Luckin: The 'Little Blue Cup' is surging, is the 'Coffee King' on a smooth path?

$Luckin Coffee(LKNCY.US) released its Q2 2025 financial report (ending June 2025) before the U.S. stock market opened on July 30, 2025, Beijing time. Overall, driven by the peak season and delivery business, Luckin's performance this quarter was impressive, with all key metrics exceeding BBG expectations.

1. Rapid store expansion continues. In terms of store count, Luckin added a net of 1,757 stores in Q2 2025 compared to the previous quarter. Although the total number of stores remained flat with Q1, the company significantly accelerated the opening of self-operated stores in Q2. Generally, when store operating profits and same-store data perform well, Luckin chooses to accelerate the opening of self-operated stores, which indirectly confirms the excellent store operating quality in Q2.

Looking at the pace of store openings, based on the progress in the first half of the year, the company has already achieved more than half of its annual target of 4,000 stores set at the beginning of the year, far exceeding expectations. Additionally, Luckin officially entered the U.S. market in Q2, demonstrating its determination to further expand into the global market.

2. Same-store sales growth accelerated quarter-on-quarter. As a core indicator reflecting Luckin's intrinsic growth per store after excluding new store effects, same-store sales growth (SSSG) increased by 13.4% year-on-year, expanding by 5.3 percentage points from Q1. Since management clearly stated in the early-year conference call that cup prices would not change significantly, cup volume is the main driving factor.

In terms of cup volume, benefiting from online orders driven by e-commerce platform subsidies and the high-temperature peak season, Luckin's cup volume surged in Q2. Dolphin Research estimates the current cup volume reached 462 cups/day, nearing historical highs. From a category perspective, in addition to coffee, light milk tea and lemon tea also significantly boosted cup volume.

Regarding cup price, although Luckin raised the overall price at the beginning of the year by 1) increasing the original price and 2) limiting the use of the 9.9 offer, considering the company's proactive launch of some low-cost, low-priced tea products in Q2, coupled with an increased proportion of orders from lower-tier markets, Dolphin Research speculates that the cup price remained stable compared to the same period.

3. Significant increase in monthly active paying users. In Q2, the company's monthly active paying users reached 91.7 million, a year-on-year increase of 31.6%, with a noticeable acceleration compared to previous quarters. Dolphin Research speculates that the core reason is the pull from e-commerce delivery platform subsidies, and attention needs to be paid to user stickiness after subsidy reductions in the second half of the year.

4. Core operating profit exceeded expectations. In terms of gross margin, after a prolonged surge, coffee bean prices fell back in Q2. With large-scale direct procurement and the continuous ramp-up of self-built roasting plant capacity utilization, along with the release of scale effects, the gross margin reached 62.8%, the highest level for the same period.

Breaking down the expense side, apart from the significant increase in the proportion of delivery costs due to the increased share of delivery business, other expenses narrowed compared to the same period due to the release of operating leverage. Ultimately, core operating profit reached 1.68 billion yuan, exceeding the market consensus expectation (market consensus was 1.36 billion yuan).

Overview of core performance indicators:

Dolphin Research's overall view:

As the first chain ready-to-drink beverage company to release its results, there is no doubt that this is a performance that satisfies investors. In recent years, Luckin has perfectly illustrated the meaning of a chain by providing consumers with affordable and high-quality products through the mutual reinforcement of product, brand, and scale advantages.

Beyond this better-than-expected performance, we can observe the impact on the ready-to-drink beverage industry after JD.com and Taobao successively increased their delivery business through Luckin's financial report. Additionally, taking advantage of this financial report, Dolphin Research will delve into the recent market concerns about the competition between coffee and tea drinks.

Let's first discuss the impact of the delivery battle on Luckin:

In the short term, combining this period's performance and expert channel research minutes, after JD.com and Taobao joined the delivery business, Luckin's delivery order proportion exceeded 30% in Q2 (previously only 17%). The subsidies from delivery platforms have significantly boosted Luckin's order volume, mainly attracting price-sensitive users.

In simple terms, the incremental group mainly comes from the lower-tier market, which usually does not consume coffee. However, due to the lower cup price in the lower-tier market and high fulfillment costs (bearing more delivery fees), Luckin's profit margin will be under pressure.

The real delivery battle only started in July, so the substantial impact on Luckin's profits is expected to be fully reflected in Q3.

However, in the long term, Dolphin Research believes that the delivery platforms' money-burning subsidies to users actually help Luckin cultivate consumers. After the subsidized user group gets used to drinking coffee, they are likely to gravitate towards professional brands with high cost-performance ratios. The final result is equivalent to Luckin sacrificing short-term profits to increase its market share in the lower-tier market.

