The market potential of luckin’s tea brand

Coffee and tea, the two caffeine-containing beverages are conquering China. Coffee retains its original function of helping people wake up and stay alert, while new styles of tea drinks have created social media buzz and become increasingly trendy among young Chinese consumers.  

On Sept 3, Luckin Coffee (Nasdaq: LK) announced that its spin-off brand “Luckin Tea” will operate independently, two months after launching a range of tea beverage products nationwide. Younger Chinese consumers have surprisingly high purchasing power for products endorsed by their favorite celebrities, which is why Luckin  introduced young web celebrity Xiao Zhan as the spokesman for the tea brand.  Fans are willing to pay for drinks and even a premium for side items.

The new tea brand includes the popular cheese foam tea, fresh milk tea, and fruit tea. According to Luckin, the company’s tea brand is in response to increasing demand for tea products among consumers. It’s currently a good time to test such a business idea, as consumers usually prefer tea-based beverages during the summertime. Overall, China’s tea beverage market value soared to CNY 53.7 billion (USD 7.5 billion) in 2018. The market is a highly competitive one with existing leading players such as Heytea and Nayuki. 

New styles of tea drinks are more aesthetically appealing. Like most other popular tea drink brands, luckin tea drinks come in transparent cups. The bright and colorful designs of such cups are naturally great for internet-generation consumers who take pictures and post them online. The product design tells the story that luckin tea is created for more relaxed and social scenarios. Luckin is starting to focus on expanding its tea business into lower-tiered markets where consumers are generally more relaxed and want to show off their lifestyle. Despite the launch of the company’s tea brand, however, luckin’s coffee business will remain its focus in first-tiered markets in which the target demographic is white-collar professionals.

From its coffee operation, luckin has gained experience in sourcing high-class ingredients and controlling product quality. Such expertise is easily transferable to the tea business. Compared with other tea drink brands, luckin has a sizeable advantage: its robust coffee network that makes fast delivery possible. From my own experience, I only waited 10 minutes to pick up a luckin tea. The average waiting time for a cup of Heytea drink, however, ranges from 30 minutes to over an hour. Ultimately, the convenience of luckin services makes high-quality tea drinks more accessible for consumers.

Luckin Tea launched a pilot Retail Partnership program on its WeChat platform. As per the program description, Luckin Tea operates via an ordering app independent of luckin’s coffee brand. The partnership is similar to a franchising model, but works slightly differently. Luckin will help new partners obtain standardized equipment and manage supply chains. Orders and pick-ups are also handled through the luckin app.

From luckin’s Q2 financial report, you will find that store rental and opening cost accounts for about 20% of its total expenses. The report indicates that luckin coffee is on track to the breakeven point. Targeting more tea beverage drinkers and removing some expenses out of the equation, luckin may break even earlier than investors predict. By diversifying luckin tea and inviting external partners, the brand may render its balance sheet no longer red.

(Top photo from Baidu Images)

Fang Yuan

Fang Yuan is our columnist. She used to live in New York and is originally from Shanghai. She is a Certified Passive House Consultant and works on sustainable building consulting. She believes that technology helps people and the environment if it is being used mindfully.

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