What Should Starbucks China Have Done About Luckin Coffee? (Tech Strategy – Podcast 3)

This is the third episode for my Asia tech class. It asks how Starbucks China should have responded to the rapid entrance of Luckin Coffee in 2018.

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  • Starbucks
  • Luckin Coffee


  • Jobs to be done
  • Demand Purification: Convenience Plus Low Price
  • Digital Superpower #1: Transform the Consumer Experience
  • Fastscaling vs. Blitzscaling
  • Money Wars

———-transcription below

Welcome, welcome everybody. My name is Jeffrey Towson. I teach at Peking University, and this is my Asia Tech class. Now for everybody who’s new, which is really everybody because this is the second one of these, this is not a podcast. I’m not trying to be sort of informative or entertaining, which is good because that probably wouldn’t work out too well. But this is a course. This is… laying out a fairly large body of content and then sort of going through it step by step, week after week. And the objective of this is to teach. That’s how I view this. And my goal is to make you better at Chinese leading tech companies, at digital competition slash combat. And these are complicated subjects. They’re very, very important subjects, I believe, and this takes time. So I basically set this up as a course and I’ve laid out the first 25 of these. So this is number two. And yes, the audio quality is not awesome. I’m still putting together the gear. I apologize for that. It will absolutely get better. But with that said, let’s go to sort of class slash episode number two, which is, what should Starbucks China have done in response to the entrance of Luckin coffee? So let’s jump into this case. Now, this is a case which is me asking you what you would do. I can drone on about this for hours. I do often. But the value of this is going to be 10 times more when you put yourself in the moment of what would I have done if it was me. If I was working for Starbucks, if I was a consultant, if I was a banker, if I was an advisor, if I was an investor, and they asked my opinion. You know. What would you have gone down the street and told them? And it’s a hard question. It’s kind of, I think, an important question. But the more you can put yourself into that mindset, the more you’re gonna get out of this. And I’m gonna push you at the end of this to vote on what you would have done and then also to take a couple minutes, about 10 minutes, and write down what you would have done. This is your three-minute pitch to the CEO when they call you and say… No, I hear you’re really good at digital strategy to do the disruption. Come on down the street and tell our CEO of Starbucks China what you would do. So anyways, okay. So let’s sort of talk about the case. Starbucks is a, you know, it’s one of these big China success stories. There’s a lot of China failures. It’s a very difficult market. One of the reasons I talk about digital combat, digital competition. is because I think this is the single most important thing that happens. It’s everyone likes to think about the market. They have all these conspiracy theories about the actions of the government. But the thing that really defines China and I would say Asia more broadly is just a ruthless level of competition. So within that, you know, sort of brutal battle, one of the big victors was Starbucks. They entered China about 1999. They opened store after store. They initially did it through partnerships and joint ventures with people who could get them locations, real estate. And they opened store after store after store. And they eventually bought out or closed out their partnerships. So it became their own sort of wholly owned thing at the end. Just a couple of years ago, this sort of finished up. And it’s a tough market. And they got there early, which is incredibly important. And they got there at a time when it wasn’t. if Chinese consumers even liked coffee. I mean, I remember having arguments about this back in China in 2008 or nine, where people would always tell me, because I’m foreign, and they’d say, oh, you don’t understand, you’re the wai guo, you’re the lao wai, you’re the foreigner. I don’t like lao wai, wai guo is okay. You know, you don’t understand China. We don’t like coffee, we like tea. I said, okay, that’s fine, but you know, tea isn’t loaded with sugar and caffeine, by the way. But that was kind of a question for a long time and Starbucks came in against this uncertain demand, which I think is definitely the case. And they opened at a certain price point that was very high, same, basically the same prices in New York and London, or the prices in Beijing and Shanghai. And the GDP per capita of China is about one sixth of the US. So that was incredibly expensive back then. It’s even expensive now. And they made the choice to sit at the top of the market and wait for consumers to rise in wealth. and eventually come to them, which is a strategy some companies take. There’s some risk involved in that. Okay. So they open from what I’ve read, they lost money for about eight years. Then somewhere around 2007, 2008, I guess they started to make some money and Chinese consumers really didn’t take off till 2010, 2011. Everyone used to talk about them in 2007, eight, which was, you know, why don’t Chinese consumers spend money? because they weren’t. Well, it finally started 2008, 2009, and then it’s taken off like a rocket ship. Now it’s world’s largest market for this, world’s largest market for that, and so on. Starbucks keeps opening 1,000, 2,000. I think today they’re probably about 3,800 stores outlets. And then they have drinks in the 7-Eleven and the supermarkets and things like that, pretty much just like you see it in the rest of the world. Okay, that was their story. And they were a huge success. Depending