producers arranged

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Speaker 1: a special delivery of some of Luckin's most popular flavors,

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Speaker 1: like their coconut latte amazing.

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Speaker 3: Can I actually try it right now? Yes, hold on

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Speaker 3: it together. M It's like two thousand calories.

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Speaker 1: Well that aside, it's actually pretty good.

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Speaker 3: It's very good. It's very delicious.

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Speaker 2: I mean, I'm not a connoissan. I'm sure that coffee

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Speaker 2: fancy coffee people would hate the taste, but fancy coffee

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Speaker 2: people also hate stuff.

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Speaker 3: That's true.

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Speaker 1: Rachel used to cover Luckan during its early days in

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Speaker 1: twenty seventeen as a startup, and in just seven years,

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Speaker 1: Luckin has outpaced Starbucks, who opened its first door in

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Speaker 1: China as early as nineteen ninety nine, and today Luckin's

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Speaker 1: become the dominant coffee retailer in the country. And it's

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Speaker 1: done that with the mix of creative products, from its

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Speaker 1: salty cream cheese and Ti latte to a popular alcohol

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Speaker 1: infused coffee. I think we should try it.

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Speaker 2: Yeah, definitely, how though it might be a bit late

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Speaker 2: for caffeine and a bit early for alcohol, or you.

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Speaker 1: Know, somewhere somewhere in the world it's cocktail hour. But

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Speaker 1: Luckin's astronomical rise was unthinkable. At one point in twenty twenty,

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Speaker 1: the company was on the brink of collapse after a

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Speaker 1: major accounting scandal wiped out its stock value, sending it

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Speaker 1: into bankruptcy.

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Speaker 2: People really just thought, well, this company is done for.

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Speaker 2: They had to close a whole bunch of stores, and people,

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Speaker 2: I guess just really that this company would just be

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Speaker 2: fading away.

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Speaker 1: Luck And not only survived, but it staged an extraordinary comeback.

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Speaker 1: Earlier this year, the company reported its fourth quarter earnings.

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Speaker 1: Total sales revenue in twenty twenty three reached three and

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Speaker 1: a half billion dollars in China, surpassing Starbucks for the

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Speaker 1: first time.

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Speaker 2: Luck And understand the local tastes and the local behavior

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Speaker 2: of consumers much better. And they have been very successful.

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Speaker 2: And the global giants have been on the backfoot, you know,

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Speaker 2: and whether you're talking about Nike, all Apple, Alstabucks, you know,

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Speaker 2: all of these companies have been humbled in some ways

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Speaker 2: in China.

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Speaker 1: Welcome to The Big Take Asia from Boomberg News. I'm wanh.

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Speaker 1: Every week we take you inside some of the world's

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Speaker 1: biggest and most powerful economies and the markets, tycoons and

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Speaker 1: businesses that drive this ever shifting region. Today on the show,

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Speaker 1: how low Fucking Coffee went from filing for bankruptcy to

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Speaker 1: beating a coffee titan like Starbucks in China, and what

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Speaker 1: It's Rocky Road says about competition in the world's second

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Speaker 1: largest consumer market. Luckin Coffee was founded in twenty seventeen

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Speaker 1: by Lu Chiang Yao and Chiang Chiu ya At that time,

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Speaker 1: they were working at a car rental company called China

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Speaker 1: Auto Renting Inc. Or car Inc, which Lou founded.

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Speaker 2: So Lu jiang Yao was already a very successful entrepreneur.

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Speaker 2: CAUs Ink was really his most successful venture, and at

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Speaker 2: the time Tenzyah Jenny was a very trusted executor of

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Speaker 2: his team, and so she was really the peasant who

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Speaker 2: came up with the original idea that there's a lack

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Speaker 2: of coffee essentially in China.

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Speaker 1: In twenty eighteen, the average person in mainland China only

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Speaker 1: drank about three cups of coffee a year. That's far

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Speaker 1: off from at least three hundred cups per person in

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Speaker 1: the US.

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Speaker 2: China is a country of tea drink because it is

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Speaker 2: really difficult to find normal coffee.

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Speaker 3: When I was working and living in China, you know.

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Speaker 2: You wouldn't really be able to wake up and order

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Speaker 2: good coffee from a five style hotel. It's just not

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Speaker 2: like something that's embedded in their everyday life.

