In business history, many have challenged common sense and called themselves disruptors, only to end up bruised. This time, it's Luckin's turn.
After Luckin's fraud was exposed, its stock plummeted 80%, and then神州租车 also took a hit. To be fair, this is a lamentable outcome. Investors have every reason to be angry, and many are calling on social media for Ernst & Young (the auditor) to come forward. However, we must admit that this is a rare case in fraud scandals where consumers didn't suffer losses—they even profited. Many are showing off their coffee vouchers, and Luckin stores are likely to see long lines today.
Many media outlets are digging into the inside story of Luckin's fraud. The question is: why did Luckin fake its numbers? Is it, as Luckin officially claims, a matter of individual integrity among executives? In my view at HUXIU, this cannot be explained by a few scapegoats; Luckin's model determined its fate. This article is not about kicking someone when they're down. Half a year ago, I wrote articles consistently bearish on Luckin.
To take Luckin seriously—having worked hard to go to the US and "fleece the sheep" for everyone—we must clarify the essence of its model as a warning for the future. In one sentence: Luckin's expansion speed exceeded its promised user growth, so fraud became a last resort.
-01- Selling Coffee vs. Selling Baozi
Luckin's model stunned many from the start. Luckin executives once arrogantly said that those who don't understand Luckin are stuck in old thinking. It must be said that this is a very "clever" model. The cleverness lies in that Luckin's team found a product type that can be rapidly expanded with capital: coffee.
Coffee has at least two advantages. First, it's relatively standardized. The entire supply chain and production process are mature, requiring little complex manual operation. This advantage is comparable only to McDonald's and KFC's burgers. Second, something burgers lack: coffee has strong social attributes, making it easy to spread through social interaction and topic sharing. McDonald's and KFC fans might show off merchandise, but they rarely post about the burgers themselves.
Of course, opening stores, buying equipment, and hiring staff all require money. Fortunately, Luckin's team had a wealthy backer from the start, so money wasn't an issue. However, due to the desire for rapid expansion and a quick IPO, the model was doomed from the beginning in two ways: first, Luckin treated coffee as a beverage, following an FMCG marketing route; second, it operated coffee shops like fast-food restaurants.
At this point, Luckin's model didn't seem too problematic. Let's open a brain hole: among China's rich food categories, what is most similar to coffee? I think it's baozi (steamed buns).
Statistics show that baozi is the most popular breakfast choice for Chinese people, enjoyed across the north and south, young and old. You could say it's like coffee: broad appeal, mass base, and a necessity in certain scenarios. The consumption frequency is also similar. But we rarely see baozi chains achieve national scale. In Beijing, Qingfeng is the only one doing well. Why? (Goubuli is more like an ancient legend.)
Analyzing further, although many people like baozi, they can't eat it every meal. For example, having baozi for dinner is a bit odd. That is, many like it, but they don't eat much. Second, selling baozi is never monopolized by one format: supermarkets can sell it, convenience stores can, and street stalls can. If a baozi shop wants to sell baozi, it must have distinct characteristics and a brand.
Similarly, why did Starbucks become the world's number one in coffee? Why does Starbucks sometimes seem "aloof," always talking about coffee brand and culture? Because coffee is a product that can be sold in multiple scenarios. How strong must the reason be for people to sit down in a coffee shop for a cup?
More importantly, the coffee culture cultivated by Starbucks and Costa over the years is still not widespread. Yesterday, an investor friend said she felt sorry for Luckin because she's a heavy coffee consumer, drinking over 100 cups a year, including both Luckin and Starbucks. But such users are not Luckin's core target.
At the end of 2019, Luckin Coffee CEO Qian Zhiya publicly stated that Luckin had 4,507 direct-operated stores, making it the coffee chain with the most stores in China. It had 40 million transaction users, with 10 million new users added in Q4 2019. New user growth has always been Luckin's most important metric. But even when investors asked, Luckin was reluctant to discuss retention rates.
As mentioned, Luckin's model is fast-food + beverage, meaning it must break through class and age boundaries, making coffee as common as cola, for the model to work. It couldn't rely on heavy users. From the start, Luckin's model design reflected this thinking.
Unfortunately, the growth rate of Chinese users couldn't keep up with Luckin's store opening pace. Luckin had to rely on subsidies to gain incremental market. It's like opening a baozi shop: everyone is steady, one store at a time, no one gets rich overnight.
So another important question arises: why did Luckin open stores frantically?
-02- The Double-Edged Sword of Coattail-Riding
In previous articles, I analyzed that opening stores belongs to the retail sector, easy to learn but hard to master, with many know-hows. A veteran with 20 years in the food and beverage industry also pointed out that frantic store opening was the biggest pit Luckin dug for itself.
So why did Luckin have to open stores? According to the above analysis, Luckin's model could achieve some market coverage even without physical stores.
We need to go back to Luckin's initial marketing positioning, the famous coattail-riding incident. In May 2018, Luckin published an open letter accusing Starbucks of monopolistic practices. From a marketing perspective, it was a brilliant ambush, putting Starbucks in a tough spot—neither responding nor not responding.
Because everyone, including Luckin itself, knew that Starbucks and Luckin were not in the same market; Luckin was selling affordable coffee.
This positioning coattail-riding also set the stage for Luckin's story in the US capital market. Simply put, Luckin's model was similar to Starbucks, but it faced a larger and more potential market. The biggest difference was Luckin's so-called "fourth space," which relied on delivery coffee to increase sales, more in line with young people's habits.
But Luckin itself didn't notice that this coattail-riding and positioning also tied its hands: Luckin couldn't do without coffee shops. Even if the shops were small, unlike Starbucks as a cultural carrier, they still had to exist.
This reasoning is simple now. Suppose Luckin told US investors, "You know Coca-Cola and McDonald's, right? We plan to sell coffee the Coca-Cola + McDonald's way. " What would US investors say? They might say, "Get out, don't defile our coffee culture!"
Coffee shops are the soil and symbol of coffee culture. If Luckin abandoned that symbol, the whole story wouldn't hold together.
So Luckin had to keep opening stores, but the original intent of opening stores should be to meet the needs of potential known consumers. Consumption power is like a seed that needs time to grow, but Luckin ran too fast and couldn't wait.
Also note that Luckin's aggressive push for coffee delivery actually fell into a paradox of China's new retail: if you transfer offline traffic to an online traffic pool too early, what's the point of your stores? Aren't you just waiting to lose money?
In fact, Luckin later kept trying new business lines, like Xiaolu Tea and light food, likely sensing the baozi dilemma I mentioned earlier. Some people drink coffee, but the total volume isn't high. Ultimately, it's a single-scenario problem from a single product. So Luckin hoped to expand product lines to drive sales.
But this involves mindshare, after all, coffee shops are offline scenarios. In retail, a traffic-driving product can boost sales of low-frequency but high-margin items; no one has heard of the reverse. "To eat a piece of cake, please buy a cup of coffee along the way!"
At this point, Luckin finally shackled itself with the chains of capital. So Luckin's fraud is the result of this "disruptive" business model being pushed step by step to its logical conclusion. All participants are to blame.
Source: 十亿消费者 (ID: gjgc168) Author: 房煜
Tips will be paid 400-2000 yuan once the tip is adopted.