Speaker 1: Hi, Big take Asia listeners. It's Wanha here. Happy New
Speaker 1: Year from Hong Kong. The team is taking a break
Speaker 1: this week, but we want to share a fun episode
Speaker 1: from earlier this year to spice up your holiday season.
Speaker 1: It's about the Chinese coffee shop chain Luckin, and how
Speaker 1: it went from filing for bankruptcy to beating Starbucks in China.
Speaker 1: When we first published this episode in July, Luckin didn't
Speaker 1: have any shops in Hong Kong, but the company has
Speaker 1: since expanded here and word is it's looking to grow
Speaker 1: in other overseas markets, including a launch in the US,
Speaker 1: so watch out for new Luckin shop near you. Here's
Speaker 1: the episode Happy Listening.
Speaker 2: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 1: Earlier this week, in the middle of a hectic news cycle,
Speaker 1: I got a drink a pick me up for a colleague,
Speaker 1: Rachel Chang. She's Bloomberg's managing editor for Global Business in Asia.
Speaker 1: So I have a very special treat for you. But
Speaker 1: I got Rachel some coffee, but not just any coffee.
Speaker 3: Wow, we should you manage to get that? This is
Speaker 3: a cross bought it?
Speaker 1: Yes, So I think you're holding a coconut latte that
Speaker 1: came from a Lucking store all the way from Shinzen
Speaker 1: here to Hong Kong. Luckin Coffee is the biggest coffee
Speaker 1: seller in China, but it doesn't have a store in
Speaker 1: Hong Kong, where we're based. So our fabulous producers arranged
Speaker 1: a special delivery of some of Luckin's most popular flavors,
Speaker 1: like their coconut latte amazing.
Speaker 3: Can I actually try it right now? Yes, hold on
Speaker 3: it together. M It's like two thousand calories.
Speaker 1: Well that aside, it's actually pretty good.
Speaker 3: It's very good. It's very delicious.
Speaker 2: I mean, I'm not a connoissan. I'm sure that coffee
Speaker 2: fancy coffee people would hate the taste, but fancy coffee
Speaker 2: people also hate stuff.
Speaker 3: That's true.
Speaker 1: Rachel used to cover Luckan during its early days in
Speaker 1: twenty seventeen as a startup, and in just seven years,
Speaker 1: Luckin has outpaced Starbucks, who opened its first door in
Speaker 1: China as early as nineteen ninety nine, and today Luckin's
Speaker 1: become the dominant coffee retailer in the country. And it's
Speaker 1: done that with the mix of creative products, from its
Speaker 1: salty cream cheese and Ti latte to a popular alcohol
Speaker 1: infused coffee. I think we should try it.
Speaker 2: Yeah, definitely, how though it might be a bit late
Speaker 2: for caffeine and a bit early for alcohol, or you.
Speaker 1: Know, somewhere somewhere in the world it's cocktail hour. But
Speaker 1: Luckin's astronomical rise was unthinkable. At one point in twenty twenty,
Speaker 1: the company was on the brink of collapse after a
Speaker 1: major accounting scandal wiped out its stock value, sending it
Speaker 1: into bankruptcy.
Speaker 2: People really just thought, well, this company is done for.
Speaker 2: They had to close a whole bunch of stores, and people,
Speaker 2: I guess just really that this company would just be
Speaker 2: fading away.
Speaker 1: Luck And not only survived, but it staged an extraordinary comeback.
Speaker 1: Earlier this year, the company reported its fourth quarter earnings.
Speaker 1: Total sales revenue in twenty twenty three reached three and
Speaker 1: a half billion dollars in China, surpassing Starbucks for the
Speaker 1: first time.
Speaker 2: Luck And understand the local tastes and the local behavior
Speaker 2: of consumers much better. And they have been very successful.
Speaker 2: And the global giants have been on the backfoot, you know,
Speaker 2: and whether you're talking about Nike, all Apple, Alstabucks, you know,
Speaker 2: all of these companies have been humbled in some ways
Speaker 2: in China.
Speaker 1: Welcome to The Big Take Asia from Boomberg News. I'm wanh.
