China's Luckin Coffee Tries To Conquer A Nation Of Tea Drinkers

May 17, 2019
Originally published on May 17, 2019 10:40 am

In a country identified with one warm beverage – tea – coffee is now hot. Indeed, as China catapults from its traditional past into a global future, java is jumping – and one national company is leading the way: Luckin Coffee.

Established in October 2017, Luckin Coffee has quickly become the second largest coffee chain in China after Starbucks. As of March, it has opened 2,370 stores — mostly in office buildings —across 28 cities and sold 90 million cups of coffee to more than 16.8 million customers, according to its official document to investors. It went public on Nasdaq on Friday.

This ambitious Chinese coffee brand aims to have 4,500 stores throughout the country by the end of this year, surpassing Starbucks, which has 3,600 branches on the streets of 150 Chinese cities two decades after it arrived in China.

Luckin, or ruixing in Chinese, means "happiness" and "luck." This lucky newcomer on April 22 filed paperwork for its Nasdaq initial public offering, aiming to raise $510 million. It secured $150 million in Series B funding four days before that, boosting the company's value to $2.9 billion.

So how do you promote coffee in a teacentric society? Starbucks has developed drinks tailored to the Chinese palates – like last summer's Chilled Cup, a smooth iced coffee with vanilla or green tea flavor. And in Shanghai, crowds come to take selfies at the world's largest Starbucks roastery.

Luckin Coffee's strategy is different.

A typical store consists of a counter, a couple of coffee makers, a few bar stools and a couple of baristas. It serves coffee and coffee drinks — Americanos, lattes, Macchiatos, flat whites — along with a variety of tea drinks, light lunch fare such as salad, noodles and wraps as well as snacks.

But don't expect to eat in. Luckin mainly operates through pickup and delivery models. (Starbucks, by contrast, didn't launch a delivery service until last September).

Orders have to be placed through Luckin's mobile app instead of third-party food delivery platforms such as Meituan and Ele.me (the Chinese equivalent of UberEats and GrubHub). Over 355 million Chinese ordered food through these apps in 2018, according to iiMedia Research, a Chinese third-party data mining and analysis organization.

Customers choose a store near them, click either "pick up" or "delivery," order a coffee and pay online. For pickup customers, a text message is sent when the coffee's done — which usually takes three minutes. Otherwise, a cup of hot, freshly made coffee is delivered in about half an hour.

Technology is at the core of Luckin Coffee's business. By collecting customer data through its app, Luckin Coffee knows who likes ordering what kind of coffee from which branch at what time, and how often the customer places an order. That enables the company to serve better coffee and improve services, Luckin Coffee claims.

While technology powers Luckin Coffee, aggressive coupons and subsidies offered through the app have helped the company grab a bigger share in the Chinese coffee market, which is currently valued over $10 billion and will hit $43 billion by 2020. Luckin Coffee serves coffee for about $3.50 a cup, while an average cup of coffee at Starbucks is $4.80. With a deal like buy-two-get-one-free, a cup of coffee costs about $2.50. It also offers 44 percent off on snacks. A chicken wrap costs only a little over $1.50.

While the coupons have helped win customers over, the cash-burning spree also has made Luckin Coffee suffer great losses — $241.3 million by the end of 2018 and over $82 million in the first quarter of 2019, according to the official document to investors.

Meanwhile, how's the coffee?

Although Luckin Coffee boasts on its website that its beans are blended by a "World Barista Champion team," including Hidenori Izaki, who won the title in 2014, many Chinese coffee drinkers are not impressed.

"I bought two cups of Luckin Coffee for just 10RMB [$1.50], both are very bad," said one user on Weibo, the Chinese equivalent to Twitter, in a post this spring.

"It's so bland that I threw it into the garbage can right away," said another Weibo user.

After being bombarded by coupons shared by her friends on social media, 28-year-old Barbara Yang decided to try the newly opened Luckin Coffee branch near her office during a boring company meeting in late 2017. She downloaded the app, ordered a coffee and had it delivered to the office. Like many other first-time customers, she got her first cup for free.

"The coffee wasn't so impressive," says Yang, who lives in Hangzhou, capital city of Zhejiang province in eastern China. "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," Yang recalls. "Luckin Coffee is for those who prefer quantity over quality." She and her colleagues now prefer a beverage more in line with Chinese tradition: bubble tea.

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