Growing against the trend! Turning losses into profits! How did Luckin Coffee play the trump card of "digitalization"?

For Luckin Coffee, which has experienced many turmoil, it has achieved a year-on-year growth rate of more than 65% for three consecutive quarters, which is not easy. In today's tight offline beverage industry, Luckin Coffee has continued to expand its stores at a steady pace and its performance has continued to improve. What is its secret? Let's follow the author to find out.

On November 22, Luckin Coffee released its third-quarter financial report for 2022. During the period, Luckin's total net income reached RMB 3.895 billion, a year-on-year increase of 65.7%. Operating profit was RMB 585.3 million, and the operating profit margin reached 15.0%, breaking through double digits for the first time.

For Luckin Coffee, which has experienced many turmoil, it has achieved a year-on-year growth rate of more than 65% for three consecutive quarters, which is not easy. The rise of Luckin Coffee has caused an unprecedented impact on Starbucks' "dominant" status.

Compare the data from the second quarter of the same period: Luckin's second-quarter revenue reached US$490 million (RMB 3.298 billion), only US$50 million away from Starbucks (China). During the same period, Starbucks (China)'s revenue fell by 40% to only US$540 million.

Luckin Coffee has a total of 7,195 stores across the country, while Starbucks (China) has only 5,761. This is the first time that Luckin Coffee has more stores than Starbucks (China).

At a time when the offline beverage industry is facing a contraction, Luckin Coffee is expanding its stores at a rapid pace while its performance continues to improve. What is its secret?

Luckin Coffee's CEO Guo Jinyi gave the answer early on. The reasons for the growth come from three aspects: the continuous launch of popular products, the continuous rapid expansion of stores, and the steady increase in transaction customers.

Behind all these reasons, it is inseparable from Luckin's emphasis on and accumulation of digitalization. It can be said that Luckin's survival and counter-cyclical growth rely on the comprehensive empowerment of digitalization to its business.

1. Digital system, creating the ability to continuously create hot products

Judging from the data, the "Raw Coconut Latte" that came out of nowhere in 2021 has indeed created one sales miracle after another: "sold out in 1 second" and "100 million cups sold in 1 year". ..... Various coffee brands are scrambling to imitate it.

Thanks to the raw coconut latte, Luckin Coffee’s revenue in the second quarter of that year increased by more than 37.18% month-on-month, which to a certain extent brought the then-slumping Luckin Coffee back to life.

Especially this year's hits "Coconut Cloud Latte" and "Raw Yogurt Latte" are still breaking sales records. Not only is its ability to create hits better than its peers, but its ability to launch new products is beyond the reach of other brands.

Luckin Coffee almost maintains the pace of releasing a new product every three days. In 2020, Luckin Coffee launched a total of 77 new products, 113 new products in 2021, and 68 new products in the first half of 2022.

All of this is thanks to Luckin's strong product digital R&D capabilities.

Although Luckin launches more than 100 new products a year, the incubation of each new product involves five major digital process departments: product analysis department, menu management department, product research and development department, product testing department, and product optimization department. Each department is both collaborative and independent, and new products that fail to pass any link will be ruthlessly eliminated.

Take the whipped coconut latte, for example.

The product analysis department will investigate the popularity of raw coconut flavor in the market, analyze whether there are related competing products, and relevant information such as my country's raw coconut production and product structure in recent years, to ensure that if this product is launched, there will be no shortcomings in the supply chain.

The product development department formulates flavors based on research information. For example, by digitizing indicators such as taste, raw materials, sweetness, and aroma, the corresponding raw materials can be found through these numbers. The feasibility of new coffee flavor combinations can be evaluated by combining a large amount of order data from the store.

The menu management department will design the menu based on the relevant conclusions of the product analysis department, accurately display the positions of different products on the APP and mini-programs, and ensure that the interface jumps smoothly when consumers place orders.

The product testing department will hand over the product to the testing department for internal testing in different ranges, and then further promote it to external testing at the city dimension.

Finally, the product optimization department will coordinate the product formula operation with the SOP of existing stores to ensure that employees in terminal stores can operate more conveniently and that the product taste is more stable.

After the above steps, the birth of a new product is often accompanied by multiple "relative" products, which continuously expands Luckin's product library. Because of this, Luckin can continuously output "explosive products".

2. Digital technology drives store expansion and management

In the second quarter of this year, the epidemic caused business suspension to catering and retail companies, and Luckin was not immune. In the second quarter, Luckin temporarily closed an average of about 670 stores per day, close to 10% of the total number of stores. In April and May, when the epidemic was at its peak, the average number of stores temporarily closed nationwide was as high as about 900 per day. But even under the epidemic, Luckin opened 615 new stores in the second quarter of 2022, nearly 50 more than in the first quarter. Behind this seemingly crazy expansion is actually the standardization and digitization of Luckin's store opening decision-making process.

Luckin has a precise site selection model. By tracking food delivery app purchases through big data, it can accurately locate areas with high concentrations of potential users and then open a store in that area.

So you will find that Luckin's stores are mainly concentrated in some business office buildings or lobbies, which are popular areas for white-collar workers who order takeout. In other words, Luckin's strategy of "surrounding the city with business" in site selection is a decision made by "algorithm".

