Li Ning crosses the river by feeling Luckin Coffee

At present, any company in China trying to enter the coffee market cannot ignore the experiences and lessons of Luckin Coffee, including Li Ning, a sports brand that was recently revealed to have applied to register the name "NING COFFEE".

Luckin Coffee, which was delisted faster than it was listed due to a fraud scandal, now seems to have recovered: According to the first quarter financial report of 2022, Luckin Coffee's total net revenue in the first quarter was 2.4 billion yuan, an increase of 89.5% compared with 1.3 billion yuan in the same period last year; net profit was 19.8 million yuan, compared with a net loss of 200 million yuan in the same period last year. This is the first time that Luckin Coffee has achieved quarterly profits in its five years of existence.

On April 11, after Luckin Coffee announced that it had completed its financial debt restructuring, Luckin Coffee Chairman and CEO Guo Jinyi said, "Today marks a new beginning for Luckin Coffee." Soon, news spread that it planned to relist on the Hong Kong Stock Exchange, but this was denied by officials.

Coincidentally, seven years ago, Li Ning also experienced a "resurrection".

Starting from 2012, Li Ning, which had an inventory backlog due to crazy distribution, saw its net profit turn from profit to loss and entered a quagmire of losses for three consecutive years. By replacing the senior management team and promoting the business transformation from the wholesale model to the brand retail model, Li Ning finally turned losses into profits in 2015 and has since entered a gradual recovery.

Luckin Coffee crossed the river by feeling its way across the river from Starbucks. If Ning Coffee wants to gain a foothold in the coffee market, it should perhaps follow the lead of Luckin Coffee. Of course, it should never follow the lead of Lu Zhengyao.

When crossing the river of Luckin Coffee, Li Ning must first learn to avoid the minefields that the former has waded through.

The lesson of Luckin Coffee, which almost led to the company's demise due to financial fraud, warns latecomers not to fabricate transactions in order to increase orders in the early stages of business development.

The 2.2 billion yuan in fake transactions helped Luckin Coffee set the world's fastest IPO record in less than 18 months, but also brought about the largest financial fraud scandal in the history of Chinese concept stocks, forcing it to delist from Nasdaq just 13 months after listing and face billions of yuan in class action lawsuits. These are all the "legacy" left by Lu Zhengyao when he was in charge of Luckin Coffee.

Finding the right market, betting on the right track, and then establishing a company, using huge amounts of financing to expand, and finally achieving a quick IPO, is the entrepreneurial routine that Lu Zhengyao has used time and again in Shenzhou Rent-A-Car, Shenzhou UCAR, and Luckin Coffee. In order to maintain the pace of this chain, Lu Zhengyao must have absolute control over the company.

In the case of Luckin Coffee, this control has even evolved into a kind of black box operation by Lu Zhengyao. In July 2020, Lu Zhengyao convened an extraordinary shareholders' meeting to decide to resign as chairman and elect new directors. According to Tencent's "Qianwang", after the on-site shareholder representatives voted on the paper proposal, Lu Zhengyao and a female employee of Luckin Coffee left the shareholders' meeting with these votes, and when they came back, they announced the voting results. There was no lawyer or vote checker to monitor the votes.

The credit value that Lu Zhengyao built up in the early days of the Shenzhou Group entered a complete bankruptcy process in the series of abnormal actions taken by Luckin Coffee. This also sounded a wake-up call for entrepreneurs like Li Ning who have successful entrepreneurial experience.

Luckin Coffee's marketing campaign of trying to attract attention by dragging down Starbucks is also a minefield that Li Ning needs to be vigilant about.

At the beginning of its establishment, Luckin Coffee was labeled as "providing consumers with a second coffee choice besides Starbucks". The most well-known incident was in May 2018, when Luckin Coffee filed a lawsuit against Starbucks, accusing the latter of abusing its market dominance and engaging in commercial monopoly.

The media flocked to the event, and Luckin Coffee, which was tied to Starbucks, also stole the spotlight by taking advantage of Starbucks' traffic. Compared with brand advertising marketing, which faces great uncertainty in terms of return on investment, although the touch-and-go marketing is low-end, it is definitely much more cost-effective. This is exactly a comparative positioning strategy in brand positioning theory that clings to famous brands, that is, companies use various methods to establish an internal connection with well-known brands in the same industry, so that their own brands can quickly enter the minds of consumers, occupy a solid position, and use the light of famous brands to illuminate their own path.

