A former tech executive who drinks three to five cups of coffee each day — perhaps at least two of them from Starbucks — Jenny Zhiya Qian must have asked herself: Why do people want coffees?
People from Italy — where drinking coffee is considered a national lifestyle — might have a different answer from the Americans who see coffee as a sugary stimulant beverage. As the Seattle coffee chain has made China its largest non-US market where it opened more than 3,300 stores, Starbucks has introduced the American interpretation of coffee to the Chinese middle class.
In China, coffee used to be the trendy western beverage that shows one’s status, education, and taste. Jenny Zhiya Qian knows that it is no longer true. By 2022, more than 70 percent of China’s urban population will be entering the middle class, per the country’s own criteria. The nation’s amount of coffee consumption is increasing (link in Chinese) by 15 to 20 percent each year. But moving forward, will the Starbucks model — which has been working for over 20 years — satisfy China’s new coffee consumers?
Qian founded Luckin Coffee in 2017, a homegrown coffee startup that has turned into Starbucks China’s biggest challenger. Within a year, it is now worth $1 billion, and has become China’s first coffee shop unicorn. But seeing Luckin as a Starbucks copycat would be a misnomer; as an indigenous brand, it is fitting in China’s own coffee culture, and trying to reshape it.
Deliveries + pickups
As the proverb goes, time is money. This is true in China, and especially true among white-collar Chinese millennials, who happen to be Luckin’s main consumers. According to a Goldman Sachs report, nearly 70 percent of Luckin customers are below 30 years old, compared to Starbucks’s 50 percent. More notably, 84 percent of Luckin locations are located in offices and malls.
As China’s online food delivery sector has grown so sizable that no other country has ever foreseen, young Chinese consumers are accustomed to having foods and beverages delivered at their doors. On average, one-time delivery fee costs 4.1 USD in the US, but only 0.8 USD in China; Luckin’s current stores are concentrated in China’s first- and second-tier cities, where 32 percent of China’s population generate 60 percent of nationwide food delivery orders.
Despite owning more than 3,000 stores, Starbucks has never bothered to develop their own delivery service. While the British brand Costa Coffee is now collaborating with food delivery platform Ele.me, it has only opened 400 stores since it entered China in 2006. In contrast, after only six months in, the number of Luckin stores had already exceeded 500.
It’s not that people don’t socialize at cafes in China; at office complexes, it could often be hard to find an empty table at a Starbucks in Beijing. However, Luckin separates different user scenarios by introducing four different types of stores. Elite and relax stores are similar to Starbucks stores, where a relatively comfortable seating area is offered. Nevertheless, about half of the locations are less spacious shop fronts that are exclusively for mobile order pickups. Luckin also has a number of locations that are not open to the public, where delivery orders are processed and dispatched through its partner SF Express.
At Sanlitun SOHO, one of Beijing’s busiest complexes, there is only one Starbucks store but three Luckin locations — two pickup spots and one elite store. During lunch hours, there may be long lines at the Starbucks counter, but the wait time at each Luckin store is usually within minutes.
“Luckin has a relatively higher number of stores, and they are still expanding,” says Kirkland Zhang, a Beijing resident working in the education sector who prefers Luckin over Starbucks. “The pickup process is more convenient. When I pass by [a Luckin store], I can pick up my coffee.”
Coffee + the new retail model
While Starbucks opened its first store in 1971 at Seattle’s Pike Place Market selling roasted coffee beans, Luckin — which labels itself as a “new retail” company, a concept that combines in-shop and online shopping experiences originally introduced by Alibaba — was born with a different type of genes.
The fact that all Luckin transactions must be made on its mobile app might shock Starbucks marketers in the US, where Starbucks has been allowing customers to make orders via the Starbucks smartphone app for in-store pickups. Not only does the feature not fancy American customers (only one out of ten transactions in the US market was made over “Mobile Order and Pay,” according to a recent performance report from the company), it has never been introduced to Starbucks’ Chinese market.
Yet in China, mobile ordering is a quotidian scenario, particularly among Chinese millennials. It would not be a stretch to find restaurants that do not offer paper menus — but QR codes on their tables, which direct customers to online menus where they can order and pay with their smartphones.
It is important to recognize that Luckin is an internet company. Its marketing strategies largely resemble other Chinese internet startups; the company gives away “red packets” (promo coupons) to those who invite WeChat friends to register on the Luckin app, not unlike how ride-hailing platform Didi Chuxing and food delivery app Meituan incentivized users during their early phases.
China might not have its own Apple, but it does have Xiaomi and Oppo: brands that offer lower-cost consumer smartphones which brought the internet to numerous Chinese households. As an internet entrepreneur, Jenny Zhiya Qian noticed the same opportunity in China’s coffee sector.
While the industry is growing rapidly, coffee consumptions are still expensive even to the nation’s middle class: In the US, a five-dollar Starbucks latte costs a little more than a thousandth of an average American’s monthly income; but in China, one earning Beijing’s average salary Beijing could only afford two hundred cups of latte each month. On average, Luckin’s pricing is roughly $1 cheaper than Starbucks; a tall-sized latte costs 31 CNY (4.5 USD) at Starbucks, but only 24 CNY (3.5 USD) at Luckin.
Founded in Seattle, the 47-year-old Starbucks has undeniably reshaped America’s coffee culture. Across the Pacific, perhaps it is now time for China to establish its own coffee culture to its young consumers, and Luckin — by familiarizing itself with the consumer base with a localized and internet-friendly approach — is doing that job.
Editor’s note: Our friends at Radii China have produced this great infographic comparing the two coffee kings.