---
title: "The Money Burner: Luckin Coffee?"
description: "At a January 2019 strategy meeting, Luckin Coffee's CEO responded to speculation that the company might become the next ofo, emphasizing investor support and aggressive expansion plans. Despite a net loss of 857 million yuan in 2018, the company aims to surpass Starbucks in store count and cup sales by the end of 2019, while continuing subsidies for three to five years."
author: "灵小七"
publisher: "New Distribution"
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published: "2019-01-07"
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# The Money Burner: Luckin Coffee?

> At a January 2019 strategy meeting, Luckin Coffee's CEO responded to speculation that the company might become the next ofo, emphasizing investor support and aggressive expansion plans. Despite a net loss of 857 million yuan in 2018, the company aims to surpass Starbucks in store count and cup sales by the end of 2019, while continuing subsidies for three to five years.

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Source: Lingshou (ID: lingshouke)
**-01-**
"Linking us (Luckin Coffee) with ofo is somewhat ridiculous." Facing recent public热议 on the topic "Will Luckin become the next ofo?", Qian Zhiya, founder and CEO of Luckin Coffee, said helplessly.
This was a small episode at Luckin Coffee's 2019 strategy communication meeting held on January 3.
However, the biggest difference between Luckin Coffee and ofo is the firm support from capital. On December 12, Luckin Coffee announced the completion of a $200 million Series B financing, with a post-investment valuation of $2.2 billion. Joy Capital, Dazheng Capital, Singapore's GIC, and CICC participated in this round. Among them, Joy Capital, Dazheng Capital, and GIC were also investors in Luckin Coffee's $200 million Series A round.
In other words, at least in strategic direction, Luckin Coffee and its investors are highly aligned. "We are highly consistent with our investors on the subsidy strategy; they even worry that we are too conservative," said Yang Fei, co-founder and CMO of Luckin Coffee, at the strategy meeting.
But from another perspective, apart from CICC, the Series B round was basically still the Series A investors "cheering themselves on."
The 2019 strategy communication meeting had two key points: first, releasing Luckin Coffee's 2019 strategic goals; second, responding to the recent reports of "Luckin Coffee's net loss of 857 million yuan" and related doubts.
According to data provided by Luckin Coffee, **as of December 31, 2018, Luckin Coffee had 2,073 direct-operated stores, covering 22 cities across the country. Among them, there were 1,897 physical stores such as pickup stores and premium stores, and 176 delivery kitchen stores.** In core areas of first-tier cities, consumers can reach a Luckin Coffee store within five minutes. Additionally, as of December 31, 2018, Luckin Coffee had 12.54 million consuming users and total sales of 89.68 million cups.
Based on the number of stores and cups sold, with over 2,000 stores, the average sales per store per day are about 130 cups. Considering newly opened stores, if we calculate based on 1,000 stores, it would be about 260 cups per store per day. Setting the price of a cup of coffee after subsidies at about 15 yuan (which is actually on the high side), we can roughly estimate the revenue per store.
Moreover, just from the cup count, Luckin Coffee loses nearly 10 yuan per cup sold. From an industry perspective, this is not selling coffee; it is more like giving away coffee.
Because according to industry data, the gross margin of a cup of coffee in a coffee shop is above 80%. But previously, media reported that Luckin Coffee's revenue in the first nine months was 375 million yuan, with a gross profit of -433 million yuan, a gross margin as high as -115.5%, and a net loss of 857 million yuan.
This money-burning logic is one of the main reasons many people do not understand Luckin Coffee.
Overall, **Luckin Coffee's overall goal for 2019 is still external expansion.** According to Qian Zhiya, by the end of 2019, Luckin Coffee aims to become the largest chain coffee brand in China, fully surpassing Starbucks in store count and cup volume. According to Luckin Coffee's 2019 strategic plan, it will open 2,500 new stores in 2019, bringing the total number of stores to over 4,500.
As for the recent half-month public热议 about "Luckin Coffee being the next ofo" and the hot topic on social media of "losing more than 800 million," Luckin Coffee views these as deliberate smears by competitors.
Luckin Coffee did not deny the fact of the loss of more than 800 million. "The loss is in line with our expectations. We also said that the annual loss would be greater than 800 million," Yang Fei said.
