The Coffee Chain that Came Out of Nowhere with the Potential to Beat Starbucks in China

9 min read 

Almost overnight, a coffee brand called Luckin Coffee made waves across China’s first and second tier cities.

Luckin Coffee entered the market vigorously and aggressively.

Take Shenzhen as an example.

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It was about two weeks ago when I just heard about Luckin Coffee. After seeing several posts on WeChat moments, I installed the app. It showed that there were no stores in Shenzhen yet, but dozens were under construction. When I opened the app again last week, there were already stores that are offering delivery. At the same time, a store front under my office building had the sign that a Luckin Coffee store is under construction. When I went to work again on Monday, I was shocked to see that it was already open for business.

When I spoke to their staff, I found out that Luckin Coffee has already opened over 20 stores in Shenzhen, and another 40 will be open by the end of April. They already opened over 200 stores across the country, and their goal is to reach 500 stores by the end of April. In comparison, the speed of HEYTEA, a popular tea beverages chain that opened only 10 stores a year in Shenzhen, is like that of a tortoise.

As far as I know, no other brand has expanded their offline stores this fast.

How good is Luckin Coffee’s business? According to their staff, on the first day, they received over 300 orders and sold nearly 500 cups by 4 p.m.

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So how good does their coffee taste?

In this short week, I have tried all four types of Luckin Coffee that does not contain sugar or milk. Overall, the quality of their coffee is already on par with Starbucks. The taste of their blend of coffee beans also has obvious similarities to Starbucks. Luckin Coffee’s selling point is also very clear:

Good raw materials (Arabica beans), good blending (blended by the champion team of the World Barista Championship), as well as fresh, which is the most important element. Their product positioning is also very clear. The price of Luckin Coffee is set between 20 to 30 yuan ($3 to $5), which is more attractive than the 30 to 40 yuan ($5 to $6) pricing of Starbucks, but separates itself from the 10 to 20 yuan ($2 to $3) coffees from McCafe, KFC, FamilyMart or other fast food coffees.

3

Though they have a clearly defined product and a rapid expansion of stores, Luckin Coffee still needs to figure out their branding and marketing. How can consumers develop a preference for coffee brand priced between 20 to 30 yuan that is not Starbucks?

Like their competitors, Luckin Coffee used celebrity endorsement for branding. Consumers can easily develop a sense of familiarity towards the brand with the two well-liked Chinese celebrities Zhang Zhen and Tang Wei who are the spokespersons. Culturally, these two spokespersons are the embodiment of superior quality.

The tricker problem to solve, however, is marketing. Even with Luckin Coffee’s numerous stores in central business districts (CBD) in first-tier cities, it is not easy to ask consumers to try their first cup. Luckin Coffee’s strategy is to offer a free cup of coffee to those who sign up on their app, and an additional free cup for those who successfully refer a friend. This old-fashioned approach generated a bombardment of WeChat Moments posts, and proved to be a viral marketing strategy.

They also offer deals such as buy two get one free, or buy five get five free. When friends or coworkers buy coffee together, the average price for one cup of coffee would drop to around 10 or 20 yuan ($2 to $3). These promotions resulted in an exponential surge in customer numbers.

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Its highly subsidized user acquisition policy and explosive expansion approaches are indicative of a typical internet company. In reality, Luckin Coffee stores does not take cash, all orders must be placed through its official app, thus every free cup of coffee represents a new registered user.

Considering cost of making coffee isn’t too high, it seems like Luckin’s customer acquisition cost of 10 or 20 yuan ($2 to $3) is higher than average in the traditional retail industry. However, looking from a internet company point of view, it isn’t bad if the cost of user acquisition for an app can be kept between that range. The mentality of building a new internet company is to rapidly obtain a large market share and form user habits. This involves high investment in the early stages, with little or no regard for immediate profits.

In the past years, traditional ride hailing and food delivery industries have been turned upside down by internet unicorns such as Didi, Meituan and Mobike that deployed above-said strategies. Today, the coffee industry is welcoming such a disruptor.

Jenny Qian, former director and deputy general manager of Ucar, a car service provider, left the company last year to start Luckin Coffee. Luckin’s brand and business model have taken shape. “The Chinese coffee market is on the verge of explosive growth, and we want to create a new high-quality coffee retailer,” Qian told the media at a press conference, “I’ve got a billion yuan ($158M) ready on hand.”

A billion yuan to create a new coffee retailer.

From now on, romantics can no longer dreams to open up a small coffee shop as this dream has been ruthlessly crushed by capital. Perhaps years down the road, small coffee shops will no longer be able to survive in this market.

When it comes to coffee, or beverages in general, the giant that you can’t miss is Starbucks.