Speaker 1: Every week we take you inside some of the world's
Speaker 1: biggest and most powerful economies and the markets, tycoons and
Speaker 1: businesses that drive this ever shifting region. Today on the show,
Speaker 1: how low Fucking Coffee went from filing for bankruptcy to
Speaker 1: beating a coffee titan like Starbucks in China, and what
Speaker 1: It's Rocky Road says about competition in the world's second
Speaker 1: largest consumer market. Luckin Coffee was founded in twenty seventeen
Speaker 1: by Lu Chiang Yao and Chiang Chiu ya At that time,
Speaker 1: they were working at a car rental company called China
Speaker 1: Auto Renting Inc. Or car Inc, which Lou founded.
Speaker 2: So Lu jiang Yao was already a very successful entrepreneur.
Speaker 2: CAUs Ink was really his most successful venture, and at
Speaker 2: the time Tenzyah Jenny was a very trusted executor of
Speaker 2: his team, and so she was really the peasant who
Speaker 2: came up with the original idea that there's a lack
Speaker 2: of coffee essentially in China.
Speaker 1: In twenty eighteen, the average person in mainland China only
Speaker 1: drank about three cups of coffee a year. That's far
Speaker 1: off from at least three hundred cups per person in
Speaker 1: the US.
Speaker 2: China is a country of tea drink because it is
Speaker 2: really difficult to find normal coffee.
Speaker 3: When I was working and living in China, you know.
Speaker 2: You wouldn't really be able to wake up and order
Speaker 2: good coffee from a five style hotel. It's just not
Speaker 2: like something that's embedded in their everyday life.
Speaker 1: Chen saw an opportunity. She quit her c suite job
Speaker 1: at car Inc. To chase your dream of building a
Speaker 1: coffee empire, and her boss Lou wanted in.
Speaker 2: How Lu Jangai reacted was that he was very supportive
Speaker 2: if he wished it the best of luck and he
Speaker 2: actually invested money himself into luck and to become a
Speaker 2: co founder.
Speaker 1: With Slu's endorsement, Luckin raised about two hundred million dollars
Speaker 1: at the end of twenty eighteen. By that time, it
Speaker 1: had already opened more than two thousand stores across China.
Speaker 1: Chan and Lou used that money to open more stores
Speaker 1: and kept the shops small and low cost, which was
Speaker 1: a very different strategy from Starbucks.
Speaker 2: A box really has this idea of they think of
Speaker 2: their cafes is what they call the third place, So
Speaker 2: it's the place between home and office, you know, lush sofas,
Speaker 2: just a really like pleasant music playing in the background.
Speaker 1: Luckin took another approach.
Speaker 2: Most of their stores were just tiny little kiosks, definitely
Speaker 2: not a place to lounge. Just think about you know,
Speaker 2: the classics sort of young twenty something Chinese professional, you know,
Speaker 2: rushing to work and just really needing to wake up,
Speaker 2: just needing to grab something on the goal so that
Speaker 2: she'll be on for her first meeting. And that's what like,
Speaker 2: it is.
Speaker 1: So as basic as you can get in terms of store.
Speaker 2: Right, but that's because they're focus was so much on
Speaker 2: mobile and takeaways.
Speaker 1: Rachel says. Luckin also capitalized on China's largely cashless society.
Speaker 2: So you know, you could order on the app, pick
Speaker 2: whatever I want, pay everything's on the app, right, and
Speaker 2: then you could literally just go to the store and
Speaker 2: then pick it up, or you can have delivery, which
Speaker 2: would be so quick, you know, less than ten minutes.
Speaker 2: And essentially, if you didn't want to, you don't have
Speaker 2: to speak to any human being at all.
Speaker 1: And doubling down on digitalization not only saved customers time,
Speaker 1: it also saved luck And a lot of money for them.
Speaker 2: It was really about innovation around the back end. Right.
Speaker 2: They would use these digital systems to manage staff, to
Speaker 2: manage inventory. That cut down a lot in costs, a
Speaker 2: lot in labor, and a lot in turn around time.
Speaker 1: That lean, digital forward approach help the company keep the
Speaker 1: cost of its products down. Today, the average latte from
Speaker 1: luck And costs about eleven un that's less than two dollars.
Speaker 1: Here's how Luckin's chief strategy officer, right Out Shakold, describes
Speaker 1: its positioning in the market in an interview with Bloomberg
Speaker 1: in twenty nineteen.
Speaker 3: If you look at the product, it's a premium product.
Speaker 3: If you look at the price, it's a mass market price.
Speaker 3: And that's where I think our model is unique because
Speaker 3: we can do both.
