Luckin Coffee’s stumble may pave way for other coffee hopefuls

Luckin Coffee announced yesterday (May 13) that its board had asked for and received the resignations of its CEO, Jenny Qian Zhiya, and COO, Liu Jian.

The moves follow a scandal that revealed millions of dollars in fabricated sales, which saw the Nasdaq-listed Chinese coffee brand's stock to plunge 80% on the day the company admitted the fraud. The scandal also triggerred growing distrust about claims made by all Chinese companies listed in the US, and four other Chinese companies saw their stock shorted in the aftermath.

But when leaders stumble, others in the race see a chance to gain ground. In this case, a benefactor of Luckin's fall from grace may be Canadian brand Tim Hortons, which opened its first China shop in February 2019.

Chinese internet giant Tencent has just announced an investment in the brand. Although the amount was not disclosed, the cash injection should help Tim Hortons with its ambition to open a total of 1,500 stores in China. The brand currently has about 50 stores, mostly in Shanghai.

The brand started operations in China in 2018. As a newcomer, 1,500 stores seems like a big target, compared with its rivals, which have far greater brand awareness. Currently, Starbucks has 4,200 stores in China, while Luckin Coffee has about 4,900. Other brands are smaller. For example, Costa Coffee, which entered China in 2006, only had about 500 stores as of 2018.

Luckin Coffee’s fast expansion (albeit exaggerated) seems to have given Tim Hortons ideas about how to use the internet to boost its brand. Two years ago, Luckin Coffee made itself a major force in only a few months' time by heavily advertising on social media platforms and giving crazy discounts to users.

Tim Hortons now says it will use Tencent’s investment to build its own online platform. Tencent has the biggest social media user base in China—more than 1.1 billion monthly active users on WeChat. With help from Tencent, Tim Hortons could match or even outperform Luckin Coffee’s social media strategy.

Tim Hortons has not revealed more specifics of its expansion plan in China. However, after Luckin's scandal, the Chinese market will treat all coffee brands with a little bit more scepticism.