“Just a cup — who doesnt love it?” Indeed, people in China do love their Luckin. But what they love about the brand is not found inside those little blue cups.

In a listing on the NASDAQ in May, Xiamen-based Luckin Coffee Inc raised US$561 million (S$767 million), as the result its valuation approached US$4 billion.

Jenny Qian Zhiya CEO of Luckin Coffee, and Charles Zhengyao Lu, non-executive chairman of Luckin Coffee, ring a ceremonial bell to celebrate trading of the company's stock during the IPO at the Nasdaq Market site in New York, U.S., May 17, 2019. REUTERS/Brendan McDermid

Jenny Qian Zhiya CEO of Luckin Coffee, and Charles Zhengyao Lu, non-executive chairman of Luckin Coffee, ring a ceremonial bell to celebrate trading of the company’s stock during the IPO at the Nasdaq Market site in New York, U.S., May 17, 2019. REUTERS/Brendan McDermid

Investors around the world, from the likes of United States BlackRock to China International Capital, and even Singapores sovereign wealth fund GIC, have been captivated by this brand new coffee chain, which has set itself up to overthrow coffee giant Starbucks in the China market.

Definitely Not Just Another ‘Starbucopy’

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Observers who dismiss Luckin as a “copycat” of Starbucks missed the point that these two companies are fundamentally different.

Where a comfortable lounge is a mainstay in virtually every Starbucks outlet in China, its 109 sit-in stores make up less than 1 per cent of Luckin Coffees 2,370 outlets (So Far).

Most Luckin customers order their coffees using a mobile app before picking it up at an outlet, or have their drinks delivered to their workplaces or even homes. This also means that Luckin stores hardly need any cashiers, which is a huge saver in terms of time and costs.

Luckin has adopted the “New Retail” business model — where the consumer experience is king — and this was what helped it achieve phenomenal growth, apart from a gigantic capital injection.

Its hassle-free delivery service is perfect for the fast-paced lifestyles of the booming Chinese middle class, which is set to make up 76% of Chinas urban population by 2022. And as more people move into the cities, the taste for both coffee and convenience will surely continues to grow.

It helps that Luckin has also cleverly used marketing to its advantage. Its coffee is endorsed by some of Chinas most popular celebrities, like Tang Wei and Zhang Zhen. Since the company was founded in 2017, it has grown from a single trial store in Beijing to the 2,370 outlets spread across 28 Chinese cities.

In merely two years, it has opened more outlets in China than Starbucks did in the previous 20 years. Luckins revenue has soared 3,395 per cent year on year, with 16.8 million transacting consumers as of March 31, according to its prospectus.—edited from todayonline.com

Testing self-service coffee machines

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On top of its glorious YoY growth on revenue, Luckin is planning on a new project focused on self-service coffee machines, which is expected to be a central part of the companys expansion strategy.

Branded as Luckin Coffee Express, the self-service machine is designed for public spaces like schools and office buildings. Users can locate the nearest coffee machine and place an order through the Luckin app. Drinks are ready just 30 seconds after scanning the pick-up code.

The Chinese brand of Luckin Coffee Express,  was trademarked by a Beijing subsidiary of the coffee upstart in May, according to Trademark Office of China.

Luckins aggressive expansion has positioned the coffee start-up as a challenger to Starbucks in China. The company said in January that it plans to have 4,500 stores in China by the end of the year and to have 100,00 stores in three years.

Luckins move into the self-service segment of the coffee industry poses challenges to existing players including Wing Cafe, Xiaoka Coffee, and Yee Coffee.—-edited from Emma Lee, Technode

A Capital-Burning Unicorn

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The truth is, Luckins strategy — to burn through capital in a fiery expansion campaign across China — is a variation on a familiar tune.

Like many Chinese start-ups, the companys short-term goal is focused on snatching market share using extravagant marketing tactics and generous subsidies.

First-time customers get to enjoy a free cup of coffee, along with six vouchers for half-price orders, for instance. Such an aggressive wooing strategy has resulted in a massive net loss of US$241 million in 2018.

How long more will investors tolerate Luckins crusade? The market has already been shown how costly a protracted money war can get, like with the fall of bike-sharing company OfO.

Capital can only carry Luckin so far, especially against an established giant like Starbucks, which has the financial muscle and network to take on a head-to-head battle for turf.

Luckins subpar coffee and food could, in fact, be its own undoing. When generous discounts prove untenable (and they will), and as Starbucks catches up in delivery capabilities with the help of e-commerce giant Alibaba, there will be little incentive for Luckin customers to stay loyal.

But this does not mean Luckin is doomed to fail. Unlike OfO, Luckin has a clearer path to profitability because it plans to cut subsidies and expensive marketing campaigns once they reach critical mass and branding in the market.

Also, the company has managed to make Starbucks react and draw the attention of big-name investors in its ambitious and bold approach to a very traditional business. This may just be the first step — the same way David first topples Goliath by hurling a stone at the centre of his forehead, before cutting his head off.

Double-edge Feedback from Wealth Managers

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Luckin Coffee Inc., received two new bullish reviews from Keybanc and Needham, while Morgan Stanley added a note of caution.

Analysts who have weighed in so far like Luckins strategic store positioning, competitive coffee pricing compared to rival Starbucks Corp and expansion potential in the Chinese market. Morgan Stanley analyst Lillian Lou was more cautious, seeing limited gains in the near future on “relatively low earnings visibility,” and noting that valuation already “looks fair.”

 

  •  Lillian Lou (Morgan Stanley)

 

Luckin may multiply sales 30x over from 2018 to 2021 as the chain opens more stores and wins over new customers.

“Coffee is one of the least penetrated and fastest-growing markets in China,” Lou said. “Urbanization and the increasing adoption of coffee-drinking by younger generations will underpin this growth.”

“We expect Luckins implied market share to grow from 1% to 23% in 2018-21. However, whether this is achievable is highly dependent on managements execution, and intensifying competition or changes in consumer tastes could also increase earnings volatility.”

 

  • Eric Gonzalez (KeyBanc) 

 

“Luckin Coffees rapid ascent toward becoming one of Chinas largest consumer brands has attracted its fair share of skeptics. However, we believe the company has several strategic advantages that should support its transition into a profitable business.”

Keybanc is positive on Luckins presence in China, limited direct competition and low budget model.

 

  •  Vincent Yu (Needham)

 

“Luckin requires customers to order their food on its app, thus gaining user engagement data to better tailor marketing, product offerings, and store location selection. Its data driven demand ‘heat map’ leads to Luckin to open in-business lobby pickup stores providing maximum convenience to its customers.”

Needham expects Luckin profits to break-even in the third quarter, while it may take another year for the company to reach cash flow break-even. —-Edited from Cristin Flanagan, Bloomberg

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In the end of the day, its a game of capital and patience. Whether Luckins original stakeholder choose to cash out after IPO — when valuation rockets now or to stay, this 20 month old start-up has rewritten the history of NASDAQ. It is still too soon to judge, if Chinese Luckin will overcome its burn rate and reborn to be the No.1 coffee chain in China, or, it may end up to be the worst nightmare for investors like the cases of LeEco and OfO.

Edited by Joreal Qian