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SHANGHAI – Here's a way to compete with Starbucks in coffee: pay your customers.
Luckin Coffee, an unprofitable start-up offering big gifts and aggressive subsidies, burst in less than two years ago in a scene of Chinese coffee long dominated by Starbucks. Helped by a smartphone app that allows users to order coffee for delivery in a few taps, the company has gained nearly 17 million customers and built 2,370 stores.
He is now considering selling shares in the US, with trading expected to start on Friday. If successful, the unprofitable and yet untested business could be worth up to $ 4 billion.
The question for investors is whether Luckin's fast-growing, fast-flowing fund model is still operating in a period of reduced expectations for single-technology companies. Last week, Uber launched an initially disappointing public offering.
"It takes time for these companies to become profitable," said Ringo Choi, managing partner for China at EY, the consulting firm. "Not everyone will become the next Amazon and all will not have the basics to maintain them."
Luckin proves that the weakened Chinese technology start-up has kept part of its popular past.
In recent years, new Chinese companies have grown in importance, collecting and burning funds at a rate that would make Silicon Valley blush. Shared bike start-ups appeared overnight, flooding cities with tens of millions of rainbow-free dock bikes. The boom in online food and retail sales left the streets of Beijing and Shanghai cluttered with delivery men wearing helmets and yellow or blue bumble beepsuits, the colors of the two major delivery companies.
Many of these companies have since then, and some have disappeared, as the Chinese economy slowed down and funding for technology companies began to dry up.
Luckin hopes to resist this trend and challenge Starbucks as the king of a tea-drinking country that has only recently discovered the joys of java. Starbucks, the Seattle-based coffee chain, holds just over half of the Chinese specialty coffee and tea market, according to Euromonitor International, a market research provider. By the end of 2018, Luckin held just over 2% of the market, according to Euromonitor estimates.
But the growth opportunities are enormous. In just four years, the Chinese tea and specialty coffee market has grown from $ 2.7 billion to $ 4.8 billion, Euromonitor said. The market is still so diffuse. The second competitor of Starbucks, the McCafe, owned by McDonalds, accounts for only 5% of the market.
Luckin has grown rapidly since its inception in late 2017. It was launched by entrepreneur Jenny Qian Zhiya and has been supported by several investment companies in China, the United States and Singapore , including BlackRock. He plans to expand his storefronts in order to have the largest network of coffee chains in China by the end of the year. This would catapult Starbucks, which has 3,600 stores in China.
Maintaining this growth depends largely on Luckin's ability to retain its customers. On social media, some people rave about cheap and convenient coffee. They praise him for offering special drinks that appeal to the varied tastes of Chinese consumers, such as a blend called Guava Ruby Tea.
Others make fun of his taste and say that his coffee is only an overpriced version of the convenience store sludge.
Several times a week, 34-year-old Liu Zhiyan enjoys going to Luckin near her job to get a dose of caffeine. "Luckin is not as good as Starbucks, the flavor is not so rich," Ms. Liu said. She used to drink Starbucks once a week, but she found herself buying coffee more often because Luckin's coffees are cheaper.
"The price is low," said Ms. Liu. "In for money."
A spokesman for Luckin declined to comment, citing a period of calm before the initial public offering on the Nasdaq Stock Market.
The price of Luckin coffee is similar to that of Starbucks coffee, but then offers significant discounts. Most of its espresso-based coffees cost between $ 3.50 and $ 4, but customers rarely pay the full price because of daily discounts of 50% or more. Luckin offers his first coffee to a new subscriber to his application. A friend sponsored by this app gets another free coffee.
Luckin also attracts coffee drinkers with great promotions, allowing huge amounts of money to go back into the pockets of customers.
An ongoing promotion encourages customers to purchase at least seven items per week, individually or in groups, by placing them in a pool of similar customers. By the end of the week, all members of the group will benefit from a 5 million renminbi reduction, or about $ 723,000. Each participant at last week's pool won $ 4, the company said. During this 10-week program, Luckin told his clients that he would pay them back more than $ 7 million.
These offers would eat away at Luckin's profits, if he had any. The funds devoted to growth have led the company to record a net loss of $ 475 million in 2018. So far this year, the company has recorded losses of $ 85 million.
Although they both sell coffee, Luckin and Starbucks approach the Chinese market in different ways. Luckin relies heavily on takeaway orders and deliveries, a popular option in a country where people love order meals on their smartphones. Luckin also runs small shops where customers can pick up their coffee, check out the latest discounts or find out more about other offers.
Starbucks, on the other hand, usually offers spacious stores, known for being a comfortable meeting place, a haven for prying parents or a crowded family apartment. Its green and white logo exudes an aura of wealth in China and the company has gained intense loyalty among the many people who reside there.
"I have never been to Luckin," said Zhang Sheng, a recent college graduate who drinks coffee three times a week. "I'm loyal to Starbucks because they have a good loyalty program."
Starbucks has its own expansion plans, with the goal of almost doubling the number of men in China by 2022. Still, last summer, Starbucks announced its partnership with e-commerce giant Alibaba for delivery of his coffee via the subsidiary, Ele.me. Starbucks representatives did not respond to requests for comment.
The next big question for Luckin is how he can start making money. It is unclear if customers who like Luckin's discount coffee will be willing to pay the full price once these discounts have been lifted.
For Owen Sun, 31, who works in product placement for a luxury business, Luckin provides a quick coffee when he is too busy to quit his job. But he is a wayward consumer and recently he was waiting in a long queue at a Shanghai cafe called Manner.
"To be honest, Starbucks is better at packing coffee," Sun said. "If the Luckin coffee price was $ 4 without coupons, I could buy Starbucks."
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