Shares, General

Luckin versus Starbucks: The battle of the baristas

Ben Weiss, Tuesday, 21 May 2019

Starbucks cup

The meteoric rise of coffee newcomer Luckin has been far from lucky, as the name might suggest. It’s unique and innovative methods of delivering coffee to consumers has taken the Chinese market by storm, and despite being just two years old, the firm is beginning to unsettle the big players at the top. But is Luckin Coffee sustainable, and will it challenge the mighty Starbucks in the future?

 

Starbucks history

Founded in Seattle Washington, Starbucks was conceived by a trio of former students from the University of San Francisco; Jerry Baldwin, Zev Siegl and Gordon Bowker. After learning how to roast high-quality coffee beans from entrepreneur Alfred Peet, they opened the first ‘Starbucks’ store in Seattle in 1971.

Although performing well, the brand did not expand vigorously until 1987, when Howard Schultz took over as owner. He grew the company from having five stores to having 46 by 1989.

The next significant step in Starbuck’s route to dominating the coffee industry was the firm’s IPO, in June 1992. At the time it had 140 stores, but following a successful float that raised $25 million (selling a total of 12% of the company), the figure rose to 280 over the next couple of years.

 

Current situation

Starbucks continued to grow and began opening outlets across the globe. Some of the first non-US countries to host a Starbucks were Japan, the Philippines, Mexico and Peru. It has since opened 28,209 stores in 76 countries as of April 2018, employing around 291,000 workers. It’s said to have nearly 40% market share of the entire US coffee industry.

Both sales revenue and gross income for Starbucks has risen year-on-year from 2014, with the company making $24.72 billion in revenue in 2018 alone. So, all-in-all it seems that things are going well for Starbucks… Enter Luckin coffee.

Starbucks down

 

What is Luckin Coffee

Luckin Coffee is a Chinese coffee company that was founded in 2017. It claims to ‘know what customers want’ and has been keen to differentiate itself from Starbucks. The main USP is that there is no ordering, and even no human contact required. Purchases are made exclusively via the Luckin app and collected by simply taking the order from the kiosks at the designated time. This also means that all transactions are cashless and made beforehand on the app.

Key Luckin Coffee USPs:

-Cashless payments

-Order, pick-up, take-away service

-100% app functionality

Luckin versus Starbucks profile

 

 Luckin

 Starbucks

 Number of stores

 <2,400

 28,218

 Stores in China

 1,700

 3,684

 Number of employees

 16,645

 291,000

 Employees in China

 16,645

 45,000

 Floated share price ($)

 25.38 ($17 expected)

 17.00

 Floated share price   (inflation adjusted) from   2019 ($)

 25.38

 45.70

 Current share price ($)

 18.61

 76.66

 Revenue for 2018 in   millions ($)

 124.72

 24,000.72

 

When talking about Luckin’s threat to Starbucks, at the moment, we’re talking about China exclusively. Starbucks is ingrained into society all over the world and dethroning such a heavyweight is no mean feat.

The battle starts in China though. Were Luckin to gain a considerable share of the market in the near future, they’ll undoubtedly push to branch out into other locations. Failure to do so, and they may opt to try to conquer the Chinese markets first before branching further afield.

However, considering the fact that Luckin has established itself in China in just a year, something that took Starbucks 20 years, offers hope for the newbie. It’s growing exponentially, far faster than Starbucks was in its opening years. Who’s to say Luckin won’t break out and attain global dominance in the next decade? If the rate of expansion continues, they could be on track. What’s more, it’s a firm that has a business model based on embracing technology and targeting the evolved consumer habits. This could bode well for Luckin in the future if the digitalisation of society that we’re experiencing at the moment continues.

Having said that, strong growth is expected with these types of unicorn companies. Luckin is losing an awful lot of money by undercutting competitor’s prices drastically. Of course, demand is thriving, but their pricing system that is based on special offers reducing the average unit price is certainly not sustainable.

 

Luckin IPO

Luckin floated onto NASDAQ on 17 May 2019. It was set to be priced at $17, towards the upper estimate of the $15-17 pre-float range, but ended up opening at $25 per share. It has since crashed way back down to $17.50. So, after a promising open, Luckin has struggled badly. The next few weeks will be key in determining whether its price will stagnate at around the $17 level that it was initially pitched at or drop further below that mark.

If it’s the former, it would not be too worrying for the Chinese start-up. General hype and excitement surrounding the IPO may have simply inflated the stock, pushing it to a superficial price that didn’t accurately reflect its value. A stagnation at $17 would mean its price sits comfortably at what it was originally valued at.

Luck v Star

A continual fall though, would be huge cause for concern. That would imply that investors simply do not value the stock, perhaps not buying into the high-expenditure-no-profit formula that Luckin is following in its early years.

 

Luckin versus Starbucks: Can Luckin make a challenge?

Can Luckin Coffee make waves into the Starbucks-dominated Chinese coffee industry? On paper, it offers a more efficient medium of purchasing coffee, very similar to how Uber revolutionised the taxi industry by introducing a cashless service that was offered exclusively via an app. It seems Luckin is successfully targeting an emerging trend in the drinks industry, where customers favour time and speed of deliverance of the product, as opposed to experience and comfort that the more traditional coffee houses offer.

However, a good idea on paper is not a good idea in reality. Luckin has adopted a bullish attitude, favouring market share and growth entirely over profits. It’s a question of how long they can sustain this offence in determining whether they will be sustainable in the long term.

Even this early on in its life, it seems as though Luckin is at an all-or-nothing crossroads. It doesn’t seem like it will relinquish this bull-in-china-shop approach anytime soon, so Luckin will either revolutionise the industry and be the leader in terms of the new way that they’re serving coffee, or it will simply run out of money and fall victim to the corporate powerhouse that is Starbucks. An equal coexistence between the two appears unlikely. What is certain is that the next few months will go a long way in unveling whether Luckin is a genuine player in the coffee game, or just a money-burning dream that’s too ambitious for its own good.  

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