You’re likely seeing more and more Chinese people holding a little blue cup emblazoned with the increasingly recognizable luckin coffee logo of a deer silhouette. Of course the iconic white and green Starbucks cup has conferred a certain social identity since as long as 20 years ago in China. But luckin coffee, seemingly an overnight hit, is catching up fast. Both coffee brands offer decent coffee and quick-bite options. Since launching 2018, Luckin has opened more than 2,000 stores in less than a year compared to the 3,600 locations Starbucks established in 10 years. Will luckin ultimately become China’s one-man answer to Starbucks and whittle away the American chain’s market share? Will the battle end with one brand finally exiting the market?
The core of luckin’s business model is very unique. Here’s why:
I recently made an afternoon visit to a luckin pickup store at Starlight Plaza in Putuo district of Shanghai. There were just three tables, six high chairs, and a barista plus cashier working by himself. No line, no shouting of names, and no separate condiment station. Prior to arriving, I ordered a flat white along with a snack via luckin’s mobile app, which also provides a handy, built-in condiment selection function. A minute or so after placing the order, I received a text notification saying my pick-up order was ready. The coffee tasted good and was well-balanced with milk. I personally loved the freshly baked cookies.
The pickup store is designed for customers making a quick visit. It is not designed in the semi-private, self-focused, or collaborative spatial layout common in the US. I wouldn’t spend an afternoon working or studying at luckin as I might in a more conventional American-style coffee shop.
It is understandable that luckin emphasizes its delivery service given that nearly half of its stores are “takeaway kitchens”. Delivery is a standard service for most local brands in China, but luckin is far beyond other chains because its locations cover a 5-minute walking distance radius in the downtown areas of most cities. Such convenience has forced Starbucks China to add their own delivery option and partner with Ele.me. Doing so has raised the question of whether Starbucks, with its current limited coverage, can maintain the quality and taste of its coffee while at the same time ensuring on-time deliveries to customers.
As a new luckin customer, I got my first drink free and only paid half price for a snack. A regular luckin latte’s price is only 3/4 that of Starbucks. Unlike its American competitor, luckin often provides massive discounts through various online campaigns and partnerships. Reportedly luckin spent RMB 860 million during the first three quarters of 2018. The company said that such spending is in line with growth expectations, likewise confirming subsidies as a key strategy of the its long-term business model.
Clearly, attracting a large number of customers right now is luckin’s priority. In fact, the coffee chain is even encouraging people without coffee-drinking habits or brand preferences to try its coffee. Luckin hopes customers will identify that its select coffee beans are not only comparable to Starbucks’s offerings but are also priced competitively. The discounted price of a latte, for instance, is similar in price to milk tea, a popular beverage among young people in China.
Starbucks China uses a typical American coffee shop design and operating strategy. Starbucks stores are usually in high-traffic locations and facilitate a space where customers can connect with business partners and friends, or individually concentrate on work or study. On the other hand, the comparatively streamlined and lean luckin operation reduces upfront and operational costs. Luckin stores are smaller and often housed in less eye-catching locations, inside shopping malls for instance. While interior design does not encourage customers to hang out for an extended period of time, luckin’s digital services make its shops considerably more efficient than those of Starbucks. Interior space is reserved for queuing, waiting, and short-term sitting. By including add-on selections to the app-based ordering process, Luckin eliminates the need for condiment stations, which are often associated with waste, mess, and out-of-stock complaints.
Luckin has not yet built its own coffee supply chain, but instead partners with coffee and non-coffee suppliers. Doing so will likely give the fast-growing coffee brand the leverage to negotiate better deals as it scales up. Starbucks by comparison has a well-established supply chain system which translates to a relatively fixed cost-per-cup.
Coffee is not the only anchor product for luckin. The company has added more new categories to its app, including lunch boxes, snacks, and most recently tea beverages. Luckin is likewise building an unprecedented delivery network that will allow virtually anything to be delivered efficiently in the future. The brand seeks to introduce more products to expand its revenue streams. I won’t be surprised if I can pick up fresh groceries at luckin stores one day.
When customers buy into the business model, luckin will defeat not only many food and beverage brands and outlets but also other service providers. The success of Amazon Subscribe and Save, for example, can be simply copied once luckin sets up a robust logistics system. The future of recurring orders then may no longer rely on heavy subsidies or advertisements. Yet, it is unlikely that luckin will ever become entirely “decaffeinated”; it is more likely to remain a coffee brand at heart.
Currently, luckin is building a thoroughly convenient digital shopping experience for customers backed by its own fast-growing logistics network in China. Has someone done something on this scale before in China? Definitely not Starbucks. Perhaps e-commerce platform JD.com, but that certainly took them a long, long time.