Luckin Coffee has bigger ambition for selling tea as it spins off Luckin Tea brand

The company pins hopes on the new tea business amid widened losses.

Chinese on-demand beverage chain Luckin Coffee has spun off its tea brand, according to an announcement on the company’s official WeChat channel on Tuesday.

Luckin launched the brand Xiaolu Tea (Xiaolu means “deer”) in early July, along with 10 tea-based products under the label, as the company co-founder Guo Jinyi was quoted saying that tea and coffee are in fact complementary in workplace environments,  KrASIA reported.

Less than two months later, Luckin has taken a big move in converting its tea unit into a standalone new company and to run it independently from its coffee business. According to the announcement, the new company will be called Luckin Tea.

A visual identity for Luckin Tea stores, products and merchandising has already been established. It is expected that the new business subsidiary will build new stores to host the emerging tea business.

A standalone app and a mini program on WeChat will also be built to facilitate online orders. Currently, tea products and coffee products are sold on the Luckin Coffee’s app and Wechat mini program, and prepared in the same Luckin’s bricks-and-mortar stores.

Luckin Coffee will also roll out a partnership plan, calling individuals to open their own tea house under the Luckin Tea brand.

The recent move will put Luckin Tea in direct competition with other tea brands such as Meituan-backed Heytea, which had a boom in popularity engaging many young consumers who sometimes have queued for hours at the chains’ stores.

Luckin had nearly 3,000 stores by the end of June, according to its latest financial report.

The firm is still far from being profitable. It booked RMB 681.3 million (USD 99.2 million) in net losses, widening more than 100% from RMB 333 million in the second quarter of 2018, partly due to sales and marketing expenses, which reached RMB 390.1 million (USD 56.8 million), up 119.1% year-on-year.

Luckin’s steps into the takeaway tea market are logical when considering that an average Chinese consumer drinks 317 cups of non-coffee drinks per year, way more than the 208 from an average American. Chinese consumers, instead, only drink less than seven cups of coffee a year on average, according to the International Coffee Organization, cited by Barron’s.

In its IPO prospectus, Luckin cited research by Frost & Sullivan to say that freshly made tea drinks had a market size of RMB 68.0 billion (nearly USD 10 billion) in 2018, KrASIA reported.