Luckin Coffee Updates: Luck In Hand (Part V)
Moat: Customer Management
4) Customer Management
Per its website, Luckin has more than 120 million registered App users. Given its App centric business model, the number is essentially a good proxy for the size of its client base, which is approximately 8.5% of Chinese population. In its earnings release, the company disclosed a more accurate metric, i.e. Average Monthly Transacting Customers (AMTC). It is the equivalent of Monthly Active User number for the social media companies. At the end of 3Q 2023, the company’s AMTC was 58.5 million or 48.7% of the 120 million registered app users (see chart below).
Quarter End AMTC
Source: Company filings.
LKNCY has done a great job of growing AMTC faster than the store count, i.e. each incremental new store had attracted more marginal customers. It expanded its store count “only” 2.7x from 5,012 in 1Q 2020 to 13,273 in 3Q 2023 while growing its AMTC an eyepopping 8.9x from 6.6 million to 58.5 million during the same period of time. The net effect is the average AMTC per store increased 3.3x (see chart below). Consequently, these dual growth engines (stores and customers) drove the total annual revenue up 3.1x from 2019 to TTM 3Q 2023.
Average AMTC Per Store
Source: Company filings.
As discussed in details earlier, LKNCY’s advantageous technology platform provided a solid foundation for customer acquisition and engagement. Its store opening is also data driven process to make sure each new store is a pond already with fish and the store will never outgrow its customers.
One important differentiating factor is the wechat based private store group mentioned earlier. These private store groups work like the channels function in Telegraph or Discord or Whatsapp. A group administrator manages the group setting and its members. The access to the group is set as public though the member is typically invited during the registration process. Setting up location based private customer groups is a standard practice among the food and beverage stores in China. What sets LKNCY apart is that management of all its groups is centralized at the headquarters, not locally by the store manager. Since LKNCY has over 13 thousand stores across China, it should also have that same amount of private store groups. We signed up on several these kinds of private store groups in different store locations at the different cities, we could immediately feel that how they are managed very differently from those of other F&B companies in China:
No interaction between the group administrator and the group members (customers). Apparently, they have done the analysis. Frequency of Q&A between the company staff and the group members has no direct positive impact on sale conversion. There is no need to have a team of customer representatives 24/7 to have online conversations with the group members in order to engage them.
Marketing messages are limited to two per day typically around noon or early afternoon. This should also be data based decision. Its core customers tend to have coffee run around noon or in the afternoon break. More frequent messaged will not lead to more purchases apparently.
Messages are mainly discount coupons for a specific drink or occasion. Coupon is never a free giveaway, but always on limited supply (value of scarcity) and group members will have to compete for the specific coupon at a specific “game” time, mostly around noon during lunch break.
The content of messages is generally synchronized across the different stores and with the company wechat channel. Since they are centrally managed in the headquarters (likely by its marketing team), it makes sense to have the same content across all the channels which is simple, consistent and efficient. But we do noticed that there were some customized marketing for the new stores or underperformed stores in order to increase more traffic.