Earlier this month, Luckin Coffee announced the launch of a new “target location” franchise model, specifying its intention to venture into hospitals and gas stations.
“Whatever Luckin does now, no one is surprised anymore,” a coffee industry professional said.
Luckin has always been known for its rapid and bold business style.
Since 2018, Luckin has opened over 10,000 stores. After achieving success with its coconut latte product, it partnered with Kweichow Moutai to introduce an alcohol-infused “sauce-flavored latte,” which became another flagship of the brand. In terms of products, Luckin has been able to maintain a rhythm of launching a new product every 1–2 weeks.
In terms of expansion, last summer, Luckin added two new franchise models, offering arrangements for existing store owners and new partners, respectively. At the beginning of this year, it eagerly put the latest franchise model on the agenda, allowing stores to be established in certain locations such as hospitals, schools, and gas stations.
Not content with dominating office and leisure spaces, Luckin is aiming to plant its flag in every place you might pass by.
Luckin’s ambition is evident, or rather, it has never concealed its ambition.
Opening a Luckin store at a gas station— is it necessary?
Luckin’s style of opening stores is known for being expansive, utilizing both franchising and self-operated models.
In November last year, Luckin announced its financial report for the third quarter of 2023, stating that by the end of Q3, it had a total of 13,273 stores, including 8,807 self-operated stores and 4,466 franchise stores. This store count also includes 11 new Luckin stores in Singapore.
Since 2022, the growth rate of Luckin’s franchise stores has consistently outpaced that of its self-operated stores. In Q1 2022, franchise stores accounted for 29% of the total store count, and in less than a year, this number increased to 33.7%.
Franchise stores undoubtedly contribute significantly to Luckin’s growth, which may explain why Luckin is making every effort to explore various franchise models.
Moreover, the revenue generated by franchise stores is not insignificant. Based on Luckin’s performance in the third quarter of 2023, its total revenue for all stores was RMB 7.2 billion. Revenue from self-operated stores was RMB 5.14 billion, showing a growth of 79.3% compared to the same period last year. Meanwhile, franchise store revenue for the quarter was RMB 1.84 billion, a year-on-year increase of 104.7%.
Evidently, franchising contributes to Luckin’s high growth rate and is considered the “soul” of its sustained growth.
Furthermore, since its inception, Luckin has focused on an asset-light store model. Unlike traditional coffee shops that typically offer ample seating spaces, Luckin’s grab-and-go store model has been one of its secrets to success. From this perspective, opening in locations like gas stations and schools is another extension of Luckin’s expertise.
An entrepreneur who wishes only to be known by the pseudonym Bei Le, told BusinessAlert that Luckin opening stores at gas stations is not surprising—it is a natural choice for Luckin at this stage. “After reaching a certain scale, it is inevitable to move toward low-cost, multi-scenario approaches for further monetization—just like how Subway can also open in gas stations and subway stations.”
In other words, Luckin’s own style of business makes it only a matter of time before it expands into every nook and cranny. Moreover, Luckin is facing the industry trend of “internal competition” in the entire coffee and tea industry. As the competition for store locations intensifies, Luckin needs to be vigilant about running out of new locations to open stores at, which can happen any time.
A problem that Luckin has gradually encountered is that the radius between its stores is shrinking, and regional protection has become a pseudo proposition. According to Bei Le, Luckin is already in a semi-saturated state in some prime locations within first-tier cities. While two stores of other brands may be spaced 1.5 kilometers apart, Luckin’s stores may only be a kilometer away from one another—the store density could have already become too high.
Taking the Hopson One mall in Beijing’s Chaoyang district as an example, the building is currently one of the top commercial areas in the city, with over 200 stores. Luckin alone has three stores in the area, located in the basement, fourth floor, and the adjacent office building. The distance between these three stores is only about 100 meters.
Having maximized the potential of shopping malls, office buildings, and streetside shops, Luckin has reached a stage where it must find room for incremental growth by utilizing other strengths: brand awareness and economies of scale.
“In the future, it might not be surprising to drink Luckin’s beverages on airplanes and high-speed trains,” Bei Le said.
Analyzing Luckin’s fixation on scale
If, in the past, Luckin relied on opening stores, franchising, and releasing various franchise models to aggressively seize market share and enhance economies of scale, then in the present and future, Luckin can instead use scale to accomplish more and continue to snowball.
In any industry, when a brand starts expanding through franchising, it is often labeled as “going downhill” by the outside world. This is because opening up to franchising is undoubtedly the fastest way to increase market share, but it comes with partial sacrifices to brand image and product quality—issues that many branded chains, especially in the food and beverage industry, struggle to resolve.
However, at least for now, Luckin seems to be navigating the franchising “gamble” quite smoothly. The more franchisees Luckin has, the more influence the brand gains through them. In the process of opening up to franchising, if a brand expands too quickly, it could end up sacrificing quality. Expand too slowly, and it may lead to a situation where franchisees act independently.
Luckin’s rapid expansion can be seen as using scale to counter the crises brought about by scale. In other words, Luckin’s ability to manage better comes from having more stores. Bei Le explained that this is a default rule in the franchising world: the more stores, the easier it is to implement various management strategies. “Even if there are controversies, such as franchisees not cooperating with regards to marketing, address the majority of them and the remaining stores will have little choice but to catch up,” Bei Le said.
Furthermore, Luckin has a significant advantage in its supply chain. From the supply of raw materials such as coffee beans, syrups, dairy products, and packaging, to its standardized production process, Luckin has formed a complete and orderly supply chain system. For brands with a franchising model, the supply chain is also a crucial source of income.
