What Can Luckin Coffee’s Expansion Teach Us About the Changes in Chinese Consumption Patterns?

Luckin Coffee, the company that is mainly known in the West for giving Starbucks a really hard time in China, is more than just another gastronomic novelty, it’s a phenomenon that reveals a lot about the changing nature of Chinese consumption. Where else have you seen a company grow from one store to 2000 in just under a year? If this doesn’t signal major consumption shifts, then we don’t know what does.

SEE ALSO: Valuation of $2.2 Billion — Can Luckin Coffee Eclipse Starbucks in China?

The headline-making Xiamen coffee chain is anything but a conventional company. It opens new locations with a speed way over the industry average and has its eyes on Starbucks’ Iron Throne of the coffee market that took the Seattle company over two decades to conquer. Although, there is hardly a person in China who would say that Luckin’s coffee is good. Yet despite its reputation for selling bland wishy-washy joe, it is still extremely popular among young Chinese consumers who choose convenience over quality. The substandard taste has caused some to put Luckin in the same category as 7/11, rather than Starbucks, hinting that its business model more closely resembles that of a convenience store than a café.

One of the factors that made Luckin’s upsurge possible is the rapid growth in the number of consumers who use smartphones for online shopping and payments over the past 5 years. Yet, paradoxically, according to Agency China, online retail, as popular as it is, still accounts for only 24% of total annual retail sales in the PRC. Although the proportion of online retail sales continues to grow, the pace of growth has slowed in 5 of 6 years since 2013. In 2019, the market is expected to grow by around 20%, a slight drop from 24% last year. The price for acquiring new customers has also skyrocketed, exceeding the average revenue generated per new customer. While the eventual transition to a fully digitized economy might seem inescapable to some, the current reality is different. With over 70% of revenues coming from offline sales, companies are trying hard to tap into that revenue stream. This is where new retail enters the picture. The witty brew of digital and conventional retail models pioneered by Alibaba with their Hema supermarkets, and adopted by Luckin Coffee, has proved to be quite popular among Chinese customers, catering to both young smartphone addicts and older consumers.

By 2027 people born in the 1990s will make up 15% of China’s population, with those born in 2000s accounting for over 21%. These people grew up in a period of rapid technological development and digitization. Naturally, they will remain extremely dependent on technology as they grow older. They are expected to consume at a higher rate than their predecessors, putting an emphasis on convenience, quality and variety. It is these digitally savvy consumers that drive Luckin’s business as they are more open to new things than their elders. Chinese consumers are shopping online to buy an increasingly diverse range of goods today than ever before.

Consumption patterns of the middle-class to affluent Chinese, who now essentially comprise the majority of the urban population, are changing drastically. Their preferences are shifting from expensive product purchases to experiences like travel and food tastings. China is gradually gaining more of an affinity for foreign food and beverage brands. According to a report from JLL China in partnership with retail data collection specialist, LocalGravity, the F&B industry is one of the fastest growing sectors in the country. Coffee, tea and ice-cream brands were listed among the most active, posting a 30% revenue growth year-on-year in 2015.

Starbucks is undoubtedly in many ways responsible for cultivating a taste for coffee among the Chinese consumers, robustly growing its business in a historically tea-drinking country. In fact, the bitter drink is already on course to surpass tea as the beverage of choice for China’s overburdened urban residents.

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A little-known fact is that China has had its own coffee farming industry for over a century. The crop was introduced to the southern province of Yunnan in the late 1800s by a French missionary. Now the industry is rapidly expanding along with the growing national demand. In addition, according to The International Coffee Organization estimates, China now grows more beans than Kenya and Tanzania combined. Yet the Chinese coffee output is still relatively lackluster, as the beans are of average quality at best, and most Chinese coffee shops prefer importing their stock from Vietnam. Nonetheless, the general public’s acquired taste for western products is already pushing local farmers to tackle these issues.

An average Chinese person currently only drinks two cups of coffee a year, compared to 700 cups drank by an Italian. However, with China’s massive population, even a minimal growth in that number is expected to bring companies major profits and the same goes for many other western products that are currently flooding the shelves of Chinese supermarkets. There is always a chance that consumption could stagnate, but when it comes to coffee, most industry professionals place their bets on the fact that it’s pretty addictive. China’s rapid industrialization and growing urban populations are likely to keep the demand for a cup of quick black energy growing.

Featured photo credit to Naoki Matsuda