Time to Buy: How Luckin Coffee is Creating a Coffee Culture in China
I think Luckin is doing it right.
Any potential large market in China brings with it intense competition, often times resulting in companies remaining in the red for years, offering great services for nothing in return until they go out of business. Everything from bike share, to smart phones, to milk tea, there’s always multiple stories of company failure before the winners finally start making a profit. When I first came to China in 2015, the bike share craze had just started. I witnessed countless companies offer free rides for the entirety of their existence until they crashed and burned, leaving nothing but bike piles behind. At one point I owned a LeShi (乐视) phone that offered free access to their streaming service on their devices. I paid something like $120 for the smart phone and I still have it to this day, but the company is long out of business. At this same point in time (2015), the choices for coffee in China were mainly Starbucks, McDonalds, Pacific Coffee (Basically Hong Kong Starbucks), and Costa Coffee (Basically UK Starbucks turned Coca-Cola brand). I don’t even recall seeing KFC coffee at that time. Attempting to find quality beans to make my own coffee meant a trek to a tiny store in downtown Shanghai that catered almost exclusively to westerners.
Starbucks has been around for so long, and is so well recognized, that they’re coasting. People who don’t even like coffee will go hang out at a Starbucks Reserve just because it’s cool (apparently). However they’re doing absolutely nothing to gain or maintain customers other than exist. And boy do they exist. They have stores everywhere. They’ll have several in a single mall. Yet they still have fewer locations (in China) than Luckin, which doesn’t even have one location at every big shopping mall. How can that be? And why?
Luckin Coffee has a strategy, and they’re going hard at it. And no Bloomberg, their strategy isn’t “sell coffee cheaper than Starbucks.” Coffee is cheap at McDonalds too. And it’s terrible. Luckin cares about their quality. They buy beans from quality sources, roast them well, and they introduce the beans’ origin to new customers in an accessible way. They know their audience — people who have never tried coffee — and their stores cater to that audience.
Take a look at any walking street and you’ll find at least three milk tea shops, none with indoor seating. When they do have stores with indoor seating, they’re overcrowded and uncomfortable. Luckin Coffee does both, well. When it makes sense, they have a spacious storefront with comfortable seating and great ambiance. When it’s unnecessary, they have a simple pickup counter for people to grab and go. While there is definitely a market for sit down, relax locations, that’s not always (and very often isn’t) what people need/want. Why pay for all that extra space when you could put that money into your drink quality?
News agencies jump at any opportunity to question the cost of Luckin’s coffee and their giving away of free coffees. They’re quick to point out the failures of previous companies like Cool Bike and LeShi, offering too much for too little until they run out of money. Yet once the clickbait is over, they never go back to check on the results and redact their statements when they’re wrong. When dozens of companies are competing for the same market, the probability of failure is extremely high. Luckin Coffee however, has managed to find something no one else is doing. While Hey Tea(喜茶), Nayuki(奈雪), and several other new small chains are fighting over the high quality milk tea drink market, ChaBaiDao(茶百道), 1點點, and GongCha are fighting over the cheap tea drink market, Starbucks, Pacific Coffee, and Costa Coffee are fighting over the big chain pretend high end coffee market, and Manner, SeeSaw, and Starbucks Reserve are fighting over the actual high end coffee market, Luckin Coffee has been quietly rising up in the background, taking the important pieces from each sector. They took the cheapness of 1點點, the quality of Manner, the western coffee shop style from Starbucks, and the pick up and go convenience from all the milk tea places, along with one of the most important pieces of a successful Chinese business: Instagramability. (Although since there’s no Instagram in China, Weibo and Wechatability). What’s the next internet famous drink? Sometimes it doesn’t even matter if the drink is good, as long as it takes a good photo. This internet fame is so coveted that places with traditionally solid menus (like McDonalds) will change it up every month with the cool new menu item. Everyone knows Luckin Coffee now, and hundreds of thousands of people have been introduced to coffee who otherwise would never have bothered to try it. Then once people graduate from flavored, sugary coffee drinks to real coffee, Luckin still has a place for them. While Starbucks, Pacific Coffee, Costa Coffee, SeeSaw, and Manner are all attempting to catch the waves from the new interest in coffee, Luckin is creating the waves and keeping the customers with brand loyalty.
You may be thinking, “So Luckin Coffee is trying to do everything, and can’t do one thing well. A recipe for failure.” Normally, I would agree with you. But Luckin has figured out how to do it strategically; Elite Stores, Relax Stores, Pickup Stores, and Express Stores (the automated coffee machines for office buildings). When it makes sense, they’ll pay for the huge space for people to come relax. When it doesn’t, they’ll save the money and open a pickup spot. When creating their menu, they follow the trendiest fruits and flavors and create interesting drinks that fit alongside the types of drinks they offer. Right now their coconut latte is trending online, and they’re using the same coconut for their smoothies, their tea drinks, and their yogurt smoothies. Currently grapes are in season, so say hello to the grape Americano, the grape smoothie, the grape tea, and the grape yogurt smoothie.
The western style coffee shop is here to stay, and they have their place in the market. But who decided every location needs to be a huge? Even Starbucks is going full force on its drive-through locations back in the US. After all, how profitable is a huge space where people come to use the bathroom and be seen working when compared to somewhere where people stop in to buy a drink and leave? At Starbucks, you’re essentially paying their rent. At Luckin, you’re paying for coffee.
As Luckin’s reputation grows, and their quality is experienced, customers are beginning to question the value of Starbucks compared to Luckin as a cheaper alternative to get the same if not a better experience. Currently in China, Starbucks still has the reputation of a “Snobby Brand” alongside Häagen-Dazs. Though as this perception fades as people start to understand the value of what they’re paying for, what does Starbucks have to offer? I personally don’t know of anyone switching from Luckin to Starbucks.
The grab and go drink market in China is tough. The usual intense competition in the Chinese market is amplified considering how long it’s been around. Long standing kings with name brand recognition have gotten comfortable and are finding themselves unable to compete with Luckin Coffee’s speed. When I first got to China, every 1點點 milk tea store had a line out front. Now, for the first time I saw one be shut down and replaced by a new “high quality milk tea drink” store. To this day, no other company seems to be directly competing with Luckin. No one is doing boba milk tea style coffee drinks but Luckin. And at this point, with such a huge head start, and having already started to turn a profit, I don’t know about you, but I’m all in on Luckin (stock. We’re talking about Luckin’s stock if you didn’t get that).
If you are interested, you can see my Luckin Coffee playlist on Youtube, where I’m attempting to taste everything on the Luckin Coffee menu and review them all at different locations. It’s pretty hard to keep up when they constantly have new menu items!
