Discussions after the Luckin Fraud: Interview with Adam Li, Partner of Panda Capital [2/3]
COVID-19 and China
Luckin's products. Image credit: Luckin Coffee.

The article is translated by EqualOcean from the Chinese version published on the official WeChat account of, our Chinese website.

This is Part 2/3 of the takeaways from the interview regarding Luckin incident that EqualOcean had with Adam Li, Founding Partner of Panda Capital, diving into the issue from the perspective of an institutional investor.

In the previous article, we looked into the problems of Luckin Coffee up to now. This part will focus on the value of Luckin Coffee and the future of the industry’s landscape in China. For the potential future strategies and the impact of the incident on the investment industry, please explore Part 3/3.

Where does the value of Luckin Coffee lie?

Q: What is your current view of Luckin’s business model?

Adam Li: The business model of Luckin can be divided into three levels.

The bottom layer is its underlying business logic of a scalable new retail pattern, which is also the fundamental layer of its business. Despite its misconduct in turnovers, we are still bullish on its underlying logic, which may represent future trends in the retail industry.

The nature of chains is to achieve economies of scale and reproducibility and to increase efficiency. And this is to be addressed through product industrialization, as well as the standardization of services and management.

First is the standardization of the product. Among the coffee chain stores in the Chinese market, the incumbent players like Starbucks and Costa are indeed industrialized to some extent, but hand-processing still accounts for a large part of the scene. Meanwhile, Luckin is more in pursuit of full industrialization and product standardization.

It then comes to the standardization of the management and operations. Luckin’s model, in fact, is to leverage information technologies to upgrade three fundamental elements in the retail industry, namely customers, products and channels.

The reason for us to say that it is not rational to directly ‘carry the death penalty’ for Luckin is that we can actually observe there is some value remaining in its business.

Take its data centers as an example. As the payment method of customers has moved from cash to mobile approach, the traceability of consumption has been greatly enhanced. Plus, with the introduction of techniques like IT auditing, it is increasingly difficult for stores to directly manipulate their operating turnovers – which was a common trick for retail companies to commit financial fraud before.

Therefore, we see Luckin’s business logic of building up a new retail model – including product industrialization, data center-driven management and operation standardization, as well as online and offline integration – is advanced, and can be adopted to other retail product categories in the future.

The second layer is coffee as a product category. In the past, the consensus in the industry was that there are three price bands in China’s coffee market, namely above CNY 35, CNY 15 – CNY 20, and below CNY 10. However, after doing a lot of research, we found that the second price band tends to be rarer – and there are only two niches in the market. One is to meet the demand on the environment, priced at CNY 35 per cup and above, like Starbucks and Costa; the other is below CNY 15, under which coffee becomes a Fast-Moving Consumer Good (FMGC).

But once coffee becomes an FMCG, a coffee chain would encounter competition from convenience stores. This is also why we think coffee is only a category that Luckin used to cut into the market. And after it builds up its store networks and logistics system, the company has the potential to become a new type of convenience store or ‘retail terminal.’

The top layer is the company itself. Indeed, Luckin has been moving too fast and resulted in significant problems like misconduct.

But at the same time, we saw that its stores were operating normally on the second day after the company announced its financial fraud. Although its app crashed because of the run on orders, there was nothing abnormal with the supply of its ingredients and the attendance of its employees. From this point of view, Luckin’s business showed its solid side.

Q: What changes did Luckin bring about to the Chinese fresh-brewed drinks market?

Adam Li: The emergence of Luckin has systematically downgraded the price per cup of fresh-brewed coffee consumed by the general public in China.

From a macro perspective, I think China’s coffee market has the potential to be as big as that of Japan and South Korea in terms of the number of cups consumed per capita. The addictiveness of coffee is relatively strong and the industry itself is diverse. The only question is – how steep is the growth?

When it comes to tea drinks, there are certain differences with coffee.

The sustainability of the brand has always been important for catering companies, and in the case of tea drinks which have high fat and high calories, this product category itself tends to be more appealing to younger generations.

In this case, how to cross the life cycle of its products is a thing that freshly brewed tea brands need to think carefully about. However, when it comes to coffee, it suffers much less on this issue. People have been consuming Espresso, Latte Macchiato, Americano and such for over half a century, so the demand for self-iteration tends to be weak. While continuous innovation is crucial for tea drinks, including aspects of taste, IP, branding, image.

For example, tea drinks were made from powders in its 1.0 stage. However, in the recent 3.0 stage, market leaders like Heytea already fully employ fresh ingredients with high costs. The use of fresh fruit will pose an entirely new challenge for the supply chain. And that’s why I thought before that tea drink is not a proper category for Luckin to enter. It is too hard for a company that has standardization in its genes to enter a market where the production is non-standardized.

Explore more of Adam Li’s insights on the leeway for Luckin coffee and the impact of its fraud scandal on the investment markets in Part 3/3.

Editor: Luke Sheehan

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