Posted on Friday, Nov 30th 2018
According to an iResearch report published earlier this year, an increasing number of customers in China are shifting to an Online-to-Offline (O2O) model for their daily needs. The Gross Merchandise Value of local lifestyle service O2O in China grew nearly 50% in 2017 to over a trillion Yuan (~$158 billion) driven by the increasing adoption of smart phones, mobile payment services and the emergence of newer products and services within the O2O model. One such player is Luckin Coffee, China’s latest entry into the Billion Dollar Unicorn club.
Luckin Coffee’s Offerings
Beijing-based Luckin Coffee was founded nearly a year ago in 2017 by Jenny Qian Zhiya. It began operations as a local coffee shop, but within a year, the company has turned into the biggest rival for global coffeehouse chain Starbucks in China. Unlike Starbucks, Luckin Coffee is not a traditional coffee shop. It resembles an internet company more than a café.
Luckin Coffee’s operations rely on the internet and mobile devices. It has over 525 coffee shops including nearly 230 “kitchens”. Consumers who wish to buy coffee from its coffee shop are expected to download its app, order coffee through the app, and even pay through mobile payment apps like WeChat, or its own mobile payments platform. It doesn’t accept cash, and you have to order through the app. Its “kitchens” are used to deliver coffee orders to offices and homes. It claims that it delivers coffees in less than 18 minutes after an order is placed. It is also expanding beyond coffee delivery to include snacks for its customers. It currently has operations in over 13 cities and caters to over 1.3 million customers.
Like all other new age tech giants, the company relies on rapid expansion, steep discounts, and aggressive advertising. Luckin Coffee cups are typically priced 20%-30% lower than Starbucks’ offerings. Recently, it also entered into an agreement with Tencent to expand its coffee delivery service.
Luckin Coffee’s Financials
Luckin Coffee is privately held and its financials are not known. It recently reported an early stage funding round of $200 million from investors including Joy Capital, Centurium Capital, GIC, and Legend Capital at a valuation of over a billion dollars. The company plans to use the funds to drive expansion. It is looking to grow its café business and plans on having the kitchens account for nearly 15% of its business.
China is the second largest market for Starbucks after the US. Starbucks has more than 3,300 stores in China. According to a 2016 Euromonitor report, Starbucks accounted for nearly 59% of China’s coffee market share with McDonald’s and Costa coffee at a distant 6% and 4% market share, respectively. Luckin Coffee’s market share is not known, but it is estimated to be still lower than any of the established vendors. Unlike Luckin Coffee, Starbucks does not rely on advertising or on delivery services. However, Starbucks is not ignoring this market either. It recently entered into an agreement with Ele.me for a coffee delivery service that will be able to fulfill order delivery in under 30 minutes.
I would like to know from you consumers about how do you decide which coffee shop to go to? What is more critical – pricing, barista’s skill, the atmosphere, or the menu selection? What do you think about Luckin Coffee’s operating model?
More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns.
This segment is a part in the series : Billion Dollar Unicorns
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