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Starbucks struggles to beat hot startup in China
Published on: 2019-03-15
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030Starbucks is facing an upstart challenger in China, Luckin Coffee, that could be going public soon in a chase to win the Chinese market with lower prices, convenience, and ok-tasting brew. The IPO could raise as much as $3 billion, adding to a parade of Chinese startups going public.

China was a tea-drinking nation, and drinking coffee is not the craze in China like it is in the western countries yet. But China's thirst for coffee has been growing rapidly. Starbucks entered China early, in 1999, and today has 3600 stores. China is Starbucks’ fastest-growing and largest market after the US.

035Starbucks is a status symbol among China's millennial and middle-class consumers who want good quality and don’t blink at paying a premium price. It's forged new ground by opening virtual stores with Alibaba and partnering with Alibaba's delivery service Ele.me for speedy deliveries.

But Starbucks faces a highly caffeinated foe in Luckin Coffee, which is gaining favor as a homegrown brand.

032Luckin Coffee is one of those highly entrepreneurial and innovative Chinese companies that has come on strong. The startup launched in October 2017, and has quickly grown to 2,000 locations across 30 China cities, and plans to open 2,500 stores in 2019. Whether that pace is too fast is yet to be seen.

Luckin is challenging Starbucks with cut-throat pricing strategies and a digital business model built on Chinese innovations. A cup of Luckin costs $3 compared to Starbucks at $3.50 – and with heavy subsidies such as two for one discounts, the price is a lot less than the premium American brand. Luckin has been winning the local vote, if not the taste buds.

033The Luckin business is built around super-speedy delivery and discounting. Starbucks is all about the experience of lingering over coffee inside the store. Many of the Luckin outlets are small kiosks, meant as takeaway locations. Customers order and pay by app and do a quick pick up at these kiosks on their way to work.

This so-called on-demand business model combines mobile orders and offline stores -- a New Retail concept that has caught on in China. Luckin is not really so much about coffee as it is about technologies for smart ordering and smart dispatching of deliveries. Its core is data to smartly handle these business operations, like Uber and its on-demand model.

036The idea for Luckin came naturally for the founder, Qian Zhiya, a former operations executive at on-demand chauffeured car service Ucar in China. One good idea leads to the next one very quickly in China.

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