7 Things Everyone Is Getting Wrong About the Luckin IPO (Pt 1 of 2)


So Luckin has filed for an IPO and we finally got to see their numbers. And yes, there are red flags all over the place. Big operating losses, funky corporate structures, speculative revenue growth and so on.

And this is not uncommon in a tech / internet ipo. But I don’t recall ever seeing this picture in a retailer. The filing has lots of detail about tech and financing / legal structures – and not that much about actually selling coffee. Has a retail coffee company ever offered dual class shares before?

Overall, I didn’t see any real surprises in strategy or execution. And based on that, here are seven things I think people are getting wrong about Luckin and its IPO.

#1: Chinese consumers may not like coffee that much.

The whole company is predicated on a big opportunity to increase mass-market coffee consumption in China. And the filing is very clear about targeting three pain points to make this happen. They state that fresh-brewed coffee consumption growth in China is limited by inconvenience (fresh brewed, not ready to drink), high price and variations in quality.

Hence, their strategy of building a huge network of outlets (more convenient), offering easy ordering by smartphone and standardizing quality. They say this will solve the main pain points and increase mass market coffee consumption.

Low price plus increased convenience is a common strategy in the digital world. Bike-sharing (Mobike) was based on low price and increased convenience. Ride-sharing (Didi, Uber) is mostly about convenience. Airbnb is mostly about low price (plus convenience).

If their strategy works and they get an increase in coffee consumption in China, their numbers will all start to look great. It is, in fact, a massive opportunity.

However, if something isn’t happening, there is usually a reason why. Coffee consumption has been very low in China for a long time. Sometimes low demand means consumers just don’t like it. Taco Bell has failed twice in China because Chinese consumers don’t like Mexican food that much. Krispy Kreme donuts failed because it was too sweet. In both cases, Chinese consumers tried their products and decided they just didn’t like it that much.

So what if Chinese consumers just don’t like coffee that much? Which is what the numbers kind of show today.

The numbers I was looking for in the IPO filing were for traffic overall and for same store sales. Typical retail stuff. I didn’t really see them. Is traffic increasing? It it falling? The overall customer traffic from 4Q 2018 to 1Q 2019 looked basically flat, despite lots of new store openings. That is not good.

We’ll see.

#2: Their digital-first business is reducing the cost structure of fresh-brewed coffee. This is important.

Significantly lowering the price of fresh-brewed coffee (not ready-to-drink) requires significantly reducing the cost structure. And that is what their pick-up business model (+90% of their stores) is doing. This does drop the real estate and staffing costs of retail coffee. That is the real innovation here.

Looking at their cost numbers, it’s hard to know how much cheaper their stores are. Plus, they account for it differently from Starbucks so it’s hard to do apples-to-apples comparison. But it certainly looks a lot cheaper (if you can get enough traffic per store).

Overall, it looks like they are executing well and rapidly with an innovative and cheaper business model for fresh brewed coffee. And if anything is going to move the needle on coffee consumption in China it is low prices.

#3: You don’t win in retail with hyper-scaling.

One of the things the IPO document talks about is the scalability of their business model. And about how rapidly they are opening outlets.

Scalability is something tech companies and venture capitalists obsess about. However, hyper-scaling is not usually how you win in retail. There are no network effects. It is not a winner-take-all business where you have to get big first. I’m not really sure why Luckin is so focused on rapid growth.

In retail, you usually win by obsessing over the details. You focus on locations, product mix, the consumer experience and other details. It’s a game operations.

And most retailers spend a lot of time getting the product-market fit and consumer experience perfect going after growth. It took KFC almost twenty years to get to 3,000 outlets in China. And it took McDonalds 20 years just to get to 1,000.

Luckin looks to me like a company that has scaled very rapidly before there was a proven product-market fit. There are some benefits to being first and getting to operational scale. But I don’t see the reason for this type of hyper-scaling approach.  But we’ll see what happens.

#4: Digital and new retail don’t really change coffee that much.

When you combine the online and offline assets of supermarkets into one seamless, data-driven experience, it really transforms supermarkets. There is simply no comparison between what Alibaba Hema is offering and traditional supermarkets. Sometimes digital and new retail completely transform the consumer experience.

But digitizing retail coffee doesn’t really change the consumer experience that much. You order on your phone. You pay with mobile pay. You pick it up or have it delivered. But you’re still just buying a cup of coffee and drinking it. The consumer experience is slightly upgraded but that’s about it. Traditional retail coffee is still pretty competitive – and is definitely not being disrupted.

Kai Fu Li calls this OMO (online-merge-offline) and it is a huge deal in certain areas like fashion, apparel, supermarkets, education and healthcare. But it is just not that big a deal in buying a cup of coffee.


That’s it for Part 1. In Part 2, I’ll go through the remaining three.

Cheers, jeff


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.


Comments are closed.