China Consumer

Brewing issues

Could Luckin Coffee be the next Ofo?

luckin-coffee-w

A subsidy in every cup

It was one of the stellar ‘unicorns’ in China’s bicycle-sharing industry. During its heyday, the start-up attracted as much as $2.2 billion in funding from internet giants like Alibaba and Didi Chuxing. Its business model was hailed as one of China’s “four great new inventions,” together with high-speed rail, mobile payments and online shopping.

But Ofo is now struggling to stay afloat. The influx of so much capital resulted in a waste of its resources: shared bikes were left unattended like garbage on city streets across China. Worried that the company could go under, millions of its users have demanded their deposits back.

“If Ofo’s success is based on an illusion that the power of capital over the past few years in China is invincible, then its failure marks the disillusion,” Tencent’s news portal grimly concludes in a recent article titled, “Who Killed Ofo?” (though it should be pointed out that the internet giant is not a disinterested party; Tencent holds a big stake in Meituan-Dianping which bought Ofo’s main rival Mobike last year and renamed it Meituan Bike in January).

Now there are whispers that another Chinese unicorn could be the next Ofo. Luckin Coffee, which WiC subscribers likely first came across in our pages last April, has become a darling in China’s start-up world. The company raised about $400 million in two rounds of funding last year and is said to be valued at over $2 billion, rendering it the first coffee unicorn. There are also rumours that the app-based coffee chain wants to list on the Hong Kong Stock Exchange.

Founded by the same team behind ride-hailing platform UCAR, Luckin is challenging Starbucks’ dominance by targeting office workers and students who prefer to have their coffee on-the-go or delivered right to their desks or homes.

The tech-focused coffee chain charges less than its American rival: a tall latte at Starbucks costs Rmb31 compared with just Rmb24 at Luckin (for more see WiC406).

Luckin recently announced that it plans to open about 2,500 new outlets in China. That would bring its total number of stores in the country to more than 4,500 by the end of the year, according to co-founder and chief executive Qian Zhiya. That figure would overtake Starbucks’ expected 4,121 stores across China by the end of 2019 (Starbucks currently has about 3,600 stores).

But as proved the case with Ofo, Luckin’s model burns through cash at a fierce rate. The company revealed that it lost Rmb850 million ($126.78 million) in the first nine months of 2018. “Profitability is off-discussion at this stage,” Yang says, shrugging off the concerns. “What we see is [growing] speed and user scale.”

Part of the reason for the cash-burn is its heavy reliance on customer subsidies to drive sales. According to company data, as of December 2018, Luckin had sold a total of 85 million cups of coffee with sales of Rmb763 million, which means the average amount paid per cup was Rmb8.9, a third of its sticker price. “Our team’s experience in transforming traditional industries can also be replicated in the retail industry. First, we use subsidies to ‘destroy’ an industry, and then we turn to the internet to recreate it,” Yang told a press conference, by way of explanation.

But as Yang must realise, most businesses built on subsidies usually find it hard to wean their consumers off them – suggesting it might be easier for Luckin to rapidly build scale than solid profits.


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