Return to site

Watch out Starbucks, Luckin Coffee is coming to a corner near you

How a one-year old startup is challenging Starbucks

· miscellaneous

{{{Wina Huang}}}

What is Luckin?

Luckin Coffee (瑞星咖啡) is the homegrown coffee startup launched by coffee lover and former tech executive Jenny Zhiya Qian. Since its inception in November 2017, the company has grown in spades. Within a year, it earned a valuation of $1 billion to become China’s first coffee shop unicorn. Within 7 months, Luckin Coffee was able to sell five million cups of coffee in a 4-month trial operation period ending May 8. This month, Luckin announced it is launching a new round of financing, aiming for a $1.5 billion to $2 billion valuation and raising $200 million to $300 million of fresh equity.

Luckin adopted an online delivery business model and targets the younger, working population by positioning itself as a cheap, convenient coffee option. In addition to cheap delivery and online ordering, it offers large discounts. Nearly 70% of Luckin’s customers are under 30 years old, compared to Starbucks’ 50 percent. In addition, 84% of Luckin stores are located in offices and malls, further appealing to its target demographic. Concentrating its stores in first and second-tier cities, where 32 percent of China’s population generate 60% of the nationwide food delivery orders, Luckin has been capitalizing on the online food delivery trend in China.

With the support of Singaporean sovereign wealth fund GIC and other investors, Qian has openly acknowledged her company as a challenger to Starbucks, betting that Luckin will eventually operate more cafés in China than Starbucks. The rise of Luckin comes at a time when Starbucks performance in China wanes. Shares tumbled in June after the company reported lackluster results: same store sales growth in China plummeted, and some new café openings were reported to be cannibalizing customer visits at nearby stores.

Luck Coffee Store

Luckin Coffee Store, Company Website

Coffee in China

Coffee’s history in China is relatively young. Modern cultivation began in 1988, with one of the earliest entrants being Nestlé. Today, almost all coffee grown in China comes from Yunnan. Coffee’s image has transformed over the years, from being an instant household product to a trendy Western luxury to an everyday commodity.

Starbucks entered China in January 1999, opening its first store in the World Trade Building, Beijing. Today, China represents Starbucks’ second largest market globally with 3,400 stores in 140 cities. Its strategy in China has been highly tactical. Instead of adopting a conventional advertising and promotions approach, Starbucks expanded aggressively. The company established stores in high-traffic and visibility locations and collaborated with local partners to develop products that catered to Chinese preferences. Positioning itself as “the third place”, Starbucks has built a robust brand in China over the years.

Coffee is a heated market in China. In addition to global names like Starbucks, which has held a longtime foothold, and Canadian chain Tim Hortons, which is making its foray, local competitors such as Luckin, HeyTea, and Coffee Box pose as fierce competitors. These players are better equipped with the knowledge, network, and pricing to appeal to locals. According to Mintel, the coffee market is growing at 5-7 percent a year, and coffee chains are increasingly moving to smaller towns and cities. The battle between Starbucks and Luckin is one among many, as chains seek new ways to draw in coffee lovers. While consumers differ on what they look for in a cup of coffee, determinants of success continue to be pricing, accessibility, and branding.

Users first, profitability second

Luckin Coffee positions itself as a disruptor. Applying an internet strategy to coffee, the company invests aggressively in customer acquisition and scale with subsidies and advertising. Its competitive advantage lies in lower pricing and greater convenience. Luckin appeals to the young, working population in China that focuses on accessibility and pricing. Customers can order coffee via the company app, watch a video of their coffee being made live, and have it delivered to their door in an average of 18 minutes. In terms of pricing, a regular latte at Luckin costs 24 yuan (around 3.49 USD) along with a delivery fee of 6 yuan (free delivery for orders of more than 35 yuan) and can be half price after promotions. Meanwhile a grande latte at Starbucks costs 31 yuan (around 4.51 USD).

