The Pilot - Luckin Coffee
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Okay, so we all say welcome to digital china. I am recording.

yeah OK.

Welcome to in china A D cast about the fascinating ese dusty CTO get with .

radio and am tom.

I'm basically here. So time doesn't get Carried away with the tech height machine. So what a lot of people don't realize about china's tech industry is that there are these waves of buzz ds that take over. So with bike sharing, a quickly developed to battery pack sharing, umbrella sharing, basketball sharing, exert. So when you read headlines from trying to tech industry, you really have to dig deeper and understand what's happening on the ground, which is kind of why we doing this podcast.

IT is actually the hype. She'd got us here in the first place for this .

new test especial. Yes, the difference is you love IT, whether I hate.

Point to various studies.

china's game industry is now conduct the largest in the world world, you may know their messaging .

chinese outbound and a chinese programs provide internal properties of the case.

So how we never china .

is show me, yes, it's state, it's claim the apple .

major deal over in china. Chinese tech giants ten sent meeting at eight point six billion dollars position to buy a major stake and .

super self forty two point three billion dollars in sales clock by a chinese e commerce site in one wild.

So a few weeks ago, we were talking about lucking coffee, which at the time we kind of caught glorified coffee APP, that we raised a ridiculous amount of funding valuation.

one billion dollars and basically APP where you can order coffee, which is not anything .

unique at all in china, right? I mean, here you can get a french fries, three course meal, even hot pot, deliver to your house. So idea that like a coffee or a cup of coffee comes to your apartment or workplace is not fresh or unique at all. And it's been hype deliver media as the starbucks killer in china, which is a pretty big deal because starbucks is killing in china is definitely the market leader.

And that's actually why we're trying to ask us the question is IT just a hype or actually have something valuable? Because at the first class, IT really looks like a scm.

And actually after trying their coffee, we both quickly got tired of IT. I mean, it's it's really mediocre. Yeah exactly.

But obviously, considering alphy investors have put a lot of money in there, people may be smart than us. We wanted to actually give you a fair shelter and trying to understand this before judging IT too much.

I mean, they are A T than i'm just .

seem probably you know, I just to seem cool.

So we already know how the APP works in the basic idea for us to start investigating the value of like in coffee, we thought we started to beginning, which is china's coffee culture, a market that both look and starbucks is really interested in um and after understanding how chinese people drink coffee and how that habit has formed here, then we can kind of look at luck model, see if that makes sense.

Because if you read the of the articles, the thing they claim is that they can make coffee production more efficient, wer the runs and therefore, be able to offer way more coffee per square and therefore, make more money than Normal coffee chains. And that's actually the core of our question, whether that could happen or not. But in the order to do that, we obviously to understand how the coffee industry works and also how coffee chains work.

I guess like for me, what I want to know is, uh, people talk about the quote digitization of coffee and I want to know what that means in a food delivery .

market that's already .

so digest. So we met up with greg savers, a china coffee expert, to kind of get his take on how things have developed here, what it's like running a coffee business and what his take is on lucking coffee.

My name is greg saver's. I've been in china for about about fourteen years or so. I pretty much of three different interests in coffee.

The first is through restaurants and coffee shops. We have a restaurant in beijing and guangzhou each, and then three coffee shops called ocean grounds in shanghai. We also have a batik e market research firm that focuses on food and beverage, specifically coffee. We've got a lot of work in the coffee industry the past couple years and this year getting ready to launch our our trading company.

So first time we talking to greg, we asked him about coffee culture in china and any differences he's noticed between what's happened here. I was developed in a market like the us.

So I think it's important to have a good understanding of how coffee culture evolved in china. It's a bit different than how involved in other parts of the world. So if you look at countries like the united states or in europe, coffee started from the bottom up.

So I started from people who were taxi drivers and bus drivers and had jobs and factories. And they used IT to stay weak. And then IT kind of slowly trickled up market where you had, like the wealthy people were still drinking tea.

