China’s on-demand beverage chain Luckin Coffee, which is rivaling Starbucks in the country, reported a total net revenues of RMB 1,541.6 million (USD 215.7 million) in the third quarter of this year, up 540.2% from last year, per the company’s earnings release on Wednesday, beating analyst estimates and sending its shares up by 7.6% in premarket trading.
Charles Lu, the company’s chairman said during the earnings call that he believes Luckin would “reach its goal to become the largest coffee player in China by the end of this year. ”
Lu’s optimism is buttressed by a number of factors, from the coffee upstart’s accelerating pace of setting up new shops to its diversified revenues sources through a growing non-coffee products offering, including a tea brand and snacks.
In its ambitious bid to overtake Starbucks’s dominance in China’s coffee market, Luckin is opening up stores at a quickened speed, adding 717 new brick-and-mortar stores in the third quarter. Three-year-old Luckin now has more than 3680 stores. In comparison, Starbucks took 20 years to achieve 4,124 as of this September.
The company looks to have around 4,500 stores by the end of this year, said CFO & Chief Strategy Officer Reinout Schakel.
While Luckin is on track to outnumber Starbucks stores tally, it commands a mere 2.1% market share as of 2018, trailing behind McDonald’s 5% and Starbucks’ whopping 58.6% per a Forbes report citing market consultancy Euromonitor.
Luckin has reached the store level break-even point for the first time with a store-level operating profit of RMB 186.3 million (USD 26.1 million), compared to a loss of RMB 126 million in the third quarter of 2018.
Jenny Qian, founder and CEO of Luckin, said during the earnings call that more customers, increasing purchase frequency, and lower procurement cost all contributed to the strong growth.
It also added around 8 million new customers quarter-over-quarter. The increase of the cumulative number of transacting customers is partially due to the strong growth from the Luckin Tea business that’s been attracting China’s tea-preferred consumers in the country’s lower-tier cities since its launch in this July.
The revenue from non-coffee products increased from 31% in 2018 to 45% in the third quarter this year, in which Luckin Tea accounted for 20%, said Qian during the earnings call.
However, the company still booked RMB 531.9 million (USD 74.4 million) in net losses, widening 18% from RMB 484.9 million in the third quarter of 2018, while the number narrowed 16% compared to RMB 681.3 million in the second quarter of 2019.
The net loss was widened partly because of its increasing sales and marketing expenses due to the launch of Luckin Tea and other new products, which reached RMB 557.7 million (USD 78 million), an increase of 147.6% year-on-year. The rising costs on materials, store rental, administration, and other operations were also contributing to the widening net losses.