Normally, all values in the mysql.user.host column are lowercase. The parser converts all host names to lowercase in sql_yacc.yy. But mysql_install_db does not, so if the actual local host name is not lowercase it'll end up this way in the mysql.user table.
This user entry becomes impossible to drop:
Note flush privileges after every drop user. Because the user is actually deleted from the in-memory structures, but not from the table on disk. That's why the second drop user fails, but if we re-read privilege tables, it reappears.