Speaker 1: After an IPO in twenty nineteen that raised more than
Speaker 1: half a billion dollars, Luckin's growth accelerated, and within three
Speaker 1: years of its launch, it was operating about forty five
Speaker 1: hundred stores in China, from top cities like Shanghai and
Speaker 1: Shinzen to more remote places like Shinjiang. But its success
Speaker 1: wouldn't last long.
Speaker 2: So in twenty twenty, Muddy Watches, which is cousin. Blocks
Speaker 2: short selling firm put out a tweet saying that day
Speaker 2: had received a whistleblower report on how Luckin was fabricating
Speaker 2: transactions and that really just everything just unraveled from that.
Speaker 1: After the whistle blower report, the US Securities and Exchange
Speaker 1: Commission investigated and charged Luckin with defrauding its investors and
Speaker 1: fabricating transactions to inflate its revenue. In the wake of
Speaker 1: the investigations, Luckin's shares plunged. At its e IPO, Luckin
Speaker 1: was valued at nearly three billion dollars. About a month
Speaker 1: after the fraud allegations came to light, the company's value
Speaker 1: tumbled to about seven hundred million dollars, and in twenty
Speaker 1: twenty one, Luckin filed for bankruptcy.
Speaker 2: Everybody left this company foot dead. So it did seem like,
Speaker 2: you know, the end of the luck And story, but
Speaker 2: it wasn't.
Speaker 1: After the break, Luckin bounces back. After an accounting fraud scandal,
Speaker 1: luck and Coffee was on the edge of collapse. It
Speaker 1: filed for bankruptcy in New York in February of twenty
Speaker 1: twenty one and agreed to pay a one hundred and
Speaker 1: eighty million dollar penalty to settle the case with the
Speaker 1: US Securities in Exchange Commission, but shortly after someone stepped
Speaker 1: in with a helping hand.
Speaker 2: David Lee is the chairman of Centurium Capital, very close
Speaker 2: to the founder Lu Jung yo. He was one of
Speaker 2: the original investors in the Ka Inc rental startup that
Speaker 2: made Lou's fortune.
Speaker 1: David Lee's admiration for Luckin's founder, lu Jung Yao was
Speaker 1: well known in the industry, and he believed in Luckin's
Speaker 1: business model. Lee's private equity company, Centurium Capital, doubled down
Speaker 1: on its investment in the coffee chain. It stepped in
Speaker 1: with two hundred and forty million in twenty twenty one,
Speaker 1: which helped clear Luckin's legal fees and fines. Luckin also
Speaker 1: underwent a major shakeup. Despite David Lee's personal connection with Lou,
Speaker 1: he decided that Luckin needed new leadership to stem the crisis.
Speaker 1: That's according to sources at the time, so in twenty twenty,
Speaker 1: Chen and Lou, the founders of Luckin, were replaced by
Speaker 1: new executives, and by twenty twenty two, Centurium became Luckin's
Speaker 1: controlling shareholder.
Speaker 2: Centurium also put in its own people to help luck
Speaker 2: and Ton things around closing downstores, hiring executives, and also
Speaker 2: very importantly helping Luckin put in a franchise system which
Speaker 2: allowed it to expand stores easily and quickly.
Speaker 1: With Centurium steering the ship. Luckin emerged from bankruptcy in
Speaker 1: April twenty twenty two, just fourteen months after filing for protection,
Speaker 1: and its small stores were ideal as China adjusted to
Speaker 1: COVID measures.
Speaker 2: COVID in China was pretty much a really bad thing
Speaker 2: for all consumer businesses because China was so strict about COVID.
Speaker 2: You know, they just these huge lockedouts. But then what
Speaker 2: was quite interesting was that its business model really insulated
Speaker 2: it from the worst of COVID. You know, these bad bones,
Speaker 2: contactless mobile payment, these kinds of takeout where you didn't
Speaker 2: have to talk to another human being.
Speaker 3: It was actually perfect for COVID.
Speaker 1: Luckin took its new lease on life and went even bigger.
Speaker 1: On top of cementing its business strategy and setting its
Speaker 1: apart from competitors, the company released new best selling items.
Speaker 1: The coconut latte we tried earlier, for example, accounts for
Speaker 1: around seventy percent of sales at some stores, and its
Speaker 1: alcohol infused Maltai lat sold five point four million cups
Speaker 1: on the first day of its launch, bringing in nearly
Speaker 1: fourteen million dollars in sales. Rachel says a lot of
Speaker 1: these out of the box concoctions have created buzz on
Speaker 1: platforms like TikTok and shaohong Shu, China's equivalent of Instagram.
