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Analysis

Coffee Talk: Can Luckin Get Lucky In China?

Jul 18, 2018 by Chauncey Jung
Coffee Talk: Can Luckin Get Lucky In China?

Say coffee, and chances are that most Chinese people would think of Starbucks and Costa Coffee, thanks to the massive penetration of these foreign coffee chains in the country.

But a native startup has quietly taken up the cudgels to thwart the dominance of these foreign giants and carve out a corner for itself in the hearts of Chinese coffee-lovers.

Luckin Coffee may not yet sound familiar to most. But the brand has managed to make market watchers sit up and take note.

On Monday the brand announced receiving an additional USD 200 million worth of investments which has this nearly one-year-old company valued at approximately USD 1 billion.

According to Tianyancha, a database for information on small and mid-size company, Luckin Coffee was registered on October 31, 2017.

Starting with USD 50 million as initial capital, the company now has achieved a 20-times growth in its nine-month development and operation phase.

Why People Say It May Beat Starbucks?

Luckin Coffee’s CEO, Qian Zhiya, the former chief operations officer and the founding member of UCAR, a Chinese car rental company, in an interview with Chinese state media Xinhua News said her goal is to beat Starbucks to become the top coffee service in China.

When asked on Luckin Coffee’s unique selling point, Qian said she believed that the combination of the rising Chinese Internet industry and Luckin Coffee’s high-quality coffee will help her startup thrive in the country which surely loves its cup of coffee.

A Xinhua report shows that China is one of the fastest growing coffee consumption markets in the world with an annual increase in consumption hovering around 15-20% against the world average of around 2%.

Unlike Starbucks, which focuses more on serving consumers in shopping malls and business areas in China, Luckin Coffee targets a special group of consumers: young professionals working in the country’s metropolis.

The company is also looking to step up serving young professionals as they tend to have higher incomes and the willingness to try something new.

“Luckin Coffee has two shops in my office building. It is easy for me to grab a cup of coffee on my way to work,” Selma Xu, a young professional working in Beijing says.

In addition to picking important locations, the rising coffee brand also focuses on affordable prices.

A report from Chinese News Agency suggests that on an average, Luckin Coffee’s products are CNY10 (approximately USD1.5 USD) cheaper than those served by Starbucks.

Working out a timely and efficient delivery mechanism is another area that the budding giant is concentrating on.

The company is looking to benefit from the take-out apps that are immensely popular in China.

The company is also investing resources and time to promotional sales, such as asking consumers to register on the app for a free cup of coffee, or buy 5 (cups of coffee) get 5 free, to attract new users.

“I think Luckin’s delivery service is very good. For Starbucks it is not so easy to get deliveries,” another young professional Dora Ling said. ”There are many coupons that Luckin Coffee offer, such as buy 5 get 5 free,” she added.

Ling’s views of Luckin coffee were shared by many as they believe that price and convenience are two important factors for them to decide what to drink and where to drink.

Luckin’s app and its pick-up system also helps retain users.

“You scan a QR code and pick up your coffee. It is easy, and it is cool,” Delphi Jiang another professional told The Passage. “It is also good to share with friends.”

With the help of its application and mini programs, Luckin coffee made it easy for their products to be shared and viewed by many potential new consumers online.

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Still a Long Journey Ahead

The rapid expansion by Luckin Coffee may be exceeding many investors’ expectations. As of July, the company had more than 500 stores in 13 cities across the country.

But compared to their counterpart Starbucks, which has more than 3,000 stores across the country, Luckin Coffee has a long way to go to catch up with the coffee hegemon.

Despite the stellar performance that is catching everyone’s attention, the rising star in the coffee industry is not without its share of imperfections, several consumers opine.

“I don’t find the taste of their coffee good. I gave up after having the first coffee,” Jasmine Chen, a professional, was downright blunt in her observation.

As marginal utilities of coffee consumptions decrease, many users who tried the new brand, may eventually cease to become loyal consumers as their curiosities expire.

After two months of exploration, Delphi, also a professional, said she is willing to try a new drink soon.

In China, interests on these perishable goods, such as coffee, milk tea, or other special drinks tend to be fast and short-lived.

Many failed products in the past, sadly, did not even leave us a name to remember.

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The Challenges

Luckin Coffee’s current operation strategy is at best very big-city-centric with the majority of the Chinese population still missing out.

At least three people from smaller cities interviewed by this correspondent said that they had never heard anything about the brand.

The high-discount promotional strategy may have attracted many price-sensitive users, but they do not seem to be loyal to the brand.

“Luckin Coffee has a lower price. I think it is more like a substitute for Starbucks as many people find Starbucks unaffordable.” Lina Yang, a senior journalist in a media house commented, “I think the price would make me stay for now.”

It remains to be seen whether these consumers will stay with Luckin once the promotional offers cease.

Also, despite attracting a sizeable interest in the brand, Luckin seems to struggle with their brand recognition part when compared to Starbucks.

While it may be too much to ask a 9-month-old company to match reputations with brands of the likes of Starbucks, Costa Coffee, or Tim Hortons, the bitter truth for Luckin currently is that, for many, it is a cheap substitute of the big daddies of the business.

More than her ambitious target of toppling Starbucks, Qian and her Luckin Coffee will need to build up the brand in its later operations.

In fact, that will be the difference between building up a long-time winning business, and a short-lived fast consumed drink that will be eventually forgotten.

Chauncey Jung

Chauncey Jung works with a unicorn Internet firm based out of Beijing. In his earlier stint with Sohu, a lead online-news platform headquartered in Beijing, Chanucey wrote in English on various subjects, spanning from culture, politics to social changes. His professional experience pays him off an insider perspective over China's internet industry. Completed his bachelor and master education in Canada, Chauncey is obsessed with trending technologies and economic developments across Asia. He can be reached at chaunceyzhang@foxmail.com

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