Luckin’s Moutai latte: What investors should know

A Flash in the pan?

On September 4, 2023, Luckin Coffee (OTCMKTS: LKNCY) and Kweichow Moutai (SHA: 600519), the maker of China's national liquor Baijiu, launched a new product called "酱香拿铁" - a latte drink spiced up with Moutai baijiu liquor. The Moutai-tinged latte has been a huge hit, with Luckin Coffee reporting that it sold over 5.42 million cups on its launch day. Single-day revenues of this single item surpassed 100 million yuan ($13.7 million), beating the record of Luckin’s best-selling products such as cheese latte (which sold 1.31 million cups on its launch day) and coconut cloud latte (which sold 660,000 cups) [source].

(If you're wondering, its texture is akin to Baileys with coffee and cream, but it carries a distinct hint of Moutai's signature '酱香' or "Jiang Aroma," a scent reminiscent of fermented beans. I can't quite find an exact translation for this aroma; it's best experienced firsthand. The alcohol content is under 0.5%.)

The success of the Moutai latte sent Luckin's shares soaring by more than 5% on the day after the launch, hitting a new high since Luckin’s accounting fraud scandal.

Not all cross-category collaborations succeed

Luckin and Moutai have both experimented with unconventional product collaborations before. For instance, Luckin launched a watermelon latte in the summer of 2022, and many other coffee makers have since made variants of fruity coffees. Moutai also launched Moutai-flavored ice cream, which became a sensation in 2022, but the degree was nothing compared to the Moutai-flavored Latte.

In the realm of coffee-liquor cross-collaboration, Starbucks also brought back a seasonal whiskey-flavored cold brew in July of this year. However, the social media buzz generated by this product launch was nothing compared to the Luckin x Moutai combo.

Does the fusion of national liquor with coffee signal a new era in the Chinese consumer market? How does the cultural context influence the success of a product launch? Is there more to the 'Moutai latte' craze than meets the eye? In today's post, we will discuss these important questions that investors should know to understand what it could mean for the long-term performance of Luckin.

Why Did It Work? The Cultural Context.

Novelty products are a great way to grab consumers' attention, but it's not just about random combinations and choosing completely incompatible elements just to create sensations. In my opinion, Luckin x Moutai did several things right that others didn't:

• This collaboration allows two distinct groups of consumers to get a glimpse into each other's lives. Moutai, known as China's luxury liquor, carries a hefty price tag, making it a sought-after beverage. The Moutai Feitian (53% ABV), used in Luckin’s latte, is among Moutai’s most premium product lines – the go-to baijiu if you want to entertain important guests in a classy and professional setting. On the other hand, Luckin primarily caters to white-collar young adults. By merging these two, the collaboration lets young consumers sample the luxury that is Moutai in a fresh and affordable way.

  In a similar vein, consider Starbucks's whiskey-flavored cold brew. In China, Starbucks sees its regular customers as belonging to a higher-income bracket, and whiskey drinking is generally considered a high-brow activity. So, for these consumers, sipping a whiskey-flavored beverage might not feel like stepping into a new world, but more of an alignment with their existing preferences.

  Furthermore, Moutai, traditionally not viewed as a ‘young’ brand, has been eyeing the younger market segment. Through initiatives like Moutai-flavored ice cream, they've signaled their intent. Moutai’s partnership with Luckin might just be the breakthrough they needed to genuinely resonate with younger consumers.

• Local-inspired flavors: In our inaugural Baiguan post, we delved into the unique perception of coffee among Chinese consumers. More often than not, their proclaimed affection for coffee refers to coffee-flavored beverages rather than the bitter Americano or cold brew. For example, Luckin's enduring best-seller, the “raw coconut latte”, is essentially a sweet, creamy, coconut-flavored latte drink—quite distinct from classic choices like cold brews or standard lattes.

• Social significance: With the launch of the Moutai x Luckin latte, catchy phrases like "早C晚A" (loosely translated as "Morning C Evening A," symbolizing 'Coffee in the morning, Alcohol in the evening') gained traction online. This clever phrase, which mirrors the lifestyle of urban young professionals, became a popular talking point, further fueling the drink's popularity. (Interestingly, the "早C晚A" catchphrase wasn't originally associated with beverages. Its first use was by Proya, a local skincare brand, where its meaning was contextually different yet equally impactful in driving sales.)

• Luckin's marketing approach: The recent success of Luckin's Moutai latte is not just about the product itself but also the way it was marketed. After all, not every novelty coffee they've launched has seen this kind of success. Luckin has done a great job in generating buzz and keeping the conversation going among consumers online. They've been a dominant presence on major Chinese social media platforms, consistently ranking high in terms of exposure. This focused effort has become more noticeable since 2023, given the rise in online chatter about the brand.

Will Moutai latte become a lasting hit? What do consumers say?

Some consumers aren't sure about the mix of Moutai with coffee latte. For some, the strong taste of baijiu with coffee reminds them of a hangover, and some are saying, "the taste makes me want to puke." While the initial curiosity might get people to try it, its staying power in the market will really depend on the customers. We're tracking more feedback and order trends in the coming months, so don't forget to subscribe to receive updates.

And for those wondering, many people have actually given the "Moutai latte" a thumbs up since its launch, enjoying its distinct taste. Across major social media platforms, close to 30% of the posts mentioning "Moutai Latte" expressed positive sentiments, with some consumers saying things like "To my surprise, I actually liked the taste" or "Am I the only one who actually liked the taste?”

The initial surge shows potential. Luckin has also announced that the team will purchase a new batch of 53% alcohol Maotai liquor to restock after stores have mostly sold out. Luckin has also announced that the Moutai Latte is a long-term strategic product jointly launched by Luckin Coffee and Maotai and will be sold for an extended period [source].

However, the landscape is not without challenges. Competitors like Cotti Coffee, with its aggressive expansion and similar pricing range, are looming on the horizon. Once the novelty wears off, the pricing and inherent taste of the beverage will still be critical factors.

The long-term appeal of Moutai latte remains to be seen. However, I believe that the collaboration is a strategic win for both Luckin and Moutai, even if the initial hype eventually fades. Moutai has been struggling to connect with younger audiences in recent years, requiring immense advertising costs to engage them effectively. Moreover, the coffee industry is increasingly reliant on savvy marketing and social media presence. The Luckin x Moutai collaboration has convinced young consumers to try it out and pay for it. Even if it turns out to be a one-time novelty purchase, it's still a brilliant move - think of it as a fully consumer-funded marketing campaign. What a brew!

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*Disclaimer: This post is not sponsored by Luckin Coffee or any other brands mentioned in the article.

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