Luckin Coffee, which has been rapidly expanding, recently achieved a milestone in its development history.
On June 5th, Luckin Coffee's (瑞幸咖啡) flagship store on Zhongshan Road in Xiamen opened, marking the company's store count in China reaching 10,000 and surpassing Starbucks to become China's first chain coffee brand with over 10,000 stores.
While achieving this milestone, Luckin Coffee's overseas expansion is also worth noting. In late March of this year, Luckin Coffee quietly began its overseas expansion by opening two stores in Singapore's Marina Bay Sands and Yihun City on Orchard Road. In addition, two stores at Guoco Tower, Singapore's tallest building, and Aperia Mall opened at the end of April. The price of the signature "Coconut Latte" is SGD 8, currently sold at an 8% discount; while a Starbucks latte in Singapore costs SGD 7.1, putting the price in the middle to high-end range.
Luckin's Store in Guoco Tower (Source: Luckin's Weibo)
Unlike its positioning in China, where it competes in the mid-to-low-end market, Luckin Coffee is targeting the mid-to-high-end market in Southeast Asia where local brand awareness has not yet been established. Can Luckin Coffee survive in this fiercely competitive market?
The Potential for Coffee in Southeast Asia
With its rapid expansion in China, is Luckin Coffee coming to Singapore just for this small market of 728 square kilometers and over 5 million people? The general consensus is that by establishing its brand in Singapore, the most internationalized city in the world, Luckin Coffee's larger focus is on Southeast Asia.
Currently, Southeast Asia occupies an important position among the world's three recognized coffee-growing regions. According to FoodTalks, in 2017, Indonesia and Vietnam were once two of the world's largest coffee-producing countries, accounting for 18% and 6% of global production, respectively. Statistics show that Vietnamese coffee has been exported to 80 countries and regions, accounting for 14.2% of the global coffee bean export market share. Indonesia is the world's fourth-largest coffee exporting country, second only to Brazil, Vietnam, and Colombia.
In recent years, Southeast Asians, who have been greatly influenced by Western culture, have also become increasingly fond of coffee. According to the International Coffee Organization (ICO), total coffee consumption in Southeast Asia increased from 8.4 million bags (60 kg per bag) in 1990 to 19.5 million bags in 2012.
Many people have yet to realize the consumption potential of the local new middle class. A report by Lightsource Capital shows that the per capita income growth rate in Southeast Asian countries is 6% to 8% per year, and Vietnam, Indonesia, and the Philippines are expected to double their income levels by 2030. Meanwhile, Malaysia's price level is steadily approaching that of Singapore. At the same time, the middle class is also exploding in number and is expected to account for 67% of the region's total population by 2030. Indonesia may be the country with the greatest consumption opportunities, with an estimated 75% of the population becoming middle class.
Luckin Coffee has set Singapore as its first stop in Southeast Asia. EqualOcean believes that its logic is based on:
Firstly, Singapore's per capita GDP exceeds USD 70,000, with 90% of the population belonging to the middle class, having stronger consumption power, and being beneficial for testing the positioning of mid-to-high-end brands.
Secondly, Singapore is one of the world's eight best coffee cities and the only city in Asia on the list. Although the Chinese make up nearly 75% of the total population, coffee is more popular than tea, driven mainly by young people and other new consumer groups.
Thirdly, Singapore is a free port and has signed free trade agreements with more than 20 different countries and regions, making it an ideal link between Asia and the world's major coffee producing and consuming markets. If a coffee merchant's warehouse is located in a free trade zone, there is no need to pay import taxes, which is very attractive to import and export practitioners.
Finally, consumers have gradually developed digital dining and online payment habits during the pandemic, driving companies on the supply side to begin digital transformation. Singaporean consumers are still accustomed to cash payments, but Luckin Coffee insists on using an all-online payment method, partly because it sees high acceptance and potential growth of online payments among young consumers. On the other hand, we speculate that this may be due to considerations of unified store management and reduced financial costs.
Luckin's Brand Ambitions
In June, Luckin Coffee broke the 10,000-store mark in China, and expanded its RMB 9.9 coffee promotion to all stores, signaling a fierce price war with new entrants like COTTI (库迪咖啡). However, the situation is different for Luckin's overseas market.
Some customers have found that after the first cup of coffee priced at SGD 0.99 (about RMB 5.25 ), the second cup returns to the regular promotional price of SGD 4.8 to 6.4 , and the app displays a regular price of up to SGD 8 per cup, which is even higher than Starbucks. Similarly, pop star JJ Lin's Miracle Coffee in the same location as Luckin's Marina Bay Sands store only charges SGD 6.5 for a latte.
