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Luckin Coffee—the Chinese coffee chain that has used lossmaking, internet-focused marketing tactics to expand rapidly across China—is under increased scrutiny as it reportedly prepares for a US IPO.
Some analysts question whether the brand’s cash-burning marketing strategy can sustain Luckin’s position in the Chinese market, or if the coffee chain will burn out before reaching maturity.
Luckin Coffee has opened more than 2,000 shops since January 2018 but posted a net loss of RMB 857 million (around $128 million) over the first three quarters of 2018. And the company’s astonishing expansion doesn’t stop there. Luckin plans to surpass Starbucks by opening about 2,500 new Chinese outlets this year.
Chinese consumers have reacted positively to the brand, which has positioned itself as a more convenient, less expensive alternative to Starbucks.
One interviewee in Shanghai said he thought Luckin had found a niche audience that was different from that of Starbucks, although he himself said he had yet to drink a coffee from Luckin. “I think they are two different products,” he said. “Starbucks pays more attention to quality. They’re selling an experience. But Luckin Coffee is convenient and affordable.”
Luckin’s operations rely on a strategy called “fission marketing,” a concept conceived by Luckin Coffee’s CMO, Yang Fei. This approach focuses on storing and maintaining internet traffic in order to build a large pool of users. Luckin purchases are made entirely within the company’s app, where the coffee chain also pushes rewards to buy in bulk or refer new customers.
According to Yang’s fission marketing strategy, once the company builds a pool of users, the next step is to “pour” the traffic. Luckin does this by pushing constant coupons that reward sharing with friends.
Luckin Coffee has completed $200 million Series B at a total valuation of $2.2 billion in December 2018 with Joy Capital, Tai Chung Capital, Singapore Government Investment Corporation (GIC), CICC and other companies participating. According to an article in Sohu, the companies above are all the former investors of CAR Inc. While Luckin CEO Qian Zhiya and chairman Lu Zhengyao are all from CAR Inc. Zhihu users joke that it’s a “club deal.”
As to whether the local brand can overtake Starbucks, some Chinese coffee drinkers are optimistic. “It depends on how Luckin is positioning its brand and how it develops in the future,” said another coffee drinker in an interview. “I think anything is possible.”