If the order volume of certain communities or office buildings is particularly large, Luckin will open an additional store nearby. If the order volume of a store is not as expected, Luckin's system will automatically remind you of the location problem and respond quickly to change the location.

Driven by the growth in scale, Luckin's average monthly transaction customers increased by 70.5% year-on-year to 25.1 million. Although Luckin's store opening style is similar to that of a few years ago, many key performance indicators now show that Luckin is growing rapidly and healthily.

With the rapid growth of stores, how to ensure the consistent quality of coffee across the country became a problem. Luckin's solution was to standardize the steps of making coffee.

Luckin uses customized equipment and incorporates it into Luckin's digital system. The backend can remotely monitor the operating status of coffee production, sales, maintenance, etc. The clerk only needs to click on the corresponding product on the screen to extract coffee according to the backend order, and then add other ingredients according to the SOP regulations.

At the same time, the backend system also provides conditional inquiries such as sales records, beverage production records, and equipment failure records, so that store managers can understand in real time how many cups are produced each day, costs, revenues, etc.

At the management level, Luckin Coffee has also fully achieved "digital management".

For example, in the traditional store model, store clerks need to do their own clearing and inventory every day and order materials based on losses.

Luckin Coffee can standardize purchasing decisions. The system will judge demand based on recent orders and automatically push a purchase quantity. Even if the store manager is inexperienced, he can determine the purchase based on this number and the store manager will be responsible for execution.

It has to be said that Luckin's digital capabilities have penetrated into every aspect of its stores, relying on standardization and process-based processes to solve problems with store opening efficiency and operational efficiency.

3. Digitalization empowers private domains and fine-tunes user operations

Data shows that Luckin's private domain users have accumulated more than 20 million, and the number of communities has exceeded 35,000. Although Luckin's success does not entirely rely on private domains, it relies on refined operations to continuously lock in old users, thereby continuously feeding back offline customer traffic.

In a sense, Luckin's achievements today are inseparable from its vigorous promotion of private domain construction in 2020.

Back in April 2020, Luckin Coffee "exposed" false transactions, and then suffered a stock price "earthquake", was investigated by regulatory authorities, and filed class action lawsuits by investors. Hundreds of billions of market value evaporated overnight, and Luckin Coffee ushered in the "darkest moment" since its establishment.

Faced with internal and external troubles, Luckin realized that it could only survive if it retained its users. Coincidentally, in 2020, the private domain economy exploded, so Luckin began to vigorously promote the private domain.

In just a few months, Luckin Coffee has connected 1.8 million users through WeChat for Business, of which 1.1 million users have joined store communities. At the same time, with the help of the API interface provided by WeChat for Business, many plug-ins and functions have been developed to help employees improve the efficiency and effectiveness of private domain operations.

Luckin Coffee customized more than a dozen tools on the WeChat Workstation

In addition to routine operational actions and distributing "benefits", Luckin Coffee has carried out more sophisticated operational actions through digital technology.

For example: Luckin Coffee has connected a third-party weather system to its corporate WeChat account, which automatically changes push text based on temperature and weather factors. It pushes cooling cold drinks to users in high-temperature areas and heart-warming hot drinks to users in low-temperature areas. It uses refined private-domain operations to awaken user demand and make repeat purchases happen naturally.

For example, at noon on October 12, 2021, push notifications were made to the community during the same time period. When cold drinks were recommended to cities with high temperatures and hot drinks were recommended to cities with lower temperatures, the order conversion rate was significantly improved.

In addition, employees can automatically receive reminders of extreme weather, and increase the delivery of coupons and pop-up reminders on the user side, making it easier for employees to provide humane services to users in the private domain, improving conversions while actively conveying the warmth of the brand.

Automatic alerts for extreme weather

It is understood that Luckin's "blacklist rate" is less than 0.03%, while many brands have even reached more than 10%. The reason is that Luckin really makes users feel that they are enjoying 1v1 personalized service.

For example, in content promotion and dissemination, Luckin uses digital means to deeply understand users' preferences and habits, and pushes different content to different users based on user portraits and user tags, thereby achieving personalized content for thousands of people, rather than simply sending it to groups with one click.

If a user likes American coffee, Luckin will not push new latte products to the customer; when new American coffee products are launched, Luckin will push new product information and coupons to the customer to encourage the user to place an order.

A series of refined operations had immediate effects. The consumption frequency of the 1.8 million users that Luckin initially connected increased by 30%, and the number of weekly repeat purchases increased by 28%. More than 35,000 cups of coffee were sold through private domains every day, accounting for about 4% of the number of cups of coffee sold by Luckin every day at that time.

Today, Luckin’s private domain operations have become an industry benchmark, and “private domain” has become an integral part of Luckin.

Final Thoughts

There is no doubt that Luckin Coffee's "turnaround" case has brought valuable inspiration to many domestic coffee brands. "User-centric" has never been a slogan. If you want to do a good job in digital transformation and private domain operations, you must truly think about problems from the user's perspective. This is the correct brand development path for today's consumers.

However, competition in the current coffee market remains fierce. We will have to wait and see whether Luckin Coffee can stand out from other brands and continue to maintain growth.

Author: Yan Tao Sanshou

Source: WeChat public account "Yan Tao Sanshou (ID: yantao-219)"