Like that was the the drink of the rich right and coffee cultural spread kind of bottom up in china, it's the complete opposite. So it's starting from the top down where you have the wealthy people starting to drink coffee and the people who are in the more manual labor type jobs, the blue color jobs still predominate drinking tea. And we haven't really seen this kind of distribution anywhere else on earth yet.

So what that means for market like china is that the most sophisticated coffee drinkers are the people who have this habit, are urban nights people, big cities and middle class elites. So people who are more familiar with western culture.

And so logical, right with greg. He just never thought about IT from this perspective before. Yeah, neither. And he actually makes sense because if you look at the coffee in china, it's been sold at four, five dollars or even sometimes six dollars per cup, right? So it's actually a very upper middle class type of product. And I really didn't think about, you know, that in western societies we usually had lower middle class. Miss class actually started drinking before IT trickled upstream, like he says.

yeah, I also been never thought about that way. And I guess for coffee shops here, like on the business side, IT means that they can sell coffee as a premium with potentially higher margins. So after adding .

coffee consumption works here in china and how that's different versus the west, obviously, our next question is about how the coffee industry actually works.

From our conversation with greg, what we've learned is even though coffee is Price higher, IT doesn't mean that it's really easy to run a coffee business in china.

Making money in coffee is is very, very chAllenging. One of the biggest chAllenges that a coffee shop faces is the barrier to entry. It's just so low. Anyone with a little bit of money can open a coffee shop.

The problem is that when you're negotiating with land words, the receiving tenders from many, many different coffee shops, right, and of baby five different tenders, only two of us will actually be a business and the rest will be a wealthy person or the son, daughter of a wealthy person who is always dreamed of opening a coffee shop. And they're going to open their coffee shop because it's their dream. Well, the problem is that what is great that they are into coffee is raising the ceiling for acceptable run Prices for the rest of us.

And the main question here is, what are the actual costs of a cup of coffee is run a big part of IT therefore is is something to actually save from a lucky perspective.

When we are talking to greg, actually the coffee part of the drink is a very small part of IT, maybe like ten percent um and he said the only thing cheap er and the coffee part is water.

The coffee part of your coffee drink is uh pretty cheap that's it's a good deal cheaper than the milk buy a lot you know i'm sure that people will smile when when they hear that and kind of think, dam you coffee shops. But the reality is everything else that goes into that is very expensive.

Your milk Prices, the Price for the cup, the Price for the straw, the lid on the neck's, all of your staff who have to make the coffee, the cost of the equipment, the rent that we just touched on. While the product itself might be inexpensive, the overall experience and getting that cup of coffee to you is quite expensive. process.

I mean, originally the question was about, alright, if I sell a cup of coffee for, let's see, three dollars, what parts of those three dollars are profit? What goes to around and coffee and a set a right? And apparently business conversation with greg, there's almost nothing spent in the coffee itself.

right? So I guess the thing is, if you can lower the rank host than your margins can improve significantly. I think greg use the term, which is that each other coffee shops are more like distribution centers.

And actually, when you and I went to a break, a murder like a coffee shop, both of us noticed that he looks very much like in assembly line. So you have a few people behind the counter, but no one really interfaces with the customer. There's no check out line.

You pay the APP. You can only, you know, order and pay the APP. Then you scan the Q, R, co.

To pay by yourself. And then behind the counter, there's like two people who are just in charge of the coffee machines. They're making the coffee. Then you have the person at like the delivery station said they are bagging everything, getting things everything ready for the delivery people.

From a business model perspective, they can really um minimize their four space. They can really minimize the amount of rent that they pay, right and maximize the most profitable customers for a coffee shop. And who are they? There are the customers who grab and go to go in. They grab their lote, their marathon and to go.

So the theory about lucky is basically smaller place, low run. And thanks to e commerce, they can generate a much higher number of orders. Therefore, they can sell the coffee at average, lower Price and still make enough money.

