Luckin Coffee: delusions of grandeur in China

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With Luckin Coffee about to float on the New York Stock Exchange and overtake Starbucks in China, Altavia Key Account Director Stéphane Joly introduces us to this latest Chinese unicorn.

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The US financial market is no longer enough – Shanghai launches its own Nasdaq

China, being the unicorn factory that is, recently introduced the Western world to one of its latest creations in the form of Starbucks’ Chinese rival Luckin Coffee, #瑞幸咖啡. The coffee chain is set to float on the New York Stock Exchange in May 2019 with the hope of raising $1 billion and consequently seeing its value reach nearly $5 billion. In order to achieve this goal and surpass Starbucks in China, however, the company will need to open a new outlet every 210 minutes!

 

Now unicorns may be mythical creatures whose futures and lifespans are so difficult to predict, but one thing for certain is that, however long or short their lives may be, unicorns do have an annoying tendency to attract money and to see their value reach dizzying heights!

 

 

Following the PER (Price Earning Ratio), Chinese investors have now invented the PDR (Price Deficit Ratio).

Luckin Coffee burns a considerable amount of money, much to the delight of its investors. Whereas alarm bells previously rang when PERs were too high, what we have now is a topsy-turvy situation where the higher the PDR, the more freely the money flows.

 

It is important to note that investors the world over have believed that companies like Amazon, which, of course, has just piteously withdrawn from the Chinese market, had a future, even though the company was still in the red in 2015, despite generating a turnover of nearly US$90 billion.

 

The Chinese are therefore about to launch their own Nasdaq – the Science and Technology Innovation Board – as if New York, the Hong Kong Stock Exchange and even the Nasdaq were no longer sufficient when it came to raising capital. As a result, technology companies will be able to get listed and raise funds more quickly on the Shanghai Stock Exchange, just as Beijing wanted and as President Xi Jinping announced in November 2018, by accelerating IPOs and therefore supporting the development of future national champions – one sure-fire way to do away with the United States’ dominance over the international funding of Chinese companies.

 

Beijing hopes to take advantage of small Chinese shareholders who are frustrated at not being able to invest in foreign markets as they see fit, and this new Nasdaq in Shanghai will enable Chinese investors, who are also particularly keen gamblers, to support the cash needs of these unicorns that they see and use on a daily basis.

 

 

Luckin Coffee: a prime example of a start-up’s ability to understand its market

Coffee consumption in China rose from virtually zero in the year 2000 to account for 2.4% of global consumption by 2018.

 

Even as recently as 2 years ago, Starbucks held nearly 80% of the market, but that was before the Luckin Coffee caribou set out from Beijing to defeat the little mermaid from Seattle!

 

The reality is that both companies have adopted very different models and have very different USPs:

 

  • Starbucks focuses on well-being at its outlets, with free Wi-Fi, baristas, etc. and a high price positioning that could be considered quite brazen when you think about the margins to be made on coffee! The initial idea, of course, was to allow customers to spend some quality time with friends, curled up comfortably on a sofa for a few hours, but alas, a 30-seater outlet where customers spent a few hours at a time was not going to generate sufficient turnover, and Luckin Coffee quickly realised this! Starbucks has positioned itself as a ‘third place’ that’s neither work nor home and has an international image that brings with it a certain social status.
  • When it came to a very individualistic country like China,  where delivery now generates over half of all restaurant business, Luckin Coffee decided to adopt a different approach. The company has a very clear understanding of its market and appeals to a much younger population, with 80% of its customers being under the age of 30 and a price positioning 20% lower than that of Starbucks. Coffee shops are springing up all over the place, with Luckin Coffee going from just 9 outlets in 2017 to opening over 2,000 in the space of a year, beneath office blocks and shopping malls, in places where there isn’t space to sit down. The company has focused on mass consumption, immediacy and ease of ordering and delivery and done away with baristas in the process! Delivery drivers make up Luckin Coffee’s main customer base, and one major factor that makes it different from Starbucks is that Luckin Coffee is a Chinese company.

 

Another thing that sets Luckin Coffee apart, of course, is the time Starbucks takes to form partnerships (as it has recently done with Alibaba). What’s more, the American company took too long to accept mobile payments using Alipay and WeChat Pay, instead favouring now-outdated cash and prepaid plastic card payments. Luckin Coffee, meanwhile, is a 2-year-old baby unicorn that has had the support of Tencent from the very outset.

 

So what next?

No one can predict what will happen next; although Starbucks, which has operated in China since 1999, does, of course, have a much greater market valuation than Luckin Coffee.

 

Coca-Cola has also recently invested in caffeine with its buyout of British chain Costa, with co-working unicorn WeWork, whose spaces are becomingly increasingly popular in China, also establishing a presence in this lucrative market.

 

There are, of course, plenty of examples of unicorns that have failed to reach any real level of maturity, with Ofo, for example, no longer with us and Mobike not looking very healthy, either. The barrier to entry is low, the aggressive price positioning not necessarily sustainable, names easily replaceable, products not particularly innovative and investors very versatile.

 

Without wishing to rain on Luckin Coffee’s parade as it basks in the glory of its flotation in New York, there is one question that begs to be asked: ‘who will be the next unicorn to get itself noticed in this thriving market?’

 

Stéphane Joly, Global Key Account Director, Altavia Europe