which numbers you believe, they got about 60, 70, maybe more percent of the retail coffee market, which is high-end. They were really an affordable luxury product. Chinese consumers really liked going to Starbucks as much as the product itself. It was an occasion. You go with your friend and you sit down. The stores are actually bigger in China than they are in the US. A lot nicer, actually. You sit down and it’s a lot about the experience more than the product. They did very well. And about three years ago, I started writing these articles saying, look, why doesn’t Starbucks have a competitor? It’s weird. There’s no China competitor. There’s a China competitor for everything. If you’re Adidas and Nike, you’re fighting with Linning and all these sort of ruthless companies. If you’re Baidu, you were fighting with Google. If you’re Disney, you’re fighting with, I don’t know. Pai brothers, Wanda, everyone’s got a competitor. Starbucks didn’t have a competitor. And I kept thinking, this is weird. Why don’t they have a competitor? And I basically started writing articles saying, look, you guys and women should open stores as fast as you can. Forget open and profitably, which is what they were doing. Open profitably, grow slowly, steadily. I said, forget that. You need to open as fast as you can because there are going to be competitors coming and this nice existence you have is going to end. Now, of course, Starbucks doesn’t care at all what I think, although I do know that some people read my stuff. I can see online when they read. Anyways, that was kind of the story. And then the CEO of Starbucks would go on his analyst calls in the US and he’d talk about the outlets in China are their most profitable stores anywhere in the world. And I was like, dude, shut up. I mean, if there’s one rule to doing business in China, Asia, if you’re making a lot of money, keep it quiet. But he would keep going on, oh, these are our most profitable stores. We have 3,500. We’re opening 300, 500 per year. Basically, he said 500 per year. They were going to open. And that was kind of the situation up until about the end of 2017. And then one day I started getting, not one day, one week, couple weeks, I started getting all these notes from people saying, hey, have you heard about Luckin? It looks like a competitor has finally arrived. And I said, ah, really? This is a real thing? I said, yeah, yeah, yeah, yeah. There’s a real player on the field. They’re moving fast. They’re digital first, which I’ll talk about, and they’re going after Starbucks business. That’s sort of end of 2017, beginning of 2018. So then Luckin basically bursts on the scene with pretty impressive speed. A couple things happened really quick. First of all, they started opening outlets at a crazy pace. Now, first thing to point out is these outlets and Starbucks outlets are not really the same thing. Starbucks is a retail location. You sit down, you have a cup of coffee, maybe you take it to go. What Luckin was opening were… there were sort of three versions. They have sort of relaxed stores where you can sit and that pretty much looks like Starbucks. They have sort of pickup counters where, you know, it’s really just a table sometimes in a lobby of a business office, or I’m sorry, the lobby of an office and you go down there and you pick it up, but not really an outlet like Starbucks. And then they have those that are just sort of delivery kitchens and things. So there were sort of three different models there and really the main model they were using was you order on your phone, you go down and you pick it up. So a very small location. But they started opening hundreds of these things very, very quickly. They opened around, I mean, they really got their soft launch in January, February of 2018. By about April, May, there were up to 500, 600 outlets. By the end of the year, they hit 2000. That would be the end of 2018. By the end of this year, which is 2019, they should hit 4000, which will. surpass Starbucks, although this is not really apples to apples. But two to three locations per day, basically. That was kind of one thing they were doing. The other thing is they started talking a lot about digital and delivery. Now digital and delivery is a common phrase you hear in anyone doing sort of F and B stuff in China, really in any retail in China. You open up the KFC, um, uh, filings for China. You’ll see the phrase digital and delivery all over. more things running through your phone and you deliver. So this is kind of a new retail concept. The Alibaba, we’re gonna take the physical world and merge it with the online world and we’re gonna do new retail and the first iteration of that tends to be digital plus delivery. They also started getting a lot of press early on mainly because they took on Starbucks, which guarantee, if you wanna get in the press in China and in the financial press, not just China, it was pretty much everywhere around the world that I started getting phone calls about this. take on a famous company, a famous foreign company, and it’s a good way to get press. And they started raising money very, very rapidly. They did a series A sometime around June, July. I think they put in seed money that came from the founders early on, then they did a series A, which in theory they raised a couple hundred million dollars and it technically made them a coffee unicorn, although that’s kind of a questionable designation these days. Okay, either way they came on blistering speed, got a lot of attention. Now, when I first started looking at them, you know, I kind of looked into the background. Okay, is this a serious team? Is this fake? What’s going on? The team is pretty interesting. The team is basically tech people, or, you know, tech entrepreneurs, digital entrepreneurs. The CEO, the founder is Chen Jia, who