Luckin Coffee Inc is right to take advantage of stumbles at rival Starbucks Corp and enter the US market. While there are legitimate questions about Luckin’s future prospects there, what it offers — targeted discounts, speedy service and an overall frictionless experience — should be as attractive to younger Americans as it has been to their Chinese counterparts.
As of this month, the coffee chain has five outlets across Manhattan — it opened the first two over the summer. It was a prodigal return to a city where it listed on the NASDAQ six years ago. However, a year later Luckin admitted it had fabricated earnings. The firm was forced to delist, fire its chairman and CEO, and pay a US$180 million fine to the US Securities and Exchange Commission.
However, Luckin did not collapse. It restructured and just three years later, dethroned Starbucks in revenue terms in China to become the country’s biggest seller of coffee, in a phenomenon I have previously dubbed “China Speed 2.0.”
Like many companies facing price competition at home, Luckin has opted to go abroad, opening its first outlet in Singapore in March 2023, although China remains by far its biggest market. After landing in Malaysia earlier this year, the chain now has its sights firmly on taking New York City and, presumably, the rest of the US.
Luckin enters a crowded space dominated by Starbucks, which is trying to recover from six consecutive quarters of declines in same-store sales, a measure of sales by stores open for more than a year.
Starbucks CEO Brian Niccol, a turnaround king who joined a year ago, wants more people to stop by and hang out. That is why he is ditching about 80 to 90 pickup-only locations to make things more cozy and conducive to conversation. That strategy pivot offers an opening for Luckin.
Besides the troubled market leader, others such as Dunkin’, fast-food restaurants and diners sell their coffee at lower prices. Dutch Bros Inc, Tim Hortons Inc, Scooter’s Coffee LLC and 7 Brew Co LLC are some of the other bigger names in the mix. Is there space for Luckin?
I visited its Sixth Avenue outlet last month, where there was a steady stream of under-40s effortlessly using their smartphones to place orders, in a carbon copy of the playbook that has powered the chain’s expansion to more than 24,000 stores in Asia. Like the vast majority of outlets in China, there was minimal seating.
The sticker price of US$5.75 per latte was similar to the Starbucks outlet half a block south. That is misleading. Everyone I met, who told me they had heard about the opening on social media, paid app-only prices. For first timers, it was just US$1.99 plus tax, compared with the US$3 to US$6 they might usually pay.
The clientele was attracted by the hefty discounts, plus the efficient mobile-only ordering process. They liked the creative latte flavors and did not miss extended interactions with baristas or having their names written on the cup — a personal touch that Starbucks is bringing back.
As for the potential issue with Luckin’s roots, younger Americans have a more favorable view of China than older people, which is a consistent worldwide trend, the Pew Research Center said. Younger consumers in both countries seem to be converging in terms of their tastes and spending habits.
Gen Z in China are finding it increasingly impossible to live their best lives. Facing a property crisis, deflation and a stagnant job market, they are relying on their parents and wearing ugly clothes in silent protest, if they manage to find work at all. So what if the stock market is booming?
As for the US, the economy is doing great, but the benefits are not trickling down.
The richest 10 percent accounted for 49.2 percent of total spending in the second quarter, the highest level since data collection began in 1989, Bloomberg News said. Long-term unemployment, especially for those with college degrees, is an issue, as is the persistently high cost of living.
Still, finding willing customers does not guarantee success. Two days after my first visit, Luckin sent a US$4.99 offer for any coffee plus a stuffed croissant. When I did not bite, it kept trying: I got regular offers to return for just US$1.99 per drink.
Bernstein analysts led by Danilo Gargiulo said the chain’s discount-heavy pricing was unsustainable, given what they observed as transactions suggesting about 500 to 600 orders a day.
The break-even point might come at 1,200 daily orders at the Sixth Avenue store, they estimated. That was more than doable at its outlets in Singapore, and Luckin had not yet even geared up its marketing firepower.
It is still early days. However, the coffee seller needs to move fast — and not just because it wants to go head-to-head with Starbucks.
Real-estate broker Josh Augenbaum said that Chinese discount bubble tea chain Mixue Group, which also sells coffee, has just signed a 10-year lease for an enormous 186m2 storefront on Canal Street. The real competitor to beat in New York might be another new arrival from China.
Juliana Liu is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region. She was previously CNN’s senior business editor for Asia, and a correspondent at BBC News and Reuters. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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