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China’s Luckin Coffee worth $1 billion after just nine months

Jul 12, 2018

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Luckin Coffee, a nine-month-old startup with its eye set on disrupting Starbucks’ assault on China’s coffee market, has raised US$200 million to fund expansion.

Participants in the funding include Singapore sovereign wealth fund GIC and the amount raised values the fledgling business at a startling $1 billion.

Luckin Coffee has already opened 525 outlets – a mix of cafes and kitchens fulfilling delivery orders – in 13 Chinese mainland cities. It is currently opening outlets at a rate of more than two every day. Its business model is based on low prices, fast delivery times for customers at home or office – and blatantly needling Starbucks with accusations of “monopolistic behaviour” on real estate leases and overpricing. A Luckin Coffee cuppa costs as much as 30 per cent less than Starbucks.

Its US nemesis already has 3300 stores and is eyeing about 6000 as early as 2022. But last month, the US company reported a slowing of sales growth and a slight dip in same-store sales.

That trend has not discouraged former Starbucks chairman Howard Schultz who earlier this week described it as a “short-term” scenario.

“I will say, unequivocally, that anyone who is betting against Starbucks in China is dead wrong,” he said, adding that he expects China to overtake the US as the brand’s top market.

One of Luckin Coffee’s strengths is its e-commerce model which allows customers to select the type of beverage and add-ons online. It’s an area Starbucks has yet to exploit, although Schultz this week hinted a deal brewing with Alibaba would address that.

Luckin Coffee is not trying to copy Starbucks, “rather, it meshes trends in China’s tech industry with the coffee-shop model mastered by its rival,” observes digitally native news outlet Quartz.

“When customers walk into one of its blue-and-white shops, they’re immediately asked to download the Luckin app to order coffee (assuming they haven’t done so already). They can pay using WeChat payments or Luckin’s own “coffee wallet” – but not with cash.”

This, explains Quartz, fits into China’s New Retail trend, in which tech giants like Alibaba and Tencent partner with supermarkets and convenience stores on mobile payments, analytics, and inventory management.

Among others impressed by Luckin Coffee’s progress to date is Goldman Sachs, whose analysts recently wrote the company is “aggressively investing in customer acquisition and scale with subsidies and advertising, and positions itself as a disrupter – bringing lower prices and greater convenience to the coffee experience. It also has a laser-focus on young office workers.”

Peking University lecturer Jeff Towson write in a blog that Luckin Coffee is “easily worth $1 billion if it can execute on the business – but that’s a big if.” he sees Starbucks has an edge by having stores in high-traffic locations its rivals – like Luckin Coffee – cannot afford.

“It may be that that real estate power can be overcome if you’ve got a really sticky hold on people’s smartphones,” he said.

Towson says there is plenty of room in China’s coffee market for Starbucks, Luckin Coffee and other players, large and small.

“Coffee consumption per capita in China is about four to five cups per year, while it is 750 in Europe and about 400 in the US. So the big opportunity is increased consumption. They don’t need to beat Starbucks to win big in China. They just need more people to drink coffee.”

Meanwhile, Luckin CEO Qian Zhiya said in a statement that the newly raised funds will be used for “product research, technology innovation and business development”.

By Robert Stockdill – Inside Retail Asia

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