is basically, she came from UCAR. She was the CEO of Ucar and some of the other Ucar people were involved in this as investors. I think they were using their office space. I think they were pretty, not tied, but using that as sort of a base of operations to some degree. They came out and first thing they said was, we want to beat Starbucks at their own game. That’s provocative. I think they sued them too, technically, about competitive behavior. Two, we want to grow with the increased coffee consumption of China. These numbers are pretty amazing. If you look at the average coffee consumption per capita, a country like the US, it’s probably getting 400 cups per year per capita. Hong Kong’s about the same. Italy’s crazy, right? It’s like 700 cups of coffee per year per person. That’s just nutty. Every time I go to Italy and do some teaching, it’s like, let’s go get another cup of coffee or espresso, actually. Starbucks in China, all the China retail side, you’re probably talking at about three to five cups per year in China per capita. And that’s really everything. I mean, if you actually just look at retail or freshly brewed coffee, you’re probably closer to two cups per year. So the idea is if we can move the needle from two to three to four cups up to 10 cups, that’s a big win. If we can get it up to Hong Kong. That’s like 250. I mean, there is a big potential upside, which is the kind of thing that usually attracts tech people. Okay, that’s interesting. So they kind of threw out three interesting stories at the same time. The first was we’re gonna beat Starbucks. That’s compelling. The second, we’re gonna grow with coffee consumption in China. That’s interesting. Third, this is new retail applied to retail coffee. We’re gonna do digital first, a whole new business model. Enabled by new digital technology. Well, that’s kind of interesting because right around the same time Alibaba new retail was really big In the news at the same time. It still is now but that was Kind of the first wave Okay, so you I went to a bunch of their outlets. They’re all nice very well done Management team looks aggressive. They look like serious people. They’re raising money. They’re moving fast. The outlets are good the first thing I noticed is They don’t seem to be doing the Starbucks strategy. If you open the Starbucks 10K, the phrase you’re gonna see all throughout that 10K is high traffic and high visibility locations. Because it turns out people aren’t that loyal to coffee places, they kinda are. I kinda like Starbucks. I think it’s good, I go a lot. But if there’s a Costa across the street and the Starbucks is three blocks away, I’m going to the Costa. So location convenience trumps brand, generally. So that’s why you’ll see Starbucks always talking about their real estate strategy, which is based on we got to get the high traffic and the high visibility locations. That’s fine. They’re sort of it. That’s their biggest strength is real estate. Well, luck in comes in with a bit of a different strategy. They say we’re going to be digital first. We’re going to lock people in on their smartphones and we don’t take cash. You go into a store. There’s no cash register. You can’t pay in cash. You can’t use a credit card. The only way to order on your phone in store out of store is to download their app. And then you can either use their own currency coin thing, or you can use WeChat Alipay, which is what everyone does. So we’re kind of digital first, and we’re gonna push order on your phone, pick it up and walk away, or have it delivered. So they weren’t banking on real estate, and a lot of their locations weren’t in the very expensive real estate. The high traffic locations tend to be very expensive. They were a couple blocks away from that, or they were in the lobbies of business offices, or they were near residential areas, or they were near office parks. but they weren’t trying to be the cornerstone location in a very high trafficked mall. You go into any high class mall, the first retail outlet at the front door is probably gonna be a Starbucks. They’re not just in the best malls, they’re on the first floor, not the third floor. And at the first floor, they’re at the door. That’s very different than being around the corner, down the alley, which is a little bit more where Luckin was based. So it raised this question of, can you beat a real estate centric strategy in retail coffee with a digital centric strategy? That was kind of an interesting question. And that was kind of what started at the beginning of 2018. And you know, the question I’m going to ask you is, okay, you’re Starbucks. You’re watching this happen. They’re all over the press. They’re opening stores like crazy. You know, what do you do? You say, it’s not a big deal. Don’t worry about it. We’re good. We’ve been here forever. We’ve faced competitors forever. Not a problem. Do you think about M and A? Do you think about having your own digital division? Now, one qualifier here, Starbucks in China at this time was notoriously bad at digital and delivery. They didn’t offer delivery, which is insane. Like. If you’re doing business in China, in food, you have to offer delivery. It’s expected. It’s like saying we don’t take mobile payment. It is absolutely mandatory. They didn’t do delivery. It was super annoying. Everyone would complain about this and their app was really not good. I said once that like their app sucked and it got picked up by the press. And it’s in a, it’s in a decent number of news articles where it says Jeff Townsend says Starbucks digital app sucked. So I’m trying not to use that word, but it really did suck. You know, they were basically signing people up for their membership program. That was the goal. You come into Starbucks, they try and give you a Starbucks card, membership loyalty