Mobile Payments Poster Child Starbucks Has New Competition in China

January 8, 2019         By: Steven Anderson

Starbucks was pretty much king of the coffee beat in China, and that almost certainly drew new competition eager to seize a slice of a market that was already proven to be robust enough for anyone. That’s where we are today in the Chinese convenience coffee market, as a new competitor, Luckin, is poised to hit the market with 2,500 new stores by the end of the year. But what does it have up its sleeve to match the poster child of mobile payments?

“Scale and speed” is part of the key, according to Luckin’s Yang Fei, chief marketing officer, during a presentation. Also on the list of success points are delivery, technology, and extremely cheap coffee. So cheap, in fact, that Luckin has already recorded an 800 million yuan (around $116.47 million US as of this writing) loss for 2018.

It’s clear that the company is prepared to absorb losses. That resolve only got clearer when Yang Fei noted that “there’s no point in talking about profit” in that same presentation. With plans to open a grand total of 4,500 stores in China by the end of 2019—eclipsing Starbucks handily at its current 3,600—the losses will only get worse.

Starbucks, of course, is not taking this lying down. According to Kevin Johnson, Starbucks CEO and president, the chain builds a new store in China every 15 hours on average. Starbucks China CEO Belinda Wong noted that they open around 500 new stores a year. Luckin’s 4,500 goal, therefore, isn’t really overkill, but insurance that the company will outmass Starbucks for at least a year.

Luckin here is using the penetration market strategy, a move that worked wonderfully for Walmart; accept losses for as long as possible in a bid to gather market share and drive competitors out of business by sheer attrition. While it likely won’t shutter Starbucks, any mom-and-pop outlets are likely to get crushed under the sheer weight of competitors. Luckin, meanwhile, seems to be matching Starbucks move-for-move and store-for-store, even down to delivery.

Only time will tell how well this approach works, but Luckin’s strategy has some validity to it and some clearly deep pockets behind it. We may well be hearing about a new mobile payments coffee giant in China soon.