Speaker 2: I think they were just really smart with innovating around
Speaker 2: the local consumer tastes and doing these like really catchy,
Speaker 2: consumer friendly collaborations, right. So the Maltai thing, they just
Speaker 2: always go viral with new things, right, and that's just
Speaker 2: so important in a really competitive Chinese consumer market, like
Speaker 2: are you able to get attention?
Speaker 1: Lukin's now grown to more than eighteen thousand stores across China.
Speaker 1: That's roughly double from twenty twenty three. Starbucks, in comparison,
Speaker 1: has just over seven thousand, and last year Luckin opened
Speaker 1: more stores than Starbucks has ever done in China.
Speaker 2: You know, Starbucks is kind of facing a broader challenge,
Speaker 2: a broader struggle than not just struggling in China's struggling
Speaker 2: around the world as well. Earlier this year, Starbucks issued
Speaker 2: a profit warning that was so bad that found out
Speaker 2: how it. Shelts was technically retired, wrote this letter and
Speaker 2: put it on LinkedIn. Talked about things that stop us
Speaker 2: needs to do better. One of them was mobile ordering
Speaker 2: and payment, which exactly the thing that Luckin and Chinese
Speaker 2: companies do so well.
Speaker 1: Starbucks isn't the only competitor chasing after Luckin's success. After
Speaker 1: founders Lu and Chin were forced out of the company,
Speaker 1: they went on to start a rival chain in twenty
Speaker 1: twenty two called Kati. Their brand already has nearly seven
Speaker 1: thousand stores nationwide. That same year, KFC opened its first
Speaker 1: takeaway only coffee outlet, k Coffee, and Richel says with
Speaker 1: 's own delivery network and even cheaper prices, cake coffee
Speaker 1: is one of the biggest threats to luck In, So Rachel,
Speaker 1: we have all these coffee newcomers in China fighting to
Speaker 1: sell a cheap cup that's also easy and quick to
Speaker 1: get right, So, how sustainable is luck and success, I mean,
Speaker 1: especially if it's customers are really just loyal to the
Speaker 1: next cheapest coffee.
Speaker 2: I think that is the question around luck and now
Speaker 2: that it's become so successful with the expansion, and now
Speaker 2: that it's come back from the brink is is the
Speaker 2: luck And brand strong enough? Is there more to the
Speaker 2: luck and brand than just being cheap and being everywhere? Right,
Speaker 2: because being cheap and being everywhere is a game that
Speaker 2: lots of chains can play. Is their brand loyalty or
Speaker 2: could they easily just be overtaken by luck In?
Speaker 3: Version two?
Speaker 2: When we talked to this former senior vice president, you know,
Speaker 2: he would say, he talked about how their ambition was
Speaker 2: always to sell coffee in the countryside, you know, imagining
Speaker 2: farmers and deep your nana weather, you know, sipping coffee
Speaker 2: on their break. I think it's a nice narrative. Not
Speaker 2: quite there yet, not quite there yet, but at least.
Speaker 1: For now, Luckin is still the company to beat in
Speaker 1: China while it continues to launch new stores and new
Speaker 1: drinks like that alcohol infused Maltai latte, and they're still
Speaker 1: packing up punch.
Speaker 3: Maybe put the ice, oh maybe a bit too much ice.
Speaker 1: Doesn't taste very alcoholic, And it's just the fragrance of it,
Speaker 1: like it's you can smell it from here.
Speaker 3: Yeah, but actually you don't taste it. No, well, I
Speaker 3: feel it a little bit. Now.
Speaker 2: That's definitely a light bud going on.
Speaker 1: Already. It's this is The Big Take Asia from Bloomberg News.
Speaker 3: I'm wan ha.
Speaker 1: This episode was produced by Young Young, Naomi and Jessica Beck.
Speaker 1: It was mixed by Blake maples In, fact checked by
Speaker 1: Eddie Dwan and Carmeli Arghana. It was edited by Aaron
Speaker 1: Edwards and Rachel Chang, additional reporting from Daniello Way. Our
Speaker 1: senior producers are Namy Shaven and Kim Gettelsen. Our senior
Speaker 1: editor is Elizabeth Ponson. Nicole Beemster Bower is our executive producer,
Speaker 1: and Sage Bauman is Bloomberg's head of Podcasts. Please follow
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Speaker 1: That helps new listeners find the show and see you
Speaker 1: next time.