program, outstanding, great idea. You gotta have a good app in China. You just have to. Forget a webpage, nobody goes to webpages anymore. It’s either you have to have an app, or even better than that, you need a mini app in WeChat, because that’s where people go. I mean, if you have a white webpage, eh, whatever. So they were very weak in this. And it was, it basically did give Luckin an opening, a line of attack. Now, what was Luckin’s line of attack? This is where you kind of have to, you have to kind of see if you believe the story or not. The story they had was, and it’s all in their IPO perspectives, this is Luckin. They said, we are gonna open up the China coffee consumption market. stuck at a very low level, which is true, by doing a couple things. The number one thing we’re gonna do is increase convenience. This is their phrase, increased convenience. You can order on your phone, you can pick it up, you can have it delivered, you can have it standardized, you can pay with this, increased convenience, very common line of attack in digital. We’re also gonna lower the cost. Starbucks, cup of coffee in China, latte, let’s say 33, 35 kuai. That’s five bucks, five to six bucks. Luckin comes in about 20% cheaper than this, more like 22, 25 kuai per cup of coffee, so four bucks. Most tea in China is probably 16 to 25 kuai. So tea is cheaper, Starbucks, top of the market. Luckin was coming 20 to 25% below them. So lower price, and the argument is we can be cheaper because we don’t have all that real estate. We’re gonna get rid of the real estate cost by shifting stuff to digital. and small locations, our cost will be lower. We’ll turn that into lower prices. Those are our two big levers to increase consumption. Increase convenience, lower price. They also said we’re gonna standardize quality. I didn’t think that was terribly interesting. Now, this, the increased convenience is actually two things. It’s one, it’s the app, it’s easy. It’s also lots and lots of locations. If you have a location within one to two blocks, we are more convenient. Now this playbook is almost identical to what you heard from Ucar and it’s what you hear from Mobike and Ofo and DD and Uber and all of these. The mobility space that went digital, their big line of attack was increased convenience, lower price. If those of you who listened to episode one, this was one of the ideas I teed up in episode one is these Mobike, Ofo companies. or access businesses, where you access a service like a taxi or rental car, as opposed to owning a business, like buying a bicycle, you access it, and the big pitch in an access business is often convenience and price. That’s often the big metrics people care about. So this sounds a lot like what they did at Ucar. Okay, that was the playbook. As they said, is it gonna work? I think that was the question. And starting of 2018, we knew their play, we knew what they were saying. They were opening smaller outlets, which were cheaper in terms of real estate. Is this gonna work? Should Starbucks be worried about this? And that was kind of where we were in about March, April of 2018. So that is gonna be the first question. I’d like you to go. Click on the link below, it should be in the podcast or go to the link to the article where I posted this on my little webpage. And there’s gonna be a vote. Take a vote, what would you have done? And I’ve given you five choices about, you know, do some M&A, launch a digital unit, do nothing, wait and see, and pick one, let’s say you can pick two. Make two choices. Do that now, pause, vote, please do it. and then come back and I’ll start to give you some frameworks for how to sort of take apart this question. Okay, welcome back. Hopefully you’ve gone and taken a quick vote. I want to sort of switch gears now from Okay, i’ve given you a case i’ve given you a question the ceo’s calling his vice president or her vice president’s calling Come on down. We hear you’re really good at this stuff You know you pitch to a ceo My experience well, I deal with difficult ceos you get three to five minutes If you’re not getting your point across that quick, you get cut off pretty often So what are you going to say in three to five minutes? Okay, do a little vote. That’s a first pass at thinking about this. Now I wanna give you some tools. That’s gonna be the approach for all these classes. I give you a question, I give you a case, then I give you a tool, then you can apply it to the case and see if it works for you. Okay, in this case, the tools are ideas, concepts, frameworks, questions, checklists, that sort of thing. Now in the last episode about Mobike and Ofo, I brought up a couple ideas. I’m going to reiterate these a lot. I’m going to repeat, I’m going to repeat, I’m going to repeat. But the ones I mentioned last time was jobs to be done. This is Clayton Christensen, famous Harvard guy. Why do you buy a product? Why do you buy a service? Well, you’re really hiring the company to do a job for you. What is the job to be done in this case? Actually, this is kind of important in this case. Are people going to Starbucks to get a cup of coffee? Is that really what this is about? It’s part of it. Are they going it because they enjoyed a cup of coffee? Are they going because it’s just a habit and they don’t even think about it? Are they going because they have a chemical dependency on it because it turns out, you know what? Starbucks has like 30, 35 grams of sugar per grande plus 75 milligrams of caffeine, something like that. It’s a crazy amount of sugar. You literally can’t buy anything in a Starbucks. beverage-wise that is not loaded with sugar and caffeine. Okay, is that the job to be done, your servicing and a mild addiction? Is it about going and sitting down and chatting with your friends? Well, that’s interesting because definitely that seems to be