WEBVTT - The Chinese Coffee Chain Beating Starbucks

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Earlier this week, in

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<v Speaker 1>the middle of a hectic news cycle, I got a drink.

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<v Speaker 1>I picked me up for a colleague, Rachel Ching. She's

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<v Speaker 1>Bloomberg's managing editor for Global Business in Asia. So I

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<v Speaker 1>have a very special treat for you. I got Rachel

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<v Speaker 1>some coffee, but not just any coffee.

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<v Speaker 2>Wow, whe should you manage to get that? This cross

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<v Speaker 2>bought it? Yes?

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<v Speaker 1>So I think you're holding a coconut latte that came

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<v Speaker 1>from a Luckin store all the way from Sinzen here

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<v Speaker 1>to Hong Kong. Luck and Coffee is the biggest coffee

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<v Speaker 1>seller in China, but it doesn't have a store in

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

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<v Speaker 1>a special delivery of some of Luckin's most popular flavors,

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<v Speaker 1>like their coconut latte.

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<v Speaker 2>Amazing. Can I actually try it right now?

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<v Speaker 1>Yes, hold on burgers right together.

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<v Speaker 2>It's like two thousand calories.

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<v Speaker 1>Well that aside, it's actually pretty good.

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<v Speaker 2>It's very good, very delicious.

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<v Speaker 3>I mean, I'm not a connoissan. I'm sure that coffee

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<v Speaker 3>fancy coffee people would hate the taste, but fancy coffee

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<v Speaker 3>people also hate Starbucks.

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<v Speaker 1>That's true. Rachel used to cover Luckin during its early

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<v Speaker 1>days in twenty seventeen as a startup, and in just

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<v Speaker 1>seven years, Luckin has outpaced Starbucks, who opened its first

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<v Speaker 1>door in China as early as nineteen ninety nine, and

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<v Speaker 1>today Luckin's become the dominant coffee retailer in the country.

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<v Speaker 1>And it's done that with the mix of creative products,

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<v Speaker 1>from its salty cream cheese and Ti latte to a

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<v Speaker 1>popular alcohol infused coffee. I think we should try.

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<v Speaker 3>It, Yeah, definitely, although might be a bit late for

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<v Speaker 3>caffeine and a bit early for alcohol, but.

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<v Speaker 1>You know, somewhere somewhere in the world, it's cocktail hour.

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<v Speaker 1>But LUs, the astronomical rise was unthinkable. At one point

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<v Speaker 1>in twenty twenty, the company was on the brink of

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<v Speaker 1>collapse after a major accounting scandal wiped out its stock value,

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<v Speaker 1>sending it into bankruptcy.

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<v Speaker 3>People really just thought, well, this company is done for.

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<v Speaker 3>They had to close a whole bunch of stores, and people,

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<v Speaker 3>I guess just really assumed that this company would just

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<v Speaker 3>be fading away.

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<v Speaker 1>Luck And not only survived, but it staged an extraordinary comeback.

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<v Speaker 1>Earlier this year, the company reported its fourth quarter earnings.

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<v Speaker 1>Total sales revenue in twenty twenty three reached three and

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<v Speaker 1>a half billion dollars in China, surpassing Starbucks for the

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<v Speaker 1>first time.

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<v Speaker 3>Luck and understand the local tastes and the local behavior

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<v Speaker 3>of consumers much better. And they have been very successful,

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<v Speaker 3>and the global giants have been on the backfoot, you know.

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<v Speaker 3>And whether you're talking about Nike, all Apple, all Stabucks,

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<v Speaker 3>you know, all of these companies have been humbled in

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<v Speaker 3>some ways in China.

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<v Speaker 1>Welcome to The Big Take Asia from Boomberg News. I'm

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<v Speaker 1>wanh Every week we take you inside some of the

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<v Speaker 1>world's biggest and most powerful economies and the markets, tycoons

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<v Speaker 1>and businesses that drive this ever shifting region. Today on

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<v Speaker 1>the show, how Luck and Coffee went from filing for

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<v Speaker 1>bankruptcy to beating a coffee titan like Starbucks in China,

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<v Speaker 1>and what It's Rocky Road says about competition in the

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<v Speaker 1>world's second largest consumer market. Luck in Coffee was founded

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<v Speaker 1>in twenty seventeen by Lu Chung Yao and Chiang chu ya.

