Luckin Coffee wants to be Mixue Ice City, not Starbucks

From product positioning to consumer experience, in this article we will explore Luckin Coffee’s strategy for seeking breakthroughs in the market and reveal how Luckin Coffee differs from traditional coffee brands.

Five years ago, Luckin Coffee revolutionized the coffee industry and brought domestic coffee into a new era of fast-paced, low-priced coffee. Five years later, Luckin Coffee has become China's first 10,000-store chain coffee brand, with more than 16,000 stores.

For the entire coffee industry, Luckin Coffee is valuable not only because it has written a myth of rebirth, but more importantly, it has accelerated the maturation of the domestic ready-brewed coffee market and influenced the consumption habits of domestic coffee users.

As a latecomer challenging its predecessors, Luckin Coffee has been labeled as the "Chinese Starbucks" and has become a hope for domestic alternatives in the eyes of the public. However, looking through the ambitions and actions behind Luckin Coffee's 10,000 stores, Luckin Coffee's goal may never have been to become the "Chinese Starbucks" but a replica of Mixue Bingcheng.

1. Differences

When Luckin Coffee, which costs 9.9 yuan, and Starbucks, which costs 39 yuan, compete with each other, consumers may complain that Starbucks is expensive. However, in fact, people who are willing to drink Starbucks never pay for the coffee itself, but for the rent of Starbucks.

In essence, Luckin Coffee and Starbucks are two completely different businesses.

Starbucks is a typical product-oriented company that focuses on user experience and attempts to bring a higher sense of value to users at all levels.

Starbucks has been working hard to create the cultural attribute of the "third space". If you sit in a Starbucks store for an afternoon, you will most likely see a young man with a frown on his face typing on a Mac. After a few hours, he seems to have completed a plan that can finally be delivered, stretching his back and showing a long-lost smile. Perhaps, you will also see a few middle-aged men, passionately trying to collide with a grand entrepreneurial blueprint in the tug of war.

Founder Howard once said: Starbucks is not a coffee company, but a business that creates connections with people through coffee. From a brand management perspective, Starbucks is more like a disseminator of coffee culture.

Luckin Coffee has abandoned Starbucks' third space and scene culture, and instead emphasized the convenience of coffee and expanded operations, opening stores quickly to cover a wider consumer group. Although it sells coffee, it actually has the same business logic as Mixue Bingcheng.

In comparison, Nayuki's Tea seems to be more like Starbucks' model, opening large stores and emphasizing lifestyle and scenes, but under the pressure of survival it has to open up to franchising. However, it has now fallen into an embarrassing situation where not many franchisees are willing to pay.

From the perspective of consumer groups, Luckin Coffee's expansion is centered on the vast number of "urban screws" on the front lines. Most of them place orders through apps and pick up or have their coffee delivered. What they drink is not the craftsmanship of the coffee or the sense of value bestowed by the environment, but a sense of refreshing mind and professional ritual.

It is obvious that Luckin Coffee wants to win the minds of tens of millions of workers, while Starbucks is creating a social space that caters to the needs of the middle class.

According to TalkingData Intelligent Marketing Cloud data, the overlap between the actual population consuming Luckin Coffee and Starbucks is less than 8%, and the proportion of their exclusive users is around 80%, which means they are essentially two different customer groups.

Starbucks and Luckin Coffee are very different in terms of positioning, culture and core groups. However, from the perspective of business model, Starbucks' new global CEO Nasshan visited the Chinese market for the first time after taking office. In an interview, he said that Starbucks still insists on direct operation.

Direct operation means heavy assets and emphasis on systematization. Therefore, while ensuring quality, Starbucks has basically maintained an expansion rate of about 500 new stores per year in China in the past 10 years.

At the Global Investor Conference, Starbucks released its 2025 China Strategic Vision: to achieve 9,000 stores by 2025, that is, to open 1,000 new stores each year.