a bigger part of the equation in China. That it’s not, you don’t see people walking down the street with Starbucks cups in Beijing like you do in New York. What you do see is these very nice locations where people sit and chat and it’s a nice thing to go and sit down. It’s the experience maybe more than the product. Now in New York it’s product plus experience, but I think it’s definitely more on one side in China. Okay, so that’s sort of one question you can ask yourself. What is the job to be done here and is it different for Luckin and Starbucks? Because Luckin has come out and said, look, this is mostly our big levers are convenience and low price. Well, is that the same job to be done? If you don’t have a nice place to sit, is that really the business we’re in? So that’s an interesting question to think about, jobs to be done. The other one I brought up last time was demand purification. This idea that one thing that digital does very, very well, by digital I mean software and data technology. That could be everything from AI to data analytics to… GPS, mobiles. I’m not going to get too much into the hardware because I’m not an engineer at the end of the day, but I mostly think when I say digital, I’m talking software, data technology, and supporting hardware. Okay, one thing that digital does very well is it sort of hones what a business really offers and it cuts out everything else. The example I gave before is Starbucks. Netflix comes in and says you don’t have to buy a cable bundle for $120 per month that runs into your house It keeps you 300 channels most of which you don’t want and by the way You have to check what’s on and you have to watch some commercials and there’s a schedule. No. No Netflix comes in and says You can watch just what you want to watch when you want how you want you can watch on your iPad You can watch on your phone. You can watch at your home. You can watch them all at once if you want There’s no commercials. I mean They purified the demand and gave consumers what they really wanted and cut out the rest. And Steve Jobs did the same thing by iTunes years ago, which was, you don’t have to buy all 10 songs on the CD. You can just buy the one song you want, and you don’t have to go to the store to get it. You can buy it on your phone, and you don’t have to wait. You can get it right now. Oh, and by the way, it’s 99 cents. Those were all sort of digital tools, smartphones, iTunes stores used to purify demand. and give customers exactly what they want and strip out the rest. It’s a very powerful approach, you see it all the time. Okay, is convenience plus low price, which is what they’re offering, and convenience is, yeah, it’s digital, but it’s also, we have lots of locations right down the street from you. Is that a demand purification in terms of consumers? Is that cutting something out that consumers don’t really care about? You can do this in things like hospitals, like hospitals have to offer everything because if you run a hospital, which I used to do, you have to be ready for anyone walking in the door at 2 a.m. with any disease and situation. It’s your problem, you gotta deal with it. You can take very profitable departments out of hospitals like plastic surgery and move them across the street in private hospitals and just carve out that piece. So you can do this sort of purification move in a lot of ways. It just… Turns out it works really well with digital. Okay, this idea of convenience plus low price, which is the mobile pitch, and it’s also the luck in pitch. I mean, there’s a reason I’m doing this episode on episode two and the other one on episode one. It’s kind of the same pitch. Is that a demand verification that’s really gonna matter? Being able to call a taxi on my phone and wait three minutes is a big improvement for me in getting a ride. I’m not sure ordering on a phone really matters that much. I don’t have a problem. I don’t like waiting in line in Starbucks, but I don’t really have a problem. Okay, so those were sort of the two questions for last week. I’m gonna give you three more, well, not questions, concepts. Over the course of this 30 to 40 episodes, I’m gonna lay out what I call eight digital superpowers. And these are my own little list. Basically there’s so much going on in digital, so many tools, so many use cases, some make you efficient, some make you just par for the course, some, a small number of moves are really game changers. If you get one of these superpowers, you are way ahead of your competition and in many cases you can make your competition obsolete. So you always have to watch, whenever I look at a new tool coming up, oh it’s IoT or it’s I’m always looking at like, is this one of the eight digital superpowers? If a company gets this, is everyone else in deep, deep trouble? Okay. One of my digital superpowers is something that significantly transforms the consumer or customer experience. Certain things really do change that. iTunes was devastating for people selling music on CDs in stores. It was devastating to them. Why would I walk down, go downtown, buy a CD with 10 songs I don’t want? No, no, I buy just the one I want on my phone right now. It’s 2 a.m. I’m sitting in my PJs in my room. I’m buying it right now. That improvement in the consumer experience was transformative. It was devastating for the stores. A lot of what Alibaba is doing with supermarkets right now is devastating for traditional non-new retail supermarkets. We’ll do some cases on that too. Spotify has been pretty devastating for iTunes. Turns out bundling every song ever made and putting them all together, and I can listen to any of them for whatever, nine bucks a month, is a pretty devastating move from the consumer experience. Okay. Does what Luckin… Is there plan, convenience, lots of locations, digital, you can buy on