[ad_1]
(Bloomberg) – The Luckin Coffee Inc. team is betting that what worked for them in car rentals will be a success with java. Their annual budget of $ 130 million – and the dominance of Starbucks Corp. in the Chinese coffee market – make it a risky project.
For now, US investors seem quite impressed by Luckin's aggressive expansion plan for the Xiamen-based company, which raised $ 561 million higher than expected during its IPO on Thursday. The stock jumped 20% to $ 20.38 in New York on Friday, as the S & P 500 index fell.
Reinout Schakel, CFO of the company, welcomed these commercial beginnings.
"It's always better than the bottom," he said in an interview.
The Chinese start-up is looking to overtake Starbucks, opening up more stores in two years than the industry giant in 20 years. This is a $ 5.8 billion market in which coffee consumption is still in its infancy and has the potential to explode.
To achieve this goal, Luckin President Lu Zhengyao and General Manager Qian Zhiya apply a strategy they used with CAR Inc. more than a decade ago: spend money from investors to quickly capture the market share of their rivals. This may be a common tactic for a Chinese Internet-based start-up, but it's unusual for a beverage company.
On the one hand, the barriers to entry are much higher with car rentals than with fast and convenient cafes. Although Luckin hopes that the rapid creation of a network of distribution kiosks and collection points in the office buildings for Chinese citizens to get caffeine will give them a head start, nothing prevents other established networks such as convenience store chains the same.
"The entire food and beverage industry is fully competitive and not very loyal to customers because there are too many options," said Jason Yu, general manager of Kantar Worldpanel based in Shanghai, Greater China. "Customers do not bear any cost of substitution if they want to change their brand of coffee or simply choose another type of drink."
The listing price of $ 17 per share has made Luckin one of the 10 largest IPOs in the US this year. This offer exceeded previous expectations of collecting approximately $ 300 million.
Losses of exploitation
Luckin, one of its BlackRock Inc. limited partners, has announced a net loss of $ 241 million for 2018, its operating expenses exceeding its revenues, and the company said that it could continue to suffer losses. losses in the future. Schakel declined to say when the company could be profitable.
Luckin's strategy is directly copied from the previous car rental company of the management team. Lu founded CAR Inc. in 2007 and launched an ambitious car purchase and expansion plan for its store-to-shop network, with significant advertising spend and discounts such as free service on the first day of the year. new customers. In 2014, it set up a rental car network with more vehicles than the other nine major Chinese companies combined.
Similarly, Luckin attracts Chinese consumers with generous discounts: new users receive a free cup of coffee and six 50% vouchers. The model works thanks to the technology of the company, which helps reduce labor and other costs, Schakel said.
Some investors are not convinced that Luckin's formula will translate into profits in the short term, especially when the giant Starbucks claims a dominant share of the coffee market.
"Restaurant margins in Luckin are negative by 50%. At Starbucks in China, they are positive at around 30%, "said Anthony Massaro, a partner at Pershing Square Capital Management, an investor in Starbucks. "We simply do not think that a model where every box loses money every year is sustainable."
He added that the two products are different to the extent that Starbucks aims to become a high-end brand in China, while Luckin is positioned for the masses.
"There is no prestige walking down the street with a cup of Luckin coffee as there is for Starbucks consumers," he said.
– With the help of Craig Giammona and Lisa Wolfson.
To contact the reporter about this story: Daniela Wei in Hong Kong at [email protected]
To contact the makers of this story: K. Oanh Ha at [email protected], Jeff Sutherland, Jonathan Roeder
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "For more articles like this, make -we visit bloomberg.com"data-reactid =" 51 "> For more articles like this, go to bloomberg.com
© 2019 Bloomberg L.P.
[ad_2]
Source link