In September last year, Luckin Coffee had already opened a store every 37 minutes on average, and in five years, the number of stores exceeded 16,000. Lu Zhengyao, the former founder of Luckin Coffee, also summarized a universal formula for capital operation: seize the opportunity, find the right track, establish a company, raise huge amounts of funds, expand with burning money, and quickly IPO.

Luckin's asset-light, fast-paced model is obviously more in line with the current Internet business culture. Currently, there are five chain brands with more than 10,000 stores in China (Mixue Ice City, Wallace, Juewei Duck Neck, Zhengxin Chicken Steak, and Luckin Coffee), and their low-cost, high-turnover chain model is their common point.

There is no doubt that in terms of store opening speed, it may become a normal situation in the future for Luckin to surpass Starbucks. However, the bloody battle in the commercial market is never just about speed. After all, in China, what is least lacking is the short-lived "Internet celebrities", and it is much more important to walk steadily than to walk fast.

2. Commonalities

In fact, compared with Starbucks, Luckin Coffee and Mixue Ice City seem to be more in tune with each other.

At present, Luckin Coffee’s development path is already very close to that of a fast-moving consumer goods brand. Or, to be more precise, Luckin Coffee is using Mixue Ice City’s approach to make coffee.

As the taste buds of young people in small towns in the sinking market are awakened by coffee, Luckin Coffee and Mixue Ice City have both entered the same battlefield outside the Fifth Ring Road.

If the successful business logic of the past 30 years was to replicate overseas models in first-tier cities, then the next opportunity is to replicate the successful business models of first-tier cities to larger lower-tier markets.

Both Luckin Coffee and Mixue Ice City are well aware of this.

At present, in every county town in China, there must be Mixue Bingcheng scattered in various high-quality locations in the city. Of course, there is also Luckin Coffee not far away. If there is only Mixue Bingcheng and no Luckin Coffee in your city, then perhaps it is already on the way.

According to the "2023 China Coffee Market Insight Report" compiled by Kamen, the current coffee order volume in China's fourth and fifth tier cities has increased by more than 250% year-on-year.

From 2018 to now, the number of Luckin stores has increased from 2,000 to 16,000, and the distribution of store expansion has shown a clear trend of sinking to lower-tier cities since 2019. Since 2021, the number of new stores in Luckin third-tier and lower cities has exceeded that of first- and second-tier cities. Among the cities where Luckin currently allows franchisees, more and more third-, fourth-, fifth- and sixth-tier cities have appeared.

Image source: Luckin Coffee

The downward trend is unstoppable and prices are becoming cheaper and cheaper.

Once upon a time, Mixue Ice City proved the feasibility of the "high quality and affordable" route by its own trial and error, and now Luckin Coffee is following suit. To celebrate the opening of its 10,000th store, Luckin Coffee is issuing a 9.9 yuan designated coffee coupon to each user every week, with the intention of bringing "high quality" coffee into the 9.9 yuan era.

Mixue Bingcheng's style labels of fast, efficient, close to the masses and down-to-earth seem to be able to be easily attached to Luckin Coffee without any sense of incongruity.

In addition, the emergence of Luckin Coffee, like a new alien species, has opened a new chapter in the coffee and milk tea industry.

In 2020, Luckin Coffee suddenly realized that coffee is not a necessity in China, but caffeine is, or in other words, "caffeine + milk + sugar". Turning coffee into milk tea is its future path.

As a result, in April 2021, Raw Coconut Latte came out of nowhere and became a phenomenal hit product that "sold out in 1 second"; in April 2022, Coconut Cloud Latte was born, selling 660,000 cups a day, and became popular on the entire Internet; in April 2023, Iced Raw Coconut Latte sold over 6.66 million cups in the first week, setting a new record again.

You will find that after 2020, basically none of Luckin’s hit products are pure craze.