Additionally, from a competitive landscape perspective, although Dolphin Research previously analyzed that Cudi's threat to Luckin is no longer significant, recently, with Gu Ming signing Daniel Wu in June and high-profilely increasing its coffee business, it is easy to observe a phenomenon where chain tea brands are also entering the coffee track through the establishment of independent sub-brands or product line expansions.

The underlying logic is nothing more than trying to gain a share in the coffee track by reusing supply chain and customer resources amid the current price war and slowing growth in the ready-to-drink tea industry, which also means that the fierce competition between milk tea and coffee has officially begun.

Since entering the coffee track in 2024, Gu Ming has started to launch coffee categories on a large scale in stores this year, currently available in 7,600 stores nationwide (nearly 80% of stores).

On one hand, from a price perspective, Gu Ming's coffee unit price highly overlaps with Luckin, both focusing on the mid-range price band of 10-20 yuan. On the other hand, Dolphin Research analyzed in "Gu Ming: Slow is Fast! Is there a 'Costco' in the Tea Industry?" that Gu Ming's supply chain and store operation capabilities are top-notch in the mid-range price band, so the market is currently truly concerned about the threat Gu Ming's entry into coffee poses to Luckin.

Here, Dolphin Research also shares some thoughts for your reference:

(1) From the attributes of the category itself, the difficulty for tea drinks to enter the coffee track is naturally higher than for coffee to enter the tea drink track:

First, from the logic of the category itself, ready-to-drink tea and coffee respectively represent "leisure" and "refreshment" consumption scenarios. In the marketing process, tea drinks often emphasize sensory pleasure and innovative experiences while downplaying professional labels, whereas coffee, due to its functional binding, strengthens professional labels through the origin of coffee beans, roasting techniques, etc., which can lead to the perception that tea drinks lack professionalism and are merely "leisure beverages" when transitioning to the coffee category.

(2) The market positioning and main consumer groups of Luckin and Gu Ming are different: From a consumer group perspective, Luckin's main consumer group consists of office white-collar workers, which is evident from Luckin's early store locations, with almost every store located in the lobbies of office buildings in first- and second-tier cities, a must-pass for office workers. The core demand of consumers is refreshment, resulting in higher stickiness.

In contrast, Gu Ming's stores are mostly located around commercial areas, and the store opening time is generally after 10 a.m., while groups with a fixed coffee consumption habit mostly complete their consumption actions before work (70% of Luckin's orders are generated in the morning). Therefore, Gu Ming's coffee consumer group is more of an extension of tea drink consumers' curiosity.

This also results in a significant difference in the scale of coffee business between the two. Based on research information, the current daily cup volume of Gu Ming's store coffee is only around 40-50 cups, while Luckin's daily cup volume is generally over 400 cups, nearly ten times that of Gu Ming.

Combining (1) & (2), Dolphin Research believes that the threat posed by ready-to-drink tea brands like Gu Ming entering the coffee track to Luckin is not significant, as it is a competition based on the competitive barriers Luckin has already established, so Gu Ming is more about cultivating coffee awareness among consumers in the lower-tier market.

Finally, based on the above analysis, from a competitive landscape perspective, whether it is tea drinks entering the coffee track or old rivals like Cudi, it is difficult to pose a substantial threat to Luckin. The company is likely to enter a period of stable growth in the future.

Based on the operating efficiency in the first half of the year, Dolphin Research assumes 5,000 store openings for the year, and considering the slight weakening of gross margin due to increased coffee bean costs in the second half of the year, Dolphin Research estimates an annual profit of 4.5 billion yuan. Considering the coffee industry's growth rate of over 20% in the next three years, giving Luckin a certain valuation premium, under a neutral scenario, Dolphin Research believes Luckin's reasonable market value is $15.4 billion based on a 25x multiple.

However, if the increase in overseas spending and the delivery battle in the second half of the year lead to a significant decline in profitability, only reaching the level guided by management at the beginning of the year (3.2 billion yuan, flat with the same period last year), under a conservative scenario, based on a 25x multiple, the corresponding market value would be around $11 billion. Based on the above valuation range, combined with the liquidity discount in the pink sheet market, you can make decisions based on your risk preference.

Below is the detailed commentary

Investment Logic Framework

According to Luckin Coffee’s disclosure, the company’s operations are split into two main business lines: self-operated stores and franchised stores.

1）Among them, the self-operated business is the revenue brought by Luckin Coffee’s directly-operated stores. Currently, directly-operated stores number nearly 17,000, with stores mainly in first- and second-tier cities, which has great significance for Luckin Coffee in building its brand image. The self-operated business is the company’s profit base, accounting for over 80% of profits.

