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Analysis

Luckin: High on caffeine and riding rough

Luckin has banked on its founders’ reputation to launch the offensive against Starbucks Coffee in China. But with shrinking discounts and an offline experience that doesn’t count much, is Luckin really looking good?

Jan 9, 2019 by A. Alfaro
Luckin: High on caffeine and riding rough

After burning CNY 857 million (US$124 million) over a period of nine months last year, Chinese coffee startup Luckin is marching ambitiously with its obsession: outdo Starbucks.

Founded in October 2017, Luckin held “beating Starbucks” as one of its mottos. With CEO Qian Zhiya declaring it will open 2500 new stores across China in 2019 and surpass Starbucks in terms of stores and cups of coffee sold, Lukin has become a serious challenger for Starbucks, which opened its first store in China in 1999.

Last year Starbucks acknowledged this competition after reporting a 2% decline in sales in Q3. In December 2018, Luckin gained a valuation of USD 2.2 billion after completing series B funding worth USD 200 million. With more than 2,000 outlets, Lukin is the second largest coffee outlet in China. Starbucks has more than 3,600 stores.

Before founding Luckin, Zhiya was COO at car rental app and website Shenzhou. For several years she worked closely with its chairman Lu Zhengyao, who supported her decision to quit the company and provided her with human and financial resources to become an entrepreneur. Zhiya later invited Lu to join Luckin as an independent member of the board. Zhiya maintains both she and Lu control similar number of shares.

Thanks to the reputation of its founding team, Luckin received attention from investors. Many of those investors came from Lu Zhengyao’s circle. With a robust financial support, Luckin outlets have cropped up all over China — 2073 stores in 22 cities. It claims to have 12 million paying users who have bought a total of 85 million cups of coffee.

However, according to local WeChat account New Retail Insider, these numbers can be misleading. A significant number of those 2073 stores are quite small and mainly designed as “stations” from which orders can be picked up.

If we consider the 12 million paying users and the 85 million cups sold, the average number of cups bought per person is just 7. In an attempt to attract customers and grab market share a number of those cups were given away for free, using promotions and discounts. Since its meteoric growth cost over CNY 800 million in losses, one wonder if Luckin could become the next ofo, the young shared-bikes company that has financially collapsed. Like Luckin, ofo relied heavily on subsidies to attract new users.

Zhiya defends the strategy saying every yuan they spend is translated into new customers, so “it is worth it”, and the company will rely on subsidies for the next three or five years. Luckin has, however, slowed down on the subsidies. From a “buy 5, get 5 for free” promotion, it has limited itself to a more conservative “buy 2, get 1 for free”. The original minimum order of CNY 35 (USD 5) for a delivery has also been adjusted to CNY 55 (USD 8).

These adjustments threaten the very basis on which Luckin’s business was launched. White collar workers were attracted to its low prices and promotions such as “the first cup is free”. The big question is whether customers will remain loyal to Luckin as it raises prices?

At least Luckin has created a brand for itself with its blue paper cups and superstars like Tang Wei acting as ambassadors. The company has spent a significant amount in advertising, especially around office buildings and elevators. The leadership of Luckin’s CMO Yang Fei, who had designed a marketing battle against Uber when he was at Shenzhou, is also worth counting on.

On May 2018, a day before Starbuck’s China Investor Conference, Luckin accused Starbucks of breaking anti-trust laws by forcing suppliers to choose between Luckin or Starbucks. Luckin became a trending topic in the Chinese social media but Starbucks did not fall for the provocation.

In August 2018, Starbucks signed a cooperation agreement with Alibaba. Its products will be delivered by Alibaba’s Ele.me, directly threatening Luckin’s delivery-based business model. Starbucks has successfully built a culture around its brand, and Luckin’s business model is largely online-based, with users ordering takeaway or delivery.

So far, Luckin has not created an authentic offline experience. When it comes to the product itself, Luckin serves the same Arabica coffee like 7-Eleven, another player in the market. This is one of the reasons why Starbucks should not be viewed as Luckin’s main competitor. But when Luckin’s prices are compared to those of bubble tea or convenience stores, it loses its competitive advantage too.

Luckin has undoubtedly brought big changes to the coffee industry in China, proving that with enough financial muscle, a brand can quickly acquire a significant market share. Though Luckin became an Internet sensation in quick time - thanks to its technology, delivery and heavy discounting- the startup is falling short in the game of oneupmanship with Starbucks.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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