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Speaker 1: Chen saw an opportunity. She quit her c suite job

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Speaker 1: at car Inc. To chase your dream of building a

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Speaker 1: coffee empire, and her boss Lou wanted in.

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Speaker 2: How Lu Jangai reacted was that he was very supportive

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Speaker 2: if he wished it the best of luck and he

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Speaker 2: actually invested money himself into luck and to become a

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Speaker 2: co founder.

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Speaker 1: With Slu's endorsement, Luckin raised about two hundred million dollars

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Speaker 1: at the end of twenty eighteen. By that time, it

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Speaker 1: had already opened more than two thousand stores across China.

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Speaker 1: Chan and Lou used that money to open more stores

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Speaker 1: and kept the shops small and low cost, which was

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Speaker 1: a very different strategy from Starbucks.

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Speaker 2: A box really has this idea of they think of

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Speaker 2: their cafes is what they call the third place, So

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Speaker 2: it's the place between home and office, you know, lush sofas,

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Speaker 2: just a really like pleasant music playing in the background.

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Speaker 1: Luckin took another approach.

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Speaker 2: Most of their stores were just tiny little kiosks, definitely

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Speaker 2: not a place to lounge. Just think about you know,

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Speaker 2: the classics sort of young twenty something Chinese professional, you know,

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Speaker 2: rushing to work and just really needing to wake up,

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Speaker 2: just needing to grab something on the goal so that

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Speaker 2: she'll be on for her first meeting. And that's what like,

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Speaker 2: it is.

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Speaker 1: So as basic as you can get in terms of store.

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Speaker 2: Right, but that's because they're focus was so much on

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Speaker 2: mobile and takeaways.

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Speaker 1: Rachel says. Luckin also capitalized on China's largely cashless society.

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Speaker 2: So you know, you could order on the app, pick

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Speaker 2: whatever I want, pay everything's on the app, right, and

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Speaker 2: then you could literally just go to the store and

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Speaker 2: then pick it up, or you can have delivery, which

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Speaker 2: would be so quick, you know, less than ten minutes.

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Speaker 2: And essentially, if you didn't want to, you don't have

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Speaker 2: to speak to any human being at all.

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Speaker 1: And doubling down on digitalization not only saved customers time,

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Speaker 1: it also saved luck And a lot of money for them.

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Speaker 2: It was really about innovation around the back end. Right.

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Speaker 2: They would use these digital systems to manage staff, to

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Speaker 2: manage inventory. That cut down a lot in costs, a

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Speaker 2: lot in labor, and a lot in turn around time.

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Speaker 1: That lean, digital forward approach help the company keep the

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Speaker 1: cost of its products down. Today, the average latte from

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Speaker 1: luck And costs about eleven un that's less than two dollars.

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Speaker 1: Here's how Luckin's chief strategy officer, right Out Shakold, describes

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Speaker 1: its positioning in the market in an interview with Bloomberg

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Speaker 1: in twenty nineteen.

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Speaker 3: If you look at the product, it's a premium product.

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Speaker 3: If you look at the price, it's a mass market price.

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Speaker 3: And that's where I think our model is unique because

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Speaker 3: we can do both.

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Speaker 1: After an IPO in twenty nineteen that raised more than

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Speaker 1: half a billion dollars, Luckin's growth accelerated, and within three

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Speaker 1: years of its launch, it was operating about forty five

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Speaker 1: hundred stores in China, from top cities like Shanghai and

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Speaker 1: Shinzen to more remote places like Shinjiang. But its success

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Speaker 1: wouldn't last long.

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Speaker 2: So in twenty twenty, Muddy Watches, which is cousin. Blocks

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Speaker 2: short selling firm put out a tweet saying that day

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Speaker 2: had received a whistleblower report on how Luckin was fabricating

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Speaker 2: transactions and that really just everything just unraveled from that.

