Luckin Coffee Changes the Games?

Team 3 (Urvashi, Justin, Rishikesh, Pratyush, Cristian, Lin Jiao)

Company Introduction
• Founded in 2017, and became the largest coffee company in China
• Provide high quality coffee with great affordability, and convenience to
customers with technology-driven retail model
• Listed in 2019 in NASDAQ, delisted in 2020, listed again in 2022
• Monthly active customers numbers reached 2.4M in 2023/12
• Opened 16,248 stores and counters in 300+ cities across China in 2023
(10,628 self-operated stores and 5,620 partnership stores.)

• Started global expansion from Singapore in 2023 (30 self-owned stores in Singapore).
 External
Analysis
China’s Freshly Ground Coffee Industry
External Analysis - General
Political Factors Economic Factors
- Yunnan Province 4th Five-Year Plan to - Per capita disposable income of

P E
build a globally important high-quality Chinese citizen increased 8.1%
coffee production base - Stimulate Domestic Demand
- National Standard for Coffee Beverages
High-Quality Coffee Processing Park Project
- Regional Comprehensive Economic
Partnership

Social Factors
- Peak of Globalization and
the study abroad trends
- Huge Opportunity for Growth
S T
Given Existing Social Practices
- “Basic” coffee culture
- per capita coffee consumption
Technological Factors
- Data Mining
- Fast dissemination of information on
social media
in China in 2021
is only about 9 cups/year VS
Japan (280), the United States
(329), and South Korea (367)
External Analysis – Industry
China’s Coffee Industry - Freshly Ground Segment
Porter’s Five Forces Framework
SUPPLIER POWER (Low)
• Cost of Labor is Low à Easy availability of alternatives à Lower BP
• Coffee beans are available domestically (Yunnan and Hainan province) and abroad (import tariff fell by 2.4%) à Cheaper à Lower BP
• Espresso Coffee Machines cost mitigated by third party equipment purchasing suppliers à Cheaper à Lower BP
• Low Supplier switching costs à Food and Equipment manufacturers do not differentiate products à Easier to switch à Lower BP

THREAT OF ENTRY (Low) SUBSTITUTE

Moderate Barriers to entry INDUSTRY RIVALRY
• Starbucks has most seniority + Market Share (Medium to High)
• Luckin’s lower pricing, strong promotion • Starbucks and New Players
strategies and economies of scale • International and Local
• High end as well as Affordable segments
• Strong Branding for Intl
already captured à
• Tough to gain access to distribution channels • Personalised service at
local à Luxurious decor
• Low Threat of retaliation
COMPETITION (HIGH)
• China mainly drinks Tea, coffee
consumption per capita is low
• Both Tea and Coffee similarly priced,
danger - Chinese citizens preferring tea
• Already well-established Tea Brands
• Existing customer preferences

BUYER POWER (Medium)

• Low Switching Costs à High BP
• Invested in R&D to ensure that it caters to Chinese tastes à Lower BP
• Overall balancing and hence medium BP
 What's Brewin at Luckin? : A Value Chain Analysis

• Inbound Logistics and production: Luckin Coffee Source Premium Arrabica coffee beans and engage
World Barista Champion teams to design coffee recipes. They also source coffee machines and
condiments from global suppliers such as Schaerer.

• Marketing and Sales: As of Dec 31, 2023 Luckin employs 152 sales and marketing employees. Luckin
have invested significantly in Marketing and Sales to acquire customers and retain them, especially
through vouchers and coupons. This has been an important driver for making coffee more affordable.

• Service: Luckin mainly focuses on providing service through the speed of their orders, utilising data
mining and consumer preferences to manage a large volume of orders. This works for customers who
are in a hurry and want to take their coffee on the go.

• Technology Development: Luckin Coffee have pioneered a Technology-Driven Retail model. This has
been crucial for the fulfilment of the largely unmet demand for coffee consumption in China. With
their centralized technology system, Luckin are able to simplify and standardize their operations to
improve operational efficiency and to quickly expand and scale up their business. Scaling up
their business also helps them reduce prices.
The Secret Behind the Success of
Luckin Coffee: Core Competency

• Affordable Coffee with heavy discounts

• Integrating Technology with Coffee

• Fast Coffee

• Aggressive Store Expansion

• R&D for new products introduction

 Competencies Valuable? Rare? Costly / Hard to Exploited by the
Sustainability
Imitate? Organization

Affordable Yes No Competitive Parity

Pricing

Integration of Digital
Yes Yes Yes Yes Sustained Competitive
Technology
Advantage

Fast & Convenient Yes No Competitive Parity

Aggressive Store Yes Yes Yes Yes Sustained

Expansion Competitive Advantage

R&D for new products Sustained Competitive Advantage

Yes Yes Yes Yes
introduction
 Competency Gaps

• Lack of Diversification in the Tea Market

• Poor Brand Reliability

• Lack Of customer Loyalty

 Business Strategy (1)
BROAD

NARROW

COST DIFFENTIATED
Business Strategy (2)
Eliminate Reduce Raise Create
New Retail Model