Thanks to Luckin Coffee’s improvement in milk tea, more and more consumers in the lower-tier markets are starting to try coffee. Compared with Starbucks, Luckin, with a lower unit price, is also closer to the purchasing intentions of consumers in the lower-tier markets.

Luckin Coffee has a strong brand potential and high cost-effectiveness, and is very competitive in the lower-tier markets. The same rule that no grass grows next to Mixue Ice City is also happening to Luckin Coffee. Neighboring coffee brands cannot escape Luckin Coffee's nightmare. According to a franchisee on a social platform, in Anhui's business district, Luckin Coffee's daily sales are 10 times that of Kudi Coffee.

In a nutshell, whether it is pricing, target groups, expansion model, category differentiation, or sinking trend, Luckin is becoming more and more like Mixue Bingcheng. New Retail Business Review predicts that in the near future, even Mixue Bingcheng's users may become Luckin's new growth in the sinking market.

3. Sequelae

With fierce expansion and a bright future, Luckin Coffee is undergoing a transformation from consumers’ “incomprehension” to “really good”, just like Mixue Ice City in the past. Of course, in the post-10,000-store era, the rapid development of Luckin Coffee is also accompanied by the same hidden dangers as Mixue Ice City.

Compared with Luckin’s “milky coffee, quick service, and cost-effectiveness”, Starbucks’ main selling points are “classic, environment, and brand”. Brands can make money steadily, but as a consumer product that is expanding rapidly, Luckin cannot ignore the aftereffects of its rapid expansion.

Just as Mixue Ice City, with its wide coverage, faces numerous challenges such as food safety, management out-of-control, and conflicts of interest among franchisees, Luckin Coffee's reputation is also declining.

For example, a customer once complained on social media that two-thirds of Luckin Coffee was ice. Luckin was then criticized for “after three sips, the rest was all ice” and became a hot topic on Weibo.

Image source: Weibo

There is a consensus in the industry that a chain of tens of thousands of stores is a huge competitive advantage. It not only has economies of scale, but can also obtain more marginal effects through combination innovations such as supply chain and marketing.

However, in the current coffee industry, with Starbucks in the front and Coodi and others chasing after it from the back, Coodi's pixel-level copying has also exposed the fact that the industry threshold is low and there is a lack of product barriers, casting a new question mark over Luckin's moat.

Since its establishment, Luckin Coffee has found it difficult to compete directly with Starbucks in terms of brand style, store style, and average customer spending. Most people choose Luckin Coffee because it is cheap. If Luckin Coffee loses its price advantage, the reason for choosing it will be greatly reduced.

On the other hand, if you want to maintain long-term customer loyalty and brand influence, you need to enhance service quality and customer experience while maintaining prices and advantages, but it is difficult to have both.

After weighing the pros and cons, Luckin's moat does not seem to be wide or deep. If it wants to go from an Internet celebrity to an evergreen, the test for Luckin will officially begin after it opens 10,000 stores.

The coffee world is changing rapidly, and is shifting from price wars and scale wars to competitions of comprehensive strength such as brand power, innovation, and supply chain. The industry is becoming increasingly inward-looking. By 2023, there will be 140,000 coffee stores.

Of course, the other side of the coin is the huge space for imagination.

Not long ago, when evaluating the domestic market, Starbucks' new CEO Nathhan mentioned that China's per capita coffee consumption is now 12 cups per year, while Japan is 200 cups and the United States is 380 cups, so China still has a lot of room for growth.

The sea is wide and the fish can leap. Luckin Coffee, which has been in the limelight, is still making efforts amid the applause and flowers that it is about to surpass Starbucks.

However, the sauce-flavored chocolate that Luckin Coffee recently collaborated with Moutai on not long ago did not seem to replicate the miracle of the sauce-flavored latte. Consumers’ curiosity about the new product has worn off, and the cold reception of new products may become the norm for Luckin Coffee in the future.

Author: Si Fanxing Editor: Ge Weiwei

WeChat Official Account: New Retail Business Review