China’s Luckin shows Starbucks how to sell coffee

Shuli Ren, Bloomberg

Barbarians are coming to the gate. Just as Starbucks Corp.’s new Chief Executive Officer Brian Niccol begins to revamp the ailing coffee chain, its Chinese nemesis plans to offer low-priced drinks in the US as early as next year.

This will be an amazing homecoming of sorts for Luckin Coffee Inc., which raised $645 million in a public listing in New York in 2019. In 2020, the company admitted to fabricating 2.2 billion yuan ($307 million) in sales, got delisted from Nasdaq, and agreed to pay $180 million in fines to the Securities and Exchange Commission. Four years on, Luckin is roaring back. It has emerged as China’s biggest coffee chain, overtaking Starbucks in sales and number of stores.

Meanwhile, at Starbucks, revenue plunged for the third consecutive quarter, with same-store sales down 10% in the US. A push to launch more products and offer promotions have failed to bring more customers into its stores, the company said.

One major issue is its clumsy mobile app, which in recent quarters accounted for more than one-third of transactions. Wait time has lengthened, so has customer dissatisfaction.

Customization, a feature that Starbucks pioneered, became supercharged with the app.

By comparison, Luckin doesn’t have a problem with digital ordering. The company, founded in 2017, is tech-savvy and manages its entire operation digitally. In fact, orders can only be made via its app. As a result, stores don’t have the two lines seen at Starbucks — one for in-person and the other for mobile orders — which can be confusing for infrequent visitors.

Granted, variety is Starbucks’s way to lure young people. The endless concoctions one can do to a Frappuccino and cold, sugary refreshers, which teenagers love, accounted for 35% of beverages sold, more than the contribution from traditional iced espresso or cold brews.

Luckin goes about attracting the fickle, social media-obsessed youth a bit differently. Rather than offering an extended menu, the company periodically introduces new, limited-time items, to test demand and keep its pipeline simple. This summer, it took advantage of the milk-tea craze among young Chinese, selling more than 44 millions cups of a jasmine tea drink in the first month.

For now, Niccol is shaking up the menu to reduce customer wait time and make life easier for overworked baristas. He is dropping much-hyped olive oil-infused coffee and bringing back the condiments bar so fussy patrons can add sugar and cream to their own liking. He also wants to make the cafes “inviting places to linger,” and move away from the “transactional” nature of mobile-app ordering. But wait time aside, Starbucks also has the issue of value-for-money. In the US, the average order costs 51% more than pre-pandemic, outpacing the 34% growth in personal disposable income, according to JPMorgan Chase & Co. At Luckin, a basic latte costs just about $2.

To be sure, the verdict is still out on whether Luckin can make inroads in the US. Americans might be hesitant to download an app created by a Chinese company, fearing data privacy issues. Indeed, Luckin will first target cities with large numbers of Chinese students and tourists, who probably already have the app installed on their smartphones.

Nonetheless, it has a shot. Ultimately, the battle between Starbucks and Luckin is over what consumers see in these drinks: Is coffee an expression of individualism or a habit? For many, it’s the latter. [Abridged]

Courtesy Bloomberg/Shuli Ren