HONG KONG • The team behind Luckin Coffee is betting that what worked for the company in car rentals will prove a success with java. Its US$130 million (S$179 million) annual cash burn - and rival Starbucks' dominance in the Chinese coffee market - makes it a risky proposition, though.
For now, US investors seem impressed enough by Luckin's aggressive expansion plan for the Xiamen-based company to raise a higher-than-expected US$561 million in its initial public offering (IPO) last week. The stock jumped 20 per cent to US$20.38 in New York last Friday, against a decline in the S&P 500 Index.
The company's chief financial officer Reinout Schakel said he was pleased with the trading debut. "Up is always better than down."
The Chinese start-up is seeking to overtake Starbucks, opening more stores in two years than the industry giant has in 20 years. At stake is a US$5.8 billion market.
To achieve that goal, Luckin chairman Lu Zhengyao and chief executive officer Qian Zhiya are employing a strategy they used with vehicle rental firm CAR more than a decade ago: burning money from investors to quickly grab market share from rivals. That may be a common tactic for a Chinese Internet-driven start-up, but it is unusual for a beverage company.
The barriers to entry are much higher with car rentals than with quick, convenient coffee.
While Luckin is hoping that rapidly creating a network of delivery kiosks and pick-up points in office buildings for Chinese urbanites to grab their caffeine fix will give it a head start, there is little to stop other established networks such as convenience-store chains from offering the same.
"The food and beverage industry is fully competitive with low customer loyalty," said Mr Jason Yu, the Shanghai-based general manager of Kantar Worldpanel. "Customers face no switch cost if they want to change to another coffee brand."
The listing price of US$17 a share made Luckin one of the 10 largest IPOs in the US this year.
Luckin, whose backers include BlackRock, reported a net loss of US$241 million for last year as operating expenses outstripped revenue, and the firm has said it may continue to see losses in the future.
Luckin is wooing Chinese consumers with generous discounts: first-time users get a free cup of coffee and six 50 per cent discount vouchers. The model works because of the company's technology, which helps keep labour and other costs down, Mr Schakel said.
Some investors are not convinced Luckin's formula will translate into profits any time soon.
"Restaurant margins at Luckin are negative 50 per cent. At Starbucks in China, they are mid-30 per cent positive," said Mr Anthony Massaro, a partner at Pershing Square Capital Management, an investor in Starbucks.