Luckin Coffee, an upcoming Chinese rival to Starbucks, released a new filing on May 6, 2019 planning to raise up to US$586.5 million at its IPO. The company will list under “LK” on NASDAQ, issuing 34.5 American depository shares* at an initial range of US$15-$17. The offering is being led by Credit Suisse Group AG, Morgan Stanley, CICC and Haitong International.
Luckin Coffee, founded by Jenny Qian Zhiya in June 2017, claims to be “disrupting the status quo of the traditional coffee shop model” with its tech-based model of on-demand delivery and takeaway and a “100 per cent cashier-less environment”. In less than two years, Luckin has quickly expanded into 2,370 stores in 28 cities backed by investors such as BlackRock, Singapore sovereign wealth fund GIC Pte, and China International Capital Corp. After closing a US$150 million Series B+ funding round led by Blackrock, valuing the company at ~US$2.9 billion, Luckin filed to go public in April 2019. By the end of 2019, Luckin intends to become the largest coffee network in China via number of stores.
Luckin plans to capitalize on China’s increasingly importance as a market for coffee. Despite only drank 6.2 cups of coffee consumed per capita in China vs. 390 cups per capita in the U.S, the coffee market is expected to triple due to rising middle-class affluence and consumption (Euromonitor, 2019). Chinese consumers are estimated to drink ~15.5 billion cups.
Luckin vs. Starbucks Strategies
A key point for investors is that Luckin is threatening Starbucks as it is targeting the same demographic and undercutting prices by an aggressive store expansion plan, a tech-based model and a freebie system – with a home-field advantage. Starbucks price share has yet to react to the announcement on May 7, with no movement in price the day following announcement.
Luckin is opening up a store every 4 hours: adding 2,500 stores in 2019 with an existing 2,370 stores established in only two years. In comparison, Starbucks has over 29,800 stores worldwide. It has been in China for 20 years with over 3,500 stores in 150 cities, with plans to establish 6,000 stores in 2022. Nonetheless, Luckin stands at only a 2.1% share of China’s coffee market last year compared to Starbucks’ domination at over 50%.
Furthermore, Luckin’s tech-based model makes it easier to open up stores, undercut competitors with cheaper pricing (less overhead and less employees), and provide on-demand delivery. With a focus on convenience and affordability, Luckin stores located in high-traffic areas, cashless and designed for fast pickup. 98% of stores are delivery-only locations, with 109 larger “relax stores”. In comparison, Starbucks stores tend to be mostly these relaxing, plushy cafes where customers can choose to spend hours in social meetings or working on laptops. However, as consumers shift towards on-demand services such as UberEats, Netflix, and Amazon, it can be observed that even food industry giants such as McDonalds are aggressively rolling out delivery services and acquiring technology companies to fulfill customer needs.
Finally, Luckin uses a unique strategy of aggressive freebies and promotions, as seen in ride-sharing companies Uber and Lyft, a trademark of their CMO. Despite being sentenced to prison for violations of China’s advertising law in 2015, CMO Yang Fei received “CMO of the Year” for his achievements as CMO of UCAR. Whether ride-sharing or coffee, Yang Fei’s brand of growth focuses on freebies to get the product in the hands of as many potential users as possible, using special offers to repurchase and refer new users, and a strong loyalty program to incite above-average purchase frequency. Food industry analyst Zhu Danpeng estimates that Luckin’s cost of customer acquisition is about RMB 80 (including physical locations) vs. industry online-to-offline delivery services at RMB 200-300 (Technode, 2019). Although powerful, this strategy frightens investors: in its first full year of business of 2018, Luckin reported a US$$475 million loss with $125 million in revenue; Q1 2019 followed with a $85 million loss with total sales of $71 million.
From a CMO that spent time in prison to a rapid expansion financed by extreme cash burn, investors have reason to be skeptical about Starbuck’s young Chinese rival. However, the ~$3 billion company’s strong growth in a short period of time coupled with a tech-based model validates them as a true Venti-sized rival.
*American depository shares are U.S. dollar-denominated equity shares of a foreign-based company available for purchase on an American stock exchange. Benefits of ADS for the companies include access to a wider investor base and the world's most sophisticated financial marketplace. The main drawback of ADS for investors is that there is a currency risk in holding them and any income payments must be converted into US dollars (Investopedia).