Liu Erhai, founding partner of Joy Capital, talks about Luckin Coffee's IPO: Why is good coffee not expensive?

Leidi.com Lotte reported on May 19

Despite the turmoil in the U.S. capital market, China's new retail coffee chain Luckin Coffee was successfully listed on the Nasdaq as scheduled, closing up nearly 20% on the first day with a market value of approximately US$5 billion.

Luckin Coffee is the second listed company acquired by Joy Capital within a year after NIO.

As the lead investor in Luckin Coffee's A and B rounds of financing, Liu Erhai, founding and managing partner of Joy Capital, said that Luckin Coffee's success is built on China's increasingly mature new infrastructure, and the maturity of the new infrastructure will also bring huge opportunities to China's industrial and investment communities.

This is the second time that Liu Erhai has rang the bell with Luckin Coffee Chairman Lu Zhengyao.

On September 19, 2014, as an investor in rounds A, B and C, Liu Erhai witnessed the listing of China Auto Rental, founded by Lu Zhengyao, on the Hong Kong Stock Exchange.

Liu Erhai and Luckin Coffee CEO Qian Zhiya

Recalling the origin of Luckin Coffee, Liu Erhai said, "In 2008, Mr. Lu told me that he wanted to make coffee in the future, so when he proposed the idea of ​​Luckin Coffee, I was not surprised at all. From an idea in 2008 to a listed company in 2019. In the past eleven years, I have seen the persistence and faith of entrepreneurs. At the same time, the fact that this thing was accomplished at this point in time also shows that the Chinese opportunities brought by the maturity of the 'new infrastructure' that we have always valued will emerge in large numbers."

"The most important thing is that Chinese consumers can drink a cup of delicious coffee in the most convenient way and at the most appropriate price." Liu Erhai believes that it all comes down to satisfying consumers.

The following is Liu Erhai's Q&A session:

Question: Why did Luckin Coffee go public so soon after being established just over a year ago?

Liu Erhai: Time is not the indicator for measuring speed. After completing the $150 million Series B+ round of financing from BlackRock on April 18 this year, Luckin's valuation was $2.9 billion. This valuation level is a very suitable size for going public.

IPO is taking your company to the public market. If the public market accepts your model and believes in your future development, then you can issue it.

Secondary market analysts will do a lot of research before making investment decisions and communicate with companies about numbers. This is the most critical thing. If you can't produce data, no one will pay attention to you.

He will not be particularly enthusiastic just because you do a good job in marketing advertising or you are so-and-so. That is impossible. Basically, you have to talk to the analyst one-on-one and place an order after full communication. In this market, there are only objective and neutral indicators such as data and value. There is no so-called "fast" or "slow".

There are also claims that Luckin Coffee is going public at this time because it has no money.

Those who say this lack basic common sense. At any time, it is a bad thing to have no money to raise funds. I always let our invested companies raise funds when they have money. If you raise funds when you have no money, what position will you be in during the negotiation? This is something that you can easily guess.

Question: Why do you think Luckin is the result of the maturity of China's new infrastructure?

Liu Erhai: To get a cup of Luckin Coffee, whether in the store or outside, you place an order through the mobile application (APP). All user data is on the platform, which makes big data analysis possible, and thus can provide products that are more personalized and targeted to each individual.

How does Luckin Coffee realize logistics? Customers can pick up the products themselves or the products can be delivered to customers. If delivery is to be realized, it cannot be realized without a perfect logistics system.

In addition, the IoT module on the coffee machine monitors the operation of the coffee machine to prevent human error and maintain product consistency, which requires the support of the IoT. A simple cup of coffee is supported by the IoT, logistics, big data, and mobile Internet.

Question: How did Luckin Coffee achieve billions of dollars in such a short period of time? Is it because of its aggressive approach?

Liu Erhai: I totally disagree with the term "radical". A high-speed train running 200 kilometers is too slow for you? A tractor would fall apart if it ran 80 kilometers. It's not that we are fast, it's because we are completely different species.

First, how much does it cost to rent a 500-800 square meter store? How much does it cost to renovate it? How long does it take? China's real estate market has been booming in recent years. How much rent is in the cup of coffee you're drinking?

How difficult is it to find a 500-800 square meter house in a suitable location for a store? Is Luckin Coffee's location selection easier? Is the rent cost per cup of coffee lower? You have to understand this principle.

Second, what is the service radius of a store? If it is 20 kilometers, it is unlikely that anyone will travel 20 kilometers to drink coffee, right? 1-2 kilometers is a more appropriate number.