Freshly Brewed Coffee

Innovative New Product Offerings High quality
Active Marketing Activities
High affordability
High convenience
Customer Rentention
Customer Satisfaction with every transaction online
Barriers Price Quality Coffee
Relax Store à Pickup store
Book Online à Delivery or pick up in the nearby store
Order with Paper Menu à Cash payment
Highly developed Areas à Every 500m in the populated areas
Business Strategy (3)
External Internal

• Threat of New Entrants (Low) • Affordable Price

• Threat of Substitutes (High) • Integrated Technology

• Bargaining Power of Customers (Medium) • Fast & Convenient
• Bargaining Power of Suppliers (Low) • Aggressive Store Expansion Experience
• Competitive Rivalry (Medium to High) • R&D Expertise for New Products

Customers who pursue - Robust supply chain with strong

Offers affordable, fast, bargaining power and medium buyer
professionalism,
easily acessible, freshly bargaining power.
youthfulness, fashion, - Advanced new retail model with large
brewed premium high big data base, strong R&D team, and
and wellness at a
quality coffee it sets the high barrier for new comers
reasonable price - Fast expansion of stores.

Who What How

Corporate Strategy –
Vertical Integration / Outsourcing
 Inventories
Suppliers
/Logistics

Value Chain
Roasting
– Owned or Plants
Outsource

R&D &
Stores
Technology
Suppliers (Coffee Beans) -
Outsource
Considerations "Suppliers. We carefully select our suppliers through a stringent
• Core Competencies: Affordable pricing dueselection
to the value chain.
process and assess the performance of our suppliers
Supplying countries give high-quality coffee beans for a cheaper price due to labor cost/govt support.
on a regular basis. During the supplier selection process, we
review their qualifications and conduct onsite visits and inspection.
• Financial Cost: Vertical integration would also have high investment costs for setting up coffee bean
Once the suppliers are on board, we monitor their daily operations
plantations.
and conduct regular evaluations. In our agreements with suppliers,
we have
• Transactional Cost: Largest coffee retail. Buys in place
in bulk anti-kickback
(Economy policieswith
of Scale) to ensure thebargaining
higher integrity of power.
Reducing Cost. our food safety and quality control and procurement systems."

1. Brazil: Luckin’s primary supplier (major exporters like Neessen consistently high volumes of premium Arabica
beans.
2. Colombia: Produce specialty single-origin seasonal offerings that highlight the region’s distinct flavors.
3. Uganda: Collaborates with smaller certified exporters for regional nuances of Ugandan arabica coffee.
4. Vietnam: Secures a year-round Robusta green supply from primary producers.
 Roasting Plants – Primarily Owned &
Some Outsource
Considerations

• Core Competencies:

o Produces consistent quality coffee that flavor is distinct to Luckin

Coffee

• Transaction Cost: Hard to change roasting plants as customers get

- 2more used
Roasting to thePingnan
Facilities: coffee &
flavor. Increasing bargaining power if
Kunshan
outsourced.
- Green Coffee Facility Baoshan
- Has third-party factories as well
- More owned = Consistent coffee
 Inventories/Logistics –
Primarily Outsourced, Some Owned
Considerations

• Core Competencies / Financial Cost:

o Core Competency: High Store Expansion
o To spread quickly without having too much costs, they use majority
outsourcing and some owned warehouses.
o Logistics and warehousing are not core competencies.
Stores/Franchise – Owned & Outsource
Considerations
"When selecting our retail partners, we usually conduct comprehensive evaluations based on a set of
stringent criteria. We also provide extensive training to our retail partners. We will also supervise our retail
• Core
partners, andCompetencies:
we reserve the right Franchise
to terminate ourenables
cooperationthewith core competency
them if they ofour
fail to adhere to
high store expansion. Alongside their brand getting more and more well
standards."
known, they have terms and benefits that incentivize people to be their
franchisees.

• Financial Cost: More franchising reduces operating and setup costs for
Luckin Coffee, which is important for rapid store expansion.

10,598 self-Operated Stores 5,620 Partnership Stores

 Considerations • Self-Developed App

Technology • R&D Team

• Core Competencies:
o Coconut Milk Series
and o Velvet Series

R&D (Owned) o SOE Coffee Series

o Utilizes core competency
o Newer Series of technology and data mining
o Luckin Exfreezo Series
o Phone app usage for customers: tracks specific time and frequency of
o Chinese Tea Coffee Series
purchasing.
o Improves operations/services/products. (warehousing/stores)
o Allows for the development of new SKUs customized to Chinese Market.

• Transaction Competencies: All collected data and new product

developments should remain private to Luckin Coffee.
 Impact of Vertical Integration/Outsourcing

The current combination of outsourcing and vertical integration has

created value for Luckin.

• Emphasis on costs in the supply chain and high growth expansion,

outsourcing has enabled them to reduce costs while taking a large
market share of the coffee industry.

