3 minute pitch to the CEO of Starbucks China – how to respond to Luckin

Jeff’s Asia Tech Class Forums What Should Starbucks China Have Done About Luckin Coffee? (3) 3 minute pitch to the CEO of Starbucks China – how to respond to Luckin

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  • #7704
    George Mills
    Participant

    If we look at the Starbucks through the customers that it services, experience customers and product customers, then Luckin is positioned to potentially extract some of Starbucks’ product customer market share. While a large part of Starbucks’ strategy in China is in delivering an exceptional customer experience (observed through the larger store formats, enhanced levels of business-friendly seating vs. other markets and the expedited roll-out of Reserve stores vs. core markets), a portion is undeniably product-led and that portion is likely to grow with time as Chinese coffee consumption (& caffeine dependence) grows.

    Marketed as a premium-segment offering, Starbucks is not necessarily in direct conflict with Luckin’s more affordable, no-frills attitude to coffee. However, particularly as consumption grows, it is feasible that through its sheer scale and ability to deliver anywhere (quickly), Luckin will be able to capture a portion of the product market that Starbucks is currently able to effectively monopolise. With no clear competitors, Starbucks has been able to blur the lines between different market segmentations and subsequently capture all demand. New market entrants with varied strategies will inevitably lead to segmentation becoming more clear with different addressable markets for each player.

    While Starbucks cannot conceivably introduce a less premium offering without suffering self-canalisation, they can optimise their distribution. While physical-store distribution is already market-leading (i.e. present in all premium locations), Starbucks could and should be offering better digital distribution. Partnering with local players to offer an expedited delivery service is one option. Another is to build a full proprietary and China-centric digital offering incl. a dedicated app and WeChat integration with social marketing through key Chinese channels. Facing enhanced competition, Starbucks may no longer take such a laissez-faire approach to digital.

    Looking at the long-term viability of Luckin and its potential business threats, they seem limited to introducing the pre-described market segmentation. While their position of scale may enable them to moderately influence coffee tastes and preferences in a market which has not yet fully developed established T&Ps (i.e. Arabica vs. Robusta blends), recipes are always changeable. Equally, Luckin’s digital augmentation is surely welfare-enhancing (thus Starbucks should be doing it too), but it is not game-changing and is unlikely to result in customers becoming “locked-in” to any form of Luckin ecosystem. Facing a non-sticky customer base, a competitor with better physical locations and a premium (though not unaffordable) product, Luckin needs more USPs than a low price and easily replicated digital strategy to steal meaningful market share. In a growing market, this does not seem to be a key business threat, so long as digital is remedied.

    #7740
    jtowson
    Keymaster

    Luckin’s goal is to increase coffee consumption in china. That’s their big opportunity. if you move coffee from 5-7 cups per year per capita to 250 (Hong kong levels), then it’s really big.

    But their pitch for how to do that is convenience, standard quality, low price (according to their IPO documents. I’m not sure that works. that sounds more like how you sell Uber and Mobike.

    I asked a senior person at Nestle how you can increase coffee consumption in China. They said it was about increasing the number of “occassions” to drink coffee. Like social occassions. or fitness occassions (they just launched a coffee based on the data showing certain “fitness lovers” in China drink black coffee before going to the gym”.
    But their approach is clearly about creating occassions (and getting people addicted). they didn’t mention anything about price or convenience.

    #7857
    Kimberly Tan
    Participant

    Starbucks, as a foreign brand, offers premium coffee and the luxury experience for the price of an expensive coffee. Their prime real estate competitive advantage focuses on providing product + experience.

    Having Digital & Delivery offering would be an additional mode of Distribution – I doubt it would dilute Starbuck’s branding as long as the design of the whole Digital and Delivery experience is well thought out. In the wave of delivery services in China, Starbucks would be losing out on significant potential demand if they choose not to have it as an option.

    Luckin’s value proposition is affordable coffee, anywhere and anytime. Another company with VC funding could easily enter the market with the same offerings.
    However, more competitors could grow the overall size of the pie as acceptance of coffee increases.

    What is crucial for Luckin to stay in the market would be quality products, customer retention strategies (e.g. app purchase points) and creative products (e.g. localised flavours).

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