Luckin reportedly seeking Ele.me tie-up for deliveries amid profit pressures

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Customers of Luckin Coffee wait in line to place their order at the counter in Pudong, Shanghai on April 4, 2019. (Image Credit: TechNode/Eugene Tang)
Customers of Luckin Coffee wait in line in Pudong, Shanghai on April 4, 2019. (Image Credit: TechNode/Eugene Tang)

Starbucks China rival Luckin is reportedly in discussions to partner with Alibaba’s food delivery arm Ele.me as the coffee startup looks to boost sales by expanding sales channels.

The negotiation is currently underway and both sides have yet to agree on the deal, reported Jiemian citing a person familiar with the matter.

The alliance would address a risk in Luckin’s plans for breakneck growth. “We mainly rely on one delivery service provider to provide delivery service to our customers …  any failure of our suppliers to accommodate our fast growing business scale … may materially and adversely affect our results of operations,” said Luckin in its IPO filing.

A spokeswoman of Luckin declined to comment citing a quiet period in reference to its impending initial public offering (IPO). Alibaba also turned down requests for comment when contacted by TechNode.

Luckin and Ele.me rival Meituan announced a deal in December, offering Luckin’s products to around 300 million Meituan monthly active users in more than 20 Chinese cities.

However, according to Chinese media citing a person familiar with the company, the result was “far below expectations,” with just 500 Luckin orders completed via Meituan app in the first month. A Meituan spokesman denied the report of disappointing sales when contacted by TechNode on Wednesday, saying that the two companies “work smoothly” and revenue has been rising.

The partnership forged last year between Starbucks and Alibaba is seen as a particularly close alliance. Ele.me has been running deliveries for over 2,100 Starbucks stores across 30 cities since August, and introduced a new online concept marrying Alibaba’s various service platforms including Alipay, Taobao, and Hema with Starbucks products.

The coffee company is also one of the early participants in A100, Alibaba’s strategic initiative to court enterprise clients with its suite of services including its cloud, logistics, and productivity tools, and create allies.

A partnership between Luckin and Ele.me “would jeopardize Alibaba’s A100 program and send the signal that Alibaba is not invested in A100 partners’ continued in-market success,” said Michael Norris, Research and Strategy Manager at AgencyChina.

However, as summer approaches and with it comes a seasonal uptick in beverage delivery orders, particularly cold beverages and juices, Luckin is looking to make sure it has this base adequately covered, added Norris.

The Chinese coffee chain upstart intends to raise up to $510 million in an initial public offering in its debut reportedly scheduled for May 17, which is expected to be one of the largest listings by a Chinese company this year. The company has been burning cash, with RMB 478 million in net losses in the first quarter of 2019 in addition to its net losses of RMB 1.62 billion in 2018, a 28-fold increase compared with RMB 56.3 million in 2017. Sales and marketing expenses reached RMB 746 million last year, nearly one-third of which were attributed to delivery costs.