One’s first visit to a branch of Luckin Coffee can be an unusual experience. Staff members do not take orders and there isn’t even a machine to order from. Instead, everything has to be done through the Luckin app.

Zhang Tianbing, the Asia Pacific consumer products and retail sector leader at Deloitte, scrolled through the online menu at a Shanghai outlet and picked out the latest drink — chocolate milk infused with the superpricey Chinese grain alcohol Moutai.

“The business has been growing quite rapidly. [There are] a lot more stores,” he said.

Luckin declined to comment for this story. However, the firm’s latest financial statements show that the coffee chain has surpassed Starbucks China’s operations, both in terms of revenue and the number of locations. Luckin finished the quarter ending Dec. 31 with $995 million in revenue versus Starbucks’ $735 million in the same period.

That is quite a turnaround from 2020, when Luckin was all over the news for fabricating over $300 million in sales and delisted from the Nasdaq stock market in the United States. 

When Luckin was set up in 2017, the coffee chain was touted as a high-tech Starbucks. The data collected through the Luckin app supposedly helps the company better target customers.

For example, the Moutai chocolate milk drink retails for 38 yuan ($5.30) per cup, though with all the discounts Luckin offers, Zhang ended up paying only 12 yuan ($1.70). Plus, he received a digital coupon for another cup. 

It “gives you some form of incentive to come back and buy again, encourage your loyalties to the extreme,” Zhang said. He pointed to a photo card that came with the drink showing its global brand ambassador, who happens to be popular Chinese singer Jackson Yee. 

Stock investor Zheng Litao thought the company was overhyped even back in 2019.

“How could this company make so much money and grow so fast even though it is showering customers with discounts? I didn’t quite believe their numbers and suspected Luckin was inflating [its] revenue, which proved to be true,“ Zheng said.

The fraud was extensive. Luckin was listed on the Nasdaq in 2019. The following year, the U.S. Securities and Exchange Commission came down on the coffee chain for overstating its sales. Luckin had to pay a fine of $180 million and delist.

The fraud led the U.S. Congress to pass the Holding Foreign Companies Accountable Act, which states that firms cannot trade on American stock exchanges unless they comply with the country’s audit rules.

Anne Stevenson-Yang, co-founder of J Capital Research, was among a group of short sellers — people who make money when stocks go down in value — who followed up on an anonymous report and bet against the stock, convinced that Luckin was faking its revenue.

Stevenson-Yang said she also has doubts about the firm’s much-touted recovery.

“Back in 2020 and before, they had to fake [at least] a quarter of their transactions in order to demonstrate growth to the market,” Stevenson-Yang said. “I mean, Luckin just doesn’t make sense as a business.“

Other analysts, like Deloitte’s Zhang, disagree. He argues that Luckin might not have been growing as fast as it claimed back then, but the original idea had merit.

“The business model was sound,” Zhang said.

That model included offering cheap but good takeout coffee. The company prides itself on keeping its operations lean so that it can charge low prices. The Luckin shop that Marketplace visited didn’t have music in the background, for instance.

Luckin “at this stage is recovering from the scandal,” Zhang said. “It has basically gotten rid of the previous owners that were not being honest with the business.”

Plus, he said there is a shift in popular taste toward coffee consumption.

According to Deloitte’s 2021 white paper on China’s fresh brewed coffee industry, authored by Zhang and his team, from 1999 until 2020 coffee was mainly a social activity, thanks in part to Starbucks’ comfortable stores. The report said China remains a tea-drinking nation. Even so, coffee drinkers in megacities like Shanghai and Beijing manage to drink about a cup of coffee a day.

“If you were talking about caffeine intake instead of a lifestyle or self-identity, the price component becomes important,“ Zhang said. 

With all its discounts, Luckin charges an average of $2 a cup versus more than $4 at Starbucks.

“For students, or those early in their careers who need the coffee but cannot afford to have a cup of Starbucks every day, then Luckin becomes a very good alternative,” Zhang said. Luckin’s price point is also appealing for those who are cutting back their spending in China’s sluggish economy.

Luckin has been experimental with its flavors, which attracted positive media coverage. Last year, it collaborated with the American cartoon franchise “Tom and Jerry” to create a mascarpone cheese latte.

Then, it partnered with China’s national liquor brand, Moutai, to create the Moutai latte and the chocolate drink. Each contains about half a percent of alcohol. Tastewise, I found the chocolate Moutai drink too sweet, watery and alcoholic. Then again, I visited at 11 o’clock on a Tuesday morning.

Starbucks China also offers alcohol in coffee, but only through its bars.

Rose Liu drinks up to four cups of coffee a day, but she runs coffee shops of her own. Naturally, she’s not a loyal Luckin customer. Even so, she has a favorite there.

“I don’t usually like Luckin. I thought it had really awful coffee, but then I tried its ice coconut latte, and I thought it’s great,“ she said. “It is tasty as a drink … not as coffee.”

Luckin’s app said it has sold more than 300 million cups of its coconut latte since 2021.

That caught the attention of former skeptic Zheng Litao. He does not like the taste of coffee, but he finds Luckin’s flavored coffee particularly good. Zheng now holds Luckin shares, which trade publicly over the counter.

He’s optimistic about the chain’s prospects.

“Luckin‘s coconut latte is a phenomenal hit. People are realizing that its sales are growing quite well and its new products are competitive,“ Zheng said.

He thinks Luckin is being kept honest because it has brought a controlling shareholder onto its board of directors. 

“Centurium Capital is a well-regulated investment company. … It is going to be very stringent in terms of compliance,“ Zheng said. And since Luckin had a fraud scandal, he added, “everyone will keep a close eye on it. I don’t think Luckin would be bold enough to fabricate sales again.”

While Starbucks has nearly 7,000 stores in China, Luckin said it has over 16,000.

The firm that was allegedly behind the anonymous report exposing Luckin’s fraud in 2020 has reportedly bet on Luckin’s comeback. 

But some, like Stevenson-Yang, still have their doubts about the company’s supposed rebound. “Sure, I think that Luckin is popular. I just don’t think that it’s cash-generative,” she said. 

There are reports that Luckin has plans to relist its shares, potentially on the Nasdaq again.

Additional research by Charles Zhang.