Many people start a typical workday with a cup of coffee. China is no different.
The coffee market in China is worth about 100 billion Yuan, whereas freshly brewed coffee grows 40% in sales annually.
Driven by the market’s huge growth potential, The Coffee Giant Starbucks was expanding across the country after entering China in 1999. There were 2,800 Starbucks shops in China last year and its goal was to achieve 5,000 outlets by 2021, completely breaking down any domestic counterparts.
However, since the end of 2017, things started changing. In Beijing and Shanghai, people started seeing a new coffee brand, Luckin Coffee. Luckin Coffee targeted the young generation of white-collar people and Internet savvy millennials, offering cheaper coffee with the taste optimized for Chinese consumers.
Qian Zhiya, the founder, pointed out two weak spots of the coffee shop industry in China: High prices and Inconvenience.
Image Source – pandaily.com
In western countries, the price of a cup of coffee consists only 1/1,000 of people’s monthly income. In contrast, it was almost 1/100 for people living in China. Also, the number of coffee shops in China was very limited. As opposed to Taiwan, where a population of 23.5 million enjoys over 5,000 CITY CAFE shops (a brand launched by 7-Eleven that offers affordable freshly brewed coffee), there were only 300 Starbucks stores in Beijing, a city populated with 29 million people.
To solve these two problems, firstly Luckin Coffee started providing a cheaper price than average Starbucks or Branded coffee. For example, a cup of latte costs 24 yuan (INR 240) at Luckin coffee store, whereas generally, it is 36 yuan.
Beside, Luckin Coffee got featured with delivery service and concentrated store network, covering as many commercial hubs as possible. Cooperating with SF Express for the delivery service, every store promised to compensate consumers if the delivery costs more than 30 minutes. Just like Domino’s and many other QSRs operate in India.
The $570 Million IPO and its Impact on the Coffee Market
Since its inception 18 months back, Luckin Coffee has sold millions of cups of coffee to Chinese consumers. Now it wants to sell its business model to U.S. investors.
The Chinese coffee chain made its debut on the Nasdaq Friday and saw its shares open at $25 a share, up 47% from its IPO price of $17. It later got as high as $25.96 before settling at $20.38 for the day, a respectable gain of 20%.
The coffee chain, which has become very popular due to its more affordable drink menu, was valued at more than $4 billion after it went public. The company managed to raise more than $570 million during its IPO.
The 22-month-old company has achieved rapid growth through building out physical stores, launching widespread marketing campaigns and offering generous subsidies.
While being relatively unknown in the United States, Luckin Coffee has taken China by storm. The coffee chain, which was originally founded in October 2017, managed to creep up to its main competitor with the opening of more than 2,400 stores in 28 major Chinese cities.
While it is seen as a rival to Starbucks, the company has a different strategy in appealing to young consumers in China and bears major profitability issues beneath all of its exponential growth.
Here is what you need to know about Luckin.
Image Source – bloomberg.com
Luckin opens a new store every five hours
Starbucks, the Seattle-based coffee chain, announced its plan to expand in China in 2017 — to open 6,000 stores in China by 2023. Now it has over 3,700 locations.
But the speed of Luckin overshadows the giant’s efforts to capture the Chinese market. Since October 2017, Luckin opened 2,370 locations within 18 months, that means it set up a new store every five hours.
There are also some key differences between a typical Starbucks store and a Luckin store. Starbucks aims to provide a “Third Place” experience in which people sit down and chat while sipping coffee. Luckin stores, however, usually act as pickup points and delivery hubs. These stores range from 20 to 60 square meters, which means it’s much cheaper for Luckin to build new storefronts and the format is easy to copy in different locations.
Image Source – yahoo.com
Focus is on delivery and pickup
Pickup stores with limited seating account for over 90% for Luckin’s total stores. These stores are in office buildings, commercial areas, and university campuses. Its network of stores highlights the other focus of Luckin — fast delivery.
Thanks to high population density and cheap labor cost, China’s millennial shoppers, especially in major cities, live on delivery, from food to groceries, and of course, the afternoon coffee. Meanwhile, busy work schedules keep employees in the office, instead of hanging out in a coffee shop.
Luckin offers an app from which you can order and get coffee delivered to the office within an average of 17 minutes, according to the company.
Profitability is questionable, Just Like Zomato and Swiggy in India
Luckin has reported total revenue of $125.3 million for 2018 by serving 16.8 million customers. But that growth came at a cost— a net loss of $241.3 million for 2018. Users have been attracted to Luckin for its aggressive marketing campaign on WeChat, the prevalent social media in China, and promotions like “Buy 5 and Get 5” and 92%-off coupons. Luckin relies on third-party companies to ensure ultra-fast delivery.
This also poses the question of, if the discounts and Offers are gone, will the revenues stay? While Luckin says the cost of acquiring each new customer, including marketing and promotions, has fallen by nearly 85% since the start of 2018, its new customers also dropped to 4.3 million this year from 6.5 million in the final three months of 2018