Foreign professors experience Luckin Coffee's brick-and-mortar stores: Starbucks' first important challenger in China

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At present, there are different opinions about Luckin Coffee, China's "new retail" coffee chain.

The pace of opening is amazing-about 500 stores have opened since the beginning of the year. That is, to complete the layout of 2-3 stores every day (including weekends).

Pay great attention to the Internet and distribution-a "new retail" model for coffee retailing.

It has made a lot of news, especially directly challenging Starbucks, and is suing Starbucks for competitive behavior.

The money is being raised quickly. The latest round of financing is said to have raised $200m-300m, valuing it at more than $1 billion-making Luckin Coffee the first unicorn in China's coffee industry.

Overall, China's round An investment team has finally turned its attention to retail coffee. Luckin Coffee's execution is fast and efficient. There is no doubt that this is a serious competitor who is bound to win. I visited several of their stores with a view to learning about them.

So why doesn't Starbucks have an important competitor in China?

I started thinking about this a few years ago. Every other company (foreign and domestic) operating in China is engaged in a fierce struggle with many competitors, rapidly changing consumption habits and investment capital. Nike and Adidas play Li Ning and Anta. Apple plays Xiaomi (and other mobile phone brands). Wal-Mart has thousands of competitors. Uber versus Didi. Google versus Baidu. EBay versus Alibaba. Such examples abound. Winning the Chinese market is a tough battle, and fierce competition is its criterion.

To some extent, however, Starbucks has been moving forward steadily, opening stores and maintaining steady growth. They have small competitors like Costa Coffee and Shangdao Coffee, as well as many teahouses and takeout stalls. In addition, there is McCoffee from McDonald's.

However, I don't think any of these can be regarded as real opponents. Surprisingly, Starbucks is defenseless in China.

In addition, Starbucks is quite open about its growth and profits in China. They open 500 stores a year (now there are about 3300). These are obviously their most profitable stores. Such a comment is popular with Wall Street analysts, but it breaks the first rule of Chinese business. If you do a really good job, please keep quiet.

So I keep asking why they don't seem to compete. I have never been able to understand. And my advice (Starbucks doesn't care) has always been: open as many stores as possible now. Don't worry about making money or not, just let go. Because the competition is coming.

Visiting Luckin Coffee, Starbucks' new competitors are coming.

Luckin Coffee was founded by Qian Zhiya, former chief operating officer of UCAR, in November 2017. According to the citations I read, the company's goal seems to be to beat Starbucks and grow with the increase in coffee consumption in China. They are also known as the "new retail" model of retail coffee. At present, the new retail created by Alibaba is a hot topic in China, so there are three views around Luckin Coffee's popularity: defeating Starbucks, developing with the growth of consumption, and the "new retail" applied to the coffee field.

I counted that there are about seven lucky coffee shops in our Peking University / Zhongguancun area, which exceeds the number of Starbucks stores in the area. When I search on their app, I can find a large number of their stores all over Beijing. As you can see in the picture below, they have pick-up stores, leisure stores and pop-up stores everywhere.

The first thing I noticed was that their stores seemed to be in the central business district and near (but not in) places with heavy passenger traffic. This difference can be important (see part 2). They seem to be located 1-2 blocks from heavy passenger traffic and eye-catching locations, which are often occupied by Starbucks. Maybe that's the strategy. Or maybe this is where they can find it. But you have to give credit to their real estate staff, who are opening stores at an alarming rate.

I sat in a store (that is, a leisure store) in Zhongguancun for a while.

Two or three couriers are waiting outside, and Lucky's delivery bags are stacked, ready to go. This is a very standard model of retail food in China at present.

Walking into the store, a beautiful young girl immediately said hello to me and asked if I needed coffee-and then showed me how to place an order on my mobile phone. Because Luckin Coffee doesn't have a cash recorder, they don't support cash or credit card payments (at least not in the stores I see). You must download their application (app) and place an order on it. Also, you need to pay through Wechat / Alipay or their own wallet function.

So, from the moment you walk in the door, they are trying to get you to pick up your phone. And they are trying to get as many orders as possible through their mobile phones-and then you can pick up or choose to deliver.

Their application (app) looks like this:

Find the nearest store, place an order, and choose pick-up or delivery. The beverage (and some food) list looks very similar to other coffee shops. But the price of coffee is about 10 yuan (about 20%) lower than Starbucks. As discussed in part 2, I think this is very important. In addition, you can see a lot of promotional activities, such as buy two cups and get one free, or buy five cups and get five free. This is also important (also discussed in part 2).

They encourage clients to sit down and relax. With a comfortable chair, free wifi and charging Jack, it is a good place to rest.

So, like Starbucks, Luckin Coffee clearly defines many stores as the "third space" in life. Although other stores mainly offer coffee pick-up and delivery services, in these places, you can go in, chat with friends, relax and read.

In this store, there is even a kiosk where you can rent a book to read (again, you can only get it on your phone).

On the whole, the stores I visited were really good. I like the color and logo.

So the first conclusion I have come to is that this is a fierce competitor. They are developing rapidly and have good execution.

But can they beat Starbucks? Do they need to beat Starbucks?

Fighting for a "high-traffic and eye-catching" position can't really kill Starbucks, because that's Starbucks strategy, a high-cost competition, and Starbucks is good at it. You can't win them in terms of marketing spending (Starbucks has developed economies of scale in these places), so maybe you can focus on using technology to change the rules of retail coffee? Or are you just expanding the market to attract the vast majority of Chinese who don't drink coffee very much? I think Luckin Coffee is doing these two things.

In my opinion, their biggest weapon is Internet + 's low price + multiple store layout. And this strategy works.

Thank you for reading.-jeff.

Jeffrey Towson is an investment management professor and PE investor and consultant at Guanghua School of Management, Peking University. Professor Tao Xun currently has 1.7 million followers in LinkedIn and is one of the top three business writers in LinkedIn China. Professor Tao Xun is the author of Amazon's best-selling book The One Hour China Contrarian Book and What Would Ben Graham Do Now?

Thank you for reading.