The Rise of a Chinese Coffee Powerhouse: A Super-Affordable Brand with Over 20,000 Stores in its Domestic Market, Set to Challenge the US and Southeast Asian Beverage Industries.

China’s largest coffee chain, Luckin Coffee, is planning to enter the US market and take on competitors including Starbucks with cheap drinks, marking the company’s comeback after a fraud scandal that saw it delisted from the Nasdaq and fined $180 million.

The expansion comes nearly five years after the company was found to have fabricated sales after raising $645 million in its 2019 initial public offering in the US. The fraud triggered a wave of lawsuits from investors.

According to industry sources, the Xiamen-based company is laying the groundwork for a US launch early next year, building its supply chain, and tailoring its technology to suit the market.

In the wake of the scandal, Luckin overhauled its senior leadership, ousting founder Lu Zhengyao, who was accused of being responsible for the fraud. Private equity firm Centurium Capital, based in Beijing and an early investor in the company, became the controlling shareholder after buying out the founder’s stake.

In China, Luckin’s annual revenue for 2023 was Rmb24.9 billion ($3.5 billion), officially surpassing Starbucks in China for the first time. The company’s revenue grew 35 per cent in the second quarter of this year to Rmb8.4 billion, with net income of Rmb871 million.

In July, Luckin said it had opened its 20,000th store in the domestic market, while Starbucks has just over 7,300 locations. Luckin will target cities with large numbers of students and Chinese tourists, such as New York. The brand wants to leverage its experience of selling affordable coffee in China to take on competitors in the US by selling drinks for around $2 or $3.

“Luckin Coffee is one of the classic examples of business model pivots in China,” said Shaun Rein, founder of China Market Research Group. “Ignoring the previous scandals, they still have great technology, good coffee, and competitive prices. In the past three years, Luckin has taken huge market share from Starbucks in China.”

Luckin is building its supply chain as it prepares for its US launch and expands in Southeast Asia. This year, it opened a $120 million roasting plant with an annual capacity of 30,000 tons in Kunshan, eastern Jiangsu province.

Experts say Luckin will have to adjust its cashless business model to suit the US market. Customers at its stores in China must order via an app that offers various discounts for group purchases and collects a lot of consumer behavior data.

“The customer experience there is very different. Starbucks really owns that market,” said Sharon Zackfia, consumer analyst at US investment bank William Blair.

The US coffee market is highly competitive. In addition to Starbucks’ nearly 17,000 stores in the US, the Dunkin’ coffee and doughnut chain has more than 9,500 locations. Dutch Bros also has about 900 drive-thru coffee shops, while coffee is sold everywhere from McDonald’s to convenience stores.

According to FT