Mark Tanner

China’s Coffee Market is Finally Starting to Get Interesting

2018/07/04 Mark Tanner
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Only in China. At the beginning of the year Luckin Coffee hadn’t sold a single cup of coffee. Less than six months and 500 stores later, the coffee chain is valued at more than a billion dollars with over 1.3 million users of their app. For the first time, it is looking like Starbucks has a legitimate challenger in the mainland.

If Starbucks is the Apple of coffee, then Luckin is the Xiaomi, hoping to offer a premium product at a lower price, and do it with locally-resonant and timely marketing and promotions to create an online ecosystem to encourage ordering and sharing.

Following the New Retail strategy being rolled out by the tech giants, Luckin is pushing the online-offline model. It only allows customers to buy their coffee from their app (no cash or cards are accepted in store) and offers 30-minute delivery. While New Retail typically creates a richer experience for consumers, it also allows retailers to extend their reach and squeeze more revenue out of their fixed costs such as rent. Hema adopts a similar model, ringing in 60% of sales through its app. Another part of their plan is paying lower rent, with stores located a few streets back from the premium locales of Starbucks.

Luckin is also following the classic Chinese tech strategy of tapping into the seemingly-infinite pool of investor cash and expanding at a mouthwatering rate – faster than Starbucks – creating buzz through promotions and incentives, then worrying about profitability when they have critical mass or the money dries up. Anyone living in a large city in China is unlikely to have missed their ads or headline-grabbing lawsuit against Starbucks for monopolistic practices.

The rise of Luckin should provide some lessons to most brands for the following reasons: 1) As saturated as it may seem, with the right products, strategy, funds and focus, there is always room to enter or grow market share in China; 2) Products such as coffee that have seen relatively small consumption levels in China can quickly morph into major categories; 3) Categories traditionally dominated by foreign brands are no longer far out of reach from ambitious domestic brands; and 4) Integrating online and offline initiatives is a powerful way to reach and resonate with consumers and beat the competition.

Time will tell whether or not they challenge Starbuck’s formerly uncontested supremacy, but whatever happens, they will be good for coffee brands overall. Although coffee consumption has nearly tripled in the past four years in China, Chinese consume an average of just 4-5 cups of coffee a year – a little more than 0.5% of Europeans and around 1% of Americans. Luckin are likely to lure more Chinese into habitual consumption, who over time will acquire more sophisticated tastes and needs, blazing the trail for well-marketed higher quality boutique coffee brands. These smaller brands may only ever account for a tiny share of the market, but in China that can be rather large. For the good fight of better coffee in China, we’d welcome the opportunity to assist with the strategy! Go to Page 2 to see this week’s China news and highlights.

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