China’s Luckin brews up a threat to Starbucks
Print Edition
QIAN Zhiya may be Starbucks’ worst nightmare.
The 42-year-old Chinese entrepreneur says she is betting that her fledgling Luckin Coffee brand will eventually have more cafes in China than Starbucks, and she has Singapore’s sovereign wealth fund and other investors bankrolling her plan.
Luckin, which only officially launched in January, has opened more than 660 outlets in 13 Chinese cities thanks to a supercharged growth plan based on cheap delivery, online ordering, big discounts and premium pay for its staff.
Its assault comes at a crucial time for Starbucks, which has 3,400 stores in China — its second biggest market after the US — and plans to almost double that number by 2022.
Starbucks’ shares were pummelled in June after it warned same store sales growth in China had plunged to zero or worse last quarter, against seven percent growth a year earlier. Its fiscal third-quarter results are due out tomorrow.
Starbucks said some new cafe openings were cannibalizing customer visits at nearby stores and it also blamed a drop-off in orders through delivery firms.
While it did not mention increased competition, investors and analysts said it is clear that Luckin does represent a threat.
However, they also point out that Starbucks’ brand has been very resilient to challenges from rivals around the world over the years, largely because of the ambience of its stores, its service and the consistent quality of the coffee served.
Reuters spoke to 30 consumers in the Beijing Yintai Center, a shopping mall that has a Starbucks, Costa Coffee and Luckin outlet, among others. Half of those polled said they had tried Luckin; most said they liked it, though more than two-thirds said their top choice remained Starbucks.
Luckin’s customers can order coffee via an app, watch a livestream of their coffee being made, and have it delivered to their door in an average of 18 minutes, the company says. A regular latte, roughly the size of a Starbucks grande, costs 24 yuan (US$3.50) plus six yuan for delivery, but can be half price after promotions. A grande latte at Starbucks costs 31 yuan.
More than half of Luckin’s stores are larger “relax” outlets or pick-up stores with some seating. The rest are delivery kitchens.
The speed of Luckin’s growth is extraordinary — it took Starbucks about 12 years to open as many stores. In many ways it echoes the way in which some major Chinese technology firms have burned through cash to grab market share.
Qian, who was previously chief operating officer at Chinese ride hailing firm Ucar, says Luckin’s focus now is all about increasing customers.
“I don’t have a timeline for profit,” Qian said at the firm’s Beijing headquarters as she sipped her third Luckin coffee of the day. “For us, what we care about now is the number of users and if they are coming back to us, whether they recognize us, whether we can take market share.”
The firm raised US$200 million this month to help fund its expansion, including an undisclosed sum from Singapore government fund GIC, a funding round which Luckin said valued the firm at US$1 billion.
The use of online ordering and delivery should be enough to unnerve many established brands, said Bruno Lannes, Shanghai-based partner with consultancy Bain & Co.
“It’s a big threat, that’s why western brands need to pay attention,” he said.
Still, not everyone agrees the Internet model translates easily to the coffee business, given the need for costly stores and quality control.
“It remains to be seen if they can really hook consumers in and create a monopoly in the market, like those we see in sectors like cab-hailing,” said Liu Xingliang, president of tech consultancy China Internet Data Center.
Hurdle ahead
And some of the consumers Reuters spoke to in the Beijing mall saw hurdles ahead for Luckin.
Lian Yiheng, 22, a student, said she was attracted by Luckin’s promotions and the convenience of delivery, but felt it needed to improve its selection of coffees and store decoration to lure people in the longer run.
Qian said the plan was to have more sit-in stores and reduce the proportion of delivery-only outlets, which would require higher spending on setting up in better locations and on decor.
Luckin’s expansion comes as Starbucks’ global rivals, like Canadian chain Tim Hortons, are also pushing hard in China. Tim Hortons plans to open 1,500 outlets in China over the next 10 years, while smaller local chains are also popping up fast.
As China’s middle class continues to increase in size and the coffee chains move into many smaller towns and cities, the market is growing at 5-7 percent a year, according to research firm Mintel.
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