THE LITTLE BLUE CUP

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Article by Tim King

Back home in the US, coffee is generally a means to an end—a caffeine delivery system, by the cup or the pot, a punch line for people who think it’s hilarious to say things like “Don’t talk to me until I’ve had my coffee.” In China, the coffee culture is a bit different. Stores like Starbucks shaped it into something more synonymous with luxury and status, but a new rival is challenging that hegemony in dramatic fashion.

Enter Luckin Coffee. Less than a year ago it had only a fifth of the stores that Starbucks has in China, but as of April the company claims there are more than 3000 Luckin locations in operation. Luckin’s rise has been meteoric, but will be a test of the “dominate first, profit later” model that’s been so prevalent in the Chinese tech startup scene, as observers and investors become increasingly skeptical about its sustainability.

BEGINNER’S LUCKIN

According to TechNode, a TechCrunch-affiliated blog dedicated to reporting the goings on in China’s tech industry, “Jenny” Qian Zhiya was drinking about five cups of coffee every day. To put that into perspective, she was drinking the same amount of coffee daily that the average Chinese person drinks in a year. Drinking lots of coffee won’t necessarily make a person want to open a coffee shop (just as drinking lots of whiskey doesn’t make me want to open a distillery), but if I can hazard a guess, all of that coffee perhaps made her consider a couple of things. Firstly, that there’s a big, wide-open blue ocean for coffee shops in this kingdom of tea drinkers. Secondly, that blue ocean is occupied only by a handful of dinghies and a gigantic luxury cruise liner (the metaphor has become tortured, I’m talking about Starbucks). Thirdly, coffee consumption is increasing 15% year-on-year in China.

Qian, a former COO of chauffeur service startup UCAR, founded Luckin in October 2017 and the first locations came shortly after, in January 2018. Focused on opening what are essentially glorified kiosks in office buildings and malls, Luckin’s convenience-focused model became immediately popular and they began to expand quickly. Hundreds of locations opened across the country in the following months, but it wouldn’t be long before they started taking shots at the king of coffee in China.

THIS CUP AIN’T BIG ENOUGH FOR THE TWO OF US

Luckin’s first salvo against Starbucks came in May 2018 in the form of an open letter filled with serious allegations. Luckin claimed that Starbucks was engaging in unfair competitive practices; first by having exclusive deals with property developers that Luckin claimed would, at Starbucks’ behest, refuse business from companies that make more than thirty percent of their revenue from coffee or even have coffee in their name; second by having a similar relationship with their equipment and coffee bean distributors, who had been telling Luckin in no uncertain terms that Starbucks was forcing them to sever business with the startup. The letter threatened to file reports with anti-monopoly regulatory organs in China, as well as lawsuits. Luckin made good on their threat days after the letter was released. There are no reports about court proceedings or settlements as a result of the suit, but the message sent to Starbucks was clear—they had a real nightmare brewing.

The following month, a round of funding that included investment from the Singaporean government would see Luckin valued at US$1 billion. China had a new unicorn.

CHOOSING SIDES

Starbucks had previously been transforming their brand image in China to be even more upscale, but now they scrambled to fend off the threat from this newcomer, whose more reliable delivery service had been wounding Starbucks’ bottom line. To stanch the bleeding, in August of 2018, Starbucks inked a deal with Alibaba, which would both overhaul their lackluster delivery services through food delivery app e le me, and offer future opportunities for integration with Alibaba apps in the digital marketplace and in the real world in the form of kiosks at Hema Supermarket locations.

Days later, Sina quoted Luckin’s co-founder and senior vice president Guo Jinyi as saying that Starbucks’ attempts to fight back were basically useless, that there was an “essential genetic difference” between their companies and that it was “not something that could be changed through ‘external makeovers.’” A month later, Luckin formed a partnership with Alibaba rival Tencent to increase marketing and integration with jack-of-all-trades, waster-of-time mega app WeChat, and to jointly develop new retail technologies such as robotic delivery and payment through facial recognition.

Now players in a proxy war between Alibaba and Tencent, the competition really began to heat up.

EXPANSION AND IPO

In a move reminiscent of the way Didi Chuxing crushed Uber in China, Luckin continued its all-out offensive on Starbucks through a pricing war, biting off chunks of Starbucks’ market share through “red envelopes” that offered customers deep discounts on their products, which were already 5-10RMB cheaper. Luckin also achieved their goal of opening 2000 stores by the end of 2018. Their wildfire-esque expansion continued in 2019, and in April they claimed to have opened another 1800 locations—if true, that’s a rate of one new store approximately every 90 minutes.

Also in April, Luckin had an initial public offering (IPO) and was listed on the NASDAQ, an accomplishment the company is so proud of that, at the time of writing, it’s been advertised on the Luckin app’s splash screen for weeks. The IPO netted them US$561 million (33 million shares at US$17/share). By this time, the company had a total public valuation of over US$3 billion, the first time that a company had hit that high a valuation in such a short time in the dot-com era.

LUCKIN OUT

Where it all goes from here we’ll just have to see. Luckin will always have a bit of a cultural edge, seeing as it’s a domestic competitor to a foreign company. Starbucks is still playing defense, but some observers note that Starbucks has the capital to hunker down for a long, bitter fight, and furthermore that it wouldn’t be unheard of for a local competitor to spring up and bog Luckin down with a second, more pressing rivalry.

While the IPO had a lot of hype, western media was eager to point out that Luckin had yet to turn a profit and, in their words, was basically burning through cash. It seems investors got the same notion, as by the end of May, Luckin shares plummeted nearly forty percent. However, Luckin appears to have no plans to stop their quest for dominance, hoping to double their number of stores by the end of the year.

Tim King is the editor-in-chief of Xianease Magazine and only drinks coffee for the buzz. He can be reached at tim.king@xianease.com

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