For traditional coffee shops, after opening the store, you have to slowly wait for half a year until everyone knows about your store, and then sales will gradually increase and stabilize.

But Luckin’s store could be searched on the app on the first day of its opening, and many stores were opened directly on the first floor of the office. Development with Internet tools is completely different from traditional store management. We cannot say we are too fast just because they are slow.

Third, the average income of Americans is 5,000 US dollars, a cup of coffee costs 2-4 US dollars, and a can of Coke costs 1-2 US dollars. The average income of Chinese people is 5,000 RMB, a cup of coffee costs 30-40 RMB, and a can of Coke costs 1-2 RMB.

This is a comparison that combines the exchange rate and purchasing power index. Do you think a cup of coffee is expensive in China? In terms of purchasing power evaluation, coffee itself must be cheap, but the cost structure of your cup of coffee has changed due to the rent in China.

Of course, if you buy a coffee and sit in the store to chat for a while, that's fine, but most people just buy it and leave. In this case, is it worth paying so much rent?

These reasons constitute what I call the new infrastructure. China's new infrastructure has enabled a group of new companies to develop. What does the new infrastructure include? Mobile Internet, mobile payment, logistics, cloud computing, and Made in China have become China's new infrastructure.

The current chain coffee model originated in the industrial age. It is a product of the industrial age, and the characteristics of the industrial age are economies of scale and lower procurement costs. Times have changed, and the external environment has changed. You can't stick to the old ways and take the old days as the golden rule.

China's industrial sector and entrepreneurs have already taken the lead and started large-scale and deep innovation. For example, some people think that Mobike is just a model innovation.

In fact, the shared economy bicycles you see in the United States and Israel, these dockless brands are all imitations of Mobike. Chinese people need to build up their confidence and stop feeling good after being charged brand taxes by foreign brands.

Entrepreneurs are already taking action. Consumers and public opinion cannot remain in the old traditional era. That is totally unacceptable. If you follow others blindly and learn to walk by imitating others, you will only be able to copy others and never run. If you learn from others, even if you become the top, it is just a miniature version. How can your value and growth be better than others?

As an innovative company, following is not our purpose, but creating demand is our mission. How do you create demand? If the people like the products and services you provide, you will succeed.

How to make people like it? The price should be lower, it should be more convenient, and the quality should be good or even better. The Chinese people's demand for coffee is suppressed.

The industry has transformed into a new era, and demand has been released. You cannot stay in the old era, so transformation is painful.

Question: Can Luckin Coffee be called a traffic business?

Liu Erhai: No, it cannot be simply called traffic. We have so many offline stores and so many supply chains. Our business cannot rely solely on traffic, you also need quality.

Luckin Coffee cannot be called O2O. O2O is just about directing online traffic to offline. Many O2O companies have died.

I think the first stage of business is information, the second stage is transaction, and the third stage, which is now, is actually integration. You can see that there are many mobile Internet things in Weilai cars.

Is NIO a mobile Internet company? That’s not the case. Mobile Internet has become part of the company, as has Luckin Coffee. It has become part of the value chain, not just a traffic diversion.

Luckin Coffee is a representative of the transformation of traditional industries under the new infrastructure, and it would be more accurate to call it "data coffee".

Is Luckin Coffee’s threshold money, technology, or market understanding?

The first is definitely the brand. After you have been in the industry for a long time, you will build up a brand. The second is the user base. At the end of last year, we had 12 million active users online. With such a large amount of assets, it is not easy to open more than 2,000 stores. In fact, it is difficult to say that any business will never be done by others. I don’t think this exists. But after a certain level, no one wants to go in.

I think it is like this. Even if you have money and your investors have money, it is not easy to find people to manage so many offline stores. Money is useless. There is a lot of money in the world. Brand, users, management ability, and data ability are the thresholds.

Question: The projects you invested in, Mobike, NIO, and Luckin Coffee, have all attracted a lot of attention. What do you think about this?

Liu Erhai: First, controversial discussions indicate that there is no consensus, which is a normal phenomenon in investment. Second, how many of these controversial discussions are rational and based on research and analysis? How many are for traffic or other reasons? Third, what do you want to ask me what I believe in the most? It's still strength.

The only weapon for fighting back is your performance. Rationally produce the numbers and show yourself time and time again. It is especially easier after going public. Let the numbers speak for themselves.

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Lei Di Chuwang was founded by Lei Jianping, a senior media person and a contracted author of Toutiao. Please indicate the source if reprinting.