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<v Speaker 1>At that time, they were working at a car rental

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<v Speaker 1>company called China Auto Renting Inc. Or car Inc.

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<v Speaker 3>Which Lou founded, so lu jiang Yao was already a

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<v Speaker 3>very successful entrepreneur, cause ink was really his most successful

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<v Speaker 3>venua and at the time tens Yeah, Jenny was a

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<v Speaker 3>very trusted executor of his team, and so she was

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<v Speaker 3>really the person who came up with the original idea

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<v Speaker 3>that there's a lack of coffee essentially in China.

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<v Speaker 1>In twenty eighteen, the average person in mainland China only

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<v Speaker 1>drank about three cups of coffee a year. That's far

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<v Speaker 1>off from at least three hundred cups per person in

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<v Speaker 1>the US.

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<v Speaker 3>China is a country of tea drinkers. It is really

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<v Speaker 3>difficult to find normal coffee when I was working and

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<v Speaker 3>living in China, you know, you wouldn't really be able

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<v Speaker 3>to wake up and order good coffee from a five

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<v Speaker 3>style hotel. It's just not like something that's embedded in

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<v Speaker 3>their everyday life.

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<v Speaker 1>Chien saw an opportunity. She quit her c sweet job

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<v Speaker 1>at car Inc. To chase your dream of building a

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<v Speaker 1>coffee empire, and her boss Lou wanted in.

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<v Speaker 3>How lu jangya reacted was that he was very supportive.

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<v Speaker 3>He wished it the best of luck, and he actually

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<v Speaker 3>invested money himself into luck In to become a co founder.

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<v Speaker 1>With Loo's endorsement, Luckin raised about two hundred million dollars

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<v Speaker 1>at the end of twenty eighteen. By that time, it

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<v Speaker 1>had already opened more than two thousand stores across China.

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<v Speaker 1>Chan and Lou used that money to open more stores

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<v Speaker 1>and kept the shops small and low cost, which was

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<v Speaker 1>a very different strategy from Starbucks.

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<v Speaker 3>Starbucks really has this idea of they think of their

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<v Speaker 3>cafes is what they call the third place, So it's

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<v Speaker 3>the place between home and office. You know, lush sofas,

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<v Speaker 3>just a really like pleasant music playing in the background.

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<v Speaker 1>Luck And took another approach.

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<v Speaker 3>Most of their stores were just tiny little kiosks, definitely

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<v Speaker 3>not a place to lounge. Just think about, you know,

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<v Speaker 3>the classics sort of young twenty something Chinese professional, you know,

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<v Speaker 3>rushing to work and just really needing to wake up,

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<v Speaker 3>just needing to grab something on the goal so that

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<v Speaker 3>she'll be on for her first meeting. And that's what

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<v Speaker 3>luck It is.

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<v Speaker 1>So it's basically I guess you can get in terms

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<v Speaker 1>of store.

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<v Speaker 3>Right, but that's because they're focused was so much on

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<v Speaker 3>mobile and takeaways.

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<v Speaker 1>Rachel says. Luck And also capitalized on China's largely cashless society.

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<v Speaker 3>So you know, you could order on the app, pick

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<v Speaker 3>whatever I want, pay everything's on the app, right, and

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<v Speaker 3>then you could literally just go to the store and

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<v Speaker 3>then pick it up, or you can have delivery which

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<v Speaker 3>would be so quick, you know, less than ten minutes.

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<v Speaker 3>And essentially, if you didn't want to, you don't have

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<v Speaker 3>to speak to any human being at all.

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<v Speaker 1>And doubling down on digitalization not only saved customers time,

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<v Speaker 1>it also saved luck And a lot of money for them.

