Other coffee chains like Starbucks or McCafé ( MCD) primarily operate within the top-tier, affluent cities where coffee consumption is higher, however, Luckin decided to shift gears and started to penetrate the 2 nd, 3 rd, 4 th, and even 5 th-tier cities in China, and it seems to be working rather well.
This has complemented its main business quite favorably and these stores grew from 874 stores in '20 to 2,562 in '22, covering around a third of total operated stores. The Retail Partnership model is basically a contract with a local store that already has a presence in what they call a "lower tier" city, for example, a bubble tea shop or some fast-food chain in a mall. I think what allows the company to have such aggressive growth is that it will no longer focus on affluent cities like Beijing or Shanghai. This model has finally turned into a profitable business with decent margins. Around 98% of all stores are Pick-up Stores. The company focuses primarily on "Pick-up Stores" that range anywhere from 20-60 square meters with very limited seating. The reason the company can expand so aggressively is because its stores are very small. Margins have improved quite considerably due to the use of cashier-less coffee shops where people can place their order online and pick it up at their nearest store whether that is a self-operated store or a partnership store.
The company has been aggressively expanding its operations in China and has well passed the king of coffee, Starbucks ( SBUX ) as the top franchise. Since the fraud scandal, the company has changed its top management completely and taken it on the chin. I will hold off for now and wait for the next report to see how the international expansion is going to develop. If the company can sustain such an expansion over the next decade, the company fairly priced. Focus on tech, which expanded operating margins quite considerably, and shifting focus from affluent cities is what seems to be fueling the growth of the franchise. With what seems like a good turnaround story post-scandal and aggressive expansion domestically and slowly outside of China, I wanted to take a look at Luckin Coffee ( OTCPK:LKNCY) to see how the company managed to turn around so quickly and become one of the top coffee chains in China.
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