Caixin
Jul 17, 2019 08:34 AM
TECH TALK

Starbucks Takes Page From Luckin, but Is That Good or Bad News for Minimalist Chinese Rival?

Watch out, Starbucks — Luckin is coming.

I’m not one to eat my words, but I have to admit to at least a temporary pause in my skepticism toward Starbucks challenger Luckin Coffee in this latest edition of Tech Talk. I’ve been a major Luckin doubter since it launched its first minimalist coffee stores last year and went on to make a major New York IPO in May despite its youth and massively money-losing status.

Luckin is trying to revolutionize China’s young coffee-drinking scene with a new and high-tech business model that combines small, minimalist stores with app-only ordering to target customers on the go. In Luckin’s early days, observers immediately compared it with Starbucks due to its aggressive expansion and the fact that both are coffee chains.

But the similarities really end there. Starbucks is far better known for its business model that offers customers space to sit down, relax and hang out with friends or talk shop in a “third place” setting outside the home or office. Luckin’s shops are tiny by comparison, with just a small serving area for the one or two baristas and a few stools where customers can sit while they wait for their brew.

All that changed last week, however, when Starbucks announced its rollout of a new concept store that was a thinly veiled imitation of Luckin. The first store opened here in Beijing’s Financial Street district, and has no seats at all. Like Luckin, Starbucks’ on-the-go customers at the new store are also encouraged to order ahead on the company’s app. 

One of our interns visited the store earlier this week, and the place appears to be a hit, at least based on this early visit. The shop was quite full, with around 15 customers inside the small space. It was also quite well staffed with four to five baristas, far more than the two or even one that I usually encounter at the Luckin in our building at Caixin.

If imitation is the greatest form of flattery, then Luckin certainly has lots to be happy about. From my own perspective, this really does look like one of the first times I’ve seen Starbucks so blatantly take a page from a rival. Investors in Luckin seemed slightly puzzled by the move at first, with the stock barely budging Friday after the new Starbucks concept was announced.

But the news finally seemed to sink in this week, and Luckin’s stock jumped a frothy 8% on Monday. At that close the stock is now 24% above its initial public offering price from a couple of months ago, even though I was almost certain it would be well below water by now.

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Photos: Lucas Galarza

Hat-eating time?

So is it time to eat my hat and admit I was wrong? Not so fast, I would argue.

For starters Starbucks adopting Luckin’s format may be a form of flattery, but it also means Luckin will suddenly have a real competitor using the same low-cost takeout format. Starbucks is far-better known than Luckin after two decades in China, and thus anyone who perhaps had defected to the newcomer to take advantage of its on-the-go conveniences could easily now defect back.

But more important, Luckin has relied almost exclusively on heavy discounts to sell coffee in its brief lifetime. By comparison, Starbucks rarely offers such discounts. Instead it holds its higher prices up as a sort of badge of honor, since anyone who drinks its pricey coffee is basically showing off their economic means with such a relatively frivolous purchase.

The one person I know who has ever paid full-price for a cup of Luckin confided in me that he felt a bit foolish after finding out that no one else ever paid full price. What’s more, I get the distinctive sense that many current Luckin drinkers would quickly ditch their new habit if the company were to discontinue its heavy discounting.

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Photos: Lucas Galarza

To test that theory, I surveyed my nearly 1,400 friends and acquaintances on the popular WeChat, since most are exactly the kind of young, urban professionals that both Starbucks and Luckin target. I asked them to rate Luckin versus Starbucks in terms of taste; whether they would continue drinking Luckin without the discounts; and whether they would consider buying coffee from the new Starbucks concept stores at full price.

The roughly 15 people who responded were surprisingly uniform. Most said Luckin was about the same or slightly inferior to Starbucks, a view I share. When you’re mass producing coffee at that scale, I’m told, the need to guarantee uniformity forces you to make sacrifices that rule out the better taste that smaller, more boutique-style shops can achieve.

On whether they would remain loyal to Luckin without discounts, people were almost unanimous in saying they would dump their new habit in a heartbeat without such incentives. Similarly, nearly all said they would still give the new Starbucks minimalist concept stores a try even without discounts.

I draw a couple of takeaways from all this. First and foremost, Luckin’s business is almost certain to torpedo by half or more once it phases out its discounts, something investors will probably demand sooner or later. The company could also see a massive loss of customers to the new Starbucks stores if the U.S. giant decides to aggressively expand the concept.

At the end of the day, none of these scenarios look good for Luckin. Accordingly, the strong surge in Luckin shares this week looks more like a round of applause than any real consideration for what Starbucks’ move actually means. The bottom line could be much gloomier for Luckin over the longer term once the new reality sets in, and I would stand by my earlier prediction that the company is set for a slow decline over the next one to two years.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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