On April 2, Luckin Coffee was forced to expose its 2.2 billion yuan sales fraud scandal, and its stock price plummeted 80%, causing sighs from all walks of life. As soon as the news came out, various related posts were forwarded all over the circle of friends, and a group of onlookers sat back and laughed at the incident. In recent days, the topic of conversation has shifted from the epidemic to Luckin coffee, the "national pride" or "national shame."
My personal understanding of this matter:
Luckin's founding team hopes to solve the pain points of China's coffee market with huge capital and carefully built brands, products and networks, combine local preferential subsidy policies to fission and stimulate potential groups, quickly expand the scale, package and go public for financing, and realize value-added cash.
With such a business purpose as the premise, if we can really cultivate the Chinese habit of "one cup of coffee per person per day" and occupy half of the country, everyone will be happy.
With huge initial financial support and investment, Luckin Coffee took its first step smoothly and quickly. Even a loser like me who doesn’t usually drink coffee was successfully attracted to it. Holding the Luckin little blue cup in hand became a fashion at that time.
However, after listing, investors look at the trend: the scale should be larger and the losses should be reduced.
In order to embrace more capital, these two points must be met. Reducing subsidies and gradually moving toward the target price is the most direct measure to reduce traffic, conversion costs, and losses. This is how Luckin Coffee was designed and executed.
But at the same time, raising the price still requires proving to investors that more people are coming to drink the product, which is difficult to do. There is no need to investigate Luckin's internal data to prove this. The difference between my order frequency and the above figure illustrates the problem.
When many fans feel that they are not getting any advantage, the cost of "love" rises, enthusiasm gradually fades, and consumption returns to rationality, Luckin's sales conversion must have naturally suffered a huge impact. However, in the capital market, a continuously positive trend must be created to stabilize and boost stock prices. At this time, the only option is to forge data that shows a larger volume and smaller losses and announce it to the public.
In 2018, Luckin Coffee suffered a total loss of 1.619 billion yuan, and a loss of 552 million yuan in the first quarter of 2019. In May 2019, when Luckin Coffee was listed in the United States, CEO Qian Zhiya said that "the losses are in line with expectations, subsidies will continue for 3-5 years, and profits are not considered for the time being."
I believe this statement is true. If Muddy Waters Research had not confirmed that Luckin Coffee had falsified data, and Luckin Coffee had continued to raise funds smoothly, it might have had money to burn until the day it “formed a habit” and become a legend.
But as the truth was about to surface, in order to preserve the overall situation, Luckin Coffee had to find a "scapegoat" to take the blame and then expose itself. Although it seems like cutting off one's own arm, in fact, it is hoped that the entire company can have a way out. It is indeed a rogue move and the most economical approach after careful consideration.
According to the order data, I haven’t bought Luckin Coffee since September 26, 2019, until the day after the incident last week, when I saw the news that Luckin Coffee had a huge order in my circle of friends and ordered another cup.
I must admit that Luckin Coffee’s data fraud is inevitably related to me and a bunch of similar losers.
What warnings and inspirations does the Luckin Coffee incident bring to Amazon sellers (or e-commerce sellers)?
On April 23, 2018, Luckin Coffee submitted its IPO prospectus in the United States. The first sentence of the prospectus reads:
“Our mission: to be a part of everyone’s everyday life, starting with coffee.”
The understanding of this sentence is the same as our understanding of Amazon's product selection and operation today.
The key to achieving profitability is to maintain a stable and higher natural conversion rate than similar competing products at the target price.
However, looking at the mistakes made by Amazon sellers in the four major links of operations reflected by the operating results of Luckin's four major sectors, one can't help but break out in a cold sweat.
We are doing the same thing as Luckin
a. Positioning, targeting, analysis and selection (product selection)
After clarifying the business purpose and goals and sorting out the resources, Luckin Coffee CEO Qian must have researched and compared multiple industries and finally chose the coffee industry because the capacity is large enough, there is hope to grow big enough, and he can find the existing pain points and packageable gimmicks in the industry. Combined with existing resources and capabilities, it can better match the business purpose of "rapid expansion - embracing capital - value-added monetization."
But the fatal mistake also occurred here, in the risk measurement and assessment stage: Luckin Coffee misjudged the real demand of Chinese coffee consumers and misjudged the relationship between the possibility, cost, cycle and financing conditions of cultivating habits.
Amazon sellers: They blindly pursue markets with large demand and large sales volume or follow others’ “good products” to enter the market. They rarely evaluate the cost of using their own conditions and resources to seize market share at different times and in different spaces. They rarely evaluate whether profits can cover costs if they need to continuously pay for traffic to gain sales and weight. They also rarely evaluate how long the promotion cycle is needed for their products to surpass competitors’ weight in this market, gain A9 recognition, and thus obtain stable free traffic, and whether the investment in this cycle is within their ability to bear.
The core commonalities between the two:
Without traffic and promotion costs, when will consumers continue to make natural purchases at the target price?
Can you bear it before this?
