For years, China has been Starbucks’s second largest market after the US. As of January 2019, the coffee giant operates over 3,500 stores in more than 150 Chinese cities and currently occupies 55% of China’s coffee market. Its growth, however, has evidently slowed down over the past year.
According to the company’s Q1 fiscal 2019 results, Starbucks saw growth of transactions in comparable store sales drop by 2% in the Chinese market, while stores open more than a year increased sales by only 1%. This growth rate remains at the conservative end of the company’s long-term projections and is significantly lower than that of just a year ago.
Additionally, Starbucks has demonstrated slowing growth in China after reporting a 2% decline in sales during Q3 fiscal 2018. Starbucks China CEO Belinda Wong said, “While recent coffee market entrants have chosen to capitalize on delivery services combined with heavily discounted offers, there’s significant compromises at play in terms of quality, experience, and business sustainability. These will prove to be short-lived.”
Neil Saunders, managing director of the consulting firm GlobalData Retail, commented, “Overall, the prospects for Starbucks look good in the short term, reasonable in the medium term, but somewhat more challenging over the longer term if economic conditions become more challenging in its key markets.”
Goldman Sachs also downgraded Starbucks stocks to ‘neutral’ from ‘buy’, citing concerns in the Chinese market last December. Goldman also lowered its price target on Starbucks from USD 75 to USD 68. Despite growing concern over the slowing growth of the Chinese economy, Starbucks remains optimistic about its foothold in the second-largest market. “We continue to play the long game in China,” CEO Kevin Johnson told analysts during the company’s quarterly conference call.
Ostensibly, Starbucks’s performance in China is likewise facing more prosaic challenges, notably competition from local rivals, such as luckin coffee.
Luckin, which launched its business a year ago, is vying to take on Starbucks as the nation’s largest coffee chain with a total of 4,500 stores in operation by the end of 2019. “China is Starbucks’s best and most profitable market now, but it took them nine years of making huge losses,’’ said luckin’s Chief Strategy Officer Reinout Schakel in an interview with Bloomberg in Beijing. “We will be faster than that.’’
Luckin’s confidence is demonstrated by its ambitious business model: widespread, smaller-sized coffee shops that aim to outnumber those of Starbucks and an app featuring a rush-delivery service with wait times averaging just 16 minutes and 43 seconds, according to the company.
At the same time, luckin stresses the high quality of its coffee. With selected Arabica coffee beans and skillful barista teams, luckin has committed to providing a freshly roasted and ground coffee consumption experience for Chinese customers. In December of 2018, the brand’s coffee blend was awarded the gold medal at the International Coffee Tasting 2018, an event held in Milan, Italy and organized by the International Institute of Coffee Tasters (Iiac). What’s more, luckin’s drinks are generally 20% to 30% cheaper than comparable drinks at Starbucks, and the company frequently deploys marketing blitzes featuring Chinese celebrities.
While Starbucks offers customers a comfortable public space for business and casual meetings, each luckin shop is designed in one of four theme types, depending on the level of services offered. Theme classifications include ELITE, RELAX, PICKUP, and KITCHEN, and all have greatly enhanced customer experiences.
Jeffrey Towson, a professor at Peking University’s Guanghua School of Management, analyzes that luckin’s digital focus differentiates it from competitors. The company’s four store themes include more self-service stores, rest areas, and delivery services. Towson also asserts that luckin’s shops are often positioned in large shopping malls or pedestrian streets within a block or two of office areas. “Luckin didn’t seem to take over the Starbucks game, getting the best position and opening the biggest store. I think they are betting that they can use technology plus more stores to increase convenience, get customers, and drive customers into their area – rather than relying on traffic and high visibility sites,” he wrote.
Luckin has streamlined the coffee purchasing experience, making it simple and nearly instant. When entering a luckin coffee shop, a customer need only spend a few moments scanning a QR code and paying for the coffee, which he or she has already pre-ordered via the company’s smartphone app.
Reassuring the company’s strategy, luckin’s CSO Schakel said, “the big advantage for us is having pickup stores versus the big stores is that in terms of rental costs, we pay significantly less than our competitors.”
Jeffrey Towson’s analysis further compares luckin’s business model to that of Starbucks, reporting that charging 20% less for each cup of coffee has given luckin more potential to further expand into segments of the Chinese market not yet secured by Starbucks.
（Top photo from Luckin)