China’s embattled Luckin Coffee adds lifestyle products to its menu

The Luckin saga continues as the Chinese coffee challenger seeks solutions to the undesirable consequences of a $310 million fraud. On Tuesday, the company announced sacking chief operating officer Liu Jian, the alleged mastermind behind the fraud, and chief executive officer Qian Zhiya, a rare female leader of a Chinese internet firm. Despite the scandal, the company is reportedly on an expansion spree, opening ten outlets per day in the second quarter.

Another recent endeavor of the coffee delivery startup offers a reminder that the NASDAQ-traded company not only aims to take on Starbucks but also has its eyes locked on hundreds of thousands of convenience stores, as stated early in its IPO prospectus. On Thursday, the coffee chain announced a one-week sales campaign (in Chinese) to promote its line of lifestyle products, which range from beauty masks and hand soap to Apple Airpods and Beats headphones. Most of the non-beverage merchandise is third-party, except for a small collection of Luckin-branded items such as coffee mugs.

Luckin began touting lifestyle merchandise in the third quarter of 2019 and has been gradually broadening the variety of its offering. These items are easily discoverable on the app by tapping the “Trendy Items” (潮品) icon placed right next to the entry to the coffee menu. The share of Luckin’s non-beverage items, which also include packaged snacks, climbed from 14% of total revenue to 23% between Q3 2018 and Q3 2019.

It may seem odd that a coffee chain is selling sanitizing wipes and trash bags, but the approach could point to a long-standing strategy in the internet business in China: To quickly build up a user base through a competitive product and monetize later through a peripheral but lucrative business.

Heavily subsidized coffee has been Luckin’s engine of user acquisition. Its lifestyle and daily products currently come with deep discounts as well, so the question is whether they will comprise the company’s cash cow when the perks are gone. After all, why would consumers shop for daily essentials from a coffee ordering app when dozens of larger e-commerce outfits come with greater selection and more mature logistics service?

Luckin received an unexpected boost on the heels of its accounting fraud. With patriotic drinkers rallying around the home-grown coffee brand and thrifty consumers rushing to redeem coupons before a potential business collapse, Luckin’s daily users jumped four-fold overnight to 4.4 million when the scandal came to light in early April, according to data TechCrunch obtained from third-party analytics firm Aurora Mobile. The growth was short-lived, however, and its DAU has since fallen and hovers below 1.5 million at the time of this writing.