• For core competencies that they need to control, they use vertical
integration as seen in their Technology & R&D and roasting plants steps.

Did Luckin Create Value Through Vertical Integration/Outsourcing?

 Corporate Strategy - Diversification
Limited Diversification Attempts:
1. Luckin Tea (Sept 2019 - 2023)
o In case Coffee becomes less demanded
o Failure due to: lack of marketing, no differentiation, no R&D for new SKUs.
o Instead they moved to going into new SKUs for Luckin Coffee: Chinese Tea
Luckin Tea Coffee Series.
o Destroyed Value

2. Luckin Coffee EXPRESS and Luckin PopMini

(Jan 2020 – 2022)
o Failure due to: Luckin Pop- Snacks (not expertise)
o Change in target audience, going into a lower price point, instead of focusing
on core customers.
o Going out of their specialty
o Destroyed Value

Luckin EXPRESS and Pop Source : Annual Report Luckin Coffee 2023, Page 22
 Geographically Diversification of Luckin Coffee
As of 31 December 2023 : Singapore
China

10,598 self-operated 30 self-operated

stores stores

5,620 partnership
stores

300 cities in China

Source : Annual Report Luckin Coffee 2023, Page 16
 Singapore Entry Mode
• Greenfields Wholly-owned
subsidiaries (WOS)

• Luckin Coffee (SGP) PTE. LTD

(“Luckin Singapore”)

Luckin Coffee has opened

an outlet at Marina Square
on March 31, 2023.

Source : Annual Report Luckin Coffee 2023, Page F-11

Opportunities and Challenges within Internationalization
Attribute Create
CAGE Analysis China Singapore
Distances
Differences in Languages Preferred menu in Mandarin Preferred menu in English
Largely a tea drinking nation, growing coffee
Cultural
C Distance
Consumer Preferences

Differences in
culture
Strong, traditional coffee blends (Kopi, Kopi-O)

Races / Nationality
Governance Systems
Administrative
A Distance Regulatory Environment
Institutional/Policy
Land Area and Population
Homogenous Heterogenous
Single-party communist republic parliamentary republic with a multi-party system
(civil law system) (English common law system)
Relatively complex and bureaucratic
Business-friendly environment
(clear regulations and efficient processes)
Strong Strong
2 2
9.6 million km and 1.4 billion people 734 km and 5.8 million people

Geographic well-developed but vary across different

G Distance
Infrastructure and Logistics
regions
Well-developed infrastructure and efficient logistics

Tropical rainforest climate is characterized by high

Climate and Environmental Factors Diverse climate due to its vast size
humidity
Differences in consumer income
GDP Per Capita US $13,140 GDP Per Capita US $88,450
(IMF, 2024)
Economic
E Distance Differences in Cost of Labor
The minimum hourly wage in Beijing is RMB
26.4 (SG$5.07)
The minimum hourly wage in Singapore is SG$9

Differences in Coffee Market Size US$19 billion (2023) US$1.6 billion (2023)
AAA Framework
Adaptation (Medium) Aggregation (High)

Create value with local relevance Create value via standardization and efficiency

For example : For example :

• Has not differentiated in menu lineup • Leverage Economies of Scale

• Nutri-Grade every drink • Deliver a similar value proposition

• Customer Acquisition Strategy of 1st Coffee • Similar supplier of coffee beans and store layout

.99
$0
Conclusion: Luckin Coffee creates value highly
Arbitrage (Low) from aggregation and moderately from
adaptation
Value creation through international
specification
 Recommendations
Misalignment between Internal and Business
Strategy:
• Internal Analysis: Affordable Pricing (CC)
• Business Strategy: Differentiation
• Assess: Difficulty of resource allocation to
support both cost leadership and differentiation
Recommendation: cut costs via internationalization
(Arbitrage). arbitrage/cost difference (such as
labor, rent, and other less fixed costs) to another
SEA countries
Misalignment between External and Corporate
Strategy:
• External Analysis: substitute competition is tea
• Corporate Strategy: Diversification into tea failed
• Assess: Represents a clear misalignment
between the external competitive landscape and
the company's strategic initiatives.
Recommendation: use proper R&D to conduct
better diligence into the tea market while analyzing
company capabilities and CC before pursuing a
new strategic direction for tea diversification.
 Recommendations
Business Strategy
• Focus on cost reduction, quality control, and Corporate Strategy
reducing low revenue SKUs with the operation • Vertical integration on the field that can create
improvement. more value and fit the CC.
• Position itself as the premium fast fashion brand • Enhance customer experience and retention
coffee by creating hot sales products with its rate.
user database and technology.
• Enhance the subscription business model with International Strategy
its strong user base. • Continuing the global expansion to SEA (except
• Continue the store expansion in the Chinese Singapore)
market with its store set-up know-how. • Keeping awareness and monitoring the
saturated coffee market in Singapore, increase
Contingency plan the adaptation strategy.
Diversification into the tea market will back
revenue when the coffee market incurs a decline
 Phew, Luckin’ Time!
Q&A Thank you!