- Teaching Notes
This case is about Luckin Coffee Inc. (hereafter Luckin), a startup co-founded in 2017 by Quian Zhiya and Lu Zhengyao (also known as Charles Lu) in China. Offering good-quality, affordable, and convenient freshly brewed coffee to Chinese consumers was the startup’s mission. To achieve this mission, Zhiya, who was the CEO of the company from 2017–2020, introduced the digital-first strategy. The startup had limited capacity and small sized stores with takeaway facilities only. Customers ordered coffee and made payment through the Luckin mobile app. The small store size and digital strategy helped Luckin reduce costs, and its coffee was lower-priced than prominent coffee retailers in China, such as Starbucks. In 2018, Zhiya stated that Luckin’s objective was to beat Starbucks; in this quest, Luckin rapidly expanded to 3,600 stores within two years, a number similar to Starbucks. To lure customers, the startup additionally offered discounts and promotions. However, industry experts and analysts were worried about the fragile business model of Luckin, which could be easily replicated by convenience stores such as 7-Eleven through the introduction of a mobile app. The rapid growth of Luckin, accompanied by a selling price below the breakeven cost, also inhibited its profitability capabilities. Moreover, many consumers complained about the taste of coffee offered by Luckin. As China was largely a tea-drinking nation, Luckin also ventured into the tea business. By August 2019, its losses were more than analyst expectations. Moreover, in April 2020, an internal investigation revealed that Luckin was overstating revenues and expenses. Subsequently, Lu, who was the Chairman of the company, fired Zhiya. Given these heavy losses, Lu faced several challenges. He had to reconsider the Luckin strategy of blitzscaling—i.e., expand first and profit later. Also, Lu needed to establish a strong competitive advantage against Starbucks and other coffee retailers in China. Furthermore, he had to search for a more cost-efficient means of growth rather than selling coffee at a discount.