Without WeChat and price war, how did Luckin Coffee expand into Southeast Asia?

In the Southeast Asian market, Luckin Coffee did not rely on the WeChat ecosystem, nor did it adopt a fierce price war strategy. Instead, it gradually opened up the market through cautious expansion and brand awareness building. This article analyzes in detail Luckin Coffee's overseas expansion strategy in Singapore and Malaysia: the transition from direct sales to franchising, and how to deal with localization challenges, competitive landscape and cultural differences.

After the Spring Festival, Luckin Coffee, which entered Malaysia for the first time, opened 4 stores locally, and another 2 of the first batch of stores will also open one after another.

Luckin Coffee’s first store in Malaysia is the Sunway Pyramid store which opened on January 23 in Selangor (the Malaysian capital Kuala Lumpur is located in Selangor, but is a federal territory).

Sunway Pyramid is located in the core business district near Kuala Lumpur and is also the largest theme shopping mall in Malaysia. In the second half of 2024, Bawang Chaji will open a new generation of flagship space stores in Malaysia, and the first store will also be located in Sunway Pyramid. Luckin Coffee's store in Sunway Pyramid is also next to Bawang Chaji.

Luckin Coffee has been building momentum in the Malaysian market for a long time since its entry. When it first debuted, Luckin Coffee launched a promotional activity for new APP users to pay 2.99 Malaysian ringgit (about 4.9 yuan) for their first cup. The waiting time for a cup during peak hours on the opening day could reach more than 2 hours, and the number of orders on the first day may exceed 1,000.

Luckin Coffee has launched more than 20 freshly brewed coffee drinks in Malaysia, which is about half of the drinks already available in its neighboring Singapore store. Signature products such as Whipped Coconut Latte and Velvet Latte are on the list, but some popular items such as Orange C Americano and Grapefruit C Americano are not yet on the shelves.

In terms of price, most freshly brewed coffees, represented by raw coconut latte, are priced at 14 Malaysian ringgit (approximately RMB 23). According to the daily practice of issuing 30% to 80% off coupons, the final actual selling price should be around 10 Malaysian ringgit, or around RMB 17.

Earlier, according to LatePost, citing people close to Luckin Coffee, Luckin Coffee will not follow the domestic price war and rapid expansion strategy when going overseas, nor will it seek to quickly eliminate local brands. Instead, it will prefer cautious expansion, coexist with multiple brands for a long time in the future, and strive to establish brand awareness.

As Luckin Coffee's first step towards a wider Southeast Asia based on Singapore, and also the first time that Luckin Coffee has cooperated with local companies in the form of regional agency and franchising, Luckin Coffee's performance in the Malaysian market is worthy of attention.

The opening scene of Sunway Pyramid store on the first day, photographed by Narrowcast

01 Singapore: A Southeast Asian base, a benchmark for overseas expansion

There have been reports that Luckin Coffee plans to launch large-scale overseas expansion from the fourth quarter of 2024 to the first quarter of 2025, and plans to expand through a large franchise model, focusing on the Southeast Asian and US markets.

The first stop for going overseas is Southeast Asia, and the first stop in Southeast Asia is Singapore (with a developed economy and a high proportion of Chinese). This is a standard path for the current leading brands in the industry to go global based on geographical and cultural factors.

Luckin Coffee's first overseas stop is Singapore, with the first store opening in March 2023. According to Luckin Coffee's chairman and CEO Guo Jinyi, Singapore is an important base for Luckin Coffee to build its brand, polish its system, and understand its overseas model. Therefore, all Luckin Coffee stores in Singapore adopt the direct-operated model, and plan to use Singapore as its Southeast Asian headquarters and expand to other countries through brand licensing.

As of the second half of 2024, Luckin Coffee has 47 stores in Singapore, making it the third largest coffee brand in Singapore. The top two are Starbucks (about 140 stores) and The Coffee Bean & Tea Leaf (about 70 stores, a long-established American coffee brand, which was later acquired by the Philippine national catering brand Jollibee and is distributed in various Southeast Asian countries).

Opening nearly 50 directly-operated stores in just over a year is not easy in Singapore, where market capacity is limited. An industry insider familiar with the investment promotion of shopping malls in Singapore told Narrow Broadcast that due to increasingly fierce brand competition, the waiting time for a store in Singapore is now more than one and a half years.

It is also subject to various high fixed costs in Singapore. According to Luckin's 2024 third-quarter report, its revenue in the Singapore market in the first three quarters was 91.4 million yuan, but its expenditure was 167.7 million yuan. The company said that the international business still "needs to reach a considerable scale" to be profitable.

