20 July 2019
Luckin Coffee is stepping up the heat on Starbucks in the China market through low prices and super-fast delivery service. Photo: Sina
Luckin Coffee is stepping up the heat on Starbucks in the China market through low prices and super-fast delivery service. Photo: Sina

Starbucks China forced to respond to Luckin’s delivery challenge

Quite often in China, if you want the business, you have to adapt to the local practice and local taste. This appears to be true as well for the top global coffee chain Starbucks.

The advent of new technologies has brought subtle changes to consumer habits. For example, mainland Chinese consumers have become so used to food delivery nowadays due to handy apps, advanced mobile payments and a highly-efficient logistics system.

Noticing this trend, less-than-one-year-old startup Luckin Coffee is aggressively offering delivery service in order to challenge the number one player Starbucks.

The Beijing-based startup was founded by Qian Zhiya, a former chief operating officer of Chinese ride-hailing app Shenzhou Youche.

The company quickly raised US$200 million after its inception in January this year. The funding round was led by Singapore sovereign wealth fund GIC at a valuation of US$1 billion.

Positioning itself as a new retail start-up rather than a conventional coffee shop chain, Luckin now has over 500 stores across China.

Located in bustling downtown streets or big shopping malls, Luckin clearly is going after the same group of customers as Starbucks. But there is one big difference.

Starbucks rarely offers delivery service, worrying that the delivery process could compromise the taste. But delivery is a key appeal of Luckin.

The Luckin App has already become the third most-downloaded one in Apple China’s food app space as of last week. The company has been aggressively offering free delivery and also rolling out other promotions online.

With this approach, the startup has reportedly weaned quite a lot business from Starbucks.

We all know that coffee shops have lucrative gross margins. In the case of Starbucks, the number is believed to be as high as 70 percent.

Luckin’s coffee is generally priced at 30 percent less than that of Starbucks. By giving up some of the margin, the startup may be able to generate much more additional volume to help pay for the fixed costs and logistics expenses, thus boosting the overall profitability.

If Starbucks sticks to its no-delivery strategy, it could lose more business.

It is perhaps this realization that has prompted the US-based coffee chain to now join hands with Alibaba’s food delivery service to offer delivery service in China later this year.

This article appeared in the Hong Kong Economic Journal on Aug 6

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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