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Starbucks’ most dangerous competitor is just 2 years old

Luckin Coffee, which was founded in 2017, is poised to have 4,500 units in China by the end of this year, says RB's The Bottom Line.
Photograph by Jonathan Maze

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Starbucks Corp. has big plans for China. Many of the company’s efforts in recent years have focused on building its business in the fast-growing economy.

The market is the company’s second largest, after the U.S., and its fastest growing. Starbucks added nearly 600 locations there in its most recent fiscal year. It is now China’s largest coffee chain.

It has solidified its tea business by integrating Teavana into its primary coffee shops and has a partnership with the Chinese tech company Alibaba to improve technology and delivery.

But Starbucks’ dominance in China is under threat from a company that didn’t exist just two years ago.

Luckin Coffee, which was founded in 2017, already has more than 2,000 locations in China and is quickly adding more. It announced this week plans to add another 2,500 locations by the end of this year, which would give Luckin 4,500 locations. The company is valued at $2.2 billion. Zero to $2.2 billion in less than two years is nuts.

Starbucks has been developing in China for 20 years and has 3,600 locations there.

Stories like Luckin’s make us nervous. In general, chains that emerge and then add a bunch of locations all of a sudden tend to make mistakes that later lead to a brand collapse—anybody who has followed the restaurant business long enough knows this.

Chains such as Boston Market and Quiznos, to name just two, emerged, grew quickly, got all sorts of attention, then for different reasons saw that growth come to a halt before they both shrunk.

Indeed, Luckin’s rapid growth has come at a cost. As Reuters reported, the company has been losing money to spend on its growth. Essentially, the company is spending a lot of money to establish its market in the hopes that profits will come later.

China is a different market. Its restaurant industry remains a vast greenfield compared to the largely developed U.S. Chains grow quickly there, where there is an arms race to be first in the rapidly expanding economy.

“The competitive environment [in China] reflects the opportunity the market presents and the opportunity to continue to grow,” John Culver, Starbucks group president, international, said during the company’s most recent earnings call in November. “We welcome all competitors, and the market is going to continue to be competitive.”

Luckin, according to CNN, is quite different from Starbucks. The company is more tech company than restaurant chain, selling coffee from tiny booths rather than traditional shops. Its rapid-growth-at-all-costs strategy is similar to the strategy undertaken by many tech startups seeking to establish markets before profitability.

Luckin doesn’t accept cash, takes orders from its mobile app and will deliver—a much bigger deal in Asia than it is in the U.S.

The two are going after different sets of customers. Luckin is targeting convenience customers with cheap coffee. Starbucks is not a value chain and has been going after more and more of an experienced-based consumer.

The vast market that is China could easily provide enough fuel for both chains. After all, multiple concepts work fine in the U.S., which is considerably smaller in population than China. There’s no reason to believe that both Starbucks and Luckin can’t operate in the same market effectively.

Yet convenience and technology are important in 2019. What’s more, Luckin has the advantage of being homegrown. A well-financed home team will typically have a strong advantage in a market race because its creators know the market and its customers and their needs.

If the company’s model proves strong enough to keep its customers over the long term so its many shops make money—which is not guaranteed—then Luckin will be a tough competitor for years to come. That would make it tougher for Starbucks in a market it has tabbed for much of its future growth—and that makes Luckin, not Dunkin' or Tim Hortons, Starbucks' most dangerous competitor. 

Starbucks should thus pay close attention to what Luckin is doing, no matter how different.

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