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Abu Dhabi, UAEWednesday 22 August 2018

Chinese coffee start-up aims to scald Starbucks

Luckin Coffee, which only officially launched in January, has opened more than 660 outlets in 13 Chinese cities already

A deliveryman leaves a Luckin Coffee in Beijing. Firm says it aims to outgun in Starbucks on in China. AFP 
A deliveryman leaves a Luckin Coffee in Beijing. Firm says it aims to outgun in Starbucks on in China. AFP 

Qian Zhiya may be Starbucks’ worst nightmare.

The 42-year-old Chinese entrepreneur says she is betting that her fledgling Luckin Coffee brand will eventually have more cafes in China than Starbucks, and she has Singapore’s sovereign wealth fund and other investors bankrolling her plan.

Luckin, which only officially launched in January, has opened more than 660 outlets in 13 Chinese cities thanks to a supercharged growth plan based on cheap delivery, online ordering, big discounts and premium pay for its staff.

A barista packs a coffee for online sales at a Luckin Coffee store in Beijing, China July 17, 2018. Picture taken July 17, 2018. REUTERS/Jason Lee
A barista packs a coffee for online sales at a Luckin Coffee store in Beijing, China. Reuters

Its assault comes at a crucial time for Starbucks, which has 3,400 stores in China - its second biggest market after the US - and plans to almost double that number by 2022.

And the speed of the attack is a warning to other established consumer brands in China that they too could be vulnerable to a start-up’s attempt to reinvent a market, brand consultants say.

Starbucks’ shares were pummelled in June after it warned same store sales growth in China had plunged to zero or worse last quarter, against 7 per cent growth a year earlier. But the firm seemed to have bounced back when it reported second-quarter sales had risen 4 per cent in China year-on-year.

Starbucks said some new cafe openings were cannibalising customer visits at nearby stores and it also blamed a drop-off in orders through delivery firms.

While it did not mention increased competition, investors and analysts said it is clear that Luckin does represent a threat.

However, they also point out that Starbucks’ brand has been very resilient to challenges from rivals around the world over the years, largely because of the ambience of its stores, its service and the consistent quality of the coffee served.

There is also no sign that Chinese consumers have turned against such a very American brand as a protest over US President Donald Trump's imposition of punitive tariffs on Chinese exports.

Reuters spoke to 30 consumers in Beijing Yintai Center, a shopping mall that has a Starbucks, Costa Coffee and Luckin outlet, among others. Half of those polled said they had tried Luckin; most said they liked it, though more than two-thirds said their top choice remained Starbucks.

A customer walks out of a Starbucks coffee shop in Beijing on August 2, 2018. Starbucks on August 2 announced a partnership with e-commerce giant Alibaba that will give the US coffee giant greater access to China's growing food-delivery market as it faces increased competition from local firms. / AFP PHOTO / WANG ZHAO
A Starbucks coffee shop in Beijing. AFP

The majority drank coffee in-store or bought to take away, with only a small number saying they had coffee delivered, a potential challenge for Luckin's delivery-focused strategy. Taste, convenience and environment were their top three priorities, more than price.

Luckin’s customers can order coffee via an app, watch a livestream of their coffee being made, and have it delivered to their door, the company says.

More than half of Luckin’s stores are larger "relax" outlets or pick-up stores with some seating.

Customers are seen at a Luckin Coffee store in Beijing, China July 17, 2018. Picture taken July 17, 2018. REUTERS/Jason Lee
A Luckin Coffee store in Beijing, China. Reuters

The rest are delivery kitchens.

The speed of Luckin’s growth is extraordinary - it took Starbucks about 12 years to open as many stores. In many ways it echoes the way in which some major Chinese technology firms, such as ride hailing platform Didi Chuxing, have burned through cash to grab market share and been valued highly as a result.

Ms Qian, who was previously chief operating officer at Chinese ride hailing firm Ucar, says Luckin’s focus now is all about increasing customers.

"I don't have a timeline for profit," she said at the firm's Beijing headquarters as she sipped her third Luckin coffee of the day. "For us, what we care about now is the number of users and if they are coming back to us, whether they recognise us, whether we can take market share."

The firm raised $200 million last month to help fund its expansion, including an undisclosed sum from Singapore government fund GIC, a funding round which Luckin said valued the firm at $1 billion.