Comparing store opening photos circulating on social media, EqualOcean found that the Marina Bay Sands store and the trial-operated Guoco Building store are slightly larger than Luckin's stores in China, with more tables and chairs, but still smaller than Starbucks. According to data from Ping An Securities, Luckin's per-square-meter sales in China reached USD 7,200, second only to Starbucks globally (USD 8,100), but we believe this is due to Luckin's takeaway model. In comparison, Tims Go, which follows a similar path, has a per-square-meter sales of USD 6,800, while Manner, which has smaller stores and higher customer spending, is believed to have a per-square-meter sales 50% higher than Luckin.
Although Luckin has positioned itself as a mid-to-high-end coffee brand in Singapore, it does not necessarily mean it wants to compete with Starbucks.
It is worth noting that as consumer enthusiasm wanes, there are more and more doubts about the brand's ability to support its prices, such as "average coffee bean quality," "poor taste and richness," and "who will buy after the wool is sheared."
Can Luckin succeed? Putting aside external voices, we find that Luckin's path to overseas expansion is somewhat similar to Starbucks' when it first ventured out of North America.
Starbucks' globalization began in 1996 and is still a low-priced coffee brand in the United States. However, when it first entered Asia, Starbucks used Japan's government smoking ban during its high-growth period to distinguish customers from smokers, emphasized high-quality coffee with rich and changing flavors in its advertising, and created a sharp contrast with the dull self-service coffee shops outside with an elegant and fresh environment. Therefore, even though its prices were more than twice as high as its local competitors, Starbucks quickly opened up the Japanese market. Subsequently, Starbucks established a high-brand positioning and successively entered East Asian and Southeast Asian countries such as Singapore, the Philippines, and China.
Today's market environment is completely different. Even Starbucks is struggling with the poor infrastructure and supply chain levels in Southeast Asia, which limit its store expansion. To achieve the same brand positioning as Starbucks, Luckin needs to focus on product differentiation, in addition to improving coffee taste.
According to research by CITIC Securities, due to cost control considerations, most domestic chain coffee shops use Arabica beans, sourced from South America, North Africa, and China's Yunnan. Starbucks also does the same. From the perspective of global supply chain procurement, Luckin's bean source in Singapore is unlikely to change much. In addition, Luckin's third-party baking supply chain is the domestic headquarter, Jinmao Coffee, and industry chain experts have a very positive evaluation of the baking quality. Coupled with its own Fujian baking factory in operation and the upcoming Kunshan baking factory, Luckin has the ability to guarantee the quality of its supply chain for overseas expansion.
Therefore, in the path of product differentiation, the key to increasing customer spending may lie in the explosive single products composed of coconut milk, milk, cheese, and fruit. In other words, Luckin's larger target audience is actually those who can accept coffee-flavored drinks. A user on Xiaohongshu once calculated that the cost of a cup of American coffee is RMB 1.8, while a latte is RMB 5.3 , and a coconut milk latte is RMB 4.05 (using Luckin's same supplier, Phinova). These costs are reflected in the price differences at the consumer end.
Luckin's Path to Defeating Imitators
Luckin's internet retail and ultra-low price model has caught the attention of overseas entrepreneurs several years ago.
In Singapore, Flash Coffee is almost universally recognized as Luckin's best imitator: more than 80% of store orders come from digital channels such as apps, and the prices of core SKUs are basically maintained at RMB 10-15, even the logo's color scheme (lemon yellow + flame red) is identical to Luckin's concept (blue + white). In terms of store location, Flash Coffee borrows from Luckin's mature model and has taken the lead in occupying ecological locations such as financial districts, universities, and core supermarkets. Its concept of "takeaway coffee" has also been implanted in the minds of local consumers.
Flash Coffee's Store in Citylink Mall (Source: Flash Coffee Official)
Recently, Flash Coffee announced that it had completed a USD 50 million B2 round of financing and operates over 250 stores in Singapore, Indonesia, Thailand, Hong Kong, and South Korea, with Indonesian stores already achieving profitability.
In addition, there are many new coffee brands in Vietnam, Indonesia, Malaysia, Thailand, and other places with strong localized genes, such as Kopi Kenangan, Fore Coffee, The Coffee House, Café Amazon, The Coffee Bean, McCafé, all of which show some traces of Luckin in their business models. We speculate that if Luckin wants to become a mid-to-high-end brand in Singapore and expand to other Southeast Asian countries through franchising, the difficulty and challenges are not small.
Moreover, the rising purchasing power of the middle class in Southeast Asia is accompanied by high demands for coffee quality and product innovation, and the sustainability of the "spending money" model also needs to be considered. It may not be easy for the middle class to become the foundation for Luckin's high-end brand overseas.
Therefore, Luckin needs to find differentiation and advantages in product, brand, and market to stand out from competitors with deeper supply chain accumulation and better understanding of the local market, and even imagine becoming a "delivery version of Starbucks" in the future. EqualOcean tried to contact Luckin, but did not receive a reply. Only time will tell how the market will answer.