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<v Speaker 3>It was really about innovation around the back end.

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<v Speaker 2>Right.

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<v Speaker 3>They would use these digital systems to manage staff, to

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<v Speaker 3>manage inventory. That cut down a lot in costs, a

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<v Speaker 3>lot in labor, and a lot in turn around time.

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<v Speaker 1>That lean, digital forward approach help the company keep the

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<v Speaker 1>cost of its products down. Today, the average latte from

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<v Speaker 1>luck And costs about eleven y that's less than two dollars.

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<v Speaker 1>Here's how Luckin's chief strategy officer, right Out Shakol describes

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<v Speaker 1>its positioning in the market in an interview with Bloomberg

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<v Speaker 1>in twenty nineteen.

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<v Speaker 2>If you look at the product, it's a premium product.

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<v Speaker 3>If you look at the price, it's a mass market price,

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<v Speaker 3>and that's where I think our model is unique because

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<v Speaker 3>we can do both.

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<v Speaker 1>After an IPO in twenty nineteen that raised more than

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<v Speaker 1>half a billion dollars, Luckin's growth accelerated, and within three

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<v Speaker 1>years of its launch, it was operating about forty five

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<v Speaker 1>hundred stores in China, from top cities like Shanghai and

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<v Speaker 1>Shinzen to more remote places like Shinjug. But its success

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<v Speaker 1>wouldn't last long.

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<v Speaker 3>So in twenty twenty, Muddy Waters, which is cousin blocks

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<v Speaker 3>short selling firm, put out a tweet saying that they

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<v Speaker 3>had received a whistle blower report on how Luckin was

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<v Speaker 3>fabricating transactions and that really just everything just unravel from that.

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<v Speaker 1>After the whistleblower report, the US Securities and Exchange Commission

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<v Speaker 1>investigated and charged Luckin with defrauding its investors and fabricating

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<v Speaker 1>transactions to inflate its revenue. In the wake of the investigations,

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<v Speaker 1>Luckin's shares plunged. At its IPO, Luckin was valued at

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<v Speaker 1>nearly three billion dollars. About a month after the fraud

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<v Speaker 1>allegations came to light, the company's value tumbled to about

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<v Speaker 1>seven hundred million dollars, and in twenty twenty one, Luckin

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<v Speaker 1>filed for bankruptcy.

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<v Speaker 3>Everybody left this company foot dead, so it did seem like,

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<v Speaker 3>you know, the end of the luck And story.

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<v Speaker 2>But it wasn't.

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<v Speaker 1>After the break, Luckin bounces back. After an accounting fraud scandal,

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<v Speaker 1>luck and Coffee was on the edge of collapse. It

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<v Speaker 1>filed for bankruptcy in New York in February of twenty

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<v Speaker 1>twenty one and agreed to pay a one hundred eighty

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<v Speaker 1>million dollar penalty to settle the case with the US

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<v Speaker 1>Securities in Exchange Commission, But shortly after someone stepped in

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<v Speaker 1>with a helping hand.

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<v Speaker 3>David Lee is the chairman of Centurium Capital, very close

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<v Speaker 3>to the founder, lu Jung Yao. He was one of

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<v Speaker 3>the original investors in the Ka Inc rental startup that

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<v Speaker 3>made Lose Fortune.

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<v Speaker 1>David Lee's admiration for Luckin's founder. Lu Jung Yao was

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<v Speaker 1>well known in the industry, and he believed in Luckin's

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

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<v Speaker 1>on its investment in the coffee chain. It stepped in

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<v Speaker 1>with two hundred and forty million in twenty twenty one,

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<v Speaker 1>which helped clear Luckin's legal fees and fines. Luckin also

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

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<v Speaker 1>he decided that Luckin needed new leadership to stem the crisis,

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<v Speaker 1>according to sources at the time, so in twenty twenty,

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<v Speaker 1>Chian and Lub, the founders of Luckin, were replaced by

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<v Speaker 1>new executives, and by twenty twenty two, Centurium became Luckin's

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<v Speaker 1>controlling shareholder.

