The Coffee Gold Rush: Luckin’s Pre-Crisis Rise

The October sun slanted through the floor-to-ceiling windows of Beijing’s Guomao SOHO, gilding the tops of the skyscrapers that housed the headquarters of half of China’s biggest internet companies. On the 12th floor of one of those towers, 25-year-old Zhang Meng, an operations specialist at a short-video startup, stared at her phone with the familiar frustration of the country’s urban white-collar workforce. She needed coffee to get through the 2 p.m. slump, but her options were infuriatingly limited: a 38 yuan ($5.50) Americano at the Starbucks on the ground floor, which would require a 15-minute wait in a line snaking out the door; a 3-in-1 instant coffee from the convenience store downstairs, which tasted like burnt sugar and chemicals; or a delivery order from one of the nascent specialty coffee startups, which would take at least 45 minutes to arrive and cost nearly as much as the Starbucks. She sighed, opened her WeChat wallet, and transferred 38 yuan for the overpriced drink, muttering to herself that there had to be a better way.

Zhang Meng was not alone in her frustration. In 2017, China’s coffee market was a study in extremes: on one end, foreign specialty chains like Starbucks and Costa dominated the premium segment, selling coffee not as a beverage but as a “third space” for socializing and working, with prices that put daily consumption out of reach for most ordinary workers. A 2017 survey by the China Coffee Association found that 72% of Chinese consumers who drank specialty coffee only purchased it once a week or less, with price cited as the top barrier to more frequent consumption. On the other end of the spectrum, low-quality instant coffee made up 70% of the country’s total coffee market, with brands like Nestlé selling powdered, shelf-stable products that contained barely any actual coffee and were loaded with sugar and artificial flavorings. The middle ground—affordable, high-quality, freshly brewed coffee that could be purchased quickly and conveniently—was almost entirely empty. It was into this gap that Luckin Coffee, a startup with no experience in the food and beverage industry and a business model that defied every rule of traditional retail, launched its audacious bid to rewrite the rules of China’s coffee market.

The founders of Luckin were not coffee connoisseurs. They were serial entrepreneurs who had built their reputations on disrupting slow-moving, entrenched industries with technology-fueled, capital-intensive growth strategies. The public face of the company was Lu Zhengyao, a 47-year-old entrepreneur who had made his first fortune founding a ride-hailing company called UAA in the early 2000s, before going on to build UCAR, a car rental and ride-hailing giant that he took public on the New York Stock Exchange in 2016. Lu was a master of what he called “efficiency-driven growth”: he understood how to use capital to acquire users fast, how to use data to optimize operations, and how to tell a compelling growth story to investors. His co-founder and chief operating officer was Qian Zhiya, a 48-year-old former executive at UCAR who had spent 15 years building the company’s operational backbone, from driver onboarding to customer service. Qian was a lifelong coffee lover who drank three to four cups a day, and she was the one who first articulated the core frustration that would become Luckin’s founding mission: “I was spending over 2,000 yuan a month on coffee, and I knew I wasn’t alone. Most people want to drink good coffee every day, but they can’t afford Starbucks, and they don’t want to drink the terrible instant stuff. There had to be a middle ground.”

The third key member of the founding team was Liu Jian, a 42-year-old technology executive who had served as UCAR’s chief technology officer. Liu was the architect of Luckin’s core data and operations system, which would become the backbone of its “new retail” model. He understood that the biggest inefficiency in traditional coffee retail was not the cost of coffee beans or rent—it was the waste caused by poor forecasting, unnecessary overhead, and the disconnect between supply and demand. “Starbucks spends millions on real estate for big stores with seating, and they have baristas who are trained to make 100 cups a day at most,” Liu explained in a rare 2018 interview. “Most of that cost is not about the coffee. It’s about the experience they’re selling. We didn’t want to sell an experience. We wanted to sell good coffee, fast, for a price anyone could afford.”

The first Luckin store opened for a soft trial run in October 2017, tucked into the basement of Galaxy SOHO, a sleek, curved office complex in central Beijing. It was a tiny 15-square-meter “pick-up” store, with no seating, no fancy decor, just a counter, a couple of espresso machines, and a QR code on the wall that linked to the company’s new app. The founders had no idea if anyone would come. They had priced their coffee at an average of 20 yuan per cup, half the price of Starbucks, and offered new users a free first drink as a test incentive. By the end of the first day, they had sold 427 cups. By the end of the first week, daily sales averaged 520 cups, a number that matched or exceeded the average daily sales of most Starbucks locations in the same area. Lu Zhengyao looked at the sales data that night and told his team, “We’re onto something.”

What Lu and his team had stumbled onto was a combination of three interlocking business concepts that were just beginning to reshape retail in China at the time: new retail, subsidy-driven growth, and market penetration. For readers who may be new to these terms, let’s break them down one by one, using Luckin’s early operations as a concrete example.

First, new retail (a term popularized by Alibaba founder Jack Ma in 2016) refers to a retail model that uses data, technology, and integrated online-offline operations to eliminate the inefficiencies of traditional retail. Traditional coffee retail, as exemplified by Starbucks, is a “brick-and-mortar-first” model: the company picks a high-traffic location, builds a large store with seating and decor to attract customers, and relies on people walking in off the street to make sales. The biggest costs in this model are rent, labor, and waste: a typical Starbucks store in a central Beijing business district pays 200,000 yuan ($28,000) a month in rent, employs 5-6 baristas who each make an average of 80 cups a day, and throws away 10-15% of its coffee beans and prepared drinks every day because of inaccurate demand forecasting.

Luckin’s new retail model flipped this logic on its head. Instead of building big stores in high-rent locations, Luckin opened tiny 10-20 square meter pick-up stores in office buildings, university campuses, and subway stations, where rent was 70-80% lower than a comparable Starbucks location. It did not invest in fancy decor or seating, because it did not want customers to linger—its entire model was built around speed and convenience. Orders were placed exclusively through a dedicated app, which used data to assign each order to the nearest store with available capacity, cutting delivery times to under 30 minutes for most urban customers. The app also collected data on every user’s preferences: what drinks they ordered, what time of day they ordered, whether they added sugar or milk, even how far they were from the nearest store when they placed an order. This data was fed into a centralized operations system that adjusted inventory, staffing, and even marketing offers in real time. If a store in a business district saw a spike in orders for cold brew on a hot day, the system would automatically send a 20% off coupon for cold brew to every user within a 1-kilometer radius of the store, and alert the store manager to stock extra cold brew concentrate. The result was a model that cut waste by more than half, reduced labor costs by 50%, and eliminated the need for expensive high-rent