Starbucks China Sales Rebounded, Where Should Luckin Coffee Go?

Starbucks China/CAP (China/Asia-Pacific) segment has contributed 18.09% of the total Starbucks net revenue. It is estimated to contribute up to 20% of the total revenue by FY 2019. But it seems to lose the buzz recently. Starbucks's revenue from China fell quarter-on-quarter in the Q4 FY2018 for the first time in three quarters.

Luckin Coffee（瑞幸咖啡）, Beijing-based startup is positing itself as mass-market alternative to Starbucks, which has seen sales in China drop in its third quarter of fiscal 2018 (quarter ended on July 1). The dropping trend started from the time Luckin Coffee entered the market. 

It is noticeable that comparable sales number includes only Starbucks company-operated stores open 13 months or longer, which means they don't count new store sales. comparable store sale in Q2 and Q3, for new stores often saturate existing stores customers, especially in areas with high distribution density, like tier 1 and tier 2 cities. In Q4 FY2018, China comparable store sales up 1% in Q4, improved from -2% reported in Q3.

A culprit is that in the past 2018 fiscal year, Starbucks has opened new 585 stores in 17 China cities. However, John Culver, group president, International, Channel Development and Global Coffee & Tea of the company claimed that most of revenue in China is coming from new stores so the company will keep bidding on expansion in the region. Second, Starbucks has increased prices partly, 3% worldly and 2% in CAP in the whole fiscal year.

Third, delivery, Starbucks debuts first-of-its-kind virtual Starbucks store in China with Alibaba partnership beginning September 2018. The company announced Starbucks Delivers has reached 2,000 stores across 30 cities in China since launching three months ago in the 2018 Q4 investor Conference. Interestingly, Starbucks plan to expand delivery in American and Japan, working with Uber Eats.

We see little change this strategy leveraged in China store sales yet because it is a bit of risk to say Starbucks' competitive response has helped to bring up the same-store sales growth to 1% in Q4 from previously -2% in Q3 2018.

Simply looking at the delivery fee and user experience, we must say it might not be a good business for Starbucks. Luckin Coffee has cooperated with food delivery platform Meituan Dianping in December, aiming to add more delivery capacity on its original SF-Express channel. 

Starbucks charges CNY 9 (USD 1.35) for delivery fee while Luckin Coffee for CNY 6 (USD 0.9), not even mention discounts and coupons the company offers every week.  

The enterprise is built on heavy subsidies, instead of brand name or quality, not yet at least. Despite Luckin's spiel on its high-quality beans and blending by the WBC Champions team, bad tasting comments are commonly seen.

QIAN Zhiya(钱治亚), CEO of Luckin Coffee once claimed CNY 1 billion (USD 158 million) has been burned into subsidies and to educate the customers in July 2018, and according to the company's plan, this strategy will keep on in exchange for market share.

According to data provided by Luckin Coffee, coffee consumption per capita in mainland China is only five or six cups per year, reported by Panda Daily. Starbucks educated its customers in the past 19 years, is responsible for popularizing today's mainstream coffee culture. It's time for Luckin Coffee to bring up its own customers as well.

Dec 18, 2018, Luckin opened the first API (Application Programming Interface) for outside businesses for employee welfares and business gifts. With a low price and high frequency, coffee consumption is the best solution for companies to buy coupons and gave out according to needs. LI Jun, VP of Luckin, claimed that the company aims to increase customer stickiness and platform daily Active Users (DAU), enable customers to change digital rights into real consumption on third-parties platform. It also helps to touch more customers for Luckin.

The company already won its first partners, including China Construction Bank Corporation, China Merchants Bank, Shanghai Pudong Development Bank and SF Express. Imagine the day all employees from these leading companies are drinking Luckin: coffee will be gifts, not goods.