For many Americans, the image of grabbing a coffee often conjures up scenes of bustling Starbucks locations, the siren logo a ubiquitous symbol of the daily caffeine ritual. But across the Pacific, a different kind of coffee revolution is brewing, one led by a homegrown Chinese brand that has not only captured the hearts (and wallets) of Chinese consumers but is also starting to redefine the global coffee landscape. That brand is Luckin Coffee, and its story is far more than just a tale of caffeine and commerce; it’s a fascinating case study in how a local brand, through strategic innovation, savvy pricing, and a deep understanding of its market, can disrupt established giants and usher in a new era of consumerism.
In recent financial reports, according to reports from Titanium Media, Luckin Coffee has announced a stunning turnaround, shaking off past controversies and emerging as a dominant force. For the full year of 2024, Luckin reported a total net revenue of 34.475 billion RMB (approximately $4.8 billion USD), a staggering 38.4% increase year-over-year. Operating profit under Generally Accepted Accounting Principles (GAAP) reached 3.538 billion RMB ($490 million USD), marking a robust 16.9% increase. What’s particularly impressive is Luckin’s performance during the fourth quarter, traditionally a slower period for the coffee industry. Despite rising coffee bean prices globally, their operating profit for Q4 2024 hit 995 million RMB ($136 million USD), a dramatic 367.8% surge compared to the same period the previous year.
This isn’t just about Luckin making more money; it signifies a fundamental shift in their business model and profitability. Same-store sales, a critical indicator of a retail chain’s health, also showed remarkable improvement. After experiencing declines in the first three quarters of 2024 (-20.3%, -20.9%, and -13.1% respectively), Luckin managed to narrow the gap significantly in the fourth quarter to just -3.4%, even achieving positive growth in same-store sales for the month of December. This turnaround is crucial for franchisees, who often struggle to achieve profitability as a brand expands. Luckin’s improved single-store profitability suggests that franchisees are no longer trapped in a “scale hell,” where more stores mean less profit per store.
Having seemingly escaped the intense “9.9 RMB era”—a period of aggressive price wars—Luckin is now thriving. But the question on everyone’s mind, both in China and globally, is: what’s next? Having successfully rewritten the rules of coffee consumption in China, how will Luckin navigate its next phase of growth, and what are its ambitions on the world stage?
Bidding Farewell to “9.9,” Embracing Strategic Price Adjustments
The global coffee market is currently facing a significant challenge: soaring coffee bean prices. Just ask South Koreans, who are known for their love of iced Americanos. They’ve started importing “beanless coffee” as international coffee bean futures prices hit historic highs, with a nearly 118.57% increase in the past year alone. This price surge is a major headache for green bean wholesalers and coffee retailers alike. Japanese coffee brand Ajinomoto AGF and Brazilian coffee roasters like JDE and PEETS have already announced price hikes on their products earlier this year.
Interestingly, in China, major coffee chains like Starbucks, Costa Coffee (known as TIMS China), and even Luckin’s aggressive competitor, Cotti Coffee, have publicly stated that they haven’t been significantly impacted by the rising bean prices. In fact, Luckin even went against the grain by lowering its supply prices for raw materials, including coffee beans, to its franchisees at the end of last year, with coffee bean prices dropping by a substantial 16.8%.
While rising coffee bean costs undoubtedly squeeze profit margins for coffee shops, larger chains with robust supply chains are better positioned to weather these fluctuations. Firstly, these chains have invested heavily in their supply networks. Luckin, for example, recently announced a massive 240,000-ton coffee bean procurement agreement with the Brazilian Export and Investment Promotion Agency. This scale provides them with significant leverage to mitigate market volatility, minimizing the impact of short-term price swings on their overall costs.
Secondly, the cost of coffee beans isn’t as dominant in the price of a cup of coffee as one might imagine. According to a research report by China Merchants Securities, beans account for only about 3.6% of the cost of a Luckin Raw Coconut Latte. Labor, rent, and marketing expenses make up a much larger portion of the overall cost. Therefore, chains can often offset bean price increases through operational efficiencies, such as optimizing their supply chains and increasing sales volume.
Luckin’s “counter-intuitive” move to lower raw material costs for franchisees makes perfect sense in this context. It boosts franchisee confidence, ensuring they can maintain profitability. Improved single-store operational efficiency leads to greater economies of scale, which in turn can help Luckin capture market share from smaller coffee shops struggling with rising costs.
