Starbucks is one of the best known brands in coffee retailing right across the world. However, in one of the company’s most important consumer markets – China – the once dominant café is facing stiff competition from a relative newcomer. Luckin Coffee was only put together as a trading entity in October 2017. Since then, millions have been poured into the business in order to make it a viable rival to Starbucks in the Chinese market. Will it be able to sustain this level of growth and can Luckin Coffee break out from China and begin to challenge Starbucks in other territories around the globe? Only time will tell, of course. However, there are signs that Luckin Coffee is not just here to stay, but is looking at a successful future around the world.
There are plenty of precedents for a once mighty brand being overtaken by an up-and-coming business. Sometimes, established brands sit back a little and fail to innovate in the way that newer and more agile businesses will choose to operate. You can see this in many sectors, especially those which cater for a global market, such as online casinos, retail outlets, social media platforms, car manufacturers and fashion brands. Will Starbucks falter in the face of such a heavily backed newcomer, or will it be able to fight back and regain its once dominant position?
Luckin Coffee Enters the Market
Starbucks has been building up its business successfully in China since it opened its first coffee shop back in 1999. When Luckin Coffee began trading, it did so as a business which would not consolidate its position trading from only a handful of retail outlets. The plan was always to go for a mass market with multiple outlets all over the major cities of China. Of course, doing so meant a significant level of investment rather than slowly building up the brand café by café. To operate in this way, Luckin Coffee set out its stall in an uncompromising fashion. The owners of the café brand meant to challenge the likes of Starbucks from the outset.
Some consider the strategy to be very aggressive and one that is fraught with potential dangers. If Chinese consumers fail to buy into the Luckin Coffee brand in meaningful numbers, then the huge amounts of money that have already been invested into the cafés could be lost. There again, given the profit margin the likes of Starbucks, Café Nero and Costa Coffee enjoy, it means that going from zero to even a reasonable level of market share in a couple of years could result in Luckin Coffee becoming a viable business almost overnight.
A Fast Growth Rate
According to CNN, Luckin Coffee plans to have opened 4,500 outlets across China by the end of 2019. That is an amazing amount of growth in little over two years that even the most successful of retail brands could dream about. Don’t think that such claims are merely hype, however. As it stands, the brand has already opened in the region of 2,000 cafés in China. This has inevitably eaten into the profitability of the major Western coffee brands operating in the People’s Republic.
Of course, you should also bear in mind that coffee consumption itself has risen greatly in China over the course of the last decade or so, a country that previously was more associated with tea consumption. Given the expanding market for coffee in China, you may be forgiven for thinking that there is enough room for Luckin Coffee and all of the major Western operators, too. That might be the case, of course, but with such dramatic expansion plans, few industry insiders consider that Luckin Coffee is not merely willing to carve out a reasonable market share as a newcomer. Rather, the plan is to take over.
Are the Western Coffee Brands Really Under Threat?
One of the factors that make coffee experts think that brands like Starbucks are going to lose out in the long-term to Luckin Coffee is the level of discounting the home-grown brand offers. Consumers can enjoy freshly brewed coffee at a Luckin Coffee outlet at some very attractive prices. The Chinese brand claims that it is able to deliver great coffee to its customers at lower than average prices because it is leveraging its purchasing power, new technologies and lower cost delivery techniques.
Others assume, however, that Luckin Coffee is operating at a loss deliberately in order to make life difficult for the more established brands. Once they are defeated, then consumers may well see price rises from a less competitive marketplace. Again, only time will tell but it is possible that the Luckin Coffee’s model will be replicated elsewhere. If so, then laws banning certain anti-competitive business practices may make life harder for the business model that Luckin Coffee currently appears to have adopted.