Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Earlier this week, in
Speaker 1: the middle of a hectic news cycle, I got a drink.
Speaker 1: I picked me up for a colleague, Rachel Ching. She's
Speaker 1: Bloomberg's managing editor for Global Business in Asia. So I
Speaker 1: have a very special treat for you. I got Rachel
Speaker 1: some coffee, but not just any coffee.
Speaker 2: Wow, whe should you manage to get that? This cross
Speaker 2: bought it? Yes?
Speaker 1: So I think you're holding a coconut latte that came
Speaker 1: from a Luckin store all the way from Sinzen here
Speaker 1: to Hong Kong. Luck and 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.
Speaker 2: Amazing. Can I actually try it right now?
Speaker 1: Yes, hold on burgers right together.
Speaker 2: It's like two thousand calories.
Speaker 1: Well that aside, it's actually pretty good.
Speaker 2: It's very good, very delicious.
Speaker 3: I mean, I'm not a connoissan. I'm sure that coffee
Speaker 3: fancy coffee people would hate the taste, but fancy coffee
Speaker 3: people also hate Starbucks.
Speaker 1: That's true. Rachel used to cover Luckin during its early
Speaker 1: days in twenty seventeen as a startup, and in just
Speaker 1: seven years, Luckin has outpaced Starbucks, who opened its first
Speaker 1: door in China as early as nineteen ninety nine, and
Speaker 1: today Luckin's become the dominant coffee retailer in the country.
Speaker 1: And it's done that with the mix of creative products,
Speaker 1: from its salty cream cheese and Ti latte to a
Speaker 1: popular alcohol infused coffee. I think we should try.
Speaker 3: It, Yeah, definitely, although might be a bit late for
Speaker 3: caffeine and a bit early for alcohol, but.
Speaker 1: You know, somewhere somewhere in the world, it's cocktail hour.
Speaker 1: But LUs, the astronomical rise was unthinkable. At one point
Speaker 1: in twenty twenty, the company was on the brink of
Speaker 1: collapse after a major accounting scandal wiped out its stock value,
Speaker 1: sending it into bankruptcy.
Speaker 3: People really just thought, well, this company is done for.
Speaker 3: They had to close a whole bunch of stores, and people,
Speaker 3: I guess just really assumed that this company would just
Speaker 3: be 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 3: Luck and understand the local tastes and the local behavior
Speaker 3: of consumers much better. And they have been very successful,
Speaker 3: and the global giants have been on the backfoot, you know.
Speaker 3: And whether you're talking about Nike, all Apple, all Stabucks,
Speaker 3: you know, all of these companies have been humbled in
Speaker 3: some ways in China.
Speaker 1: Welcome to The Big Take Asia from Boomberg News. I'm
Speaker 1: wanh Every week we take you inside some of the
Speaker 1: world's biggest and most powerful economies and the markets, tycoons
Speaker 1: and businesses that drive this ever shifting region. Today on
Speaker 1: the show, how Luck and Coffee went from filing for
Speaker 1: bankruptcy to beating a coffee titan like Starbucks in China,
Speaker 1: and what It's Rocky Road says about competition in the
Speaker 1: world's second largest consumer market. Luck in Coffee was founded
Speaker 1: in twenty seventeen by Lu Chung Yao and Chiang chu ya.
Speaker 1: At that time, they were working at a car rental
Speaker 1: company called China Auto Renting Inc. Or car Inc.
Speaker 3: Which Lou founded, so lu jiang Yao was already a
Speaker 3: very successful entrepreneur, cause ink was really his most successful
Speaker 3: venua and at the time tens Yeah, Jenny was a
Speaker 3: very trusted executor of his team, and so she was
Speaker 3: really the person who came up with the original idea
Speaker 3: that there's a lack 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 3: China is a country of tea drinkers. It is really
Speaker 3: difficult to find normal coffee when I was working and
Speaker 3: living in China, you know, you wouldn't really be able
Speaker 3: to wake up and order good coffee from a five
Speaker 3: style hotel. It's just not like something that's embedded in
Speaker 3: their everyday life.
