China’s Luckin Coffee plans US launch in comeback from fraud scandal

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

China’s largest coffee chain, Luckin Coffee, is planning to enter the US market and undercut rivals including Starbucks with its low-priced drinks, marking a comeback for the company after a fraud scandal that resulted in its Nasdaq delisting and a $180mn fine.

The Xiamen-based company is laying the groundwork for a US launch as early as next year, building out its supply chain and customising its technology for the market, according to two people with knowledge of the matter.

The expansion comes nearly five years after it was exposed for inflating revenues after raising $645mn in a US initial public offering in 2019. The fraud led to a wave of investor lawsuits and the company being booted off the main Nasdaq exchange.

Luckin’s annual revenue of Rmb24.9bn ($3.5bn) exceeded Starbucks’ in China for the first time in 2023, though Starbucks has fewer outlets and its sales per store in China tend to be higher. The company’s revenue rose 35 per cent in the second quarter of this year to Rmb8.4bn, with Rmb871mn in net income.

In July, Luckin said it opened its 20,000th store in the country, while Starbucks has just over 7,300 locations. The Seattle-based company’s China slowdown is coming as sales are falling in the US, with the number of transactions declining by a tenth in its latest quarter. Brian Niccol, the company’s new chief executive, has said his priority is reviving US growth.

Luckin will target cities with large numbers of Chinese students and tourists such as New York, the people said. The company has been running advertisements during NBA games to build name recognition ahead of its planned launched, added one of the people.

Luckin wants to leverage its experience selling affordable coffee in China and undercut US incumbents by selling drinks priced around $2 or $3, the people added.

Luckin Coffee declined to comment.

“Luckin Coffee is one of the great turnaround stories in Chinese business history,” said Shaun Rein, founder of China Market Research Group. “Many people thought they were dead, but underlying the fraud was a company with great technology and decent coffee at a competitive price.

“Over the past three years, Luckin has grabbed massive market share from Starbucks in China,” he added. “Now, it is coming after Starbucks on its home turf.”

Since the scandal, Luckin has overhauled its top management, kicking out the founder Lu Zhengyao, who Luckin alleges was responsible for the fraud. Lu did not respond to a request for comment.

Beijing-based private equity group Centurium Capital, an early investor in the company, became its controlling shareholder after acquiring the founder’s stake.

Luckin has been building out its supply chain as it prepares for the US launch and an expansion in south-east Asia. This year, it opened a $120mn roasting plant with an annual roasting capacity of 30,000 tonnes in Kunshan in the eastern province of Jiangsu.

Luckin will have to adapt its cashless business model to the US market, said experts. Customers in its China stores have to order through an app, which offers discounts for group purchases and collects a wealth of data on consumer behaviour.

“The customer service experience here is just so different,” said Sharon Zackfia, a US-based consumer analyst at investment bank William Blair. “Starbucks kind of owns this market.”

The US coffee market is fiercely competitive. Besides Starbucks’ nearly 17,000 US stores, coffee-and-doughnuts chain Dunkin’ has more than 9,500 locations. New York-listed Dutch Bros has about 900 drive-through coffee outlets after expanding by a fifth in the past year. Meanwhile, coffee is sold everywhere from McDonald’s to convenience stores.

“Luckin faces a new challenge in the US, which is very saturated. Whereas in China it is opening up new markets with its coffee, bringing new consumers to the drink, in the US, the consumers already know what coffee is and have expectations,” said John Zolidis, founder of investment adviser Quo Vadis Capital.