The Ascent Before the Fall

The Phoenix Brews

Chapter 1: The Ascent Before the Fall

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On a cold January morning in 2017, in a cramped office building in the Haidian District of Beijing, two former internet executives sat across from each other, surrounded by whiteboards covered in aggressive growth projections and a coffee machine that neither of them particularly trusted. They had just wired the first $20 million of investor capital into a company that did not yet have a single operating store, and they were about to attempt something that most Western business analysts would have deemed impossible: building a coffee empire in a country where tea had ruled supreme for five thousand years.

Charles Zhengyao Liu and Jenny Zhiyao Qian had both spent the better part of a decade watching China's internet economy transform entire industries. They had seen Tencent reshape communications, Alibaba revolutionize retail, and Didi Chuxing completely upend how millions of Chinese citizens got from one place to another. What they had learned from these transformations was a simple but powerful lesson: in China, the winner takes almost everything. Market share in the Middle Kingdom rarely followed the traditional S-curve of gradual adoption. Instead, companies that moved fast, spent aggressively, and captured the imagination of young urban consumers could achieve dominance almost overnight—and once that dominance was established, it became extraordinarily difficult to displace.

Coffee, Charles and Jenny had concluded after months of market research, represented perhaps the last major consumer category in China that remained fundamentally untapped. While Starbucks had been operating in the country since 1999 and had painstakingly built a network of over 2,500 stores, the total Chinese coffee market remained a fraction of its potential. Per capita coffee consumption in China stood at a mere 4.5 cups per year compared to 300 in the United States or 400 in South Korea. For a country of 1.4 billion people, the opportunity was almost incomprehensibly vast.

But it was not just the size of the market that excited them. It was the changing habits of Chinese consumers themselves. The rise of the middle class, the urbanization of tens of millions of people, the influence of Western cultural trends among younger generations—these forces were combining to create a new generation of Chinese consumers who viewed coffee not merely as a caffeine delivery mechanism but as a lifestyle statement, a social ritual, and increasingly, a daily necessity. Mobile ordering, delivery apps, and the ubiquity of smartphone penetration meant that the traditional coffee shop model—with its emphasis on premium real estate and leisurely in-store consumption—was ripe for disruption.

The company they were building would come to be called Luckin Coffee, though in those early days it existed only as a legal entity and a fierce ambition. The name itself was a play on words, combining the Chinese character for "good fortune" (lu) with "Ke" (the phonetic rendering of coffee in Chinese) to create a brand that sounded both lucky and coffee-forward. It was clever marketing that would later become one of the most recognizable brand names in China, but in January 2017, it was just two people and a pitch deck.

What made Luckin fundamentally different from its competitors was not the coffee itself—which was sourced from the same Brazilian and Ethiopian beans used by dozens of other brands—but the delivery mechanism. While Starbucks had built its empire on the "third place" concept, creating stores that served as extensions of home and office where customers could linger for hours, Luckin was designed to be fundamentally mobile. Stores would be smaller, optimized for preparation rather than seating. Orders would be taken exclusively through a smartphone app, eliminating the friction of cash transactions and in-store waiting. Coffee would be delivered to customers wherever they happened to be—offices, homes, shopping malls—within thirty minutes of ordering.

This model was not entirely without precedent. In the United States, companies like Blue Bottle and Blue Ocean had experimented with delivery-centric approaches, and in China itself, the infrastructure for rapid delivery had been perfected by Meituan and Ele.me, the dominant food delivery platforms. What Charles and Jenny understood, perhaps more clearly than anyone who had attempted to build a coffee business in China before, was that they were not really building a coffee company at all. They were building a technology platform that happened to sell coffee.

This distinction would prove crucial to their ability to attract capital. Traditional restaurant investors looked at unit economics, same-store sales growth, and the amortization of capital expenditures across a store's lifespan. But technology investors in China in 2017 were operating by a different set of rules entirely. They were looking at monthly active users, customer acquisition costs, and the potential for network effects—the idea that each new user made the service more valuable for existing users. If Luckin could position itself as a tech company rather than a restaurant chain, it could command the valuations being accorded to other Chinese internet unicorns.

The founding team that Charles and Jenny assembled reflected this technological orientation. Liu Jiaran, who would become Luckin's head of technology, had previously built the backend systems for Meituan's flash-sale division, handling tens of thousands of concurrent transactions during peak periods. The company's head of operations had cut his teeth at Didi, managing the logistics of a driver network that spanned hundreds of cities. Marketing was led by a former executive from Xiaomi, the smartphone company that had disrupted the mobile device industry with its combination of premium products and rock-bottom prices.

It was this Xiaomi connection that would prove particularly influential in shaping Luckin's early growth strategy. Lei Jun, Xiaomi's founder and one of the most celebrated entrepreneurs in China, had popularized a concept that came to be known as the "Ronghe Fazhan" model, which roughly translated to "ecology-driven growth." The idea was that a company could sacrifice profits on its core product in order to acquire users, then monetize those users through an ecosystem of complementary services. Xiaomi sold phones at or near cost, then made money on apps, accessories, and services. Luckin would sell coffee at a heavy discount, acquire millions of users, and theoretically find ways to monetize them beyond their morning caffeine fix.

The launch strategy was, by any conventional measure, audacious. On June 18, 2017, Luckin opened its first 525 stores simultaneously across thirteen cities. The grand opening was accompanied by an advertising blitz that blanketed subway stations, elevator screens, and social media feeds with the company's distinctive blue logo. New customers received a free cup of coffee. Existing customers received discount coupons for additional purchases. Within a week, Luckin had become the most talked-about brand in Chinese social media.

The scenes at those first stores captured something of the chaos and excitement that would define Luckin's early days. In Shanghai, lines formed outside the company's modest storefronts as curious consumers—many of them young office workers who had never been particularly interested in coffee—waited to redeem their free drinks. The app interface was sleek and intuitive, one of the best-designed mobile ordering experiences in the Chinese market, and the actual coffee, while perhaps not the equal of specialty roasters like %Arabica or %Arabica's emerging Chinese competitors, was more than acceptable to the average palate.

Behind the scenes, the operational challenges were immense. Keeping hundreds of stores running simultaneously, coordinating supply chains for coffee beans and milk, manag