“In the future we will have more cafes than Starbucks,” Ms Qian declared.

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One of the investors in the latest fundraising said it is the logical time for there to be a shake-up of the coffee world in China.

“This model will appeal to young customers amid the country's consumption upgrade,” said the investor, who asked not to be identified.

The use of online ordering and delivery should be enough to unnerve many established brands, said Bruno Lannes, Shanghai-based partner with consultancy Bain & Co.

"It's a big threat, that's why western brands need to pay attention," he said.

A barista prepares a coffee for online sales at a Luckin Coffee store in Beijing, China July 17, 2018. Picture taken July 17, 2018. REUTERS/Jason Lee
A barista prepares a coffee for online sales at a Luckin Coffee store in Beijing. Reuters

Still, not everyone agrees the internet model translates easily to the coffee business, given the need for costly stores and quality control.

"It remains to be seen if they can really hook consumers in and create a monopoly in the market, like those we see in sectors like cab-hailing," said Liu Xingliang, president of tech consultancy China Internet Data Centre.

And some of the consumers Reuters spoke to in the Beijing mall saw hurdles ahead for Luckin.

Liu Xu, 23, an advertising professional, who compares Luckin to a “flash mob” that came out of nowhere, said he tried the firm’s coffee out of curiosity but prefers hand-drip single-origin coffee.

And Lian Yiheng, 22, a student, said she was attracted by Luckin's promotions and the convenience of delivery, but felt it needed to improve its selection of coffees and store decoration to lure people in the longer run.

Ms Qian said the plan was to have more sit-in stores and reduce the proportion of delivery-only outlets, which would require higher spending on setting up in better locations and on decor. On the question of quality, she says that it uses select arabica beans from Ethiopia.

Luckin's expansion comes as Starbucks’ global rivals, like Canadian chain Tim Hortons, are also pushing hard in China. Tim Hortons plans to open 1,500 outlets in China over the next 10 years, while smaller local chains are also popping up fast.

As China’s middle class continues to increase in size and the coffee chains move into many smaller towns and cities, the market is growing at 5 to 7 per cent a year, according to research firm Mintel.

Li Yibei, owner of Double Win Cafe, which has a chain of eight coffee shops in Shanghai, said Luckin would have an impact on the market, but there was plenty of space left.

"Maybe they will hit Starbucks to some extent, but remember Starbucks has many die-hard fans. Maybe they can grab some followers from them, but I don't think that many," she said.

And Starbucks is not taking the threat lying down. Last week the US firm announced it is partnering tech giant Alibaba to deliver its coffee in Chinese cities starting this autumn, betting the move will revive sales growth in its second-largest market.

"I consider this strategic partnership to be one that ... will just be rocket fuel for Starbucks' growth and continued expansion in China," Starbucks chief executive Kevin Johnson said last week.

The Seattle-based company will pilot delivery services from 150 Starbucks stores in Beijing and Shanghai and plans to expand that to more than 2,000 stores across 30 cities by the end of the year, Starbucks and Alibaba said in a joint statement.

Starbucks expects to start seeing some of the benefits from the partnership in the next quarter and the full impact in 2019, Mr Johnson said.

The companies will collaborate across businesses within the Alibaba group, ele.me, supermarket chain Hema, online retailers Tmall and Taobao, and mobile and online payment platform Alipay. Starbucks will also open a virtual store on Alibaba's platforms where customers can buy Starbucks merchandise, they said.

The delivery programme will leverage ele.me's 3 million registered riders, with an aim of delivering orders within half an hour. Starbucks will establish "Starbucks Delivery Kitchens" inside Hema stores and use the supermarket's delivery system to fulfil Starbucks delivery orders.

Starbucks had no formal online delivery in China before this deal.

Analysts have said an official delivery arrangement would push up costs for Starbucks.

Starbucks said its delivery menu will only contain items that can meet its half-hour deadline, but did not specify whether it will charge for the deliveries. Its pilot delivery programme in Manhattan and Seattle a few years back fizzled out partly because it charged too much: $5.99 per delivery.

Luckin Coffee charges less than $1 per order and has said its deliveries took an average of 18 minutes.

Starbucks and Alibaba did not give financial details of the partnership and declined to say whether the companies had discussed taking equity stakes in each other.

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