Speaker 1: Chien saw an opportunity. She quit her c sweet job
Speaker 1: at car Inc. To chase your dream of building a
Speaker 1: coffee empire, and her boss Lou wanted in.
Speaker 3: How lu jangya reacted was that he was very supportive.
Speaker 3: He wished it the best of luck, and he actually
Speaker 3: invested money himself into luck In to become a co founder.
Speaker 1: With Loo'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 3: Starbucks really has this idea of they think of their
Speaker 3: cafes is what they call the third place, So it's
Speaker 3: the place between home and office. You know, lush sofas,
Speaker 3: just a really like pleasant music playing in the background.
Speaker 1: Luck And took another approach.
Speaker 3: Most of their stores were just tiny little kiosks, definitely
Speaker 3: not a place to lounge. Just think about, you know,
Speaker 3: the classics sort of young twenty something Chinese professional, you know,
Speaker 3: rushing to work and just really needing to wake up,
Speaker 3: just needing to grab something on the goal so that
Speaker 3: she'll be on for her first meeting. And that's what
Speaker 3: luck It is.
Speaker 1: So it's basically I guess you can get in terms
Speaker 1: of store.
Speaker 3: Right, but that's because they're focused was so much on
Speaker 3: mobile and takeaways.
Speaker 1: Rachel says. Luck And also capitalized on China's largely cashless society.
Speaker 3: So you know, you could order on the app, pick
Speaker 3: whatever I want, pay everything's on the app, right, and
Speaker 3: then you could literally just go to the store and
Speaker 3: then pick it up, or you can have delivery which
Speaker 3: would be so quick, you know, less than ten minutes.
Speaker 3: And essentially, if you didn't want to, you don't have
Speaker 3: 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 3: It was really about innovation around the back end.
Speaker 2: Right.
Speaker 3: They would use these digital systems to manage staff, to
Speaker 3: manage inventory. That cut down a lot in costs, a
Speaker 3: 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 y that's less than two dollars.
Speaker 1: Here's how Luckin's chief strategy officer, right Out Shakol describes
Speaker 1: its positioning in the market in an interview with Bloomberg
Speaker 1: in twenty nineteen.
Speaker 2: 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 Shinjug. But its success
Speaker 1: wouldn't last long.
Speaker 3: So in twenty twenty, Muddy Waters, which is cousin blocks
Speaker 3: short selling firm, put out a tweet saying that they
Speaker 3: had received a whistle blower report on how Luckin was
Speaker 3: fabricating transactions and that really just everything just unravel from that.
Speaker 1: After the whistleblower report, the US Securities and Exchange Commission
Speaker 1: investigated and charged Luckin with defrauding its investors and fabricating
Speaker 1: transactions to inflate its revenue. In the wake of the investigations,
Speaker 1: Luckin's shares plunged. At its IPO, Luckin was valued at
Speaker 1: nearly three billion dollars. About a month after the fraud
Speaker 1: allegations came to light, the company's value tumbled to about
Speaker 1: seven hundred million dollars, and in twenty twenty one, Luckin
Speaker 1: filed for bankruptcy.
Speaker 3: Everybody left this company foot dead, so it did seem like,
Speaker 3: you know, the end of the luck And story.
Speaker 2: But 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 eighty
Speaker 1: million dollar penalty to settle the case with the US
Speaker 1: Securities in Exchange Commission, But shortly after someone stepped in
Speaker 1: with a helping hand.
Speaker 3: David Lee is the chairman of Centurium Capital, very close
Speaker 3: to the founder, lu Jung Yao. He was one of
Speaker 3: the original investors in the Ka Inc rental startup that
Speaker 3: made Lose 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: according to sources at the time, so in twenty twenty,
Speaker 1: Chian and Lub, 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 3: Centriium also put in its own people to help luck
Speaker 3: and turn things around, closing down stores, hiring executives, and
Speaker 3: also very importantly helping Luckin put in a franchise system
Speaker 3: which 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 3: COVID in China was pretty much a really bad thing
Speaker 3: for all consumer businesses because China was so strict about COVID.