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In reality, Starbucks is responsible for popularizing today’s mainstream coffee culture. Before Starbucks, coffee did not dominate the market in this ubiquitous and convenient fashion. Thirty years after its founding, Starbucks is still the epitome of coffee chain brands.

However, Starbucks’ status is not immutable.

Other than direct competition from Costa Coffee, Starbucks is threathened by both fast-food coffee options like McDonald’s and KFC, as well as all kinds of niche boutique coffee shops that are more fashionable. Starbucks’ coffee is scored only around 70 or 80 (out of a perfect 100) by coffee reviewers which is not excellent. Many coffee enthusiasts that started with Starbucks have developed higher tastes and turned to a variety of finer boutique coffees. Cheaper coffee from McCafe has a standard close to Starbucks, with little gap in quality.

Boutique Coffee Shop: FishEye Cafe

Faced with the pressure of competition, Starbucks continues to innovate. In the past year, Starbucks has opened up Starbucks Reserve roasteries that sell more expensive hand-crafted and siphon coffee, using selected coffee beans of different origins. The purpose is to broaden the influence of the coffee culture while upgraing Starbucks’ brand positioning.

As an international brand, Starbucks has not taken any action in the Chinese delivery market. People still need to wait in line at physical Starbucks stores for a cup of coffee, which is an inconvenience in modern China.

This leaves opportunities for the coffee delivery market.

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Coffee Box: a pioneer in the coffee delivery business

Coffee Box was first established in 2012. At that time, Coffee Box positioned itself as Starbucks for delivery. I was among its first batch of users and enjoyed Starbucks delivery a few times. However, the deliveries took too long (its business model was that a delivery guy would order a takeout at Starbucks), and the packaging was not good, so I gave it up soon after that.

After 2015, Coffee Box transitioned to running their self-made coffee instead of delivering other brands. It turned to Meituan for logistical solutions, used beautiful environmentally friendly carton packaging, and developed new flavors such as “bulletproof coffee”. It has already gained a considerable amount of market share.

However, after tasting it for a few time, I stopped ordering because the quality of the coffee is really not up to par. Maybe they placed too much emphasis on packaging and too little on the quality of the coffee, as it cannot even measure to KFC’s freshly grounded coffee.

This is also evident on Coffee Box’s official website, where there is no reference to its quality or raw materials, but only an emphasize on its delivery services.

After over half a decade of development, how many physical take out stores does Coffee Box have? The answer is just over 100, much less than the number of Luckin Coffee stores that has opened in a mere three months.

Coffee Box has undoubted been met with a crazy competitor. Judging from the current situation, the chances of Coffee Box winning this battle is very slim. Yet Luckin’s ambitions extend beyond the delivery budiness.

I chatted with a Luckin Coffee store manager, and he told me that there are four different types of stores: A type stores are large flagship stores, B type stores are small and medium-sized stores with seats, lobby stores are small self-pickup stores inside office buildings and delivery stores. Currently the latter two make up the majority. Use lobby stores and delivery stores to increase the number of stores and thus making it easier for consumers to make purchases, build a large enough market size, and then use A and B type stores to take over Starbuck’s locations at CBDs. This, is Luckin Coffee’s strategy and an inevitable path to their development.

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Having read to here, you might think Luckin Coffee is destined for commercial success, but it is not so easy in reality. I belive that Luckin Coffee still needs to resolve three issues in order to be successful.

  1. Operation and management problems brought by its rapid expansion
    Any rapidly expanding company will face problems such as how to manage the team, how to train and motivate the staff, how to guarantee the quality of the product, and so on. In the four cups of coffee delivered by Luckin, I’ve already encountered a broken paper bag and a missing straw when I ordered ice coffee. I believe at this growth rate, similar problems will be commonplace. How to manage the service is very important.
  2. Whether the quality of the coffee can be maintained.
    Product quality is the basis of brand building in this day and age, as it is commonly acknowledged that your product is your brand. Can Luckin Coffee maintain the current level of production despite its rapid expansion? Can they maintain the competitiveness of the product? Can they ensure quality ingredients and materials when faced with lower priced competitors? All of these are unknown. Fortunately, coffee making is simple and controllable, and I believe that they can guarantee the quality of the product as long as they adhere to the right values.
  3. Do Chinese consumers really need a cup of coffee?
    According to data provided by Luckin Coffee, coffee consumption per capita in mainland China is only five or six cups per year. While these numbers are even lower than a heavy coffee drinker’s weekly consumption, it is proof that many people have yet formed the habit of drinking coffee daily.

It is a cup of coffee that the Chinese professionals need, or is it a cup of Starbucks? This is probably the biggest question facing all coffee makers.

(This is an opinion piece by the author, which does not reflect Pandaily’s official stance on the matter. The original article has been edited for republication. If you wish to publish an article through Pandaily, email [email protected]

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