Chinese coffee startup Luckin: We won't be the next ofo

January 04, 2019 15:01
Adapting to China’s mobile-focused consumers, Luckin promises to deliver drinks to customers within 30 minutes after an order is placed. Photo: Reuters

Fast-growing Chinese coffee chain Luckin said it aims to be the country's largest coffee chain by the number of cups sold and outlets this year, overtaking Starbucks, which has about 3,300 stores nationwide.

“What we want at the moment is scale and speed,” Luckin’s chief marketing officer, Yang Fei, told reporters in Beijing on Thursday.

The year-old startup plans to open 2,500 stores this year, bringing the number of its outlets, including cafés, pick-up booths, and take-out kitchens, to more than 4,500.

With just over 2,200 company-owned stores opened in 22 cities, Luckin aims to expand to about 300 second- and third-tier cities, Yang said.

Positioning itself as a “new retail” startup, Luckin also seeks to achieve a competitive edge with its delivery service. Customers can either pick up their beverages in a nearby store or have their drinks delivered within 30 minutes to their home or office after placing their orders on the Luckin app.

Luckin outsources deliveries to logistics service provider SF Express. Last month, it reportedly started partnering with China’s dominant on-demand services platform, Tencent (00700.HK)-backed Meituan Dianping (03690.HK), to tap the latter's nationwide delivery network.

It promises a free drink if the order is spilled or does not arrive within 30 minutes.

Luckin is also banking on its price advantage. Its large latte costs 24 yuan (US$3.5), 20 percent cheaper than a similar Starbucks order.

It also offers loyalty bonuses and incentives such as QR code-based coupons, as well as deep discounts like a “buy five, get five free” promo, which was later reduced to “buy two, get one free”. 

Luckin said it sold five million cups of coffee in just four months after it launched its first store in Beijing in January 2018.

However, the chain posted a net loss of 857 million yuan (US$124.8 million) in the first nine months of the year, although sales reached 375 million yuan.

Yang said it was a “strategic loss” and in line with the firm’s expectation. Despite the huge loss, Luckin will double down on subsidies and incentives in the next three to five years. “There’s no point talking about profit,” he said.

Qian Zhiya, the firm’s chief executive, told reporters that Luckin had expected to offer around 1 billion yuan as subsidies to customers in 2018, "and [the actual figure] did not exceed our expectation".

Market observers believe China’s startup frenzy will further cool down in 2019 as many of the new firms are unable to maintain their cash-burning operations.

One of the most aggressive and high-profile startups, bike-sharing giant ofo, has been struggling with a cash crunch as millions of users demand deposit refunds.

Asked whether Luckin can pursue its aggressive expansion despite the “startup winter” in China, Yang said: “We would never be the next ofo.

Qian added: “There is no comparison between Luckin and ofo, considering that customers do not need to pay a deposit for our coffee.”

Last month, Luckin secured US$200 million in its series B funding round, taking its valuation to US$2.2 billion. Five months earlier, it completed a US$200 million round to reach unicorn status with a valuation of over US$1 billion. 

Luckin's backers include Singapore sovereign wealth fund GIC as well as venture capital firms Legend Capital and Centurium Capital.

Starbucks is not taking Luckin’s challenge sitting down. The US-based coffee giant plans to increase the number of its outlets in China to 6,000 by 2022, from 3,300 at present.

Starbucks has also teamed up with Alibaba-backed food delivery service Its “Starbucks Delivers” service, which also promises delivery within 30 minutes, will be available in more than 2,000 stores across the country.

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An employee packs an online order for delivery at a Luckin Coffee store in Beijing. Photo: Reuters