Meteoric cafe startup Luckin Coffee threatens Starbucks with unfair competition lawsuit

Luckin Coffee, the coffee shop startup using market acquisition tactics borrowed from China’s internet companies, has written an open letter to Starbucks accusing it of monopolistic practices in the country and proposing a possible lawsuit, according to Tencent News (in Chinese). Luckin has taken issue with Starbucks’ exclusivity rights with property owners and putting pressure on suppliers not to work with other brands.

Luckin Coffee said that Starbucks has signed contracts of exclusivity with commercial property owners which prevent them from granting leases not just to other coffee shop chains, but any other business where over 30% of operating income is derived from coffee sales or even whose names are related to the word “coffee”. This also applies when the Starbucks stores are not yet open.

Luckin Starbucks open letter
Open letter from Luckin Coffee criticizing Starbucks’ business practices. (Image credit: 36Kr.com)

Luckin Coffee has opened 400 stores in its first four months in 13 cities across China and is looking for locations nationwide. It describes itself as part of China’s “new retail” trend.

The other part of Luckin’s complaint is Starbucks’ alleged pressuring of suppliers. Luckin stated that as it also sources high quality ingredients such as Arabica coffee beans, it is inevitably dealing with companies that also work with Starbucks. According to Luckin, some suppliers of machinery, equipment and ingredients have said Starbucks has asked them not work with Luckin, and some have already notified Luckin that they will cease to supply the startup.

Tencent quotes a lawyer appointed by Luckin as saying the law stipulates that companies which dominate a market cannot restrict the trading activities of competitors. The report quotes Luckin’s letter as saying: “In order to expedite the resolution of the problem, we have instructed King & Wood Mallesons to file a complaint with the national anti-monopoly administrative law enforcement agency on the above issues in the near future, and formally file a lawsuit with the People’s Courts in the relevant cities.”

Luckin Coffee is thought to be poaching experienced Starbucks baristas, offering them several times what they are earning working for the Seattle-based chain.

Update: Starbucks responded to the allegations on Tuesday by saying that China’s coffee market has huge volume and is open to competition: We have no intention of participating in the promotion hype of other brands. We welcome orderly competition, mutual promotion, continuous innovation, continuous improvement of quality and service, and creating real value for Chinese consumers.

There are over 3,000 branches of Starbucks in China, about half of which are operated by Starbucks itself and the other half licensed. The company already serves over 5 million people a week on the mainland and intends to open another 2,000 shops by 2021, roughly half the speed of Luckin’s current rate.

Starbucks isn’t the only international player trying to cash in on the hope that China will become a nation of coffee lovers as it becomes wealthier. The UK’s Costa Coffee has also been expanding in China and has over 400 stores here.

According to its latest company report, released before the arrival on the scene of Luckin, Costa Coffee had “learned valuable lessons from our experience to date and we have now developed a clear plan to succeed in the market” and now believes that its “current operations represent a platform to unlock the potential in China and to establish a Number 2 position in the market.”