Simultaneously, leveraging the industry narrative of rising coffee bean prices, Luckin has strategically pulled back from the deep end of the price war. In the first half of 2024, they began adjusting their “9.9 RMB promotion.” The prominent “9.9 RMB coupon” that used to pop up immediately when opening the Luckin app disappeared, replaced by a less aggressive “Weekly 9.9” zone. While still offering 9.9 RMB coffees, the selection was significantly reduced to fewer than ten options.
This year, Luckin has taken it a step further, implementing price increases. Products that were previously priced at 29 RMB are now listed at 32 RMB, a roughly 3 RMB per cup increase. The “9.9 RMB zone” now features only three coffee choices, with most of their classic drinks effectively priced around 12.9 RMB.
Both the reduction in raw material costs for franchisees and the scaling back of “9.9 RMB coffee” promotions point to the same strategic goal: enhancing store profitability. In the first three quarters of 2024, Luckin achieved revenue of 24.862 billion RMB, a 39.4% year-over-year increase. However, net profit was 2.091 billion RMB, a decrease of 18.1% compared to the previous year. While Q3 revenue hit a record high, same-store sales growth had been declining for three consecutive quarters amidst rapid store expansion. In Q1 and Q2 of 2024, net profit also showed a downward trend, only recovering slightly in Q3.
Luckin attributed the profit decline, and even a loss in Q1 2024, to a decrease in the average selling price of their products. The rapid expansion and ongoing price wars were starting to backfire on their financial performance. As a result, Luckin slowed down its store expansion rate throughout 2024, gradually returning to the pre-price war expansion pace of 2023.
By mitigating the negative impact of store expansion on existing store sales, Luckin has been able to improve store profitability through price adjustments and lower raw material costs. In Q4 2024, both cup volume and average selling price per cup increased, leading to a significant narrowing of the decline in same-store sales.
In the internet era, the capital market once embraced “scale above all else.” But whether scale becomes a “hell” or a “flywheel” ultimately depends on a company’s ability to build a sustainable and virtuous cycle in its business model. Currently, Luckin’s business model and operational efficiency are showing clear signs of validation.
Venturing into “12.9”: Luckin Reimagines its Positioning
Despite the trend of price increases for several of Luckin’s products, CEO Guo Jinyi stated, “The company currently has no plans or intentions to raise prices, and the 9.9 RMB coffee promotion will continue.” While Luckin is indeed maintaining the “9.9 RMB coffee,” it appears less about continuing a price war with competitors and more about retaining price-sensitive consumers while signaling a shift away from being solely perceived as a “low-price” brand.
On one hand, Luckin has the financial strength to sustain promotional activities. In Q4 2024, their single-store operating profit margin further improved to 19.6%. With this buffer, maintaining a foothold in the low-price market can effectively deter aggressive counterattacks from rivals.
On the other hand, 9.9 RMB is arguably the lowest sustainable price point for coffee chains given current operating costs. Any new entrants to the market will have to consider this “bottom line.” For Luckin, which aims to further penetrate lower-tier cities, this “price benchmark” remains strategically important.
However, in these lower-tier markets, Luckin’s story becomes less straightforward. Since 2021, Luckin has been gradually expanding into third, fourth, and fifth-tier cities. Currently, it has over 8,000 franchise stores primarily targeting these markets, contributing about 20% of its total revenue. Compared to directly operated stores, which are mostly concentrated in first and second-tier cities, franchise stores in lower-tier cities generally have weaker profitability.
Firstly, consumers in lower-tier cities are more sensitive to coffee prices. In the sub-9.9 RMB price range, Luckin faces even fiercer competition, including brands like Cotti Coffee, which has famously promoted prices as low as 6.9 RMB.
Secondly, coffee consumption habits in lower-tier cities are still developing. Data indicates that coffee consumption frequency in lower-tier markets is only about one-third of that in first-tier cities, slowing down the return on investment for individual stores.
Given the challenges of deeper market penetration at lower price points, raising prices becomes a logical strategic move. By establishing a price system at a higher range, Luckin can differentiate itself from homogeneous competition, a sign of brand maturation.
For Luckin, however, transitioning from the “9.9 RMB” to the “12.9 RMB” market is not merely about adding three RMB to the price tag. It’s about how to leverage continuous new product launches, particularly “blockbuster” products, to gradually weaken consumers’ price anchoring on “9.9 RMB.”