So conceptually, lucky model actually makes a lot of sense when you look at the rent Prices in china's overall coffee industry. But the next question is, have they executed well on this concept? So to look into that, we did kind of a silly small test where we basically bought lots of coffee for multiple days at the same time to track the order numbers .

yeah and luckily, actually they have an order number of system, which makes is kind of easy to guess how many coffees they sell per day. And the key thing we want to figure out is already leveraging the ecommerce play to be able to sell more coffee than any Normal chain. So just a few basic metrics about the lucky in my office building.

So IT is office building in central shanghai. But this coffee places inside the building, the area for a coffee preparation, is very small, probably thirty square meters, something like that. And they have maybe four, five people in the staff preparing coffee. And based on our estimations, they were able to get about six hundred orders per day, which means minimum six hundred cups of coffee.

But obviously, the way that we counted orders is not foolproof. I mean, I kind of dropped the ideas a joke to time because i'm sure they've thought about compellers trying to trying to counter orders. So actually, we had no idea if six hundred was reasonable, if he was right, if he was low in the industry or impossibly high.

So we went back to greg and we ask them, like, you know, do you think is possible for a coffee shop makes six hundred? And if so, like what kind of number? Like what does .

this mean if factory there are their online sales platform? I think that's certainly possible. I've read similar numbers ah so that, that six hundred cup number is not so different than than the numbers i've read.

And based on my in market experience, I think that's possible. It's really a volume game for them. Any beverage that they sell will be profitable.

This epo isn't going as planned, you because I was uh, expecting us to be able to be way more negative about but everything we've learned so far is actually saying that they are a pretty good case.

Yeah I mean, there business miles actually pretty simple IT sounds like you know a huge pain point in the coffee industry is rent save, tackle that with these distributions, tion centers and they know food delivery and the delivery system in e commerce, whatever. So mature in china that you can roll this out easily or you have the infrastructure you're not like those companies in twenty fifteen building out food delivery for the first time, right? So everything is kind of set up for them to expand early quickly and just take advantage of this, I guess, decent coffee industry in china.

yeah. And if they're able to lower the rent a lot and the coffee cost is already very low and the leveraging e commerce as a sales channel, IT means that they can actually drop the pricing for coffee in china overall without losing like on the gross profit level. I think IT .

works particularly well in china because the cost of labor here is so low that if you make this, you know actually we're talking to greg said that you are like in coffee that breasts are pretty low skilled. Not that they're not intelligent people or anything like that, but that lucking has designed IT such that you go to lucking coffee and making the coffee he is really easy so you can hire not very specialized labor, right, to do this for you and deliveries also really cheap er here. So I mean, I don't know if this would work outside of china, but in china you can set this model up, the simple model up easily and attacks les around problem, then IT makes your margin speaker.

So eva, based on everything we've heard so far, is supporting the fact that luck in isn't the sm like we thought you.

yeah. I think maybe also something that we both IT is evaluating the product primarily, which is that the coffee is not very good. They're only just buying uh, users with discounts to have them by their media re coffee. But actually I think the business model is pretty small even if i'm underwhelmed .

by their product. okay. So sound business model, but let's talk about how to grow.

So from what luck and down so far looks like the following the same trajectory as a lot of chinese consumer facing companies. Um they're trying to basically buy their market share via subsidies in discounts. So in the past, you know right, healing companies have done this bike share companies as well. Basically, you make your product free so that there is very little reason for someone not to use your product. yeah.

But one thing I feel is little be different when compare lucking to, for example, D, D, is that because margin is so high for coffee, even though when they almost give out the product, I know like in the beginning their deal was by one, get free. Now you get about thirty, forty percent of, but in that case, still actually make money on the coffee. So compared to alert other internet startups in china, one lucking girls and gain more use surveys and transactions, they actually do not lose more money. They actually just make more money.

I guess my bigger concern is that as like can continue to grow um I feel like they can't rely on subsidies forever. And at some point they need to build some kind of brain loyalty um to say they get rid of subsidies.

