When Luckin, a billion-dollar Chinese coffee start-up, penned an open letter this spring to Starbucks threatening to sue the Seattle-based brewer on antitrust grounds, the U.S. coffee giant dismissed it as a mere marketing gimmick. “We have no intention of participating in the promotion hype of other brands,” it responded.
But sudden changes to its China strategy suggests that Starbucks saw a threat in Luckin much bigger than being taken to court. Recent moves by Starbucks, including the delivery partnership it announced two weeks ago with Alibaba, indicate that in this particular battle, Goliath is taking David seriously, and doesn’t intend to get knocked out.
Luckin was founded less than a year ago by Jenny Qian, the former COO of Uber-like car provider, UCAR. Within seven months, it had already achieved unicorn status, clinching its billion-dollar valuation in a $200 million funding round led by Singapore’s sovereign wealth fund, GIC.
In May, it made good on its promise and sued Starbucks, alleging the coffee house was coaxing landlords into signing exclusive rental agreements, preventing rival coffee shops from opening stores in Starbucks locations. Despite this claim, Luckin has expanded quickly. Since its soft launch in January, the coffee house has opened close to 600 stores in China – a feat it took Starbucks twelve years to achieve.
But Luckin’s coffee shops are different. Starbucks stores have always emphasized comfort, providing a “third place” for consumers to socialize outside of their homes or offices. Conversely, nearly half of Luckin’s shops are “takeaway kitchens”, dedicated exclusively to fulfilling orders made online and delivering them out of store. Luckin’s popularity represents a shift in China’s consumer culture that Starbucks has been slow to react to.
The ‘third place’
When Starbucks entered China in 1999, its third place strategy resonated with China’s emerging middle class, who were reluctant to return to cramped apartments after spending long hours confined to crowded offices.
Starbucks was also able to capitalize on its international standing and present itself as a premium brand. Even though the Chinese weren’t (and still aren’t) major coffee drinkers, clutching a Starbucks cup soon became a status symbol.
But its premium branding almost backfired in 2013 when consumers discovered that Starbucks was charging more in China than it was in the U.S. Worse, Starbucks is also more expensive in China relative to the average income: in America, the average salary buys 1,000 lattes a month, but in Beijing the average earner can only afford 200.
Luckin’s coffee is up to 30% cheaper than the java at Starbucks, and it is subsidizing its prices, offering “buy two, get one free” and “buy five, get five free” offers. With Rmb2 billion ($290 million) in cash reserves, CEO Qian has said Luckin is “in no rush to make a profit” – an attitude more typical of a Chinese tech start-up than a coffee shop.
Tech is pivotal to Luckin’s success. All of its orders are made in-app. Even at the stores where patrons can actually sit and relax, customers have to download the Luckin app to place an order. Payment is then made through WeChat or Luckin’s own Coffee Wallet. There is no cash option.
This doesn’t seem so unnatural in China, where mobile payments are fast becoming the norm. Even Starbucks teamed up with the nation’s number one online retailer, Alibaba, last year to roll out AliPay features across 2,800 stores.
But Luckin’s emphasis on delivery harnesses another major shift in consumer culture.
China’s food delivery industry has ballooned over the last three years into a market valued at $41 billion. Seeking dominance, competing couriers have burned through cash offering discounts to entice users (much like Luckin is doing now). Clashes between the companies have even turned violent, with drivers from the rival firms brawling on the streets.
Despite the chaos, business has been good. The market grew 23% last year, proving particularly popular among 20-30 year olds: a demographic that also makes up 70% of Luckin’s business. As more millenials turn to deliveries, fewer will be seeking that third place.
Smelling the coffee
Now that it has a billion dollar rival on its doorstep, Starbucks has woken up to China’s changing consumer culture and has enlisted Alibaba to help it run deliveries. Alibaba owns Ele.me, China’s second-largest food delivery provider, and will dedicate some of its three million drivers to running Starbucks orders.
Starbucks doesn’t say its new delivery deal is a response to Luckin, but some of its features are familiar, such as the new “Starbucks Delivery Kitchens” dedicated exclusively to fulfilling delivery orders. The new program will be trialed in Beijing and Shanghai this fall before spreading rapidly across Starbucks’ other locations, completely dwarfing Luckin’s reach.
Besides running coffee, Alibaba will also help Starbucks create a comprehensive presence online, allowing customers to buy merchandise, order coffee, collect points and make payments all through one service. Starbucks refers to this digital footprint as a “fourth place,” and it wants to integrate it with its third places, creating a confluence of online and offline services.
This is not a new idea in China. Alibaba calls it “New Retail” and has been championing the model since 2016. It is also the model that Luckin has adhered to from the get-go and proved to be popular for coffee.
The model’s popularity, however, could potentially lead to Luckin’s own downfall. Luckin should be worried now that Starbucks has embraced New Retail, because it is easier to add internet on top of existing offline services than build a whole system from scratch. Starbucks already has 3,400 locations and plans to add a new China store every 15 hours for the next four years.
It may be adapting, but it is doing so to stay. As Howard Schultz warned at a roundtable in Shanghai’s flagship Starbucks Roastery – the biggest Starbucks in the world – “Anyone who is betting against Starbucks in China is dead wrong.”