your phone, pick it up, have it delivered? Does that transform the consumer experience? Now it’s an upgrade, but a lot of things are upgrades. ATM machines are upgrades. Sliding doors that open when you walk in are upgrades. That’s just normal business. You gotta keep upgrading your tech over and over. They’re not transformative in terms of the competitive dynamic. Does the luck in argument transform the consumer experience? And I’ll leave that to you. I would, well, let me. I would say it doesn’t. I think it’s nice. I don’t think it puts Starbucks out of business. I think delivery was a gap Starbucks didn’t have. It was a capability gap. So that was a problem. But I don’t think it makes them obsolete. I still think going to Starbucks, having a cup of coffee is a pretty nice business. Okay, so that’s sort of question number one I want you to think about. And these are sort of for the homework for this class is think about that one. Another concept is this idea from Reid Hoffman, who is the founder of LinkedIn. This idea of fast scaling versus blitz scaling. And this is kind of something that’s been happening in China, which is People just start raising a ton of money. One of the things Luckin is doing is they are raising a lot of money. They raised a couple hundred million dollars, and then six months, seven months later, they raised another round. So they are raising a ton of money, and they’re deploying the money. They’re subsidizing their drinks. They’re giving away free cups of coffee all over the place. They’re opening stores that are probably operating at a loss. They’re using money as a weapon competitively. And they’re also using it as a way to achieve scale and growth very, very quickly. Now, is that the same? There’s a difference between fast scaling and blitz scaling. I would call that, I mean, in the book, there’s a book, blitz scaling by Reid Hoffman. And he argues that blitz scaling, the difference between just scaling fast, raising money and going quick is… In one case, you’re focused on an uncertain situation and in another, you’re not. Now, he would argue in both cases, I’m speaking for him obviously, that you need to get product market fit first. You have to have a product, you have to see good adoption by people. Okay, this market likes this. Fine. Now that we’ve got that proven, let’s grow fast and we can raise money to do that. And it also makes it very hard for our competitors if they’re not doing that. Now the difference between blitz scaling and fast scaling is how uncertain is your environment. Blitz scaling is defined as sort of two differences. One, it’s not clear if this is gonna work at all. You’re throwing a huge amount of money. It’s like flicking on the afterburners of an F-16. You flick them on, you know, the whatever that thing, and the jet engine roars to life. You shoot forward. That works very well. You can move very fast, but it’s very inefficient. You’re wasting money. You’re not using money rationally or efficiently. You’re wasting it and you know you’re wasting it. Those afterburners on jets waste fuel. Okay, we’re doing that and we’re doing it. We’re a market. It’s not totally clear. This is going to work. It’s not clear. The market is going to really take off. I’m going into uncertainty. I’m turning on the afterburners. I’m burning fuel rapidly with the idea that hopefully two things happen. Number one. I achieve network effects. I achieve some sort of competitive advantage where once I get to scale, it’s game over for everybody else. So this works well for markets that are winner take all or winner almost take all. You get network effects, it locks everyone out of the market. That’s Uber, that’s DD, that’s eBay. If you can get to scale first, it’s not just that you’re bigger, it’s everyone else is done. So it works, you can go to afterburners. if it gets you a winner-take-all situation. When we get there first, the market’s ours, it’s closed. And also, it’s uncertain so you could fail. But if it works, you’re gonna win big and you’re gonna win it all. So that’s kind of blitz-scaling. The way I actually think about it, which is not a Reid Hoffman analogy, the afterburner thing is his analogy. The analogy I like is that movie Fast and Furious. where they do the street racing and they all have these nitro tanks. And then in some of the episodes like Vin Diesel’s, he’s out in front a little bit and then his competitor flicks on the nitro and he surges forward and then Vin says, too soon, too soon. And then he flicks on the nitro and he surges ahead right before he gets to the finish line. That’s kind of blitz scaling. You burn a huge amount of fuel, you waste a lot of money. but you get to the finish line just before the other guy and it’s game over, race is over, that’s the end. Now fast scaling. You’re not doing that. You’re not just blatantly wasting money in a way that, look, we’re wasting half the money. We’re burning our fuel. You’re not burning at that level. You’re using a lot of capital, you’re raising capital or operating cash, and you’re growing very aggressively, but you’re not just dumping the fuel in and blowing money. And also you probably don’t have this finish line on the horizon where, look, if we get there first and we get our network effects or other competitive advantage in place, it’s game over. That’s fast scaling. Okay. One is, is more aggressive, bigger risk, but a bigger payoff, split scaling. And the other is more, um, just aggressive, but rational and thoughtful growth. That’s fast scale. Okay. What is luck in doing? Now I think Starbucks didn’t do either of these two things. They grew from 1999 to today, 20 years. They grew steadily. They grew very cautiously. They opened stores. They tried to get them to break even. They tried to use their operating cashflow to open new stores. They didn’t raise