What makes someone choose one product over another? Then it's really about, do I like their coffee more? Do I love the luck and brand? I just think that it'll be a big chAllenge for them to hold on to users after they stop giving out subsidies and discounts because once that happens, they really need to have enough brand loyalty or compelling enough products for people to choose them even if their Prices aren't so competitive um or there are any like fun by one get one free deals.

But the question is, do they actually need to increase their Prices and care about that? What if their entire strategy is to become the of coffee, you know, going out to tear three to four cities of china and enabling that trickling downstream and making coffee like super cheap, still having margins? I mean, they only need to do like one RMB profit per cup of coffee, which is there to a sales Price of you know way less than ten R N B, as long as they go for the volume.

right for sure. I think that could be a five year goal, right? But I think ten years, fifteen years down the line, I suspect they want to build a reputation for themselves, like not just speed.

I think at this point, that's a very comfortable thing to do. Bring coffee to lower at your cities. I'm sure there's fortunes be made there. Siah agree with that, but I do still think that at some point they're gna have to work on brand.

This actually totally changed my mind about luck in like we started off by me being super negative.

And U. S, well, you're so easy.

Maybe I am easy. I don't know about after you know understanding coffee industry, understanding margins of coffee, actually getting some type of small, tiny proof about how much they sell already. Now after nine months, I kind of really believe in this concept now.

And I don't believe it's from a perspective of, you know oh, they're gonna make so much money, this is going become a high margin type of business. I only believe in luck in from that. I think there is some room on the market of scaling out coffee to the real mainstream of china, making one RMB two R M B per up and just make sure have millions of orders per day. And they were still building a very large business .

after learning more about lucking coffee, especially parts of their business, not just their product, I understand why it's very likely that they're turning a good amount of money through each distribution center and why, let's say, some investors would think it's a good idea to give them two hundred million dollars. I think the question have had to convert first time coffee drinkers in china is still pretty big.

I mean, whoever figured you that out has like a huge market to feel right. Because what I think of is I know that starbucks, when they came to china, they kind of became this living room concept where people go to starbuck to hang out and you know, the hours or later, it's like a place where people just chill. And even for me, like I love starbucks in china.

I didn't love IT in the U. S. I love in china because there's good wife. This outlets and was truly comfortable. And that's why people go there too.

Maybe IT has some kind of upper class branding in lower to your cities, and lucky doesn't have any of that, right? IT has no offline presence really that that appealing. So I guess my question is a celebrity marketing and discounts enough to get people into loving their coffee? Yeah exactly.

So basically, lucking is just a proof that you know there's an opportunity to go after mainstream in china. And this is a typical product where there is no opportunity to drastically lower the consumer Prices. But obviously, there's lower things that we don't know. Is that even possible? Like to do IT in a short amount of time.

right? I guess like you know you brought to sell me before, maybe it's a good analogy. You know um making coffee cheaper or more mainstream, like making smartphones more cheap and mainstream. And then slowly you kind of build and brand .

one of the things that actually got us interested about lucking is because media is helping them up to become this kind of starbuck killer. But the more you think about IT, the more you make sense that starbucks will continue to be this kind of experience center where lucking is just the cheaper and maybe more efficient way to just get the thing you want to drink, period.

nothing more. I think they can right? And being the number two to starbuck is spinal means like a doesn't mean that you're economic a lot of money .

either yeah exactly. So uh, thank you for listening to this episode where we been trying to figure out whether lucky in is actually a good case or not. In sense.

this has been a test episode. We'd really love your feedback on the content itself or the structure would have you and are always looking for interesting topics and questions. Thanks for about china's. Feel free to suggestions or tips about that as well.

And for the first time ever, I think eva has changed her mind. Plan shang, hi coffee .

is going high tech right now. And at start, us newest river, the train called loss.

And this is multiple years in planning.

The name comes from the chinese name with a lot and happiness.