Luckin puts the heat on Starbucks in China

A Luckin Coffee outlet in Beijing. The start-up is going all out to open outlets to unseat Starbucks as the top java seller in China.
A Luckin Coffee outlet in Beijing. The start-up is going all out to open outlets to unseat Starbucks as the top java seller in China. PHOTO: BLOOMBERG

China start-up pouring in $176m a year counts GIC among investors

BEIJING • Luckin Coffee, a Chinese start-up that's banking on selling cappuccinos to on-the-go office workers, is burning through money each year opening outlets to unseat Starbucks as the top java seller in the country.

Launched about a year ago, the local challenger is confident it has a winning model: Small coffee outlets that will outnumber Starbucks cafes by year's end, an app that rushes out deliveries in about 18 minutes and lots of steep discounts. It is burning US$130 million (S$176 million) a year, according to the Xiamen-based company.

"China is Starbucks' best and most profitable market now, but it took them nine years of making huge losses,'' said chief strategy officer Reinout Schakel in an interview in Beijing this week. "We will be faster than that.''

Luckin's success so far is putting pressure on Starbucks, which until now had no meaningful challenger and dominated the market with more than 50 per cent share. The companies are employing vastly different approaches in their claims to the US$3.2 billion retail coffee market that is Starbucks' fastest-growing and second-biggest. That competition is likely to heat up with China's economic slowdown.

Questions abound on whether Luckin can parlay customer discounts and media hype into as powerful a brand as its rival. The Seattle-based behemoth has lately dialled down its ambition in China, even as it still targets a tripling of revenue by 2022. Starbucks reported last month that comparable sales growth could be as low as 1 per cent over the long term, sparking concern that competition and cannibalisation are taking their toll.

Currently valued at US$2.2 billion and backed by investors including Singapore's GIC and China International Capital, Luckin has emphasised convenience, betting that Chinese office workers would rather have ease of access over frills - and pay about a third less. Its outlets are cashless and customers are meant to be able to get their coffee without ever speaking to anyone.

The outlets, in or near office buildings, are designed for fast pick-up and delivery - and exploit a competitive edge where Starbucks has been late to the game. Despite Chinese consumers' reliance on food delivery, Starbucks launched delivery in partnership with Alibaba Group only in August.

 
 

"If I were an investor in Starbucks, I would also invest in Luckin to hedge my bets,'' said Mr Schakel, who is also chief financial officer.

Luckin has made headlines for setting a target of 4,500 stores this year, most no larger than a studio apartment rather than sit-down cafes. Still, they would outstrip Starbucks' count of about 3,600.

Starbucks is also setting up small, delivery-focused kitchens in Alibaba's Freshippo supermarkets and more than 2,000 of its stores are now equipped for delivery.

Luckin, also known by its Chinese name Ruixing, faces an uphill race against a global competitor which has clocked 20 years in the world's second-biggest market. The local upstart is reliant on discounts and promotions to attract customers, which may create an unsustainable spike in demand. China's landscape is littered with start-ups whose cash-burn models and flashy press never translated to profitability.

Mr Schakel said China has enough potential to sustain more than one chain. Chinese consumers currently drink just four to five cups per capita, compared to about 300 cups in places like Taiwan, Hong Kong and South Korea, he said.

Even as it mounts its challenge, Luckin still looks to Starbucks to lead the way with its considerably larger resources in promoting coffee consumption in China, a traditionally tea-drinking country.

Luckin will focus on expanding in Tier 1 and 2 cities, while waiting to see how Starbucks fares deeper in rural China, he said. "Of course we are competitors, but ultimately we both want the market to grow."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 18, 2019, with the headline 'Luckin puts the heat on Starbucks in China'. Print Edition | Subscribe