a ton of money to do any of this. It was a very, you know, very standard business retail growth strategy. They didn’t do fast scaling. They didn’t do blitz scaling. Okay, what is Luckin doing? It kind of looks like they’re blitz scaling. I mean, it looks like they’re raising money. They’re throwing it in there. And I don’t really see any network effects. And I don’t see any competitive advantage they get by being bigger. If one company has a thousand coffee outlets with an app, is there anything stopping me from creating an app and opening a thousand coffee outlets in my town? I don’t see how that’s shutting me out. So I don’t think their blitz, I don’t think blitz scaling will work in this scenario because I don’t see a big competitive advantage. And I don’t see network, definitely no network effects. They could be building in some competitive advantages in terms of switching costs. If they can get a hold on people’s brains by using an app, having a direct relationship, maybe doing some gaming, maybe doing some subscriptions, maybe doing some points, if you could lock people in, you could maybe build in switching costs. And you could maybe get some economies of scale if you get enough locations. But one of the interesting things about their business is they argue that by having these small real estate locations, we have gotten rid of the cost structure of Starbucks. That’s why we can come in cheaper. That’s true. Their business model, which is digital first, not real estate first, is cheaper. So they can have a price advantage. Here’s the problem with that. Starbucks’ biggest competitive advantage is the real estate. That’s what locks people in. It’s the fact that they have a footprint of retail locations that are the closest. They’re in, this is why they talk about high traffic and high visibility locations. That’s their competitive strength is their real estate. Now, if you try and go up against Starbucks at a shopping mall, where are you gonna open your store? Starbucks is gonna be on the first floor, nice big store right by the entrance. You’re going to probably have to be on the third floor. Well, guess what? People don’t go up three flights of stairs to go to your coffee place. They go to the closest one. That’s kind of the idea. High traffic, high visibility. You can go against them on the ground floor, but you’re going to probably have to open a big store and it’s going to be empty for a while and you’re going to bleed cash. So what Luckin did is they dropped the real estate in a large degree, which made them cheaper and more scalable, which is true, but it also gave away their biggest competitive advantage, which is the retail footprint. So, okay, I don’t see the competitive advantage. The only competitive advantage that jumps out at me is maybe you’re locking people in with some of the fun stuff you can do on software when you’re on someone’s phone with a mobile app that you can’t do in real life. That could work. Okay, so that was kind of my take on those first two points, which was, Starbucks was not a fast scaler, they were not a blitz scaler. It kind of looks to me like luck in his blitz scaling. But I don’t see the network effect. I don’t see the competitive barrier and I don’t see the finish line that’s gonna lock the market up for them by dumping all this capital. Okay. And that brings us to sort of the third concept for today, which is what I call money war. And this is very common in China. It’s very common in Asia. And it’s not just digital. You see it in industry after industry, which is people use capital as a weapon. They do it all the time. You see it in factories, you see it in steel, you see it in real estate, you see it everywhere. You’ve got a steel factory, I’ve got a steel factory. You’ve got a solar plant, let’s say solar panel manufacturing plant, I’ve got a solar panel manufacturing plant. I raise a lot of money in the market, in the venture capital market probably. I increase my scale, I increase my capacity. Maybe I got some government money, which is another common way is government debt. I double my capacity that lowers my unit costs or to some degree, I could be running pretty empty and I’m selling solar panels cheaper than you. Okay, you do the same thing. You raise money, you have to match me. Your unit price is now equal to mine. I raise more, you raise, we keep doing this game, raising money, building out capacity, giving away subsidies, giving away free coffees, giving away free Uber rides. You know, using money as a weapon in a lot of ways. Until everybody in this game is losing money. We’re all in the red, except for the one player who’s in the lead, who is at break even. And that’s who gets the market. We also call it last man standing. Everyone bleeds, and whoever can bleed the longest and not die, that’s who gets the market. Eventually everyone else collapses to the floor. The one party is still there, they get the market. Now venture capital version of money war is more like money raising where the leader like a mow biker in OFO raises a bunch of money and gives away a bunch of free bike rides. That gets them volume. They appear to be the market leader. That makes it easier for them to raise money at a higher valuation. They then pump more money in and you see this sort of whoever’s out front just raises the most amount of money. And if you’re fifth or sixth in the market, you find it harder and harder to match their raises and you fall away. So this idea of a money war is something we see in China all over the place. It definitely happened in Mobike versus Oboe. It definitely happened in Groupon when they had the war of a thousand Groupons many years ago. I’ll probably do a case on that at some point. Is luck in just using money as a weapon? That’s all it is. It’s maybe a short-term weapon. Maybe it’s a long-term