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Speaker 1: After the whistle blower report, the US Securities and Exchange

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Speaker 1: Commission investigated and charged Luckin with defrauding its investors and

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Speaker 1: fabricating transactions to inflate its revenue. In the wake of

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Speaker 1: the investigations, Luckin's shares plunged. At its e IPO, Luckin

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Speaker 1: was valued at nearly three billion dollars. About a month

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Speaker 1: after the fraud allegations came to light, the company's value

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Speaker 1: tumbled to about seven hundred million dollars, and in twenty

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Speaker 1: twenty one, Luckin filed for bankruptcy.

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Speaker 2: Everybody left this company foot dead. So it did seem like,

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Speaker 2: you know, the end of the luck And story, but

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Speaker 2: it wasn't.

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Speaker 1: After the break, Luckin bounces back. After an accounting fraud scandal,

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Speaker 1: luck and Coffee was on the edge of collapse. It

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Speaker 1: filed for bankruptcy in New York in February of twenty

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Speaker 1: twenty one and agreed to pay a one hundred and

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Speaker 1: eighty million dollar penalty to settle the case with the

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Speaker 1: US Securities in Exchange Commission, but shortly after someone stepped

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Speaker 1: in with a helping hand.

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Speaker 2: David Lee is the chairman of Centurium Capital, very close

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Speaker 2: to the founder Lu Jung yo. He was one of

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Speaker 2: the original investors in the Ka Inc rental startup that

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Speaker 2: made Lou's fortune.

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Speaker 1: David Lee's admiration for Luckin's founder, lu Jung Yao was

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Speaker 1: well known in the industry, and he believed in Luckin's

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Speaker 1: business model. Lee's private equity company, Centurium Capital, doubled down

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Speaker 1: on its investment in the coffee chain. It stepped in

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Speaker 1: with two hundred and forty million in twenty twenty one,

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Speaker 1: which helped clear Luckin's legal fees and fines. Luckin also

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Speaker 1: underwent a major shakeup. Despite David Lee's personal connection with Lou,

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Speaker 1: he decided that Luckin needed new leadership to stem the crisis.

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Speaker 1: That's according to sources at the time, so in twenty twenty,

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Speaker 1: Chen and Lou, the founders of Luckin, were replaced by

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Speaker 1: new executives, and by twenty twenty two, Centurium became Luckin's

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Speaker 1: controlling shareholder.

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Speaker 2: Centurium also put in its own people to help luck

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Speaker 2: and Ton things around closing downstores, hiring executives, and also

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Speaker 2: very importantly helping Luckin put in a franchise system which

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Speaker 2: allowed it to expand stores easily and quickly.

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Speaker 1: With Centurium steering the ship. Luckin emerged from bankruptcy in

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Speaker 1: April twenty twenty two, just fourteen months after filing for protection,

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Speaker 1: and its small stores were ideal as China adjusted to

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Speaker 1: COVID measures.

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Speaker 2: COVID in China was pretty much a really bad thing

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Speaker 2: for all consumer businesses because China was so strict about COVID.

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Speaker 2: You know, they just these huge lockedouts. But then what

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Speaker 2: was quite interesting was that its business model really insulated

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Speaker 2: it from the worst of COVID. You know, these bad bones,

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Speaker 2: contactless mobile payment, these kinds of takeout where you didn't

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Speaker 2: have to talk to another human being.

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Speaker 3: It was actually perfect for COVID.

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Speaker 1: Luckin took its new lease on life and went even bigger.

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Speaker 1: On top of cementing its business strategy and setting its

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Speaker 1: apart from competitors, the company released new best selling items.

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Speaker 1: The coconut latte we tried earlier, for example, accounts for

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Speaker 1: around seventy percent of sales at some stores, and its

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Speaker 1: alcohol infused Maltai lat sold five point four million cups

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Speaker 1: on the first day of its launch, bringing in nearly

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Speaker 1: fourteen million dollars in sales. Rachel says a lot of

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Speaker 1: these out of the box concoctions have created buzz on

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Speaker 1: platforms like TikTok and shaohong Shu, China's equivalent of Instagram.

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Speaker 2: I think they were just really smart with innovating around

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Speaker 2: the local consumer tastes and doing these like really catchy,

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Speaker 2: consumer friendly collaborations, right. So the Maltai thing, they just

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Speaker 2: always go viral with new things, right, and that's just

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Speaker 2: so important in a really competitive Chinese consumer market, like

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Speaker 2: are you able to get attention?