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<v Speaker 3>Centriium also put in its own people to help luck

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<v Speaker 3>and turn things around, closing down stores, hiring executives, and

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<v Speaker 3>also very importantly helping Luckin put in a franchise system

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<v Speaker 3>which allowed it to expand stores easily and quickly.

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<v Speaker 1>With Centurium steering the ship, Luckin emerged from bankruptcy in

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<v Speaker 1>April twenty twenty two, just fourteen months after filing for protection,

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<v Speaker 1>and its small stores were ideal as China adjusted to

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<v Speaker 1>COVID measures.

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<v Speaker 3>COVID in China was pretty much a really bad thing

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<v Speaker 3>for all consumer businesses because China was so strict about COVID.

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<v Speaker 3>You know, they just these huge lockedouts. But then what

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<v Speaker 3>was quite interesting was that its business model really insulated

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<v Speaker 3>it from the worst of COVID, you know, these bad bones,

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<v Speaker 3>contactless mobile payment, these kinds of takeout where you didn't

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<v Speaker 3>have to talk to another human being.

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<v Speaker 2>It was actually perfect for covid.

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<v Speaker 1>Luckin took its new lease on life and went even bigger.

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<v Speaker 1>On top of cementing its business strategy and setting itself

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<v Speaker 1>apart from competitors, the company released new best selling items.

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<v Speaker 1>The coconut latte we tried earlier, for example, accounts for

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<v Speaker 1>around seventy percent of sales at some stores, and its

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<v Speaker 1>alcohol infused Malti lat sold five point four million cups

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<v Speaker 1>on the first day of its launch, bringing in nearly

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<v Speaker 1>fourteen million dollars in sales. Rachel says a lot of

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<v Speaker 1>these out of the box concoctions have created buzz on

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

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<v Speaker 3>I think they were just really smart with innovating around

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<v Speaker 3>the local consumer tastes and doing these like really catchy,

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<v Speaker 3>consumer friendly collaborations, right. So the Maltai thing, they just

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<v Speaker 3>always go viral with new things, right, and that's just

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<v Speaker 3>so important in the really competitive Chinese consumer market, Like

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<v Speaker 3>are you able to get attention?

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<v Speaker 1>Luckin's now grown to more than eighteen thousand stores across China.

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<v Speaker 1>That's roughly double from twenty twenty three. Starbucks, in comparison,

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<v Speaker 1>has just over seven thousand, and last year, Luckin opened

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<v Speaker 1>more stores than Starbucks has ever done in China.

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<v Speaker 3>You know, Starbucks is kind of facing a broader challenge,

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<v Speaker 3>a broader struggle. They're not just struggling in Chinay're struggling

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<v Speaker 3>around the world as well. Earlier this year, Starbucks issued

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<v Speaker 3>a profit warning that was so bad that found out

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<v Speaker 3>how It Shelts was technically retired, wrote this letter and

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<v Speaker 3>put it on LinkedIn. Talked about things that stop us

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<v Speaker 3>needs to do better. One of them was mobile ordering

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<v Speaker 3>and payment, which exactly the thing that Luckin and Chinese

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<v Speaker 3>companies do so well.

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

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<v Speaker 1>found Lu and Chin were forced out of the company,

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<v Speaker 1>they went on to start a rival chain in twenty

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<v Speaker 1>twenty two called Kadi. Their brand already has nearly seven

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<v Speaker 1>thousand stores nationwide. That same year, KFC opened its first

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<v Speaker 1>takeaway only coffee outlet, k Coffee and Rachel says with

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<v Speaker 1>KFC's own delivery network and even cheaper prices, k coffee

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<v Speaker 1>is one of the biggest threats to Luck in so, Rachel,

0:13:26.679 --> 0:13:29.320
<v Speaker 1>we have all these coffee newcomers in China fighting to

0:13:29.400 --> 0:13:31.920
<v Speaker 1>sell a cheap cup that's also easy and quick to

0:13:31.960 --> 0:13:36.080
<v Speaker 1>get right. So, how sustainable is luck and success? I mean,

0:13:36.200 --> 0:13:38.920
<v Speaker 1>especially if it's customers are really just loyal to the

0:13:38.960 --> 0:13:40.240
<v Speaker 1>next cheapest coffee.

