Luckin joins Starbucks in blurring boundaries between coffee and tea

3 min read
Yang Fei, co-founder and CMO of Luckin (Image credit: Luckin)

Luckin Coffee has taken the wraps off a new tea drink brand dubbed Xiaolu Tea, meaning “Fawn Tea” in Chinese, joining Starbucks in expanding into country’s already crowded bubble tea market.

The company wiill gradually roll out a range of tea-based beverages, including cheese tea and more traditional styles across its 3,000 stores spanning 40 cities from Thursday, Luckin said at a press conference on Monday in Beijing.

Co-founder and Senior Vice President Guo Jinyi pointed out that coffee and tea drinks are the two most popular types of drinks among China’s young office worker segment and the move represents “a sound strategy for Luckin.”

As always, the Xiamen-based coffee upstart plans to give out generous freebies and discounts to attract quick adopters for the brand. They can enjoy a “buy 10 get 10 free” promtion for the first two weeks following the launch, disclosed Yang Fei, co-founder and chief marketing officer.

It’s worth noting that Yang’s Monday speech marked a rare public appearance for the controversial marketing figure who has been absent from the company’s corporate filings and press conferences after coming under scrutiny early this year over his previous imprisonment.

Obviously, Luckin’s tea ambitions have been brewing for months since it already rolled out four fruity summer drinks, also named “Fawn Tea” in April.

“We’ve entered summer and a piping hot coffee isn’t necessarily what consumers are looking for,” Michael Norris, research and strategy manager at AgencyChina, told TechNode

Norris points out that this is part of Luckin’s efforts to diversify consumption occasions by offering juices and tea-based beverages. “As early as its IPO filings, a chunk of Luckin’s revenue came from outside of selling coffee. If you look closely at where Luckin is spending its ad dollars and giving discounts, it’s trying to drive consumers towards ordering cool drinks and light meals, creating further revenue diversification and more deeply embedding itself in white-collar professionals’ consumption habits,” he added.

Similarly, Luckin’s rival Starbucks is also expanding to tea drinks in search of new growth points. In mid-April, Starbucks launched eight such drinks, including the triple circus and peach shrub, ahead of the summer season.

Starbucks’ summer drinks line-up (Image credit: Starbucks)

The coffee chains’ expansion comes after local milk tea brands HeyTea and Nayuki brought out coffee drinks in March.

Although more and more Chinese consumers are drinking coffee, tea remains popular. However, younger generations crave a variety of convenient yet trendy options compared with the oolong and traditional types enjoyed by the generations before them.

Modern Tearooms

Up-and-coming local tea brands like HeyTea have drummed up a lot of interest from younger consumer over the past two years. The on-going milk tea craze is driven by two elements: the added values of premium spaces, learned from foreign coffee chains like Starbucks, as well as the improved flavors.

By offering “tea room” spaces usually found at Starbucks, the new breed of tea shop operators offer a comfortable space usually in premium locations near shopping centers or office buildings where customers can relax. Branded in line with culture prevalent among China’s wenyi qingnian, often defined as China’s hipsters, local tea startups are now tapping white-collar workers or middle-income consumers seeking novel experiences. Flavors are improved by introducing varied ingredients including fresh fruits, cereals, and cheese.

HeyTea also plans to incorporate social media aspects into its WeChat-based ordering platform to attract more younger consumers, CTO Chen Peilin disclosed in May.

China’s tea drink market was worth RMB 90 billion (around $13 billion) in 2018, according to data from iMedia Research. The country had over 450,000 fresh produce beverage locations as of last year.

Despite the opportunities, industry watchers are concerned that the move might dilute the pair’s branding somewhat. “Starbucks sells an experience; the brand and focused menu with few items matters,” private investor ZQ Ong told TechNode. “Launching new and seasonal items just to keep up probably harms the brand if taken to excess,” he added.

Consumers also expressed their concerns over the flavors. One Weibo user named Toyomixa says she still prefers fruit tea drinks from HeyTea and Nayuki after testing Luckin’s new range. “Luckin’s fruit-taste drink is brewed out instead of being made fresh from fruit, there’s no pulp in it.” Others would choose Luckin because there are more outlets, more discounts and shorter queues.

Despite the implications for the beverage market, Ong believes food delivery giants like Meituan and Alibaba’s Ele.me will be the “biggest winner” from the changes. “Beverage deliveries, including milk tea, are fairly high volume and frequency. This helps in increasing order density per deliveryman. This goes a long way in improving margins for Meituan and Ele.me and lowering the unit cost for new retail deliveries (groceries/pharma) for Alibaba, he added.