weapon I’ll go into more of Eventually, I’m gonna lay this out in a big chart, but I’m gonna put all of these tactics and concepts at three levels Level one is going to be competitive advantage and superpowers Level two is going to be normal back and forth dynamic moves and tactics and level three is going to be called irrational moves and dirty tricks A lot of what goes on in China is just dirty tricks and irrational moves that don’t last long term. A money war is just an irrational move. We’re going to raise money, we’re going to blow it, people are going to take losses, the investors are going to take a bath probably, but we’re going to win the market by using money this way. And it’s pretty common. So those are kind of the three concepts for this class. Digital superpower. Does this… company, transform the consumer experience with digital tools in a profound way. Concept number two, fast scaling versus blitz scaling. Concept number three, money more. And I’m going to be putting these out in text, so I’ll send you charts eventually and stuff like that. And then the two from last class, jobs to be done, demand purification, in this case convenience plus low price. So that’s five ideas. I’m going to list them. in the article for this or in the notes to the podcast. And this sort of brings me to the homework for this class, which is 10 minutes of your time. What is your three minute pitch to the CEO of Starbucks, China, who has called you in? What should I do? I hear you’re smart at this stuff. Tell me what to do. I want you to come up with a three minute pitch, which is like writing a half page. You can just do bullet points. Based on these five questions I just gave you, just ask yourself, what is the job to be done at Luckin versus Starbucks? Does this matter in this case? Demand purification, is this digital superpower transforming the consumer experience? Is this fast scaling versus blitz scaling? Is this just money war? Look at it through those five frameworks, questions, and come up with an answer on what should the CEO of Starbucks China do? And that’s the homework and you can write it down. You can come into the discussion forum, if you’re a member and post it there and we’ll start doing comments and feedback. Or you can just put it in a Word document, put it in your file. And my standard thing to all my students, look, if you can’t write it, you don’t know it. If you’re just listening to me talk, thank you for that, I appreciate it. You have to do something, you have to take some level of action. Even if it’s just 10 minutes of writing, step, do it on your phone. If you’re on the subway listening to this, press pause, pull up your notes and just type it in with your thumbs. Um, this is the kind of thing. If you make some level of effort like this, let’s say 10 minutes every day, it’s really going to add up over time. You’ll be stunned. Anyways, I’m going to keep pushing you. I’ve, as I kind of said, uh, I’m going to nag, I’m going to push. Think about me as the personal trainer who’s pushing you to do five more reps. You know, do harder, push yourself harder. Okay, and that’s the case for today. And let’s see, one last story. No more content for today. I think that’s more than sufficient. I’m actually sitting in Bangkok, which is, as of next week, my new home. Which I am really excited about this. It’s put me in a good mood for quite a while. I’ve been coming here for years and years. I travel almost all the time, but this is one of my sort of home bases, and I’ve just enjoyed it so much that I’ve slowly started working from here. And I found a nice place not too long ago. So that’s being finished right now in terms of paperwork and, you know, all of that. So I can move in. I’m officially a Bangkok resident next week, I guess. My story, my new Bangkok story, which I’ve been telling a lot is I was out apartment hunting a couple months ago. And of course it was like 1 p.m. and it’s ridiculously hot. And I forgot it was. ridiculously hot at 1 p.m. like it always is. So I was walking out and I ended up walking a long, long distance to a shopping mall. And, you know, it was kind of turned a little desolate, just like this highway almost with an overpass and I’m walking along the dirt on the side. And up on the overpass, there’s a scooter guy, a guy on a scooter and he’s waving at me. Okay, he’s a taxi guy or a scooter taxi. I wave back and he waits for me and I eventually get to him and I say, well, he’s, where are you going? I say, well, I’m going to the, um, this mall over sort of in the east. He says, okay, okay, okay. You come with me. And I said, well, how much, how much? And he’s, no, no, no, he kind of waves a five at me. He puts his hand up like five. I say, okay, five. I assumed that was 50 baht, which is about the right price. I hop on the back. He, you know, he, he drives me about, must’ve been 15 minutes on the back of this guy’s moped. He drives me to the mall, drops me off at the front, says, here you go. His English wasn’t that good. Then I pull out a 50 baht and I hand it to him. And he goes, no, no, no. And he does the same motion to me with his hand. He wasn’t saying five. He was waving no. And turns out he’s not a taxi guy at all. He was just a guy who saw me walking on the road. And he helped me out and took me across. And that’s like. That stuff happens in Thailand on a fairly regular basis where people act like that and I just really enjoy it. It makes me kind of honestly makes me feel a little guilty because I’m not that nice. I’m from New York. New Yorkers, we’re not that pleasant. I’m working on being sort of a more friendly person as I’m out in the world. Anyways, that’s my story. Thank you so much for listening to the class this week and I will hopefully see you next week.



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