Luckin vs Starbucks: baristas and technology are engaged in a gigantic battle for Chinese coffee drinkers’ loyalty.
Seattle, Washington-based Starbucks Corporation has been the indisputable market leader in the Chinese coffee industry ever since its Beijing World Trade Center branch opened its doors in January 1999. Yet Starbucks’ two decades of coffee dominance in China appears to be reaching its end.
While “China watchers” and retail industry insiders have been expressing concerns about Starbucks for months, it has taken Wall Street a few months to catch on; just last week, Goldman Sachs downgraded the Starbucks stock from “buy” to “neutral” for the first time in recent memory, specifically citing Starbucks’ bleak business trajectory in China as a major concern.
Most of this concern is linked to Luckin Coffee 瑞幸咖啡 Ruixing Kafei, the young tech-forward coffee startup that has managed to build more than 2000 outlets throughout 30 mainland cities in just about 14 months of operations, reaching startup “unicorn status” seemingly overnight.
While China is Starbucks’ largest market after the US, with roughly 3600 stores across 150 cities, it took Starbucks nearly 13 years to achieve Luckin’s current size. Perhaps even more shocking, Luckin is showing absolutely no signs of slowing down any time soon; the Luckin team has publicly announced its goal of reaching 4500 outlets across China by the end of 2019, and as of November, Luckin Coffee’s overall value was estimated to be about US$2 billion, a figure that has almost certainly risen since.
Luckin is clearly trying to develop a mass-market coffee product that can bring the “coffee shop experience” to the working class at an ultra-competitive price point.
While its early success may seem unfathomable, it mostly comes down to three distinct points of difference within its business model: the Luckin app, delivery infrastructure, and competitive pricing. For outsiders visiting China or first-time Luckin customers, the most noticeable quirk of Luckin’s business model is that customers are forced to use the Luckin app to purchase a coffee in a Luckin store or have Luckin coffee delivered to their office or home. Luckin does not accept cash payments at all: there are no tills inside Luckin stores. Fortunately, Luckin offers new users a free beverage after their first download, to lessen the pain a little. While this may seem perplexing to many outsiders, this is a feature that distinctly appeals to an increasingly app-focused Chinese consumer base who prefer digital payments to cash.
With tensions rising between China and the US, Luckin has another unique competitive advantage: its status as a truly Chinese coffee brand, owned by Chinese people and tailored specifically to the unique tastes of the Chinese market. If these tensions continue to grow worse, one can expect Luckin to follow the trend of many other Chinese companies by appealing directly to this patriotic sentiment and further distancing itself from the distinctly American image of Starbucks.
With Luckin’s CEO Jenny Qian Zhiya and most of its senior leadership coming directly from UCAR, a ride-hailing service spun out of rental car giant Car Inc, it should come as no surprise that transportation and delivery are two key focus points of the business. With the exception of a few sit-down locations in hot real estate areas, the vast majority of Luckin Coffee locations do not offer customers a place to sit. While many locations have space for customers to wait in line and pick up drinks, roughly half of Luckin stores are “preparation stores” that focus solely on preparing beverages for the endless queue of Luckin delivery drivers. Thanks to this elaborate and effective delivery system, customers can usually expect to get their coffee quickly; Luckin claims the average delivery time is roughly 18 minutes, (and even during the busy morning hours in my Beijing office park, I never had to wait longer than 30 minutes). With young Chinese city-dwellers becoming more and more reliant on delivery services like Ele.me and Meituan Waimai, Luckin’s impressive delivery capabilities allow the company to remain convenient and attractive. As a side benefit, this store setup also allows Luckin to place most of its shops in cheaper out-of-the-way locations with limited foot traffic, allowing for significant real estate savings.
Price the differentiator
Perhaps the most important point of differentiation between Luckin and Starbucks is price.
While Starbucks generally charges at least 35 RMB (US$5) for most of its coffee drinks, Luckin’s prices generally fall in the 20 to 25 RMB range, with only a 6 RMB surcharge for delivery.
Luckin also regularly runs promotions that bring the price per cup down to as little as 10 RMB, prices no competitor has been willing to match. While the exact price of a Luckin coffee fluctuates dramatically due to promotions, customers can generally expect to pay 30-40 per cent less than they would pay for a similar drink at Starbucks. Perhaps even more appealing, Luckin’s widely used “refer a friend” system rewards users who convince their friends to download the Luckin app with a free beverage.
These three aspects of Luckin’s business platform have clearly caught on with young Chinese customers and urban office workers, who are increasingly looking for cheaper and more convenient coffee options. It appears that Starbucks ultimately has little chance of competing with Luckin in this lower end of the market. While Starbucks does have an app developed for the Chinese market, it is not nearly as intuitive or eye-catching as Luckin’s well-developed system. Similarly, after Starbucks failed to catch the wave of China’s food-delivery boom, it may be too late for Starbucks to substantially overhaul its delivery capabilities. Starbucks did not implement its own internal delivery service until August last year, arguably three years too late.
Until last summer, Chinese customers have been forced to improvise their own “hacked” Starbucks deliveries through the app Ele.me; those wanting Starbucks coffee had to use an unwieldy two-step process using two separate apps to get their drinks delivered.
While Starbucks could use its resources to develop a more effective app and more efficient delivery system for the Chinese market, it is likely too little, too late; after ignoring these two major trends in Chinese retail over the past few years, Starbucks is already considered an inconvenient option by rushed coffee customers, an image that will prove hard to shake off. And after spending nearly two decades cultivating the company’s image as a high-end aspirational brand for the emerging Chinese middle class, it is unlikely Starbucks can drop its prices enough to compete with Luckin’s promotional pricing.
Ultimately, it seems Starbucks has no choice but to “go high” in this market. While Luckin has already cemented itself as the most popular option among working-class coffee drinkers looking for an everyday beverage option, the startup has yet to grab the attention of the more status-driven higher end of the coffee market. As many industry insiders have pointed out, Luckin’s “take-and-go” model and delivery focus does not offer customers the high-end experience of whiling away an afternoon sitting at a coffee shop. So while Starbucks executives certainly have significant reason to be concerned over their dwindling market share, Starbucks still maintains a solid grasp on the market for customers seeking a true coffee experience, rather than just caffeine boost to get them through the day.
This split in the market has been happening naturally, and is quite apparent: if you visit a Luckin outlet in any tier-one Chinese city, you will most likely encounter either a delivery man holding several bags to be delivered or a young office worker making the coffee run for his or her office, taking 10 or 20 cups back up to the office. Meanwhile, the most common sight at an urban Starbucks location is a store filled with tables, each crammed with Chinese millennials or parent groups chatting the afternoon away. In a sense, this harkens back to the ethos of the company’s original entry into China in the late 1990’s: Starbucks built its business in China by providing customers with第三空间 di san kong jian, a “third place” between home and work that functioned as a public conference room or a relaxing respite from the busy world outside, an important societal role that was traditionally satisfied by China’s ancient tea house culture. As Gwynn Guilford, reporter for Quartz, puts it: “In China, Starbucks doesn’t sell coffee to make its millions… it rents couches.”
If the statistics are to be believed, there is certainly space in the market for both companies; Chinese citizens drink just four to six cups of coffee per year on average, compared to 250 among British residents and 360 for Americans. While Starbucks will likely continue to face struggles as the company redefines its hold in the Chinese market, this year we will see how Luckin Coffee’s unique business model fares – will Luckin continue to set record-breaking growth numbers, or will it shatter before showing any profit?
Hunter White – Inside Retail Asia