China’s largest coffee chain, Luckin Coffee, made headlines when it faced a massive scandal that led to bankruptcy. However, within three years, the company not only survived but managed to surpass Starbucks as China’s leading coffee chain. In this article, we’ll delve into the details of Luckin’s incredible turnaround by analyzing its business strategy, cost-cutting measures, revenue growth, and marketing innovations.
Cost Reduction Strategies
Before their comeback, Luckin faced enormous losses, primarily due to their unprofitable pricing strategy. They offered deep discounts and free coffee promotions, leading to a surge in customers but inadequate revenue. Luckin’s net income margin reached a staggering -193% in 2018. To address this, the new management stopped reckless store expansion, discontinued unprofitable side businesses, and significantly reduced sales and marketing expenses. They also scaled back discounts and raised prices.
Revenue Growth through Product Innovation
Luckin’s remarkable revenue growth can be attributed to product innovation. They introduced groundbreaking coffee beverages like the Brown Sugar Boba Latte, which resonated with young Chinese consumers who preferred sweeter drinks. This success led to further investment in research and development, resulting in a range of innovative coffee beverages that broadened their customer base. By offering unique drinks, Luckin was able to raise prices and increase sales volume, ultimately driving revenue growth.
Successful Marketing Initiatives
Luckin shifted from performance ads to brand advertising, targeting a younger demographic. They advertised on popular social media platforms and secured an endorsement deal with Eileen Gu, a freestyle skier who became a national sensation. These efforts transformed Luckin’s brand image and propelled it to the top spot among young consumers, while Starbucks faced a decline in popularity. Effective marketing initiatives significantly contributed to Luckin’s revenue growth.
Franchising Business Model
Luckin adopted a dual approach to store expansion, with company-operated stores in higher-tier cities and franchised stores in lower-tier cities. This strategy allowed them to expand rapidly while maintaining quality. They did not charge upfront joining fees or annual franchise fees, and their unique franchising terms made it profitable for franchisees. This approach allowed Luckin to overtake Starbucks in terms of the number of stores and revenue.
Effect of the Pandemic
During the pandemic, Luckin’s self-pick-up and delivery model thrived, while Starbucks, with many stores in shopping malls, faced reduced traffic. Same-store sales growth showed that Luckin consistently outperformed Starbucks, with innovative drinks playing a crucial role. The pandemic had severely disrupted Starbucks’ operations in China, benefiting Luckin.
Luckin Coffee’s remarkable turnaround is a testament to how a seemingly hopeless business can transform itself with the right strategies. New management’s focus on building solid business fundamentals, effective marketing, and embracing franchising were critical elements of their success. Luckin’s story is a reminder that, with the right team and a bit of luck, even a disgraced company can overcome scandals, fix its business, and surpass dominant brands in a few short years.