Almost 20 years after its first coffee brew in China, Starbucks announced its most ambitious expansion plan to almost double its stores to 6,000 and triple its revenue over the next five years in its fastest growing market. The announcement came at almost the same time that the global coffee chain was sued by a six-month-old and much smaller indigenous coffee shop startup Luckin, which is also aggressively tapping into the Chinese coffee market.
Luckin alleges that Starbuck, leveraging on its market monopoly, signed exclusive contracts with property developers to disallow storefronts rental for competing coffee brands, including Costa, Pacific Coffee and Mann Café. Additionally, Luckin also claimed that Starbucks has put pressure on suppliers in an effort to hamper their partnership with Luckin. Some suppliers were asked to make options between Starbucks and Luckin.
As a result, some of Luckin’s partners had to terminate their contract with the company.
Founded in last year-end, Luckin has set up more than 500 stores across China in less than six months, growing at a breakneck rate even Starbucks cannot compare. Starbucks said it’ll be launching new storefronts every 15 hours in China, translating to around 288 new shops over the same period.
Starbucks responded saying the Seattle-based coffee chain was not interested in participating in a marketing stunt. However, according to people familiar with the matter, Starbucks is preparing for a counterclaim.
Luckin Coffee, founded by ex-COO of Chinese ride-hailing firm UCAR, QIAN Zhiya, is the fastest growing coffee brand in China.
After 4-month-trial, Luckin Coffee has established 525 stores in 13 Chinese cities and has sold 5 million cups of coffee to 1.3 million customers as of May 8, when it announced the official opening.
Entered the Chinese market 19 years ago, Starbucks now operates 3300 stores in 141 Chinese cities, and looks to keep expanding its business in China alongside the whole Asia to make up to its dipped growth in its home market.
The fast expansion of Luckin Coffee could be partly attributed to its cash-burning marketing scheme. The startup offers a free treat for new customers and another free cup when a new customer is recruited through a referral program. Besides, customers enjoy deep discounts and free 30-minute delivery when they buy multiple cups.
Price also contributes to Luckin’s quick rise. Compared with Starbucks, Luckin Coffee is normally 5-10 yuan cheaper. The delivery services allow customers to avoid the queue time in the coffee shop.
Luckin Coffee’s cash-burning expansion is funded by its angel investors. The startup managed to raise RMB 1 billion (approx. US$ 156.8 million) from QIAN’s ex-boss, CEO of UCAR LU Zhengyao among other investors. QIAN plans to splash all the money raised to grow customer loyalty, and she had previously told media that Luckin Coffee didn’t have a timetable to turn a profit and was prepared to stay unprofitable in long term.
To fuel its expansion, Luckin Coffee revealed earlier this year that the startup will raise a Series A round in April or May.