Luckin Coffee unyielding in cash-burning strategy

“The losses are in line with our expectation,” says Luckin Coffee.

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Luckin Coffee unyielding in cash-burning strategy

China’s on-demand beverage startup Luckin Coffee has reportedly lost RMB 857 million (US$124 million) in the first three quarters of 2018, according to a Sina Technology report that references the company’s recent business financing plan. Luckin saw RMB 375 million (US$54 million) in revenue during the same period.

The firm had expected annual turnover of RMB 763 million (US$111 million) in 2018, with a forecast of growth to RMB 18.5 billion (US$2.7 billion) in 2021. In response to the media coverage on its loss, Luckin spokesperson claimed that the numbers are very much in line with their management team, adding further that the year-end losses will, in fact, mount even more over the last 3 months of 2018.

Though Luckin’s operations have fallen short of the first prediction, the startup remains steadfast in its “cash-burning” strategy to gain market share. Previously, KrASIA reported Luckin Coffee’s brisk fundraising over several months, which hinted at Luckin’s plans for proliferation across China in 2019. The firm’s current valuation is over US$2 billion.

Conceived in 2017, Luckin Coffee burst onto the scene with bold ambition. The goal was to usurp Starbucks’ dominance in the country’s coffee chain market. The company offers subsidies to entice consumers, and so far has sold more than 85 million cups of coffee to 12 million customers. In a short span of time, the chain has mushroomed to a network of over 1,700 stores, giving Starbucks and its 3,300 outlets in China a run for their money.

Steep discounts – the lure of a similar experience at more affordable rates – is only a part of the strategy that worked well for Luckin since Starbucks offer that experience targeted at wealthier Chinese consumers. Convenience and visibility is another part of Luckin’s money-splashing. One example is the 18 minutes delivery time guarantee from Luckin’s founder herself Qian Zhiya if Chinese consumers in major cities make the order by their phone app.

Facing new competition, Starbucks is adjusting its strategy in China. The American coffee chain partnered with Alibaba to establish an online delivery store in September, using the agents of food delivery platform Ele.me and tech-driven supermarket to put cups of joe in the hands of thirsty Chinese consumers.

With 450 million millennials who may become habitual coffee drinkers, and steady annual double-digit growth in coffee consumption in the country, China is ripe for a caffeine boom, similar to Japan’s experience from the 1960s onward that has made it the world’s fourth-largest consumer of coffee. According to studies by McKinsey and National Bureau of Statistics of China, the booming Chinese middle class whose disposable income is forecasted to grow at a compound annual growth rate (CAGR) of 9.6% from 2018 to 2022, and this could further boost coffee demand. More importantly, at the moment, there is still a huge potential for growth: China’s coffee consumption per-capita is still at 3 cups per year, far lower than that of the UK (250 cups per year) and the US (363 cups per year).

To keep up with the Starbucks-Alibaba alliance, Luckin partnered with the HK-listed Meituan, making Meituan the only third-party food delivery platform that lists Luckin’s stores and menu. Before this tie-up, Luckin’s coffee could only be ordered through the company’s proprietary app.

Editor: Brady Ng & Ben Jiang