Starbucks CEO says Chinese rival Luckin’s ‘heavy discount’ strategy isn’t sustainable

A war of words in the coffee world is brewing after the CEO of Starbucks claimed Chinese upstart Luckin can’t last just days after it filed for a U.S IPO.

Kevin Johnson, who leads the American coffee giant, told CNBC that competitors in China including Luckin have adopted a strategy of building market share using “heavy, heavy discounts” that he believes is not sustainable.

“We’re deploying capital and building 600 new stores per year,” he said. We’re “generating the return on invested capital that we believe is sustainable to continue to build new stores at this rate for many years to come.”

Starbucks claims 30,000 stores worldwide. It has been in China for 20 years and it is aiming to reach 6,000 stores in the country by 2022. Luckin, fuelled by over $550 million in VC money, has quickly scaled to reach 2,370 locations in under two years with plans to add a further 2,500 this year. That would see it overtake Starbucks — which has 3,600 stores across 150 Chinese cities — although that a metric gives a distorted view since Luckin specializes in digital orders and on-demand delivery. That’s in contrast to the retail model operated by Starbucks.

Still, Starbucks has moved to close any perceived gap on service. The U.S. firm struck a partnership with Alibaba last year to tap its service for coffee delivery and it is integrating with Alibaba’s e-commerce services.

Despite the competition, Starbuck said in its a quarterly report last week that same-store comparable sales — revenue from existing stores — rose by three percent year-on-year while it grew its new store base by 17 percent. In a further boost, it said its rewards membership program reached 8.3 million with the addition of one million additional customers.

“We’ve set a very good strategic foundation and we’ll continue to drive on the things that differentiate in China,” Johnson added.

Despite that promising progress, the competition is sure to reach boiling point when Luckin does go public.

Valued at $2.9 billion by a set of investors that include Starbucks-backer Blackrock, Luckin’s filing has a placeholder raise of $100 million which could increase as the listing process progresses. The company posted a $475 million loss in 2018, its only full year of business to date, with $125 million in revenue. For the first quarter of 2019, it carded an $85 million loss with total sales of $71 million.

Starbucks doesn’t break out figures for China, but across ‘China/Asia Pacific’ in Q1, it recorded $232 million in operating income on total revenue of $1.29 billion from nearly 9,000 stores.

With a strategy of growth at all cost, Luckin’s numbers are mind-boggling for a listing, let alone for an 18-month-old business.

To quote Alex Wilhelm, former TechCrunch reporter and current editor of our sister publication Crunchbase: “What an amazing F-1 [filing]. I have no idea what this company is worth, how big it will get, or what it’s current health is.”

Starbucks, though, is betting the fad won’t last and that its own business will continue to stand the test of time in China.

Interestingly enough, other companies are already emerging to undercut Luckin — our China-based partner Technode reported that Coffee Box raised $30 million last week — while the model is being replicated in Southeast Asia. For example, in Indonesia, a startup called Fore Coffee has already raised close to $10 million for a digital-first service that uses on-demand partners for delivery.