In terms of price, the first cup for new customers at Luckin Coffee’s Singapore stores is 0.99 SGD, and drinks are priced at 6-8.5 SGD, with discounts ranging from 4.2-6.8 SGD (about RMB 22-37). For example, a raw coconut latte is priced at 8 SGD, with a discount of 5.6 SGD (about RMB 30). This price is close to the 6.0-8.7 SGD of Starbucks in the local market (Starbucks’ brand positioning in Singapore is not high either).

In addition to the price, Luckin Coffee faced two major controversies in Singapore. One was that the raw coconut latte was classified as D in the official beverage classification of Singapore, implying a high sugar/saturated fat content, which once caused public concern. However, some consumers said that they paid more attention to personal taste. In Singapore, where milk products can also be classified as C, there were also jokes such as "D for Delicious".

However, judging from the local hot-selling products shown in the Luckin Coffee APP, the top five best-selling products and their corresponding grades are Oatmeal Latte (B), Thick Milk Latte (C), Iced Americano (A), Latte (A) and Orange C Americano (C), which shows that consumers still prefer traditional flavored coffee with lower sugar content.

Hot-selling products in different regions, left: Malaysia, right: Singapore

The second is that Luckin Coffee relies heavily on APP orders in Singapore, which is also an invisible barrier for Singaporean consumers who have a strong awareness of personal information privacy.

This is indeed a real localization problem. On the one hand, in Singapore and other Southeast Asian regions, online ordering methods such as WeChat applets in China are almost non-existent, and manual ordering is still the norm. On the other hand, digital operations of members (including accurate push of coupons) can be said to be one of Luckin's strongest weapons at present. Without other auxiliary forms, if an independent APP is not enabled, it is almost equivalent to Luckin completely giving up this long board, which is also difficult to achieve. In the end, this problem may still need to rely on time to solve.

02 Malaysia: The first stop for cooperation and franchising, heading towards a wider Southeast Asia

Malaysia borders Singapore, has a larger market capacity, and also has a higher proportion of Chinese people and a per capita GDP level similar to that of China. It is an ideal first stop for radiating outward from Singapore.

In December 2024, after several months of preparation and screening, Luckin Coffee announced that the agency rights for Luckin Coffee in Malaysia had been won by Dazi Industrial. The latter's Dazi Group is a diversified group with deep roots in Malaysia, with 7 listed companies spanning 10 fields from chemicals to real estate to consumption, with a total market value of more than 8 billion Malaysian ringgit.

It was disclosed that Dazi Industrial will obtain Luckin Coffee's 10-year franchise rights in Malaysia, with the option to renew it twice, each for five years, after the expiration.

According to information released by Daizi Industry to local media, they hope that Luckin Coffee’s stores in Malaysia will reach 200 within two to three years. This number is considered to be the balance point for achieving profitability.

They also emphasized that one of the key points of Luckin Coffee's marketing strategy in Malaysia is the membership program, with the goal of making Luckin Coffee cover all Malaysians. This can also be seen as one of the signs that Luckin Coffee adheres to its membership strategy overseas.

In terms of the number of stores, the number one coffee brand in Malaysia is the local company ZUS Coffee, which was established in 2019 and now has more than 600 stores in Malaysia. It has also begun to expand to the neighboring Philippines, Singapore and Brunei; Starbucks, with more than 400 stores (its franchise rights in Malaysia belong to the local listed company Success Food), ranks second.

In terms of revenue scale, according to Huayang Tea House's prospectus, during the 2023 fiscal year, Starbucks Malaysia ranked first with a revenue of 1.091 billion Malaysian ringgits (approximately 1.783 billion yuan) and a net profit of 119 million Malaysian ringgits (approximately 194 million yuan), and ZUS Coffee ranked fourth with a revenue of 241 million Malaysian ringgits (approximately 394 million yuan) and a net profit of more than 10.2 million Malaysian ringgits (approximately 16.67 million yuan), which is still a large gap from the former.

ZUS Coffee is also considered to be Luckin’s biggest competitor in Malaysia. As a local brand that is recognized as imitating Luckin, ZUS Coffee has obvious traces of learning from Luckin in terms of the color and design of the APP, the general direction of coffee beverages, and the peripheral marketing of new products.

In terms of price, ZUS Coffee is priced on par with Luckin Coffee in Malaysia, and some products are slightly higher, such as its signature product CEO Latte priced at 9.90 Malaysian ringgit, and the recently promoted banana coffee series priced at 12.90 Malaysian ringgit (and launched a marketing campaign where customers can bring real bananas to stores to exchange for free banana coffee). In terms of product selection, ZUS Coffee also offers more product lines including tea latte, alcoholic coffee, lemonade, 1L large-capacity bottled coffee, etc.