However, as a well-known brand established for 32 years, Li Ning certainly cannot be as low-level as Lu Zhengyao and play the fraud game.

From a utilitarian point of view, Luckin Coffee has already touched Starbucks' porcelain, and Li Ning's next move would only be an imitation of the ugly woman. What Li Ning should learn from Luckin Coffee's experience of touching Starbucks is not the specific approach, but the spirit of "making up one's mind and must market".

In addition, a careful analysis shows that Ning Coffee’s marketing resources are actually much superior to Luckin Coffee’s, and there is no need to copy them at all.

Li Ning and Lu Zhengyao were both born in the 1960s, but the former obviously has a much higher national fame and influence than the latter. The aura of "Prince of Gymnastics" made Li Ning a national idol in the 1980s and 1990s, and his role as a torchbearer at the opening ceremony of the 2008 Olympic Games further enhanced his influence, making him well-known among the middle-aged and elderly groups.

Li Ning is no less attractive to young people. With the opportunity of appearing at the New York Fashion Week in 2018, the trendy brand route of "China Li Ning" was established. Driven by the "national tide" culture, Li Ning has become one of the representative brands of the new domestic products.

After building up its brand reputation through marketing, Li Ning may also face the same problem as Luckin Coffee, that is, the brand is there, but the brand power is insufficient. Starbucks' brand influence, which has been condensed over a long period of time through space culture, cannot be caught up by Li Ning overnight. Another way to build a brand before Li Ning is to learn from Luckin Coffee and open stores as close to potential users as possible.

By the end of 2021, Luckin Coffee had 6,024 stores, surpassing Starbucks China (5,557) to become the number one in the Chinese market. Its brand influence also grew further with the expansion of the number of stores.

Rapid store expansion was one of the main strategies of Luckin Coffee when it was first established. In 2018, Luckin Coffee opened more than 2,000 stores in a year, quickly attracting 12 million users. In 2019, it continued to open stores at a growth rate of 131%. After suspending the pace of expansion in 2020 due to the fraud scandal, Guo Jinyi restarted the store expansion strategy in March last year. By January this year, Luckin Coffee had opened a total of 360 new stores, breaking its record for the total number of stores opened in a single month.

These new stores not only help Luckin Coffee attract offline users more quickly, but also save the waiting time of users who place orders online to the greatest extent, effectively improving consumers' brand favorability.

Starbucks, which had its market share snatched away, could no longer sit still and began to accelerate the pace of opening stores in China, expanding rapidly from 600 stores in 2019 to 5,557 stores in 2021, and plans to reach 6,000 stores in 2022.

What supports their rapid store expansion is the continuous flow of capital investment. Taking Luckin Coffee as an example, Qichacha data shows that as of May 2021, coffee projects have received financing 114 times in the past eight years, with a total disclosed amount of 11.568 billion yuan, of which Luckin Coffee alone accounted for 9.9 billion yuan, accounting for 85%.

How to obtain strong financing capabilities is not only what Li Ning needs to learn from Luckin Coffee, but also a major challenge that Li Ning Coffee needs to face. After all, there is not much unclaimed money in the market, and mainstream investment institutions and large Internet companies have almost all made arrangements in the coffee market, such as Meituan and ByteDance betting on Manner, and Tencent participating in the investment in Tims.

From the perspective of Li Ning's own business, if it does not seek external financing, compared with Luckin Coffee's nearly 10 billion yuan investment, relying solely on its own transfusions will inevitably drag it into a quagmire of losses. In 2021, Li Ning's revenue exceeded 20 billion yuan for the first time, and its net profit increased by 136% year-on-year to 4 billion yuan. The financial report data is almost the best in the past 10 years, but it has not made much splash in the capital market. On the day the 2021 financial report was released, its stock price fell by 5.24%, and the current stock price has shrunk by nearly half from the high point in the middle of last year.