Speaker 3: You know, they just these huge lockedouts. But then what
Speaker 3: was quite interesting was that its business model really insulated
Speaker 3: it from the worst of COVID, you know, these bad bones,
Speaker 3: contactless mobile payment, these kinds of takeout where you didn't
Speaker 3: have to talk to another human being.
Speaker 2: 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 itself
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 Malti 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 3: I think they were just really smart with innovating around
Speaker 3: the local consumer tastes and doing these like really catchy,
Speaker 3: consumer friendly collaborations, right. So the Maltai thing, they just
Speaker 3: always go viral with new things, right, and that's just
Speaker 3: so important in the really competitive Chinese consumer market, Like
Speaker 3: are you able to get attention?
Speaker 1: Luckin'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 3: You know, Starbucks is kind of facing a broader challenge,
Speaker 3: a broader struggle. They're not just struggling in Chinay're struggling
Speaker 3: around the world as well. Earlier this year, Starbucks issued
Speaker 3: a profit warning that was so bad that found out
Speaker 3: how It Shelts was technically retired, wrote this letter and
Speaker 3: put it on LinkedIn. Talked about things that stop us
Speaker 3: needs to do better. One of them was mobile ordering
Speaker 3: and payment, which exactly the thing that Luckin and Chinese
Speaker 3: companies do so well.
Speaker 1: Starbucks isn't the only competitor chasing after Luckin's success. After
Speaker 1: found 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 Kadi. 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 Rachel says with
Speaker 1: KFC's own delivery network and even cheaper prices, k 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 3: I think that is the question around Luck, and now
Speaker 3: that it's become so successful with the expansion, and now
Speaker 3: that it's come back from the brink, is is the
Speaker 3: Luck and brand strong enough? Is the more to the
Speaker 3: Luck and brand than just being cheap and being everywhere? Right,
Speaker 3: because being cheap and being everywhere is a game that
Speaker 3: lots of chains can play. Is that brand loyalty or
Speaker 3: could they easily just be overtaken by Luck? In version two,
Speaker 3: when we talked to this former senior vice president, you know,
Speaker 3: he would say he talked about how their ambition was
Speaker 3: always to sell coffee in the countryside, you know, imagining
Speaker 3: farmers and deep your nana weather, you know, sipping coffee
Speaker 3: on their break. I think it's a nice narrative. Not
Speaker 3: quite there yet, not quite there yet, but at least.
Speaker 1: For now, Lucking 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 2: Maybe put the ice maybe a bit too much.
Speaker 1: Ice doesn't taste very alcoholic, And it's just the fragrance
Speaker 1: of it, like it's you can smell it from here, yeah,
Speaker 1: but actually you don't taste it.
Speaker 2: No, well, I feel it a little bit now.
Speaker 3: It's definitely a light bud going on already.
Speaker 2: It's very.
Speaker 1: This is The Big Take Asia from Bloomberg News. I'm
Speaker 1: wan ha. This episode was produced by Young Young, Naomion
Speaker 1: and Jessica Beck. It was mixed by Blake Naples and
Speaker 1: fact checked by Eddie Dwan and Carmeli Argana. It was
Speaker 1: edited by Aaron Edwards and Rachel Chang, additional reporting from
Speaker 1: Danielle Away. Our senior producers are Nami Shaven and Kim Gettelson.
Speaker 1: Our senior editor is Elizabeth Ponson. Nicole Beemster Bower is
Speaker 1: our executive producer, and Sage Bauman is Bloomberg's head of Podcasts.
Speaker 1: Please follow and review The Big Take Asia wherever you
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Speaker 1: and see you next time.