By Tanner Brown
BEIJING — The Chinese startup that has reshaped the coffee sector here, wiping away Starbucks’ dominance in the country, is leaping into an untraditional foray — one that is sure to perpetuate questions about its long-term strategy.
Nasdaq-listed Luckin Coffee came out of nowhere in 2017 and swiftly ate into Starbucks’ /zigman2/quotes/207508890/composite SBUX -0.64% domination of China sales, with its intuitive mobile app, ubiquitous grab-and-go stores, and discounts so deep that they have frustrated some investors.
One conspicuous example of Luckin’s cutthroat strategy was the building of hundreds of its stores within mere meters of existing Starbucks locations, often right next door.
Those stores are among the 5,000 countrywide that Luckin has opened in a mere two years, blowing past the number Starbucks opened in its 20 years in China.
The Luckin-Starbucks rivalry in China is more complicated than merely the number of stores, and time will tell whether Luckin’s evolution validates the view of the young company as inventive or disruptive or the naysayers who see an undisciplined outfit with a slapdash approach. It will also show whether Starbucks can adapt in a hyperdigital society when confronted by a mobile-savvy competitor.
Reached by phone and email, the corporate communications department at Starbucks told MarketWatch, “As a matter of policy, we do not comment on specific competitors.” The company’s representatives did express, however, that Starbucks has confidence in the China projects currently in development.
This week has brought insight into Luckin’s grandiose vision of itself. Despite offering snacks and mugs for some time, it rolled out a motley suite of products that further its departure from mere coffee peddler. Among these sundries are electronic devices provided by big brands, including Apple /zigman2/quotes/202934861/composite AAPL +1.61% AirPods, part of what a Luckin representative told MarketWatch was an official partnership.
Other digital goods you can order while awaiting your Luckin latte include wireless keyboards, computer mouses, Bluetooth radios, calculators, cables, power banks, official Beats headphones and dozens of other items. It’s an eclectic, and lengthy, roster of items that ranges from electric toothbrushes to Tupperware to virus-fighting and sanitizing products.
As with the company’s coffee strategy, many of these items sell at discounts that bring prices lower than on China’s leading e-commerce sites. A company spokesperson would not say how long these bargain rates would last. But this gets at a leading concern surrounding Luckin’s strategy. Its success has long relied on deep discounts, which contribute to quarter after quarter of financial losses.
One might ask: Who would buy a pair of headphones while grabbing a coffee? A factor worth considering is that the items, ostensible impulse buys, do not exist as in-store inventory and must be shipped by Luckin’s exclusive courier partner, ZTO Express, the company told MarketWatch.
But some industry watchers are less than dismissive of the underlying logic. “Who knows,” said Matthew Brennan, managing director of China Channel, which organizes tech-related conferences. “It could be random. People have birthdays, for example, and you might suddenly remember you haven’t gotten someone a gift,” and all you needed was to see the product on the app.
As for the by-delivery-only nature of the purchases, Brennan said he ordered a coffee mug from his home, and it arrived, in typical Chinese fashion, in 15 minutes.
Brennan echoed some industry analysts — and presumably the company’s own hope — in observing that, with cheap coffee driving foot and app traffic, some percentage of that customer volume, once engaged, will be enticed to consider the higher-end — and higher-margin — offerings.
Luckin raised $500 million during its May IPO, offering shares at $17, which had nearly doubled until the coronavirus crisis in China and now stand at $25. Despite losing money overall, Luckin achieved, it said, its first-ever positive store-level profit margins in the third quarter of 2019. Revenue growth has continued to climb, as well.
But the real story is the magnitude of the company’s ambition. Its vision was outlined in an internal PowerPoint presentation widely circulated online in China and echoed by one of Luckin’s leading investors, Li Hui. The vision foresees the current incarnation of the plucky startup growing into a combination of Starbucks, 7 Eleven, Costco /zigman2/quotes/201191698/composite COST -0.14% and Amazon /zigman2/quotes/210331248/composite AMZN -0.45% , aspiring to match, respectively, those chains’ premium beverages, ubiquity, curation and one-stop-shop nature.
The goal would sound improbable, even laughable, if China hadn’t produced over the years more than a few examples of small companies leveraging technology to disrupt and capture new markets.
Luckin has a lot left to prove, of course, but, for now, this grandiose depiction of its own future commands our attention.
Tanner Brown is a writer at MarketWatch and Barron’s and producer of the Caixin-Sinica Business Brief.