If you are among the rare ones who hasn't heard of Luckin Coffee (NASDAQ: LK), many already named this second largest growing coffee-based chain as a Chinese Starbucks. Whether or not it can catch up to Starbucks Corporation (NASDAQ: SBUX) is an ongoing debate, but their business models are vastly different.
Starbucks aims to serve wealthier customers in China. Starting with its locations all the way to its price, this is a high-end strategy. Comparing to the U.S. where there are around 15,000 stores, Starbucks has only 4,300 in China. If we also take into account Beijing's population, there is a massive segment that is left unserved – and here comes Luckin.
Starbucks has an average cost of $4.30 a cup whereas Luckin is way more affordable at $1.50, targeting mass consumers and expanding its range far beyond a small niche of wealthy coffee-lovers.
Then there is Luckin's convenient store format and convenient locations which also do the trick. But there's more to Luckin than just a provider of coffee for the masses, although the low-end is still the largest market in China.
When it comes to low-end, instant coffee providers take up as much as 65-70% of China's coffee market and the market is led by western companies like Nestle (OTC: NSRGY). As for the mid-segment, there are brands such as 7-Eleven with competitive value propositions. But Luckin has an edge in this segment because unlike others, it gives its customers a fast service as they can place the order in the app and pick up their beverage at a nearest store in just 3 minutes.
Things become trickier in the high-end segment as Starbucks also offers flexible delivery options of pick-up, delivery or dine-in. But in November, Luckin has surpassed the number of Starbucks stores with 4, 910 locations.
When it comes to knowing how to use technology, Luckin has done a great job with its business model that enables the company to open new stores quickly while also offering cheaper pricing.
Luckin has enjoyed an explosive growth since it was founded in 2017, and it started expanding into the tea segment as China has culturally more of a tea-drinking background. Management is clearly showing efforts to diversify from the traditional coffee-business, but along with all that growth, the company is burning cash and has yet to prove the sustainability of its impressive business model.
From one angle, Luckin's future growth and profitability in China are perhaps less uncertain compared to Starbucks. But although Starbucks' throne in China is seriously threatened by this fierce competitor with aggressive growth and home-field advantage, don't say goodbye just yet- remember that it even pulled of a surprise with its Italian venture.
So, if Starbucks made its way to the coffee kingdom, it is likely to have another trick up its sleeve. But Luckin has exceeded forecasts, its stock surged 54 percent in November after it posted strong third-quarter results and it's not showing any signs of stopping! Therefore, predicting the winner of this match is an impossible mission.
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