In China, Starbucks has been the leading coffee chain for several years. But a 2-year-old local company, Luckin Coffee, is now challenging Starbucks and is growing at an unprecedented rate.
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Conquering the Chinese market
Established in October 2017, Luckin Coffee currently operates about 2,370 stores across the country and is the number two coffee chain in China. In contrast, Starbucks has more than 3,683 shops. However, Starbucks was established way back in 1999. The speed at which Luckin Coffee is opening stores almost guarantees that the company will overtake Starbucks very soon. In fact, Luckin Coffee plans to have 4,500 stores by the end of this year.
“China’s coffee market is highly underpenetrated… Inconsistent quality, high prices, and inconvenience have hampered the growth of the freshly-brewed coffee market in China. We believe that our model has successfully driven the mass market coffee consumption in China by addressing these pain points,” the company said in its prospectus (Market Watch).
Luckin Coffee has a very aggressive growth strategy. Most of the stores it opens are very close to existing Starbucks outlets. Almost 1,100 Luckin Coffee stores are located within a quarter mile radius of a Starbucks shop. Many of them are just a few feet away. The proximity to Starbucks allows Luckin Coffee to target coffee-loving customers. However, this strategy does come with a serious risk — if customers don’t like the taste of Luckin Coffee, the company puts itself in a tight spot. Unfortunately, many in social media have commented that they are quite unsatisfied with Luckin Coffee’s offerings.
“The coffee wasn’t so impressive… The experience was pretty good though, given that their coffee is cheaper than Starbucks. They have three branches near my office and the nicely packaged coffee was delivered directly [to me]… I had vivid memories that the coffee and croissant I ordered were so bad… Luckin Coffee is for those who prefer quantity over quality,” a 28-year-old who tried the coffee said to NPR.
Despite Luckin Coffee’s impressive growth, there are some serious concerns about whether it can be profitable in the long run. Much of its growth comes from undercutting Starbucks through aggressive pricing and discounts. For instance, Luckin Coffee used to offer two coffee products for the price of one. But such tactics are not sustainable. And investors understand this. Heavy discounts account for the biggest chunk of the company’s spending.
“Right now, investors look at the company and they see growth, and that looks exciting… The thing is, if your only continuous path to growth is spending at this rate, it is very difficult to make a profit,” Ben Cavender, director of Shanghai-based consultancy China Market Research Group, said in a statement (Forbes).
Concerns about profitability have hit the company’s shares very hard. On its first day of trading on May 17, the firm’s share had surged by 53 percent. But after that initial surge, things have been bad for Luckin Coffee investors as prices right now are trailing almost 35 percent to 40 percent below the peak.