Locked In Overheated Battle With Its Clone At Home, Luckin Eyes Expansion In U.S.

Key Takeaways:

• Luckin Coffee plans to expand to the U.S. and other markets following its first offshore move into Singapore, as competition remains stiff and demand weakens at home
• The budget coffee chain’s quarterly revenue exceeded 10 billion yuan for the first time in the three months to September, up 41% year-on-year

By Xiao Lin

“Going out” was and remains a mantra for Chinese businesses in search of new growth opportunities and relief from fierce competition at home. But the latter part of that equation, going out to escape competition, is quickly becoming yesterday’s story as Chinese companies increasingly encounter their domestic rivals in overseas markets as well.

First it was smartphone makers, then bubble tea and electric vehicle makers. Now, coffee is shaping up as the next overseas battlefield for two of China’s most aggressive chains, Luckin Coffee Inc. LKNCY and Cotti Coffee, its clone of sorts that was founded by Luckin’s original founding duo after being booted from Luckin due to an accounting scandal.

Cotti has ignited a relentless price war in China by selling most of its brews for just 9.9 yuan per cup, or about $1.26, prompting Luckin to join in with its own drinks at that price point. The resulting coffee war has hurt not only Luckin, but just about everyone else on China’s vibrant coffee scene, including global giant Starbucks SBUX.

Despite losses from its first overseas exploration in Singapore, where it opened its first non-China location last year, Luckin said it is exploring opportunities in the U.S. and other markets, according to its latest quarterly results announced last week. That came as it also reported strong revenue growth on aggressive new store openings, and as its margins stabilized more than a year into the price wars that have plagued the sector.

“The international market is full of opportunity, but it also presents significant challenges,” said Chairman and CEO Guo Jinyi on the company’s earnings call. He didn’t elaborate, but the Financial Times reported that Luckin could launch its first U.S. store as early as next year, targeting cities with large numbers of Chinese students and tourists such as New York. It will offer coffees priced around $2 or $3, throwing down the gauntlet to Starbucks and other chains that typically charge much more. The company is also reportedly planning to enter Hong Kong with the opening of two new stores in the city, according to local media reports.

The U.S. move would also mark a homecoming of sorts for Luckin, since the company was booted from the Nasdaq and fined $180 million after its accounting scandal in 2020 involving 2.2 billion yuan ($310 million) in fabricated sales.

Nearly five years later, Luckin appears to have emerged stronger under its new management. It has overtaken Starbucks to become the largest coffee chain in China. But it remains haunted by its two co-founders, Lu Zhengyao and Jenny Qian, who have cloned the company’s strategies even more aggressively at Coffi.

Chinese startups are no strangers to price wars, using the cash-burning strategy since the early 2010s to rapidly expand, creating tech giants like DiDi Global and PDD Holdings. Luckin, which rose to prominence on its low prices, is now getting a taste of its own medicine from Cotti. Its younger rival started its 9.9 yuan pricing strategy early last year only a few months after launching its first store in the city of Fuzhou in South China’s Fujian province, forcing Luckin to follow suit.

Lightning expansion

Cotti has opened new stores at a lightning pace since then, including its 10,000thlast month, with plans to add another 40,000 more by the end of next year. Cotti has employed the kinds of aggressive tactics that got Luckin to where it is, including rewarding franchisees for opening stores close to Luckin’s, according to multiple media reports.

The fierce price wars are squeezing Luckin’s profitability and especially its same-store sales, though its latest report showed some signs of relief from the price wars.

Luckin’s latest quarterly revenues totaled 10.2 billion yuan ($1.4 billion), exceeding the 10 billion yuan mark for the first time in the three months to September, up 41.4% year-on-year. While impressive, the growth lagged the company’s store expansion over the same period, which rose 61% to 21,343 outlets.

Luckin’s operating expenses also remained high due to the rapid pace of new store openings, at 84.7% of total revenue. These expenses grew 38.2% from the same period last year, roughly in line with its revenue growth.

The impact of the price wars and rapid expansion were most evident in the company’s same-store sales, which fell 13.1% in the third quarter. While that looks bad, it was actually an improvement from the last two quarters, which both saw drops of over 20%. Same-store sales grew 19.9% in the same period last year.

Starbucks’ same-store sales in China also suffered, dropping 14% in its latest quarter through September.

In a positive sign, Luckin’s store-level margins showed signs of stabilizing in the third quarter, and its operating margin even improved to 15.3% for the period from 13.4% a year earlier. That helped the company to report net income of 1.3 billion yuan for the quarter, up from 988 million yuan a year earlier.

Following its publication of the results, Luckin’s shares, which are still traded over-the-counter in New York, rallied for two days before giving back some of their gains on Friday. Despite a recent bull run for Chinese stocks, Luckin is still down about 25% over the last year. The company’s stock trades at a price-to-earnings (P/E) ratio of 24, behind the 30 for Starbucks but ahead of the 22 for fast food operator Yum China YUMC, which is also expanding aggressively into the coffee space.

Luckin’s overseas foray dates back to March 2023 when it opened its first two stores in Singapore. Cotti showed up in the market just nine months later, offering coffee at its first Singaporean store for about S$3.99 ($3) per cup, roughly 20% less than Luckin’s average price of S$5, according to media reports.

Luckin said that it had opened 45 stores in Singapore by the end of the third quarter and recorded a loss of about 76.3 million yuan there for the first nine months of this year.

Cotti beat Luckin to the U.S. by opening its first store in Hawaii last year and a second one in Los Angeles early this year, offering Americanos for $2.99.

Luckin said it is not expecting near-term profitability from its international push and will instead aim to reach significant scale first, following its China strategy. Recognizing the stiff competition it will meet in the U.S. from established players, the company said, “we intend to approach our expansion strategy there with careful consideration and a disciplined execution plan.”

“It indeed requires patience, time and continuous investment,” said Chairman Guo.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.