2）Franchise business revenue includes five parts: the sale of raw materials to franchisees (coffee beans, milk, coconut milk); profit sharing from franchise stores (levied on a tiered basis according to each store’s gross margin); equipment sales; delivery services; and other services. Of these, raw-material sales account for nearly 70% and are the core revenue source of the franchise business. Currently, there are over 9,000 franchise stores, accounting for about 20% of revenue, focused on third- and fourth-tier (lower-tier) markets to seize premium locations there. Although the pace of franchise store openings is faster, their profitability is not as strong as that of the self-operated stores.

2. Maintaining Rapid Store Expansion and Accelerating Same-store Growth

In terms of store openings, Luckin Coffee added a net 1,757 new stores quarter-on-quarter in 2Q 2025. Although the total store count was flat versus Q1, in Q2 the company clearly accelerated the pace of openings for its self-operated stores. Generally speaking, when a store’s operating profit and same-store metrics remain strong, Luckin will choose to speed up the rollout of directly-managed outlets—an indirect confirmation of the excellent store operating quality in Q2. Judging by the first-half pace, the company has already completed more than half of its full-year target of 4,000 stores set at the start of the year, far exceeding expectations. Dolphin expects the company to open over 5,000 stores by year-end.

On the overseas front, in Q2 Luckin officially entered the U.S. market, opening two self-operated stores in Manhattan, New York. Unlike its domestic low-price strategy, in the U.S. Luckin has set its prices directly against Starbucks, competing head-on with the global coffee giant—demonstrating its resolve to further expand into the worldwide market.

As the core metric that captures Luckin’s organic growth per store after stripping out the impact of new openings, same-store sales growth (SSSG) rose 13.4% year-over-year and accelerated by 5.3 percentage points from Q1. Since management made it clear in the early-year conference call that the average price per cup would remain largely unchanged, cup volume is the primary driver.

In terms of cup volume, aided by online orders subsidized through e-commerce platforms and spurred by the peak-season heat, Luckin’s cup volume surged in Q2. Dolphin estimates current volume at 462 cups/day, approaching a historical high.

By category, in addition to coffee, tea beverages introduced in the same period last year—such as light milk tea and lemon tea—also significantly boosted cup counts. On pricing, although Luckin lifted overall prices earlier in the year by (1) raising base prices and (2) narrowing the ¥9.9 promotion’s applicability, Dolphin believes the average price per cup held steady year-over-year, given the launch of some lower-cost tea items in Q2 and a higher share of orders coming from lower-tier markets.

Monthly active paying users rose sharply. In Q2, the company’s monthly active paying user base reached 91.7 million, up 31.6% year-over-year and noticeably accelerating versus the previous few quarters. Dolphin believes the core driver was the subsidies from e-commerce and food-delivery platforms; going forward, it will be important to monitor user stickiness once those subsidies begin to roll back in H2.

3. The delivery business has driven a sharp increase in fulfillment costs, while the core operating margin has remained broadly stable

In Q2, Luckin Coffee achieved total revenue of RMB 12.36 billion, up 47.1% year-over-year and surpassing Bloomberg’s expectation of RMB 11.6 billion. Breaking down by segment, self-operated stores generated RMB 9.5 billion in revenue, a 44.8% year-over-year increase, while the franchise business contributed RMB 2.87 billion, up 55% year-over-year—outpacing the growth of the self-operated channel. Dolphin attributes this faster franchise growth primarily to delivery-driven incremental volume concentrated in lower-tier markets (where franchised stores predominate).

About Gross Profit Margin：In Q2, after coffee-bean prices had surged sharply for over six months, they eased somewhat. Thanks to large-scale direct sourcing and the ramp-up of capacity utilization at its self-built roasting plants—coupled with the release of economies of scale—Luckin’s gross margin climbed to 62.8%, its highest level for the period.

Based on the Fujian and Jiangsu roasting bases already in operation, 45,000 tons of capacity can supply 20,000 stores. Including the 55,000 ton roasting base under construction in Qingdao, there remains substantial room for further cost compression going forward.

On the expense side, it is clear this quarter that, due to the higher share of delivery business, the delivery expense ratio surged from 7.2% year-over-year to 13.7%, making it the biggest drag on profitability. Given that July marked the peak of the delivery-army competition, Dolphin expects delivery expenses to remain elevated in Q3. Other expense items—including the sales expense ratio and the administrative expense ratio—both narrowed year-over-year thanks to operating leverage. Ultimately, core operating profit reached RMB 1.68 billion, exceeding the market consensus of RMB 1.36 billion.