0:13:40.400 --> 0:13:43.240
<v Speaker 3>I think that is the question around Luck, and now

0:13:43.240 --> 0:13:45.920
<v Speaker 3>that it's become so successful with the expansion, and now

0:13:45.960 --> 0:13:48.320
<v Speaker 3>that it's come back from the brink, is is the

0:13:48.400 --> 0:13:51.240
<v Speaker 3>Luck and brand strong enough? Is the more to the

0:13:51.320 --> 0:13:55.880
<v Speaker 3>Luck and brand than just being cheap and being everywhere? Right,

0:13:55.880 --> 0:13:58.160
<v Speaker 3>because being cheap and being everywhere is a game that

0:13:58.240 --> 0:14:01.560
<v Speaker 3>lots of chains can play. Is that brand loyalty or

0:14:02.000 --> 0:14:04.800
<v Speaker 3>could they easily just be overtaken by Luck? In version two,

0:14:05.160 --> 0:14:08.240
<v Speaker 3>when we talked to this former senior vice president, you know,

0:14:08.360 --> 0:14:11.959
<v Speaker 3>he would say he talked about how their ambition was

0:14:11.960 --> 0:14:15.239
<v Speaker 3>always to sell coffee in the countryside, you know, imagining

0:14:15.280 --> 0:14:18.240
<v Speaker 3>farmers and deep your nana weather, you know, sipping coffee

0:14:18.240 --> 0:14:22.480
<v Speaker 3>on their break. I think it's a nice narrative. Not

0:14:22.560 --> 0:14:25.480
<v Speaker 3>quite there yet, not quite there yet, but at least.

0:14:25.320 --> 0:14:28.560
<v Speaker 1>For now, Lucking is still the company to beat in

0:14:28.680 --> 0:14:31.680
<v Speaker 1>China while it continues to launch new stores and new

0:14:31.760 --> 0:14:35.960
<v Speaker 1>drinks like that alcohol infused Maltai latte, and they're still

0:14:36.240 --> 0:14:37.080
<v Speaker 1>packing up punch.

0:14:38.160 --> 0:14:41.600
<v Speaker 2>Maybe put the ice maybe a bit too much.

0:14:41.600 --> 0:14:45.239
<v Speaker 1>Ice doesn't taste very alcoholic, And it's just the fragrance

0:14:45.280 --> 0:14:47.880
<v Speaker 1>of it, like it's you can smell it from here, yeah,

0:14:47.920 --> 0:14:49.240
<v Speaker 1>but actually you don't taste it.

0:14:50.000 --> 0:14:51.800
<v Speaker 2>No, well, I feel it a little bit now.

0:14:52.480 --> 0:14:55.520
<v Speaker 3>It's definitely a light bud going on already.

0:14:56.080 --> 0:15:03.880
<v Speaker 2>It's very.

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<v Speaker 1>This is The Big Take Asia from Bloomberg News. I'm

0:15:04.680 --> 0:15:08.400
<v Speaker 1>wan ha. This episode was produced by Young Young, Naomion

0:15:08.640 --> 0:15:11.920
<v Speaker 1>and Jessica Beck. It was mixed by Blake Naples and

0:15:12.000 --> 0:15:15.080
<v Speaker 1>fact checked by Eddie Dwan and Carmeli Argana. It was

0:15:15.200 --> 0:15:18.680
<v Speaker 1>edited by Aaron Edwards and Rachel Chang, additional reporting from

0:15:18.760 --> 0:15:22.760
<v Speaker 1>Danielle Away. Our senior producers are Nami Shaven and Kim Gettelson.

0:15:23.000 --> 0:15:26.680
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0:15:26.720 --> 0:15:30.400
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