In fact, the outside world's surprise at Luckin Coffee's huge loss and the speculation of becoming the next ofo are, to some extent, doubts about how long Luckin Coffee can sustain itself.
While Luckin Coffee says it has no funding problems, it also announced a more aggressive store opening plan and a three-to-five-year continuous subsidy plan. **The core is to prove that Luckin Coffee's and investors' strategy is not wrong; on the contrary, Luckin Coffee will respond to the market at a faster pace, which is commonly said as solving all problems through development.**
But with huge losses and the capital winter, what is Luckin Coffee's confidence in accelerating expansion and claiming to fully surpass Starbucks?
**-02-**
To some extent, Luckin Coffee's choice to speed up at this time has its rationality and inevitability.
First, since Luckin Coffee benchmarked against Starbucks, the two have had offensive and defensive moves. For example, starting from September 19, 2018, Starbucks announced cooperation with Ele.me to launch coffee delivery services in some stores in Beijing and Shanghai. According to the plan, by the end of 2018, delivery services would expand to 2,000 stores in 30 cities nationwide, and the membership systems of both parties would be connected. Additionally, Starbucks would join forces with Hema Fresh to create Hema Fresh's first brand delivery kitchen - Starbucks "Delivery Star Kitchen."
The "delivery business" has been seen by the outside world as Luckin Coffee's biggest advantage over Starbucks, and "delivery coffee" is one of Luckin Coffee's labels. But at this strategy meeting, Qian Zhiya emphasized that Luckin Coffee is not a delivery coffee company; with over 2,000 stores nationwide, it is convenient for users to pick up. Data shows that as of December 31, 2018, the proportion of self-pickup at Luckin Coffee stores increased from 35% in mid-2018 to 61%.
From the competitive situation, Luckin Coffee's high-profile challenge to Starbucks has also put pressure on itself. At this point, if it does not advance, it retreats. Therefore, Luckin Coffee, eager to shed the delivery label, has shouted the slogan of fully surpassing Starbucks in store count and cup volume.
Second, through the marketing approach of capital boosting + social fission, Luckin Coffee completed the brand building from 0 to 1 in a very short time. From this point, Luckin does have the possibility of breaking out in the future. Moreover, at this point in time, it must push forward whether it wants to or not.
The reason is simple: **First, hesitation might waste all previous efforts. Second, capital will not let you slow down.**
But then again, Luckin Coffee directly locks its competitor as Starbucks. However, to date, there has been no public occasion where Starbucks considers Luckin Coffee a rival of the same magnitude. To some extent, Luckin Coffee has "latched onto" a "tall, handsome, and rich" opponent.
By the way, Starbucks once responded: "We do not participate in hype."
So, where is Luckin Coffee's growth space?
The potential of the Chinese coffee market is undoubtedly huge. Data provided by Luckin Coffee shows that in 2017, the per capita coffee consumption in mainland China was 4 cups per year, while Japan, South Korea, and Taiwan had per capita consumption of over 200 cups. According to the "2017-2021 China Coffee Industry Investment Analysis and Prospect Forecast Report," China's growth rate is 15%-20%, far higher than the global average annual growth rate of 2%.
On the other hand, Luckin Coffee is indeed educating the market and expanding the consumer base for coffee. "We precisely hope to enlarge the entire coffee market, so we are inclusive," Qian Zhiya once said. The more inclusive mass market includes novice users who occasionally buy coffee. The potential of this segment has not been fully tapped. Once market education succeeds, it may be shared by others. Therefore, accelerating expansion to capture more users is imperative.
Thus, Luckin Coffee has proposed two indicators: fully surpassing Starbucks in store count and cup volume, and becoming the largest chain coffee brand in China. This might also become a good story for Luckin Coffee to seek the next round of investors or in the capital market. Although at this strategy meeting, Qian Zhiya refused to answer questions about whether Luckin Coffee would list in Hong Kong and the speed and pace of financing.
**-03-**
The outside world's doubts about Luckin have not disappeared because of these explanations. Under the crazy money-burning model, with rapid store expansion and heavy subsidies, where is the profit model?
After just one year of rapid expansion, Luckin Coffee has opened over 2,000 stores. It is worth noting that after 17 years in China, Starbucks only reached 2,000 stores in January 2016. To date, Starbucks has only 3,600 stores in China.