Although Luckin’s business model has allowed it to be successful among young consumers, it is unclear how sustainable it is. Qian claims (perhaps quite concerning from an investor’s standpoint), “I don’t have a timeline for profit. For us, what we care about now is the number of users and if they are coming back to us, whether they recognize us whether we can take market share”. The firm raised $200 million this July to help fund its expansion; however, the question remains whether Luckin can achieve long-term growth. The internet model of coffee may appeal to young consumers now, but delivery and discounts are cash burning operations. Coupled with the company’s focus on creating brick-and-mortar stores, Luckin’s business model straddles three costly roads: expensive store constructions and maintenance and quality control inherent to food delivery.

Who Will Win?

Will Luckin be short-lived success, or will it create its own vertical in the coffee market? Will the Company displace Starbucks, or will it merely illuminate areas of improvement for the coffee giant? In the near-term, I think the company will not threaten Starbucks or dramatically alter the coffee market.

First, accessibility will not likely be a sustainable competitive edge for Luckin because Luckin is not the only solution to this problem for urban white collar workers. Consumers can easily find fresh brewed coffee in offices, nearby cafés, and even convenience stores if they are looking for a quick fix. Regarding delivery, most coffee brands are working with platforms like and Meituan to bring coffee to doors. Furthermore, large players are setting up their own coffee delivery networks. For example, McCafe has started working with SF Express (the same delivery company that Luckin is working with). Meanwhile, Starbucks announced in August that it is collaborating with Alibaba across key businesses, including, Hema, Tmall, Taobao, and Alipay.

Second, Luckin’s offline presence pales in comparison to Starbucks. While Luckin excels in the online delivery model (for now), the company has had to adopt an aggressive brick-and-mortar expansion strategy. Within nine months, Luckin has opened more than 1000 stores, a costly endeavor combined with its heavy investments in elevator advertising. There are four types of Luckin stores: flagship stores emulate the cozy Starbucks environment, while small delivery kitchens serve only to hand coffee to delivery bikers. We cannot overly discount the importance of the live coffee-drinking experience. A quick side-by-side shows the stark contrast between Starbucks and Luckin. Starbucks stores offer a unique ambience, varying depending on where the store is located. For example, Starbucks Beijing Fang (北京坊) flagship store (seen below) transforms coffee drinking into an opulent dining experience. Meanwhile, Luckin stores such as the two located at the Toutiao office in Beijing (seen below) are minimalistic and give off a “quick stop” feel. This contrast in in-store experience not only affects what types of people visit, but also shapes the two companies’ respective images.

Finally, in terms of branding, Luckin has put itself in a difficult position. It markets itself as an affordable, convenient brand, however, in its price range of 15 to 25 yuan, consumers can turn to convenience stores and even fast food chains to obtain coffee of similar quality. In contrast, Starbucks has invested heavily over the years to build a strong high quality-oriented brand in China. Based on a survey conducted by Reuters in Beijing Yintai Center, of the 30 interviewed consumers, half said they had tried Luckin; most said they liked it, though more than two-thirds said their top choice remained Starbucks.

Luckin has demonstrated exceptional growth over a short time period and commercialized coffee delivery. However, its long-term competitive advantage remains uncertain. On pricing, will its position not be threatened by other cheap, accessible options? On delivery model, will other brands, either small or large, not join the race and outcompete Luckin? Finally, on brand and offline presence, can Luckin really disrupt Starbucks’ entrenched position? Despite Luckin’s impressive recent growth, Starbucks omnipresence combined with its high quality products and services make it a formidable adversary.

Luckin piqued my interest from a business perspective, but as I reflected on this great caffeine battle, I could not help but think about how over the past almost three months of being in China, whenever I pass by a Starbucks store, there are people chatting, working, sipping at every hour of day. I realized that of the many coffee chats I have participated in, almost all of them have taken place at a Starbucks location. At least in the near term, Luckin is an alternative to Starbucks, but not a replacement.

All Posts

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!