WalkIn Case Study: The Luckin Coffee Story and What It Means for India
THE CHINESE COFFEE MIRACLE
The Chinese have traditionally been known to be tea drinking people with the beverage playing important roles in daily life.
However, since 1999 when Starbucks opened its first store in Beijing, growth in coffee consumption has shown no sign of plateauing. From 1 store in Beijing in 1999, Starbucks has grown to 3,700 locations across China, with a focus on Tier 1 cities. Starbucks now accounts for 80% of the retail coffee business in the country!
With caffeine’s appeal to a younger, economically empowered generation with globalized aspirations, analysts are optimistic on the coffee market. Starbucks shares this optimism, with aggressive plans to open a new store every 15 hours for the next few years.
This kind of opportunity attracts competition and a serious contender to Starbucks China is Luckin Coffee.
THE ENTRY OF LUCKIN
Luckin opened its first store in Beijing in 2017, 18 years after Starbucks did. Over the past 2 years, Luckin has gone from 1 store to 2,400 locations across the country. The company is now valued at over $3 Billion. It raised over $500 Million in its recent listing on the Nasdaq.
Luckin’s approach was to boldly snatch market share away from Starbucks in their preferred turf i.e. in Tier 1 cities — with some Luckin stores springing up just meters away from Starbucks locations.
In a growing market, Luckin aims to expand its store network faster than Starbucks’.
THE LUCKIN STRATEGY
Luckin was fortunate to have been born in the age of mobile and ubiquitous connectivity. This allowed them to build their brand around the smartphone, an advantage that Starbucks tries to foster through its mobile story.
Luckin built its strategy on 3 principles:
1. Provide high quality at low cost
Luckin maintains a high quality of coffee, bettering the benchmark set by Starbucks. Popular YouTube blogger TechZG did a blind taste test of their Lattes and found that Luckin’s was better. The price of a Latte in Starbucks is 30 RMB while in Luckin the same would cost 20% lower at 24 RMB.
All Luckin stores are of the kiosk format i.e. there is no seating. This reduces their cost of operations, a cost advantage which is passed on to the customer.
Further, Luckin operates completely via cloud kitchens. This further reduces the cost of operations and helps maintain their quality while standardising the offering across their outlets.
2. Win on customer experience
Aside from the exponential growth, one of the more famous aspects of Luckin is their “Mobile Only” approach. Customers can place orders only via the Luckin mobile app.
By removing almost any at-store interaction, Luckin can centrally control end-to-end user experience. Staff training is focused around order fulfillment which is another cost benefit and advantage while scaling.
Delivery is a key aspect of the Luckin experience, with Luckin underwriting its delivery by guaranteeing a free coffee if the coffee has spilled or delivered after the stipulated 30mins. Customers can also skip delivery and pick up the coffee themselves.
Further, Luckin runs standard but lucrative campaigns on their coffee, one very popular one being Buy Five and Get Five free.
3. Expand quickly
Luckin’s light footprint, in terms of both retail space and staff training, allows them to be nimble and expand their store network much faster than traditional retailers.
LESSONS FOR INDIA
A reality check
There are some obvious wins that Indian QSRs can look to replicate from Luckin’s evolution. Driving customer experience and having an asset-light footprint has helped Luckin differentiate itself from Starbucks. It further helped that they were in a market where avg. time spent on mobile is higher than in most parts of the world. However, the differentiation ends there. Their breakneck expansion and aggressive pricing has piled up losses to the tune of $122 Million last year between January and September.
Luckin is depending heavily on the growing coffee market in the country which is set to grow at 15% YoY. They aim to be the cheapest and most convenient coffee destination for this growing market. This, they hope, will improve their per store profitability and push their books into the green. Luckin has positioned itself perfectly for this long game.
To summarize, their strategy is to continue what they do best, and wait for the market to grow naturally.
The current Indian context for coffee
Indian coffee consumption growth expectations stands at a strong 7.5% YoY.
However, the consumption behaviour is very different in India. Young India primarily consumes retail coffee at leisure cafes for the ambience, music, free Wi-Fi etc. which are incidental purchases at hangout destinations or meeting venues.
Coffee consumption as a habit is picking up over the past few years especially among young professionals, much like the upward trajectory it enjoyed in China. However, unlike China, in India this habit is fulfilled by convenient and free-to-use coffee vending machines found within the office.
Cafe Coffee Day is already a pioneer in the office vending space serving over 1 billion cups last year. Driven by an easy-to-onboard subscription program, a strong distribution network and innovations in the machine itself. Mountain Trail Foods (of Chai Point) is the new strong entrant in the vending market with their innovative BoxC vending machines.
Replicating Luckin
The Luckin model focuses around coffee consumption as a habit. Providing premium coffee, with a great user experience, at a low cost.
In India, paying for premium coffee as a habit is a significant shift in behaviour. Premium coffee targets the same customer demographic that is already getting its caffeine fix for free, right next to their desks. It would be a rather steep task to make these customers pay for premium coffee and wait for it to be delivered. Remember, Luckin never changed behaviour, but capitalized on the change that Starbucks had already catalysed.
To summarise, the model looks exciting in the Indian context. But driving a completely new consumption habit for a ubiquitous product like coffee is a challenge. Infact Luckin has already partnered with Americana group to expand into the Middle East and India. We will be keenly watching their progress, it will be an exciting battle.