In the same industry, consumers’ consumption habits and perceptions may differ significantly in different regions or platforms.
b. Brand packaging & product creation (differentiation and credibility)
When it comes to solving the problem of “convincing consumers”, we have to say Luckin Coffee has done an excellent job, and the investment in this step is well worth the money. Luckin’s initial fission effect was by no means simply due to its super-value subsidy preferential policies. "Integrating world-class supply chain resources - celebrity endorsements - "Little Blue Cup" and various store standard CIs - international raw material awards, etc." This packaging solves the problem of basic conversion rate and is worthy of learning and reference by all e-commerce sellers.
But the facts have proved that at this point, facing consumers in the Chinese coffee market, short-term brand packaging and product creation can only solve the conversion rate problem based on cost-effectiveness, but cannot solve the problems of rigid demand and brand loyalty.
Amazon sellers: The biggest difference between Amazon's sales process and domestic e-commerce is that buyers' decision to purchase is not based on pre-sales manual shopping guides, but directly depends on the quality of all interactive information on your product listing page (Landingpage) compared with similar competing products.
The product page on Amazon creates the same overall image packaging as Luckin Coffee.
For products in the same industry, can they summarize pain points that others cannot see? Can homogeneous products extract differentiated selling points? For differentiated products, are the differentiated points unique and correspond to the real needs of buyers? Is the description authentic? Does the main picture have the logic of storytelling? Does it dispel the biggest concerns of buyers? Is the picture exquisite and impressive, making buyers feel like they have never seen a big brand? Does the video script have an immersive plot? Do the five descriptions perform their duties and cater to different scenarios? Does the Q&A answer the most important questions of buyers? Does the evaluation speak out the buyers' future wishes?
Don’t imagine that you can become a hit just by being the same as a hit!
The core commonalities between the two:
To solve the consumers' "believe it or not" and "buy it or not" depends on how much material you prepare for the FABE rule.
C. Promotion and conversion
Evaluating Luckin's entire early promotion, traffic generation and conversion effects, in addition to "high-paying" Focus Media to be responsible for offline advertising, learning from Uber's promotional policies and rapidly covering a large number of offline stores played a decisive role in promoting the rapid expansion of scale. However, it is precisely this method of burning money at all costs to cater to the sales volume and coverage of the capital market that has become Luckin's biggest burden at this stage.
Amazon sellers: They start to attract traffic without analyzing the market competition and difficulty of the platform, without finding similar competing products to evaluate the conversion rate at the target price, without calculating the promotion costs and required period in advance, and without creating a page with quality that exceeds that of competing products:
Spend a lot of money to create artificial data to cater to Amazon A9; launch advertising to open up a large number of traffic channels, but only know how to open but not willing to make choices;
Just like Luckin Coffee, they directly use low prices to increase sales and rankings, trying to quickly gain weight, but either the conversion rate changes too much and they can never return to the target price, or they return to the target price but cannot stabilize the conversion rate and sales, and their weight drops and never recovers;
When doing promotions on and off the site, you will lose money on every sale.
The core commonalities between the two:
Not all types of products can achieve high conversions just by being at the top of traffic. Convenience stores and mobile phone films may work, but coffee and coffee machines may not.
If your core competency is unprofitable pricing, then the period of time when you are unprofitable may be long.
This is the only entrance for vehicles from 600 companies to enter and exit the park. Luckincoffee is exposed at least twice a day, and parking is convenient in front of the coffee shop. However, it has lost its "core competitiveness" and the large traffic is no longer accurate. Not to mention conversion, there are very few "clicks" now.
d. Measures to achieve profitability
In order to reduce losses and gradually restore profitability, Luckin Coffee reduced its subsidy discounts starting in 2019 and increased the price of certain products by RMB 1 (observing changes in conversion rates). However, judging from this fraud incident, the real situation is likely that both the loss of old users and the development of new users are not ideal.
In terms of channel cost reduction, Luckin launched the unmanned retail "Luckin Instant Purchase" and "Luckin Bargain" at its strategic launch conference on January 8 this year, planning to further reduce terminal product delivery and conversion costs. However, even without this fraud incident, it remains unknown whether Luckin's brand has been consolidated to the point where consumers are willing to automatically continue to buy it.
Amazon buyers: reducing the amount of fake orders or stopping fake orders will reduce the stimulation to the Amazon system, and naturally the orders will stop; there is no keyword targeting, and the advertising bids are uniformly lowered, resulting in a sharp drop in traffic, sales, rankings, and weight; raising prices, but being constrained by the price ceiling of competitors, can only come at the expense of conversion rate and sales.
The core commonalities between the two:
When consumer cognition and habits and system recognition weights are not yet stable, if the inherent defects cannot be changed, it will be extremely difficult to restore profits and ensure sales at the same time.
While writing the article, I also read several chapters of the textbook "Principles of Marketing"
The biggest feeling: Awe of business logic and rules
Where to start
If we must distinguish between two things:
Luckin Coffee is burning other people's money, while we are burning our own.
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