The Luckin vs. Starbucks fight is accelerating, both in terms of stores opened and hype. Luckin has IPO’d. And Tim Horton’s is jumping into the China coffee biz.
What is going on?
Why is there so much activity in the previously sleepy business of Chinese retail coffee?
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Recall, a similar thing happened in bike-sharing in 2017. A fairly simple business with a digital twist became a big business and hot media topic. Bike-sharing was proclaimed to be the next phase of ride-sharing (it wasn’t). It was part of China’s new “sharing economy” (no such thing). Mobike and Ofo turned out to be innovative bike rental businesses, riding the waves of a couple of sexy ideas. I wrote an article at the time about this titled “How Hype and Greed are Ruining Bike-Sharing”.
I think something similar is happening in retail coffee in China. The hype and the money are overwhelming a fairly simple business situation.
Here’s what I think doesn’t really matter in the Luckin vs. Starbucks fight:
Delivery doesn’t really matter.
Both Luckin and Starbucks are now doing coffee delivery. And it turns out delivering a caramel machiatto with the foam still on it is kind of technologically challenging. But delivery is not really a big deal. And neither company is going to win based on delivery. It’s just something that consumers expect in China and it is an operating cost for these restaurants. But it’s not a big deal.
Store openings and capital raises don’t really matter long-term.
Luckin has brought a venture capital-type approach (move fast and break things) to retail coffee. They are opening outlets rapidly and spending big on customer acquisition (buy five, get give free). That is a very different approach than Starbucks’ 20 year steady organic growth in China. This is going to be a short-term phenomenon. Luckin will either succeed big or fail fast.
New retail and digitization don’t matter much.
Luckin came at retail coffee riding China’s “new retail” wave. This is actually a big and transformative idea in sectors like groceries and fashion. But digital doesn’t really change retail coffee that much. You order a coffee and pick it up or have it delivered. Digital is an operational upgrade but it doesn’t change the consumer experience that much. It does change how you access consumers but the product and experience aren’t that different.
I think Luckin vs. Starbucks is going to come down to one big and still unknown (to me) number – which is:
How much traffic is Luckin getting at its pick-up locations?
Here’s why I think this number matters:
- Luckin is not taking on Starbucks in its core business – which is selling an affordable luxury product / experience based mostly on high-traffic and high visibility locations. Starbucks customers go to a nice location to relax and get an expensive coffee. The strategy is mostly about getting high-traffic and high-visibility real estate. Plus lots of marketing. And they have now partnered with Alibaba to move this more online and to add delivery. Overall, it’s a nice strategy in the affordable luxury space. But it is mostly about their strength in real estate – and their strength as a luxury brand.
- Luckin, in contrast, is about bringing retail coffee to the mass market of China. They are trying to increase the very low overall coffee consumption of China. And that is the big play. If they can move coffee consumption from 4-5 cups per year to say 20 cups (in contrast to 400 in the USA), that will be a huge win. I think Luckin is mostly a mass-market play (similar to what Xiaomi did with the iPhone).
- Luckin, therefore, has a different business model than Starbucks. Their strategy for moving the needle in mass market coffee consumption appears to be low price plus increased convenience, which is a commons strategy for digital. You order via smartphone with mobile payment. You get your drink by rapid delivery or by pick-up at tons of locations (conveniently close by). Luckin doesn’t need super nice retail outlets in the best locations. They need tons of them blanketing neighborhoods.
- The CEO of Luckin is an ex-executive at UCar and this low price plus convenience strategy is common in mobility. Digital is good for this and hopefully consumers develop a habit for the service (caffeine helps here). This approach also attacks the higher cost structures of non-digital businesses (like pricey real estate and traditional marketing).
For Luckin to succeed, they need to get the mass market to start drinking more coffee. So I think it’s the traffic growth that matters. And not in delivery or at their sit-down relax stores. It’s the traffic growth at their pick-up locations. That’s the number that I think matter.
The economics of coffee delivery just aren’t that good. Probably bulk orders and some high-density neighborhoods are ok. But you aren’t going to get ahead in life paying guys on scooters to rapidly delivery lattes.
Similarly, it’s not about the sit-down-and relax outlets (like Starbucks). That gets you significant real estate costs.
It’s with the order and pick-up business model where Luckin will succeed or fail. Luckin really needs people to order on their phones and then walk a block and pick up their drink. That’s where the economics look the best and where you want the big increase in coffee consumption in in China. And keep in mind, most Luckin locations are not really retail coffee outlets. Often they are little more than counters in the lobbies of office buildings. They are small convenient pick-up spaces. And it is easy to deploy them in big numbers close to where people work and live.
So that’s the number I’ve been looking for. How much traffic is Luckin getting for pick-up orders? I’ve even sat in their outlets in Beijing and counted people coming in. But I still don’t really know. They did raise a second round at a $2B valuation, which could indicate their traffic is good. However, their rapid IPO could indicate that that this is a get-out-fast strategy. We’ll see.
A final point.
Tim Hortons has recently decided to enter China. They are owned by 3G Capital, which also owns Burger King. And I believe the Burger King franchise for China is still overseen/owned by Cartesian Capital out of New York. Although it is operated by a Burger King franchisee out of Turkey. It’s kinda weird.
But it raises a cool question. How should you enter the Chinese retail coffee at this point?
Some initial thoughts:
- They cannot do the Starbucks real estate-first approach. It’s been tried. You can’t beat Starbucks at being Starbucks.
- They also probably cannot beat Luckin at a digital-first mass market strategy.
- The Tim Hortons brand isn’t going to help that much. They will get a pop in the beginning because Chinese consumers like new stuff. But that will fade fast.
I’m thinking 2-3 potential strategies:
- They could partner with a big real estate company. Somebody like Wanda. That limits their future but it is an easy path and it gets you in the game.
- They could just avoid the competition. Forget first and second tier cities. Go to the far West of China (Ningbo, Yunnan, etc) and get there first. Copy Carlsberg beer.
- They could try to reinvent retail coffee on the marketing side. Maybe focus 100% on digital marketing and social media. Is there a different business model here? Just spit balling.
Anyways, that’s my take. Thanks for reading – jeff
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