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Speaker 1: Lukin's now grown to more than eighteen thousand stores across China.

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Speaker 1: That's roughly double from twenty twenty three. Starbucks, in comparison,

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Speaker 1: has just over seven thousand, and last year Luckin opened

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Speaker 1: more stores than Starbucks has ever done in China.

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Speaker 2: You know, Starbucks is kind of facing a broader challenge,

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Speaker 2: a broader struggle than not just struggling in China's struggling

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Speaker 2: around the world as well. Earlier this year, Starbucks issued

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Speaker 2: a profit warning that was so bad that found out

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Speaker 2: how it. Shelts was technically retired, wrote this letter and

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Speaker 2: put it on LinkedIn. Talked about things that stop us

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Speaker 2: needs to do better. One of them was mobile ordering

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Speaker 2: and payment, which exactly the thing that Luckin and Chinese

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Speaker 2: companies do so well.

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Speaker 1: Starbucks isn't the only competitor chasing after Luckin's success. After

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Speaker 1: founders Lu and Chin were forced out of the company,

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Speaker 1: they went on to start a rival chain in twenty

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Speaker 1: twenty two called Kati. Their brand already has nearly seven

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Speaker 1: thousand stores nationwide. That same year, KFC opened its first

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Speaker 1: takeaway only coffee outlet, k Coffee, and Richel says with

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Speaker 1: 's own delivery network and even cheaper prices, cake coffee

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Speaker 1: is one of the biggest threats to luck In, So Rachel,

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Speaker 1: we have all these coffee newcomers in China fighting to

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Speaker 1: sell a cheap cup that's also easy and quick to

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Speaker 1: get right, So, how sustainable is luck and success, I mean,

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Speaker 1: especially if it's customers are really just loyal to the

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Speaker 1: next cheapest coffee.

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Speaker 2: I think that is the question around luck and now

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Speaker 2: that it's become so successful with the expansion, and now

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Speaker 2: that it's come back from the brink is is the

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Speaker 2: luck And brand strong enough? Is there more to the

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Speaker 2: luck and brand than just being cheap and being everywhere? Right,

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Speaker 2: because being cheap and being everywhere is a game that

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Speaker 2: lots of chains can play. Is their brand loyalty or

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Speaker 2: could they easily just be overtaken by luck In?

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Speaker 3: Version two?

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Speaker 2: When we talked to this former senior vice president, you know,

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Speaker 2: he would say, he talked about how their ambition was

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Speaker 2: always to sell coffee in the countryside, you know, imagining

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Speaker 2: farmers and deep your nana weather, you know, sipping coffee

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Speaker 2: on their break. I think it's a nice narrative. Not

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Speaker 2: quite there yet, not quite there yet, but at least.

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Speaker 1: For now, Luckin is still the company to beat in

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Speaker 1: China while it continues to launch new stores and new

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Speaker 1: drinks like that alcohol infused Maltai latte, and they're still

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Speaker 1: packing up punch.

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Speaker 3: Maybe put the ice, oh maybe a bit too much ice.

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Speaker 1: Doesn't taste very alcoholic, And it's just the fragrance of it,

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Speaker 1: like it's you can smell it from here.

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Speaker 3: Yeah, but actually you don't taste it. No, well, I

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Speaker 3: feel it a little bit. Now.

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Speaker 2: That's definitely a light bud going on.

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Speaker 1: Already. It's this is The Big Take Asia from Bloomberg News.

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Speaker 3: I'm wan ha.

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Speaker 1: This episode was produced by Young Young, Naomi and Jessica Beck.

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Speaker 1: It was mixed by Blake maples In, fact checked by

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Speaker 1: Eddie Dwan and Carmeli Arghana. It was edited by Aaron

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Speaker 1: Edwards and Rachel Chang, additional reporting from Daniello Way. Our

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Speaker 1: senior producers are Namy Shaven and Kim Gettelsen. Our senior

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Speaker 1: editor is Elizabeth Ponson. Nicole Beemster Bower is our executive producer,

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Speaker 1: and Sage Bauman is Bloomberg's head of Podcasts. Please follow

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Speaker 1: and review The Big Take Asia wherever you listen to podcasts.

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Speaker 1: That helps new listeners find the show and see you

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Speaker 1: next time.