你好 – Nǐhǎo – good afternoon! In this post I would like to introduce Luckin Coffee to you.
In terms of the number of branches, the company is the largest coffeehouse operator in China. By the end of 2019 there were more than 4,500 locations in the Middle Kingdom (Starbucks: 4,100). The number of customers was over 40 million.
Luckin Coffee is growing extremely fast. The current figures for the past third quarter of 2019 are very impressive. Compared to the same quarter last year Q3 / 18:
- Revenue increased 558% from $ 33 million to $ 214 million.
- Average monthly total sales were 44.2 million items, an increase of 470% over 7.8 million.
- This growth is primarily due to the total number of branches. At the end of Q3 / 19 there were already 3,680 branches, which means an increase of 210% compared to 1,189 branches. As mentioned at the beginning, the company even reported more than 4,500 branches in January 2020 – an increase of another 800 branches since the announcement of the last quarterly figures.
For me, this is motivation enough to take a closer look at the company.
Starbucks – pioneer of Chinese coffee consumption
The Middle Kingdom is particularly known for its long tradition of drinking tea. China is the country of origin of tea and it was the most important drink more than 4,000 years ago. This tea tradition lives on to this day, tea houses can be found everywhere that invite you to linger.
At the turn of the millennium, the American coffee house chain Starbucks entered the Chinese market and for the first time offered coffee in its branches on a larger scale.
Starbucks conveyed the western myth of the successful employee who is on his way to work with a Starbucks mug or the efficient founder who starts up with his MacBook in the Starbucks branch.
This image was particularly well received by the younger Chinese. The Starbucks mug and drinking coffee became a status symbol.
This move from Starbucks was strategically very far-sighted. In the United States and especially in Europe, Starbucks competes with many local coffee bars or coffee chains (Costa Coffee). In addition, most people have a coffee machine at home or in the office and thus supply themselves with coffee.
The Chinese market is somewhat different in this regard. Few people have their own coffee machines and there are only a few coffee bars. So Starbucks has entered a market that has virtually no competition.
Although the Chinese, as mentioned at the beginning, are actually a nation of tea drinkers, Starbucks has the most shops in China after the USA.
So Starbucks has more or less prepared the Chinese coffee market. But now a powerful competitor is entering the field – Luckin Coffee.
While the company is still at a loss, it has opened more stores in China within two years than Starbucks in the past 20 years.
Starbucks is also under pressure in terms of price. Luckin Coffee products are about 20-30% cheaper.
Luckin Coffee business model
Luckin Coffee was founded in 2017 by the Chinese Qian Zhiya and is based in Xiamen. The name of the company stands for Luck (happiness).
The company sees itself as a pioneer of a technology-driven coffee retail model and a cheap competitor to Starbucks.
It appears confidently as an alternative to the Americans and sometimes publicly denounces Starbucks’ monopoly in PR campaigns. Since many Chinese are very nationally conscious (which is promoted by President Xi), this is a clever marketing strategy that does not seem to fail to have an impact.
Compared to Starbucks, the Luckin Coffee branches are significantly smaller and therefore offer fewer seating options.
It offers the usual products that can also be found at Starbucks – coffee and all conceivable derivatives.
Basically, Luckin Coffee has set itself the goal of offering coffee, especially to take away. Many of the shops are in close proximity to larger office complexes in order to be able to provide the employees with sufficient coffee early and at noon.
In contrast to Starbucks, the branches manage completely without a cash register system. The company processes all ordering and payment processes via the mobile app. According to the company, this should improve the customer experience and operational efficiency. Their success proves them right. Starbucks is also increasingly trying to implement a cashless environment.
According to the company, the goal for the coming years is to maximize customer comfort, improve brand awareness and achieve even broader delivery coverage.
So that you can get a better idea, I have included the following video, which takes you to one of the Luckin Cafés.
In January 2020, the coffee chain operator announced two new services, Luckin Coffee EXPRESS – a coffee machine and Luckin Pop – a machine that sells snacks and drinks. The aim is to reach more consumers in factories, office buildings, universities and schools, airports, bus stops, petrol stations and motorway service stations.
According to the company, the products in the snack and beverage vending machines can be offered at lower prices than the competition thanks to a large-volume procurement strategy and close cooperation with the suppliers.
In summary, unlike Starbucks, Luckin Coffee is more focused on technology and creating efficient processes. The company also wants to supply as many people as possible with its products. There is less emphasis on staying in the branches, but rather on fast processing – somehow fits super-ambitious, modern China.
Despite its only three years of existence, Luckin Coffee has very impressive statistics. The growth figures described at the beginning are really enormous – I don’t remember ever reading a sales increase of more than 500% in a quarterly report.
Because of this growth prospect, Luckin Coffee is also valued at around $ 10 billion on the stock exchange, although it is currently only generating sales of approximately $ 500 million (trailing twelve months). The cost of massive expansion is also reflected in the profit and loss account. The company posted an operating loss of $ 350 million (TTM) – that’s violent.
So it all depends on whether Luckin can continue to grow so strongly. Here, however, I am optimistic.
Tier 1 liquidity – the ratio of cash ($ 243 million) to current liabilities ($ 116 million) – is 209%. This value can be considered very solid.
Even if the long-term debt of $ 53 million is added, the cash position covers the total of all debts by far ($ 243 million cash to $ 169 million debt). This is a very good financial situation that allows Luckin Coffee to continue to grow strongly.
The coffee market must of course also enable this growth. But there should be enough potential here.
While the Americans drink an average of 400 cups of coffee per person per year, in China it is just 5 cups.
As a result, the volume of the Chinese coffee market is expected to increase from $ 7.1 billion in 2018 to $ 12.6 billion in 2023, not least triggered by the Starbucks and Luckin Coffee offerings.
This illustrates the long-term growth opportunities. If the Chinese only drink an average of 50 cups per person per year in 10 years, which corresponds to only one eighth of the US consumption, the market would have to increase tenfold (at constant prices).
The more market share Luckin Coffee can claim, the more the company will benefit from the growth of the coffee market.
Luckin Coffee’s strong drive to expand is probably also due to the fear that other suppliers will benefit from the potential of the coffee market. The faster Luckin Coffee takes a leading position here, the faster the company may be able to achieve cost leadership and brand awareness that leads to deep barriers to entry.
I personally hold Luckin Coffee shares. For this reason, I could be biased and therefore this post is not an investment recommendation for you. The share price is likely to fluctuate significantly in the coming months and years depending on the growth figures. This should always give good entry opportunities.
In the event that the Chinese do not become a coffee lover nation, Luckin Coffee still has very good cards. The company also sells the Chinese favorite drink – tea.
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