Starbucks China is betting on deliveries with Ele.me to stay ahead

With sales dropping, the coffee chain giant might be facing a real threat from local startup Luckin Coffee.

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Starbucks China is betting on deliveries with Ele.me to stay ahead

Seattle coffee giant Starbucks is tying up with China’s O2O and food delivery company Ele.me in a bid to reverse slowing growth in the world’s biggest consumer market.

The company will formally announce the launch of a nationwide, Ele.me-powered delivery service for its coffee in August, according to a July 26 report by Caijing. Starbuck’s China CEO, Belinda Wong, said in May that the firm is working on a program for mobile delivery and ordering.

Ele.me is now an Alibaba subsidiary after it was acquired by the e-commerce giant in April this year.

With this move, Starbucks is pitting itself against local coffee upstart Luckin Coffee, which recently raised a hot US$200 million funding round backed by Singapore’s sovereign wealth fund GIC. It’s now valued at US$1 billion.

Starbucks also announced its Q3 report a few days earlier, showing a slowing growth in China. Revenue from stores in China that have been operating for 13 months or longer dropped by two per cent in Q3 2018 compared to the previous year, the first drop in nine years, according to local media outlet Q Daily.

China still remains one of Starbucks’s big bets. The coffee chain aims to expand to 6,000 stores by 2022, double its current store count. While China and the Asia-Pacific region only account for 19 per cent of Starbucks’ revenue as per its financial statements in Q3 2018, the company views China’s coffee market as a bigger growth opportunity compared to the saturated US.

Back to Luckin, whose growth has been stellar since its founding in October 2017. The Beijing-based startup, already the second-largest coffee chain in China, is aiming to increase its store count by close to ten times of its current count to 6,000 in 2020.

It’s touting a strategy that makes it more akin to an internet startup than a coffee company – in a consumer market where QR codes are everything, Luckin mandates that transactions for its coffee are made on its app.

Its core costumers, 70 per cent of which are below 30, order Luckin coffee on the app and pick it up at the store. Luckin partners with Shunfeng Express for deliveries. The ‘new retail’ model, like Alibaba’s Hema store which is an internet-enhanced supermarket, is very popular among young Chinese consumers that demand convenience on the go.

In a way, Luckin is more in-tune with the Chinese market than Starbucks, which never really saw the need to jumpstart its delivery despite being the dominant player in the country. Luckin is pricing its coffee slightly cheaper than Starbucks while going for the same, reasonably affluent millennial market. And Luckin is backed by venture capital. Compared to the listed Starbucks, whose performance is under constant scrutiny, Luckin it is not in a rush to turn profits anytime soon.

Whether the young local upstart will take over the American behemoth is anyone’s guess, but in the meantime, Luckin is making a mark by suing Starbucks in March this year for anti-competitive behaviour. At the very least, Starbucks is now taking the competition seriously.

Editor: Nadine Freischlad