(Republished with the author's permission - Check out Felipe and Ad Astra Coffee here)
In 2018, we started to read or hear news about the rising of Luckin Coffee in China and its possible threat to Starbucks dominating position in the Chinese coffee market. The story of a Chinese “David” battling against the Goliath of coffee started to gain traction in coffee and financial circles; in 2019, news of this story reached mainstream media abroad.
After Luckin went in for an IPO in the US, its value reached US$ 3.9 Billion dollars in 2019. It was the coffee unicorn of China, and investors fell Luckin was posing a greater threat to Starbucks than before.
However, in 2020 news about Luckin’s suspicious records after an audition, later found to be RMB 2 billion (around US$ 281 million dollars in today’s currency exchange rate) in inflated sales numbers, brought down its stock price and invited more scrutiny from Chinese and US authorities on the company’s financial situation.
In this first part of a three-part series, we will explore the rising of both companies in China: when did they both first open in China and which brand operates more outlets.
When did they both first open in China?
Beginnings of Luckin and Starbucks in China has two decades of difference, with Starbucks being the pioneer of coffee shops in China.
According to Starbucks Stories and News, Starbucks opened its first store in China’s capital in 1999, a time where China was still a heavily tea-drinking culture and Beijing’s Olympic Games were 9 years away in the future. It was a bold move as China’s coffee consumption was mostly instant and soluble coffees.
One year later, in May 2000, Starbucks opened its first store in China’s financial capital (Shanghai), next to the iconic Oriental Pearl Tower in Lujiazui, a landmark of Pudong New Area. It was its biggest store in the world for many years, until Starbucks opened its Shanghai Starbucks Reserve Roastery in Dec. 2016, with 2,787 sqm. But this title was then taken by Chicago’s new Starbucks Roastery in Nov. 2019, with a size of 3251 sqm.
Distribution of Starbucks stores in China are heavily focused on the first and new first tier cities, approx. 57% of its stores located in those dozens of cities which, in 2017, had a GDP higher than ¥1 trillion RMB (approx. US$140 billion dollars), a higher economic output than “Myanmar, Cambodia, Uganda and Estonia combined”; while the rest of its stores are scattered across second, third, fourth, and fifth tier cities.
Fast-forward to Sept. 2022, Starbucks opened its 6,000th store in China (at Lippo Plaza in Shanghai), which also accounted for Starbucks’ 1,000th store in the city. Starbucks is inseparable from Shanghai’s coffee culture, with the number of its stores is 1/6 of the total number of stores in China. With this, Shanghai became the first city in the world with 1,000 Starbucks stores.
Luckin’s story follows the path of Starbucks, as Luckin opened its first store in Beijing too (Oct. 2017). From its early beginnings, it attracted the interest of investors. The company received an initial investment of 1 billion RMB (around US$140 million dollars) from Lu Zhengyao.
Along with Qian Zhiya, Mr. Lu and Ms. Qian, who both were executives of CAR Inc (the largest car rental company in China), were the first shareholders of Luckin. The logic behind the company was to be more of an Internet company, rather than a traditional coffee company. This was clear with the launch of its own APP, amassing data from its APP users, while also having sales and revenue numbers to show investors and continuing raising money.
Luckin’s strategy was to direct all orders and customers’ traffic through their APP, and giving first-timers and loyal customers different types of promotions, usually based on giving for free many cups of coffee when placing individual orders and with heavily subsidized prices, so individual customers “had” to share their free coffees cups with their colleagues, classmates and friends, spreading brand’s recognition.
Initially, Luckin’s APP was far from perfect and had some issues, having some customers complaining about not being user-friendly and smooth; while also its coffee quality was not on par with Starbucks, Costa and other coffee chain stores products.
Luckin achieved their first 500 stores in May 2018, and it continued keeping its aggressive expansion in the market. Its business model, in terms of store size, is different from Starbucks, as Luckin focuses on small stores, with an area of 5-20 sqm, which are in office buildings, schools, airports, business districts, etc.
The small size of its stores is due to the company’s focus on delivery services since its very first stores, instead of being a “third space”. Using either Luckin’s own APP or through Chinese main delivery service APPs, Meituan (美团 in Chinese) and Ele.me (饿了么 in Chinese), customers place their orders and either to pick them up by themselves or get their coffee deliver to their offices, schools, or homes.
Distribution of Luckin stores in China follows a similar path as Starbucks’ store distribution, with around 66% of Luckin stores in first and new first tier cities (May 2022).
In Sept. of 2022, Luckin announced it has more than 7,195 stores (6.6% of the total Chinese coffee shops market), winning the race against Starbucks in the number of stores opened in China. Not only that, but Luckin’s Q4 2022 financial results showed high earnings and healthy finances.
Which brand is more popular/operates more outlets?
China has around 110,000 coffee shops, of which small and independent stores represent around 87% of the total. By contrast, Luckin had more than 7,200 stores (6.6% of the total market) by end of Q4 2022, while Starbucks was celebrating its 6,000th store (Sept. 26, 2022) in Chinese mainland, which represents around 5.5% of the total market.
Based on both companies’ statements and commitments of 2022 and near future, Luckin and Starbucks are committed to keep opening stores. Jinyi Guo, Luckin’ Chairman & CEO, told last year to Reuters "we believe the potential of China market remains huge."
Howard Schultz, previous Interim CEO of Starbucks, during Starbucks (SBUX) Q2 2022 Earnings Call mentioned that “I remain convinced Starbucks' business in China will be eventually larger than our business in the U.S.”
In terms of brand’s popularity, Luckin and other local Chinese brands are challenging Starbucks dominance in the market. According to Sohu News, the most popular coffee brand in China (2022) was Luckin in first position, while Starbucks ranked third.
The top 10 list included Luckin Coffee, Manner Coffee, Starbucks, Seesaw Coffee, Tim’s Coffee, Algebraist Coffee, Peet’s Coffee, % Arabica, M Stand and Lucky Coffee (莘运咖 in Chinese, not to confused with Luckin).
This is the end of the first part of the series; in the second part, we will explore how do the two companies operate differently in China.
Stay tuned!
Follow Felipe and his data & market services for your coffee brand at Ad Astra Coffee Consulting on LinkedIn for latest news and updates from China's coffee market.