However, Yang Fei responded, "From our team's experience, you can see that we are all veterans with over 10 years of entrepreneurship, with experience in multiple profitable listed companies. Investors would not invest if they could not see clearly, so please do not worry too much; just enjoy our coffee and subsidies."
The response seems fine. But Yang Fei should also know that there are many projects that investors cannot see clearly. If we were to list a comparison of investment successes and failures, it would be like the difference in number between the moon and the stars.
Moreover, whether it is shared bikes in the sharing economy or unmanned shelves in unmanned retail, the subsidy-style crazy money burning has led to bleak endings for most players.
Of course, Luckin Coffee is also seeking new growth spaces and exploring more application scenarios. For example, on December 18 last year, Luckin Coffee announced the opening of its enterprise API platform to enter the enterprise market. The open API platform enables real-time interaction between Luckin Coffee and corporate clients, allowing on-demand access to Luckin Coffee's coupon code library data to meet needs such as points redemption, membership benefits, employee welfare, and business gifts, exporting technology and service capabilities to partners in other fields. China Construction Bank, China Merchants Bank, Shanghai Pudong Development Bank, SF Express, and others became its first batch of strategic partners.
But it should be noted that Starbucks' gross margin exceeds 50%. Luckin has previously explained its negative gross margin as a sales strategy to attract consumers by significantly reducing the price per cup. According to Luckin Coffee's plan, subsidies will continue for the next three to five years, so when it will become profitable is still unknown.
In the past year, Luckin Coffee's promotional methods, such as free cups for new users, buy two get one free, and buy five get five free, indeed attracted many users. Once subsidies stop, how many retained users will there be?
Using subsidies to retain users and traffic has not seen particularly successful cases in the past two years. For example, how many years have fresh e-commerce companies subsidized users? How many are profitable now? How many can say they have found a sustainable business model?
From Yang Fei's explanation, it seems self-consistent. For example, users choose Luckin Coffee not only because it is cheap but also because of high cost-performance, high quality, and high convenience. "Price, quality, convenience, and brand are all comprehensive advantages," Yang Fei said. From the user profile, Luckin Coffee stores are mostly in business districts and office buildings, with users mainly white-collar workers who have high spending power. At the same time, the new generation of young business people is increasingly rational, pragmatic, and smart.
Another issue to note is whether long-term high subsidies are reasonable. With Luckin Coffee's acceleration, subsidies will still exist. It is conceivable that for new stores, subsidies remain one of the effective ways to attract customers.
However, Luckin Coffee is also adjusting its subsidy strategy. Starting from January this year, Luckin Coffee's promotions changed from buy 2 get 1 and buy 5 get 5 to buy 2 get 1. It will gradually lower the threshold for recharging gifts and increase coupon subsidies. The promotion for light food products, which was 50% off when launched in August last year, was adjusted to 66% off in January this year. In addition, the threshold for free delivery has been raised from 35 yuan to 55 yuan. It is believed that in the next three to five years of subsidies, the intensity will be adjusted further.
However, if it is not because of price but from high quality and high convenience, Luckin Coffee's benchmark Starbucks is also accelerating its layout in the Chinese market. In mid-December 2018, Starbucks said it would increase its store coverage in China from 3,600 stores in 150 cities to 6,000 stores across 230 cities in the next four years.
Although Luckin Coffee claims to surpass Starbucks in store scale and cup volume, **whether its store scale will necessarily bring high-loyalty users, and whether its brand influence can compete with the giant, remains to be seen. After all, brand culture construction and consumer trust and stickiness cannot be burned out with money.**
In addition, the management issues brought by rapid expansion are still a challenge for the newly established Luckin Coffee. Managing 2,000 stores versus managing over 4,000 stores is clearly not the same level of difficulty and challenge.
At least for now, Luckin Coffee is very confident in its approach and strategy, and the management team is aligned with the capital side. This is an advantage that many startups do not have, and it is the most fundamental reason for its daring to accelerate. But then again, if a coffee brand with the same playbook and capital support as Luckin Coffee appears in the market, what choice would consumers make?
One point seems insignificant but is actually very important: **In many people's eyes, Starbucks is more than just a cup of coffee; it is a cultural symbol. As for Luckin, as of now, it may really just be a cup of coffee.**
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