At the same time, Li Ning's marketing expenses are still rising. Last year, sales costs increased by 44% year-on-year, and advertising and marketing expenses increased by 39.1%.

Another reason why Li Ning needed to expand its stores after entering the coffee industry is that most of its more than 7,000 offline stores across the country were located in shopping malls, far from the main consumer groups of coffee, and it was difficult to attract white-collar workers. If it wanted to expand the market quickly, Ning Coffee needed to imitate Luckin Coffee and open more stores in office buildings and other areas.

At the first quarter performance communication meeting this year, Guo Jinyi specifically pointed out that a large portion of Luckin's self-operated stores are located in office buildings, universities and other nearly closed scenarios. Because they are naturally resistant to the epidemic, their revenue in the current quarter was not greatly affected.

Faced with greater uncertainties in the external environment, Li Ning may need to control the cost of each store when opening coffee shops at this time.

Luckin Coffee is also a good example to learn from. The survival rate of Luckin Coffee stores has not decreased as the number of stores has increased. Data shows that in 2019, the survival rate of Luckin Coffee's newly opened stores reached 63% for 12 months, and this figure increased to 93% in 2021.

Behind this is Luckin Coffee’s shift in store operation strategy since 2021: from relying on low-discount coupons to develop the white-collar group to refined operations to retain users.

In order to control the cost of each store, Luckin Coffee began to intentionally improve the efficiency of its stores. The main measure is to use Internet thinking, quickly iterate and try and error, create hot products, and attract orders. In the past year, Luckin Coffee has launched a total of 133 new products, maintaining a rhythm of launching new products every week.

Luckin Coffee's first hit product, "Raw Coconut Latte," appeared in 2021. By May of this year, the cumulative sales of Raw Coconut Latte had exceeded 100 million cups. In April of this year, Luckin Coffee's co-branded "Coconut Cloud Latte" became a hit again, with total sales exceeding 81 million yuan in more than half a month.

Another measure taken by Luckin Coffee to control the cost of a single store is to focus on online sales and digital transformation through the new retail path. Since its establishment, this coffee brand has abandoned the offline ordering method, and all orders must be placed through online apps and mini programs. In its early days, delivery orders accounted for more than 60% of its total orders.

Compared with Starbucks, this strategy directly allows Luckin Coffee to obtain lower rental expenses and less staff expenses. Jiemian News reported that Luckin's 20-60 square meters of quick-service stores account for more than 90%, and most of them only need 3 or less employees. Starbucks stores are 150-300 square meters in size and need 5-6 employees.

In order to reduce the cost of each store, Starbucks also began to launch the "order online, pick up in store" coffee express service in May 2019, launched a small store model similar to Luckin Coffee, and successively cooperated with Ele.me and Meituan to launch takeaway services. In the past few years, Starbucks has always insisted on refusing delivery services, and even spawned many companies specializing in Starbucks errands and takeaways.

Last year, Starbucks' revenue from China's takeaway market reached 3.5 billion yuan. Starbucks China Chairman Wang Jingying recently revealed that Starbucks' sales from digital channels accounted for 43%, a record high.

At present, Li Ning's Ning Coffee has not been fully rolled out. In addition to the flagship store in Xiamen Zhonghua City, which has a dedicated coffee leisure area, only a few stores have tried to launch some coffee marketing activities. For example, when the first Li Ning 1990 store in Beijing Parkview Green opened, it provided consumers with freshly ground coffee.

In an external response, Li Ning expressed the hope to enhance customers' comfort and shopping experience by optimizing in-store services. Providing coffee service in the store will be an innovative attempt at improving the consumer experience at the retail terminal.

However, in new consumer markets including coffee, offline is no longer the mainstream consumption scenario, and new retail that combines online and offline is the standard for major brands.

In the view of Zhuang Shuai, founder of Bailian Consulting, the "determination and investment of cross-border players are very important... Every industry is like a mountain between two worlds. It takes time to improve the capabilities of raw material procurement, coffee making, product innovation, personnel recruitment and management, but competition will not stop, and consumers will not give you time to grow just because your products and services are inadequate."

This may also mean that if Li Ning wants to make a big splash in the coffee industry, the time window left for him to learn from Luckin Coffee will not be too long.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.