However, this supply chain advantage requires significant scale to sustain. Luckin operates its own coffee roasting factory, with a purchase volume of over 30,000 tons of green coffee beans in 2022. Every time a new product is launched, it means negotiating the supply of new flavors of dairy products or syrups. To absorb such massive upstream resources, Luckin can only continue to open more stores.
Bei Le also said that Luckin’s fast pace of introducing new products is a constraint on franchisees. On one hand, continuous brand development brings visible benefits to franchisees. On the other hand, franchisees could attempt to seek third-party suppliers to save costs, which not only harms the brand’s interests but also leads to quality issues. “Launching new products quickly, changing flavors every few days, franchisees can also find it hard to locate alternative sources,” Bei Le said.
In the eyes of Li Xu (pseudonym), a coffee practitioner, the current landscape of the coffee industry can be aptly summarized as “Luckin and other brands.” According to Li Xu, this category of other brands includes even globally renowned enterprises like Starbucks and Costa Coffee.
Li Xu said that Luckin’s fixation on scale is, to a certain extent, an act of “pulling the mountain.” For example, the franchise model recently introduced by Luckin to target existing store owners is essentially aimed at putting the Luckin name on any storefront that may engage in commercial activities, or incorporating struggling independent coffee shops into its camp. “Luckin will keep swallowing as much as possible,” he said.
The coffee industry is in a new phase, but it has yet to fully unfold
Today’s Luckin has no rivals.
This doesn’t mean that Luckin is so strong that no one can share its cake. It’s just that Luckin, in terms of business models, products, and other relevant aspects, lacks a true competitor at the moment.
In the past, people could say that Luckin was stirring up the Chinese coffee market as a disruptor. Now, this disruptor has become a behemoth, and other players in the industry have little choice but to brace themselves.
Firstly, Luckin is suppressing similar coffee chains in terms of quantity. According to Bei Le, Luckin has the potential to reach 30,000 stores. “In the current coffee and tea market, the brand with the most stores is Mixue Bingcheng, with over 20,000 stores. Given Luckin’s speed—opening more than 3,000 stores in a year—catching up with Mixue should theoretically not be difficult.” For other coffee chains, matching Luckin’s store numbers is an uphill battle.
In the past few years, brands like Manner Coffee, M Stand, Seesaw Coffee, and Nowwa Coffee, which were once darlings of the capital market, are now struggling to keep up. Li said that these coffee chains are fundamentally different from Luckin, both in terms of what they offer and their business models—they seem to be entangled with each other, while Luckin continues to “run in its own wilderness.”
Secondly, Luckin is seemingly exerting psychological pressure on its competitors. Da Ke, the pseudonym of an independent coffee shop owner, told BusinessAlert that Luckin is like a reference point in the coffee industry, “The price cannot be higher than Luckin’s, the taste cannot be worse than Luckin’s, and even if it is Luckin that introduced a sauce-flavored latte, customers will still come and ask if you have it,” Da Ke said.
From their perspective, as an independent coffee shop that has yet to build up a stable customer base, seeing Luckin open a store less than a kilometer away is akin to a “catastrophe.”
In the coffee industry, there is a consistent belief that, in the future, as more people understand coffee and demand higher quality options, the number of people who truly understand and appreciate coffee will increase. However, Bei Le said, “It’s still the same logic—Luckin is now on a path that no one else has taken. Everyone else is still wandering outside. As consumer demand for coffee increases, independent boutique coffee shops are bound to make money, but this doesn’t mean Luckin can’t make money because Luckin has solidified its dominance in the market of high-frequency and essential coffee consumption.”
The joys and sorrows of Luckin may not resonate with other branded coffee chains.
Bei Le believes that Luckin’s next challenge lies in management capabilities. He said that brands that are not good at management may collapse when they have a few hundred or over a thousand stores. “In the franchising world, the expansion stage is roughly divided into three phases: 1–100, 100–1,000, and 1,000–10,000,” he said.
“The first stage focuses on the brand’s uniqueness and its ability to build a brand, which are relatively basic. The second stage tests how the brand uses money to scale, which depends on internal team incubation capabilities, marketing capabilities, and involves a lot of issues related to service providers and franchisee management. The third stage focuses more on broad strategic policies, […] having a clear direction without causing major chaos. The second stage is the most challenging phase. Luckin has endured it and also managed the third stage well, so things are unlikely to get too difficult, but we still need to wait and see. After all, there are too many [Luckin] stores now,” Bei Le said.
There are many brands currently experiencing the transition from 100–1000 stores, such as Manner and M Stand. How well they can withstand the most challenging of management and operational issues will directly affect their brand’s lifespan.
China’s coffee industry is quickly unfolding, whether it’s attributed to the rapid expansion of Luckin, or the era of RMB 9.9 discounts. However, it has yet to completely unfold, at least in comparison to the tea industry. Coffee still requires a considerable amount of time for market education as an imported product.
“Tea beverages have evolved to the next stage, focusing more heavily on concepts. For example, brands like ChaPanda try to tell the story of Eastern tea, and popular brands like Hey Tea and Nayuki are starting to focus on the spiritual expression of drinking tea. Coffee brands are still focusing on awareness, penetration, and scale—it hasn’t reached the same stage yet,” according to Li Xu. In his view, the horn has not sounded yet, and the coffee industry is still far from the time when it truly needs to be anxious.
After all, the industry has yet to reach a state of saturation, so why get overly fixated on the next step?
This article was adapted based on a feature originally written by and published on BusinessAlert (WeChat ID: BusinessAlert). KrASIA is authorized to translate, adapt, and publish its contents.