Luckin Coffee Faces More Challenges, LIU Erhai Tried to Dispel Doubts of The Market
Luckin Coffee is now giving coffee giants like Starbucks huge pressure, with its products with convenience and subsidies. However, comments about Luckin Coffee in China are positive as well as negative. LIU Erhai, the company's board director tried to give responses to the critics.
Luckin Coffee announced on Dec 12 to obtain the company’s Series B Financing of USD 200 million, valued at USD 2.2 billion. With a rapid expansion powered by capitals, Luckin Coffee is now seen as a strong competitor to the Starbucks in China and forced the “big brother” to take a series of measures to meet the challenge in China local market.
Dec 14, Starbucks launched its virtual stores in partnership with Alibaba, to provide products and services to fans of Starbucks as well as Alibaba, not only on Starbucks app and ele.me, but also new channels like Alibaba Tmall and Alipay, etc. Furthermore, consumers do not need to purchase the member card to join the membership anymore, and could simply become a member by registering with a cellphone number. As to the offline sales channel, Starbucks announced to expand the company’s network to 6000 stores in 230 cities in 4 years.
However, there’re also a bunch of negative comments about this emerging coffee startup. Critics doubt that Luckin Coffee’s business strategy of “crazily burning money” could be sustainable, by which Luckin Coffee provide similar products with a price near 1/3 of the Starbucks. Some authors in China even claimed Luckin Coffee would be the next ofo, one of the biggest station-free bike-sharing platform operated via an online mobile application, recently was suspected to be impoverished, that over 10 million consumers are waiting to get their deposit refunds of CNY 99 or 199 per user.
Dec 21, according to the business plan of Luckin Coffee’s Series B Financing, which was learned by financial job search and training service provider CareerIn, the cumulative sales income of Luckin Coffee was CNY 375 million and the net loss was CNY 857 million, in the first nine months of 2018, with a gross margin of CNY -433 million, and a gross profit rate of -115.5%.
How should Luckin Coffee be evaluated? Why does the venture capitals have confidence in this company? Would it face a huge decline after stopping subsidies?
LIU Erhai (刘二海), the Founding and Managing Partner of Joy Capital joined Luckin Coffee’s board of directors, with continuous investment. Joy Capital, as the lead investor of Luckin Coffee’s Series B Financing, had also taken part into the Series A in May of this year. According to an article from iyiou.com, LIU Erhai accepted an interview with Sina Technology, answered several questions about “Buring money” and “subsidy”, and shared the perspective of Luckin Coffee as well.
The secret for Luckin Coffee’s rapid growth:
In LIU Erhai’s opinion, Luckin Coffee’s rapid expansion of 1,700 stores in 21 big cities had benefited from the rich experience of the founding team. The founder of Luckin Coffee QIAN Zhiya (钱治亚) used to be the COO of UCAR (神州优车, NEEQ:838006), which is a chauffeured car service provider committed to guaranteeing safe and standardized chauffeur services for its customers. And one of Angel Round investor LU Zhengyao (陆正耀) is also Chairman and CEO of UCAR. The experience of the operation of UCAR, is highly correlated with Online to Offline business, which can be used in operation of Luckin Coffee, to connect huge while dispersive consumer needs for coffee with Luckin Coffee shops all over the cities, through the Internet, and driven by data.
LIU Erhai believes that coffee is becoming a mass market from the niche market it used to be. Built on a highly developed internet infrastructure, “digital coffee” will become the mainstream of the future coffee market, that most cups of coffee will be related with data, not only delivery will be data-driven, the product design, distribution of stores, consumer experiences, etc. would all be driven and enhanced with data. LIU Erhai claimed Luckin Coffee to be such a digital coffee company, which can use technology to improve the quality and experience with proper prices that consumers can afford.
Responses to several doubts and challenges:
For Concerning of subsidies cannot last for long, which helped Luckin Coffee a lot to obtain consumers quickly, for now, LIU Erhai believes that “burning money” is actually an investment for entering minds of consumers.
What if other competitors quickly copy and follow up? LIU Erhai said that Luckin Coffee will do revolution before others catching up, by expanding its product categories, from coffee to juice, and light meal.
When talking about the ability of management, LIU Erhai admitted it to be a big challenge, that Luckin Coffee used to pay a lot for the commitment of “Free if the delivery costs over 30 mins”, while the management is getting better.
The real challenge for Luckin Coffee is far from coming:
In the author’s opinion, Luckin Coffee will face at least two big challenges, one is Brand Equity of the company, another is the trap of this Nonrigid Demand Market.
Compared with Starbucks, Luckin Coffee is just a new player in the market, the Brand Equity of this company is much lower than the old brands. By Brand Equity, the author means Brand Awareness, Reputation, Association, Relevance, etc. Lower Brand Equity means a serious Public Relations Crisis might be a disaster to the brand, for example, a food safety issue would have much more negative influences on Luckin than Starbucks.
As to the trap of Nonrigid Demand Market, in the author’s opinion, Luckin Coffee would definitely need to face a sales decline without subsidies, and the business model is not similar with Uber or Didi in China, consumers’ needs for coffee in China, could be met with a large number of alternative products. Coffee of another brand, Tea, Milk Tea could all be the challengers.
In the end, maybe food delivery platforms like Meituan Dianping would be the final winner. According to information on Dec 18, Luckin Coffee is planning a tie-up with Meituan Dianping, China's leading e-commerce platform for on-demand services, to deliver coffee and other food products through Meituan Dianping's delivery network in China.
- Author: ZHANG Fan; SONG Ning contribued to the article; Write to ZHANG Fan at ZhangFan@EqualOcean.com