Luckin coffee, founded in 2017, has become the first Chinese unicorn to go public within just two years. Despite recent Chinese-US trade tensions, the coffee chain’s stock surged 47% on the first day of trading despite an IPO priced at USD 17 per ADS (American Depositary Share). Luckin’s stock price performance suggests investors are confident in the coffee startup’s business model.
Investors’ high hopes for luckin’s potential are well founded. According to the brand’s IPO filing report, the average person in Mainland China drank 6.2 cups of coffee in 2018, compared with 209 cups in Taiwan and 388 cups in the US. According to Frost & Sullivan, the amount of coffee consumed in China is expected to increase to 10.8 cups per capita (15.5 billion cups) by 2023. Historically, the exponential growth of coffee consumption in Japan, Hong Kong, and Taiwan coupled with urbanization and income increase. Therefore, luckin is confident that coffee consumption habits in China will become part of everyday life as they have in neighboring East Asian countries.
In anticipation of market expansion, luckin has been rapidly enlarging its presence in China, at an expected rate of one new store every 5 minutes throughout 2019. What’s more, the coffee chain has strategically set up more pick-up stores, which account for 91.3% of its total stores as of March 31, 2019. These stores benefit from targeted locations around office buildings, commercial areas, and universities. Pick-up stores usually have smaller footprints, which require comparatively modest rental and decoration costs. The interior design of pick-up stores is virtually standardized, allowing for speedy store openings and access to wholesale prices for design and decoration materials.
In addition to establishing a network of offline stores, luckin is also building a unique digital ordering process. The digitized process has multiple benefits including ensuring a standardized ordering experience that minimizes mistakes. It also generates and analyzes order information, which can then be inputted into inventory management and workforce systems, resulting in better demand forecasts, automatic replenishment, waste control, and staffing.
Nevertheless, the coffee chain’s subsidy strategy is debatable. Free and discounted drinks are offered to customers via various promotions. This approach, according the IPO filing report, is termed as ‘dynamic pricing strategy’. Luckin uses algorithms to adjust and apply different discounts to customers, which explains why you and a friend might receive different discounts on the same day. The app has the flexibility to tweak margins based on customer behaviors, seasonal fluctuation, and material costs.
To fuel its market expansion, Luckin needs capital. Unlike bike-sharing startup ofo which collected USD 2.2 billion from Seed Round to Series F but later burned its funds. Luckin acts more like e-commerce platform Pinduoduo. Luckin has the opportunity to purchase other companies using public stock as currency rather than cash if needed, so therefore will be able to raise more money through the issuance of more stocks. The IPO has also helped establish a transparent brand image.
Comparably, it took Starbucks more than two decades to go public. Luckin, however, is not a typical coffee chain. According to the company, its core is technology. Luckin might be categorized as a disruptor for its ambitious use of technology to run against typical brick-and-mortar operations. Such establishments naturally benefit from face-to-face interaction to create a unique customer experience. However, luckin’s cashier-less experience doesn’t mean zero interaction with staff. Customers can can freely interact with baristas as well as conveniently provide feedback via luckin’s app.
Looking at the US market, perhaps only Uber’s model seems comparable to that of luckin. Uber has truly changed the transportation landscape as a ride-hailing service provider. The service relies on technology that matches supply and demand and sets up dynamic pricing. Yet, Uber has been faced with criticism ranging from creating traffic congestion to drivers accused of crimes. Many argue that many of these issues result from the fact that Uber does not own the cars in its fleet and does not have full control over its drivers.
What can we expect following luckin’s IPO? I think the coffee chain will continue to open stores and simultaneously retain customers through its dynamic pricing structure. The recent IPO will help Luckin more easily raise money moving forward. It also means Luckin will be accountable to more shareholders and prepare itself for further public critique. The IPO likewise makes no secret of luckin’s business model. The company clearly understands how easily a successful business model can be copied in China, so the pressure of competitors may become a risk factor for Luckin in the long-term.
(Top photo from luckin coffee)