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Luckin is challenging Starbucks in China, its second largest market

  • Overview of China’s coffee market
  • Comparison in terms of numbers for Starbucks and Luckin
  • Future outlook for Luckin

 

China’s coffee market has been undergoing significant changes and growth in recent years and as per a report by Frost & Sullivan, the retail sales for the market grew from RMB 15.6 billion to RMB 56.9 billion between 2013-18, it is expected to reach RMB 180.6 billion by 2023, registering a CAGR of 26% between 2018-23. This growth has been fueled by the country’s rising urbanisation and increasing disposable incomes alongside the growth in the overall income base, especially for the middle class. Chinese coffee consumption has also grown from 3.2 cups per capita (2013) to 6.2 cups per capita (2018). But when compared to other Asia economies such as Taiwan, Hong Kong and Japan, which consumes 209.4, 249.5 and 279 cups per capita, respectively, the growth opportunity in China clearly seems to be huge.

Starbucks has a humongous presence in China and it is under threat by a year-old China-based coffee chain; Luckin Coffee Inc., which is challenging the coffee giant in one of its top markets outside the United States. Moreover, Luckin is expanding its store presence at a rate which could soon overtake Starbucks in China. Starbucks store location strategy in China is much like what it is in the United States, which is targeting locations with more wealth and per capita income. Luckin also adopted a similar strategy, while it has half of the Starbucks stores in Shanghai and is way behind in Hangzhou, it has a higher store count in Beijing, Guangzhou and Shenzhen, among others. Besides its home advantage, with an aggressive growth plan, the company is also undercutting the competition through its prices as it charges roughly 20-30% lower than the comparable items from Starbucks and is also targeting Starbucks demographics (Starbucks is known globally for its stores in the most prime locations of a city).

In total Luckin Coffee has 2,380 store locations in China as of January 2019, while Starbucks has a total of 3,683 store locations in China as of November 2018. According to the store count, Starbucks has a higher number and is muscling Luckin but considering the fact that Luckin is less than two years and Starbucks has been in China for close to 20 years, Luckin has a very dominant presence. Additionally, as per reports, Luckin plans to have 4,500 outlets by the end of 2019, which would push it ahead of Starbucks store count in China. While both companies serve coffee, they are more different than alike. Though Starbucks operates through its trademark coffee shops many of Luckin’s establishments are tiny booths (~91.3%), the rest are ‘relax stores’ and delivery kitchens and orders are taken online for both delivery and pickup via these stores. Furthermore, for Luckin technology is the key and its coffee shop rely heavily on its app right from its payments to orders (its outlets do not accept cash). Luckin has an uphill battle against Starbucks, which has been in the country since 1999 and dominates the Chinese market with more than 50% of the market (2018) as per reports from Euromonitor. While Luckin holds only a small 2.1% of the market (2018). At the moment, Luckin is losing money as it expands its business operations, which is common for a young start-up. In 2018, Luckin reported a net sale of $125 million and a net loss of $241 million.

Both companies have made strategic partnerships to cement their growth. In 2018, within a span of a month both the coffee players teamed-up with the Chinese tech giants Alibaba and Tencent, respectively. Starbucks partnered with Alibaba for delivery services, while Luckin associated with Tencent for its payment getaway WeChat payments.

A direct comparison of the two companies on financials is not feasible as Starbucks does not divulge its financial results separately for China. But if we compare it with Starbucks China/Asia-Pacific region, it generated ~$4.5 billion in revenue and an operating income of $867 million (2018). Starbucks’ company-operated establishments in the China/Asia-Pacific region registered an average sales per store of $794,000 (2018, [significantly less than its stores in the Americas where it was ~1.54 million]). While, as per the IPO filing of Luckin, its revenue per store was ~$148,700, indicating a much fewer sales in volume than Starbucks. According to these numbers Starbucks is likely to maintain a lead over Luckin in revenue in the next few years, even though Luckin might finish the year (2019) with more stores as per its expansion plan in its IPO document. But Luckin is a year-old coffee chain, its progress and the future plan looks very promising and might just give Starbucks a run for its money at least in China. Addedly, with technology playing a key role for Luckin through the use of Artificial Intelligence, the company is in a better position to analyse customer behaviour for a better selection of products and services. But the main challenge which remains ahead for both Starbucks and Luckin for their growth in China is the conversion of the country, which is traditionally a tea-drinking population to coffee drinkers. Positively, the coffee cups consumption per capita in China is much lesser as compared to other Asian countries, the growth opportunity is huge. The real opportunity for Luckin is not to tap the market share of Starbucks, but to convert more Chinese (traditionally tea drinkers) into regular coffee drinkers in the coming years.

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