When Starbucks (SBUX) entered the Chinese market in 1999, many were skeptical. China was a vast market, but the Chinese had no cultural history of drinking coffee and already had a well-established love for their many exceptional teas. Still, Starbucks gained a footing in major cities and expanded steadily and successfully. Now, however, a new entrant has emerged to challenge Starbucks. The company that taught Americans to slow down and enjoy a cup of good coffee now faces a distinctly modern Chinese challenge from the speedy and technologically enabled delivery of Luckin Coffee.
Starbucks Enters China
The first Starbucks store in China opened in Beijing in January, 1999. From there they expanded slowly and carefully in major markets with a system that paralleled their success in the United States. The stores were quite similar in look and feel, with the same iconic imagery and many of the same food and beverage offerings.
Fast forward more than a decade and Starbucks was still going strong in China. Comparable store sales in the China Asia Pacific (CAP) segment grew 22% in 2011 and 15% more in 2012. The company saw a significant growth opportunity in China and announced a goal of 1,500 stores by 2015. Starbucks continued to grow by opening approximately 250 stores each year from 2013 to 2015 while comparable store sales grew 9%, 7% and 9% during those years. In 2015, the Starbucks official Tmall store was also launched. Tmall is a platform for local Chinese and international businesses to sell brand name goods to consumers in mainland China, Hong Kong, Macau and Taiwan. Thus, Starbucks was offering their products to Chinese consumers in much of the way it did to Americans in grocery stores.
Starbucks was not just growing in its sales and stores; the company was creating a new experience for Chinese customers that was decidedly upmarket. A cup of coffee in Shanghai remains roughly twice as expensive as in a city in the United States, but business remained strong as urban professionals were attracted to an affordable luxury. The foundation of the strategy remained the experience of the third place, neither home nor work, but a comfortable and familiar place to relax or work.
Luckin Coffee Arrives
Luckin Coffee was founded in 2017, and changed the growth dynamics of the Chinese coffee market. CEO Jenny Qian Zhiya, formerly COO of China’s car rental giant CAR Inc and its ride-hailing affiliate UCAR, approached the coffee opportunity with a Chinese perspective and an emphasis on speed. Starbucks was founded on the experience of their coffee shops, which emulated the experience of an Italian café, but Luckin Coffee was designed for the fast pace of China’s business people.
Luckin Coffee revolves around the smartphone. When customers walk into one of its blue-and-white shops, they’re immediately asked to download the Luckin app to order coffee (assuming they haven’t done so already). They can pay using mobile payments or their own Luckin Coffee app. On August 1, 2018, Luckin Coffee announced that it had opened over 800 locations with plans to reach 2,000 by year end. In comparison, after nearly 20 years in China, Starbucks had approximately 3,300 locations as of September. The speed of development seems to have jolted Starbucks to accelerate development, since it now plans to open new stores more rapidly.
Additionally, in July 2018, Luckin closed a $200 million funding round at a $1 billion valuation. Investors included Centurium Capital, a private equity fund founded by the former China head of Warburg Pincus, and GIC, Singapore’s sovereign wealth fund. Luckin Coffee was preparing to move faster yet.
Tencent and Alibaba Join the Contest
In April 2018, Luckin Coffee partnered with Tencent and opened a pop-up store in Tencent’s headquarters building. Then in September, Luckin signed an agreement with Tencent to increase network traffic and build smart stores. Tencent’s chatting app, WeChat, will collaborate with Luckin Coffee on applications for smart stores, including image recognition, paying with facial recognition and delivery via robots. Luckin Coffee announced that with its Tencent partnership, it hopes to upgrade its current smart operating system to achieve smart procurement, distribution, quality control and marketing.
Using WeChat’s social function, Moments, facilitated the rapid spread of Luckin Coffee among young people, helping to boost online ordering and cheap, fast delivery.
Starbucks responded by joining forces with Tencent-rival, Alibaba. Under this tech giant, the partnership came with food delivery heavy-weight Ele.me, cashless supermarket chain Hema, Tmall, Taobao and Alipay. With Hema supermarkets, Starbucks plans to create “Starbucks Delivery Kitchens” specifically designed for Starbucks delivery order fulfillment. Alibaba and Starbucks plan to co-create a virtual Starbucks store that will integrate multiple platforms across Starbucks and the Alibaba ecosystem, allowing members to register, redeem benefits and enjoy an extensive range of services.
Starbucks Responds to Chinese Need for Speed
Starbucks launched pilot delivery services in both Beijing and Shanghai in September, targeting 150 stores in China’s two leading cities. Through the partnership formed with Alibaba, consumers can now order Starbucks' coffee and food on Alibaba’s Ele.me, and Hema. Additionally, Starbucks announced plans to expand its delivery services to 2,000 stores in 30 cities across China.
Starbucks previously announced a five-year growth plan to open nearly 600 stores annually, more than double the pace of recent years, aiming to increase the number of Starbucks coffee shops in China to 6,000 over the next five years.
Starbucks has built its platform on great real estate by locating many stores in expensive, prestigious, high-traffic locations that previous rivals struggled to afford. Most Luckin stores are in lower cost locations and rely on their customers using smartphones or receiving deliveries. Luckin Coffee uses the app to draw people to cheaper locations.
Other competitors have sensed an opportunity, such as US fast-food giant McDonald’s which launched a coffee delivery service through its McCafé’s delivery mini-app on Wechat, as well as Ele.me and Meituan Dianping. McDonald’s plans to deliver hot drinks to customers within 28 minutes, further demonstrating the competitive focus on speed and convenience.
Having Tencent and Alibaba involved has changed the competitive landscape entirely. We expect rapid expansion, technological development and possibly even price wars ahead. The slow cup of coffee is now very fast. Chinese fast.