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China technology

China’s loss-making Luckin Coffee start-up doubles down on subsidies to win customers from Starbucks

  • Luckin plans to add about 2,500 new stores this year, increasing its total number of outlets to more than 4,500
PUBLISHED : Friday, 04 January, 2019, 6:03am
UPDATED : Friday, 04 January, 2019, 4:02pm

Luckin Coffee, the loss-making challenger to Starbucks, is doubling down on its store expansion and consumer subsidies this year, with plans to open about 2,500 new outlets in the world’s most populous nation.

That would bring the Xiamen-based start-up’s total number of stores in the country to more than 4,500, according to company co-founder and chief executive Qian Zhiya at a press briefing in Beijing on Thursday. It would also overtake Starbucks’ current total of about 3,600 stores across China.

“Luckin aims to become China’s biggest coffee chain brand by the year end, totally surpassing Starbucks by cups of coffee sold and number of shops,” Qian said.

China’s Starbucks challenger Luckin Coffee vows to maintain subsidies even as losses mount

Founded in 2017 as a coffee-and-bakery chain, Luckin has had an espresso-charged start in terms of store expansion, fuelled by consumer subsidies and growing demand for coffee in a country that traditionally preferred drinking tea. As a brainchild of the same founding team behind ride-hailing platform UCAR, Luckin was originally billed as a smartphone-based on-demand coffee business but has morphed into a more traditional bricks-and-mortar coffee shop chain. 

“Subsidy will remain as one of our core strategies, at least in the next three to five years,” Luckin chief marketing officer Yang Fei said in the same briefing. “Our investors are not the least concerned. On the contrary, they believe we are being too conservative.”

The store expansion of Luckin, which is valued at US$2.2 billion, comes after its tie-up with Meituan Dianping to deliver coffee and other food products through the Chinese on-demand services giant’s nationwide delivery network.

Meituan to team up with China Starbucks challenger Luckin Coffee on delivery services

That rivals a partnership formed in August between Starbucks and Ele.me, the food delivery arm of Alibaba Group Holding – parent company of the South China Morning Post.

A Starbucks China spokesman said on Thursday that the company welcomes competition and believes there is plenty of room for independent stores and chains to grow and thrive in China. Starbucks plans to open 600 stores annually in China over the next four years, targeting more than 6,000 outlets in 230 cities, he said.

Luckin’s expansion plan reflects the well-trodden path taken by China’s on-demand internet service providers, which offer subsidies to quickly gain a critical mass of customers. It is used by Didi Chuxing in the ride-hailing market, the likes of Ofo and Mobike in the bike-sharing sector, and by Meituan in its ongoing battle with Ele.me in food delivery.

It’s ‘Luckin’ good as Chinese Starbucks challenger sees valuation double with another US$200 million

“Luckin will not stop subsidies, and neither should our competitors expect us to stop,” Yang said.

The price for a large cup of latte coffee at Luckin is 24 yuan (US$3.50), which is about 20 per cent cheaper than a comparable order at Starbucks. Luckin also offers a free drink for any delivery order that is spilled or does not arrive within half an hour.

“Profitability is off discussion at this stage,” Yang said. “What we see is [growing] speed and user scale.”

Luckin, however, confirmed last month that consumer subsidies had resulted in more than 850 million yuan in losses from January to September last year. It estimated having more than 12 million customers and nearly 90 million cups of coffee sold as of December.