In 2024, Luckin launched an impressive 119 new products, averaging almost one new product every three days. Among them, the newly launched Little Butter Latte in late September became the second best-selling product in Q4, only behind the perennial favorite Raw Coconut Latte. Frequent collaborations with popular culture IPs, including “Black Myth: Wukong,” “Tom and Jerry,” and “Pingu,” not only kept consumers engaged but also generated significant marketing buzz.
In Q4 2024, even though Luckin reduced promotional力度, the number of monthly active paying users still increased by 24.5% year-over-year, indicating a growing consumer habit. Moving forward, Luckin is poised to explore a new positioning beyond just “high-value coffee” and “premium business coffee.” By balancing price competitiveness and perceived value, Luckin aims to secure a brand value space that allows for sustainable premiumization.
Cultivating Brand Equity, Going Global Without Relying on Low Prices
The international market undoubtedly presents an even larger testing ground. In the domestic market, Luckin must still carry the “9.9 RMB coffee” banner while exploring the possibilities of “12.9 RMB coffee.”
But in overseas markets, Luckin is free from many of these constraints. According to LatePost, citing sources close to Luckin, their international expansion strategy will not replicate the domestic price war and rapid expansion approach. Instead, they aim to coexist with multiple brands in the long term, gradually establishing brand recognition.
At the end of last year, Luckin officially entered the Hong Kong market, with drink prices generally ranging from 39-45 HKD (approximately $5-6 USD), comparable to Starbucks’ prices. In Singapore, Luckin’s drinks are priced between 22-37 RMB (approximately $3-5 USD), similarly positioned near Starbucks’ local pricing.
Unlike Cotti Coffee and Mixue Ice Cream, which are pursuing global expansion with a continued low-price strategy, Luckin has chosen a distinctly different path. However, “low price” has, to some extent, become a label for Chinese coffee brands. To shed this label and succeed internationally, how will Luckin navigate overseas markets?
To answer this, it’s crucial to understand the differences between domestic and international coffee cultures and markets. While coffee culture might be considered “imported” for many Chinese consumers, it is a deeply ingrained cultural norm in many overseas markets.
Starbucks’ international business success is not solely due to brand recognition; it stems from a deep understanding of the diverse coffee preferences across different countries. In China, coffee evolved from a “business need” to a “workday necessity.” In other countries, coffee consumption is closely tied to individual dietary habits. Diversity and customization are key selling points for Starbucks, offering options for sweetness, milk types, and flavorings.
If Luckin fails to grasp the demand for “personalization” among international consumers and relies solely on “low price” as its competitive edge, it will be challenging to gain significant market share in mature overseas markets, let alone sustain growth.
Furthermore, various countries already have established coffee brands and supply chains. Luckin has been operating in Singapore for over a year and a half, but has not yet achieved profitability. Industry insiders suggest that Luckin’s international business needs to scale up to reach profitability. If they want to avoid “burning money for scale,” they will need to invest more time and patience in overseas markets.
However, the value of Luckin’s international expansion is already becoming apparent. The “quality coffee” image they are building overseas is starting to filter back to the domestic market through social media and cross-border consumer groups. Their pricing strategy breakthrough in international markets is also contributing to the brand’s upward trajectory.
When international consumers share photos of Luckin’s collaborative drinks on Instagram, young Chinese consumers begin to re-evaluate this brand, which was once primarily associated with “cheap coffee.”
Of course, as highlighted in a recent article from Consumption Research Institute, Luckin Coffee’s growth path is providing new inspiration for Chinese consumer brands. According to a report by Value Planet, in 2023, the total number of coffee consumers in China approached 400 million. Luckin’s brand growth not only demonstrates an upgraded path of “value-driven” development but is also an epitome of Chinese consumer brands continuously maturing, establishing systematic competitiveness, and building cultural value. As brand assets gradually accumulate, Luckin’s process of reshaping consumer discourse power in the Chinese coffee market is accelerating, also providing a reliable new benchmark for the long-term development of Chinese brands.
Undoubtedly, Luckin will encounter numerous difficulties and challenges in its international expansion. But in the long-term race of brand building, the current Luckin possesses a newfound confidence to break through its limitations and redefine its place in the global coffee industry. The journey is just beginning, but the aroma of change is undeniably in the air.
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