This is the second part of a three-part series about Luckin vs Starbucks in China.
In this second part, we explore how do the two companies operate differently in China; and cultural differences with their menu options in Chinese market.
How do the two companies operate differently?
Although both Luckin and Starbucks are coffee companies, the concept and business models followed by each of them have many contrasts; one of its contrasting differences are their stores sizes.
Starbucks main business model is large stores, with an area of 50-200 sqm, which are in business districts, shopping centers, high-end office buildings, etc. Large size stores are one of the characteristics that creates Starbucks’ third place concept, “a warm and welcoming place, outside of our homes and our workspaces, where we connect and build community.”
However, since July 2019, Starbucks has opened more than 1,300 Starbucks Now stores, its mobile order and pay experience stores (deliveries via Meituan, Ele.me and Starbucks Delivers WeChat mini-program), with plans to open more stores in high-traffic places such as business and transportation hubs, a direct answer to Luckin’s business model and challenge.
According to Lemon Club’s 2021 White Paper on Chinese Coffee Industry Development, Starbucks stores efficiency is around 300,000 RMB (around US$ 43,000 dollars) to 400,000 RMB (around US$ 57,000 dollars) per month, assuming a single store of 70-80 sqm, with a profit margin of 14.8%.
Luckin stores are mostly small stores, with an area of 5-20 sqm, which are in office buildings, schools, airports, business districts, etc. Moreover, not all its stores are under the self-operated model: around 70% of its stores are self-operated stores with a profit margin of around 20%; while the other 30% of its stores are associated stores.
As Luckin stores are not meant to be “third places/spaces” due to their small size, its business relies on delivery services through online (WeChat or Alipay) payments via their own mobile APP, Meituan and Ele.me delivery apps.
Cultural differences with menu options
After arriving late to Chinese coffee market (compared to Starbucks), Luckin keeps working on its coffee quality and innovative menu, localized to Chinese palate and preferences.
While both Luckin and Starbucks coffees can generally be categorized under the definition of commercial grade coffee (coffees with a cupping score lower or around 80 points, out of total 100 points), Luckin has been flirting with specialty coffees (coffees scored between 80 to 100 points, with zero primary defects) in its menus since the 2020.
An example of it was Luckin’s addition of Colombia El Paraiso farm coffee beans in its SOE menu in March 2022, this SOE was available for Americano, Dirty (an espresso poured over cold milk), Coconut Dirty, Latte, and Flat White. Specialty coffee beans from this Colombian farm have been very popular since 2021 inside Chinese specialty coffee market, due to these coffees outstanding notes of lemongrass, ginger candy, and fruity notes. Import of these coffee beans into China was a direct cooperation between El Paraiso farm, the National Federation of Coffee Growers of Colombia (FNC) and Luckin.
Innovative and tailored-made coffee drinks for Chinese consumers are another strong point of Luckin’s R&D and recent menu additions.
In April 2022, Luckin coffee joined hands with 椰树椰汁, a Chinese coconut milk brand, to launch Luckin’s new "Coconut Cloud Latte" coffee. After its launched, it attracted many consumers to its new product, who in turned shared photos of it on Chinese social media platforms, which successfully became a new trend in Chinese social media and sold millions of cups.
The success of Luckin’s coffee + coconut milk drinks attracted the imitation of many coffee brands and even milk bubble tea brands: Tim’s, Pacific Coffee, HeyTea (喜茶 in Chinese) and other brands launched their own coconut lattes one after another.
Drinks like these are quite popular in Chinese coffee culture, where signature coffee drinks (or “特调咖啡” in Chinese) are becoming a key category.
Starbucks also constantly updates their menu in China. According to Dana M., previous Beverage R&D at Starbucks, “when fresh fruit tea was developed in China, Starbucks launched the summer drink series, which was a strategy to cater to the consumption trend at that time. The Tea Cloud茶云 series in 2020 was also a new product series developed for Chinese consumers, which subsequently triggered a competition among Chinese beverage chains to develop various Cloud云 series products.”
One of Starbuck’s latest additions to its menu was the “Shanghai Coffee in Crema Ristretto style”, launched in Sept. 28th 2022 in all its Shanghai stores as part of Starbucks partnership with Shanghai to promote the city. The new product is said to be inspired by and for Shanghainese palate, having flavors and notes of “malt, cream… and butter scotch syrup.”
But it seems the company is somehow slow on adapting more Chinese coffee consumer trends, which may be a similar issue faced by many foreign brands in China: by the time a foreign company is ready to "make a move" in Chinese market, e.g., launching a new product after some months of R&D work in response to a new trend, Chinese brands have already adapted to the trend, launched their new products, and the trend is almost gone.
According to Kathryn Read, international sales and marketing consultant, in her article 5 Trends to focus on in Chinese Consumer Behaviour 2023, “locals (Chinese companies) react faster to trends and are closer to what consumers really want, whilst having the courage to make bold decisions... To win in China, you have to be able to take bold decisions and execute quickly on them, otherwise you will lose out to the local brands for sure.”
This is the end of the second part of the series; in the third and final part, we will explore if Starbucks is still too traditional in its approach and what does the future may hold for both companies in China.
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.