On Xiaohongshu, where the penetration rate of Chinese in Malaysia is also very high, the comparison between Luckin and ZUS is definitely one of the core topics in the discussion about the opening of Luckin Coffee in Malaysia. On this issue, ZUS also expressed that it welcomes Luckin Coffee to jointly promote the coffee culture, and the most important thing is to do its best.

It is also worth mentioning that as Luckin’s old rival in China, Kudi entered the Malaysian market at the end of the year after launching its internationalization strategy in August 2023, and currently has nearly 20 stores. According to the observation of Narrowcast, these stores are usually located in non-core locations in core shopping malls.

Some media have also quoted a statement from a Kudi insider saying that unlike Luckin Coffee, which wants to pursue branding overseas, Kudi's overseas strategy is still to sell at low prices. Taking Malaysia as an example, most of Kudi's coffee is priced at 8.9 Malaysian ringgits, and with the coupons, the actual selling price is about 7.12 Malaysian ringgits (assuming 20% ​​off, about RMB 11.6), which is indeed a price advantage over Luckin Coffee and ZUS Coffee.

However, judging from the expansion speed alone, the number of Kudi's stores is obviously far from the 200 profit threshold mentioned by the big industry. Industry insiders who are familiar with Kudi's overseas expansion also mentioned to "Narrow Broadcast" that Kudi went overseas in the first half of 2024 and sold regional agency rights in many countries and regions, but because the path was too extensive, the momentum was significantly weakened in the second half of the year, and the overseas expansion team originally drawn from various provinces has been recalled.

According to the international version of the Kudi app, Kudi has launched coffee services in 13 countries and regions (official data shows that it is in 27 countries and regions overseas, with a total of more than 2,000 overseas stores). However, among these 13 countries and regions, South Korea, which once had 4 stores, was reported to close all stores in November 2024 and temporarily withdraw from the market.

03 How does Luckin Coffee view its overseas expansion?

By reviewing Luckin Coffee’s management’s descriptions of its overseas strategy on multiple occasions, we can extract three key pieces of information.

First, the domestic market will always be our base and basic foundation.

Luckin believes that from the perspective of customer base and spending power, the ceiling of China's coffee industry is still rising, and it will become the world's largest coffee consumption market. Luckin will continue to deepen its store network layout and consolidate and expand its brand advantages in China.

According to Luckin's third quarter report, Luckin's Q3 revenue exceeded 10 billion yuan for the first time to 10.181 billion yuan (a year-on-year increase of 41.4%), with a single-quarter net profit of 1.303 billion yuan and more than 21,000 stores at the end of the period. The excellent performance of domestic performance indicators and the continued involvement in the coffee supply chain are also important factors for Luckin to expand overseas.

Second, Luckin’s thinking about going overseas is systematic, and its vision is to become a world-class coffee brand.

If you want to build a brand, you should not only look at financial indicators such as revenue, profit, and market value, but also indicators related to brand mind such as the number of stores, coverage, brand image, and international influence.

Third, Luckin Coffee is aware that its overseas business is highly complex and that the overseas market requires patience, time and continuous investment.

Compared with the mature coffee markets in many overseas countries, domestic coffee consumption is still at a very early stage. As a representative brand in the early stage market, Luckin Coffee did not set its sights on replicating its successful domestic experience and rapidly expanding overseas in order to penetrate the mature market. Instead, it chose to re-explore and continue to polish its organizational model and business model, looking for more suitable ways and more flexible strategies to expand its overseas business, and to be patient in the long term.

Path dependence and the belief that going overseas is a dimensionality reduction attack are the biggest obstacles to the success of domestic brands going overseas. In the Korean market, where people are ridiculed for having iced American coffee in their blood and the per capita coffee consumption is nearly three times the global average, the failure of Kudi's single low-price strategy is also an example of this.

Of course, Luckin will still encounter many difficulties and challenges. In the discussion about Luckin Coffee in Malaysia on Xiaohongshu, some Malaysian netizens complained that Luckin Coffee tasted bland and unpalatable, and failed to live up to the expectations of a popular Chinese brand. Chinese netizens comforted them: Do we buy it because it tastes the best? Isn't it the best among the 9.9-yuan brands?

Putting aside the 9.9 yuan label and finding the next firm reason for consumers to "buy it, buy it, buy it" will be a key step in determining whether Luckin can truly leap into a world-class brand. Of course, this step can take a long time to complete if Luckin is willing.

Author | Xiao Chao (Kuala Lumpur)