A storm in a coffee cup: Should Starbucks worry about Luckin in China?

In an open letter this month, Beijing-based Luckin Coffee accused Starbucks of using exclusive contracts with property owners to prevent other coffee shops from being present at the same sites, as well as pressuring industry suppliers to stop doing business with Luckin. The startup threatened Starbucks with an unfair-competition lawsuit.

The salvo is the latest in a 'David vs Goliath' PR narrative from Luckin since its soft opening five months ago. In this period, the brand claimed to have sold an impressive 5 million cups of coffee in its 400 stores across 13 cities.

The impending legal battle for coffee-mug share is described as ‘blue versus green' by local Chinese media due to the logo colours of Luckin and its gargantuan American competitor, Starbucks.

Starbucks has a powerful market position in China, with 3,300 stores in 141 cities, beating other international rivals such as Costa Coffee and Pacific Coffee through domination of strategic real estate and superior in-store experience. On 17 May, Starbucks already announced its ambition to triple revenues in China over the next five years. This plan will include opening a new store every 15 hours through to 2022.

Luckin describes itself as a challenger to Starbucks, with very different marketing logic.

All purchases are managed through Luckin’s app in which consumers can collect their coffees in-store or have them delivered in 30 minutes. Luckin’s key interface with users is this very app. Aside from an ordering service, the app provides a map that helps coffee aficionados find different types of stores, ranging from flagship locations where you can sit and enjoy your beverage (just like Starbucks), to spots where you can buy and go.

Apart from convenience, Luckin has worked hard to create credibility and relevance through its communications. The brand’s collaboration with the World Barista Championship is proudly displayed in elevator advertising in office areas. Fronting their campaigns are local actress Tang Wei, well known for her relatability and spontaneity, and Taiwanese actor Chang Chen, prized for his masculine style and taste.

Luckin has an interesting differentiator in its provision of enterprise accounts and discounts for corporations wishing to caffeinate their employees – a smart move as Chinese companies look to invigorate their work environments.

Its price strategy also fills a gap between coffee offerings from fast-food restaurants such as McCafe and Starbucks. Its coffee is typically 20% more expensive than the former, and 10% cheaper than the latter, but still premium enough to drink in front of colleagues.

As Chinese consumers gain more knowledge and appreciation of coffee, Starbucks will eventually have to accept that new contenders with niche footholds will emerge.

While Starbucks rules the roast for in-store coffee consumption, Luckin has turned the workplace to its advantage. In-office coffee consumption is a statement of ambition among millennial professionals in China. The millennial professional’s weapon of choice is a branded Styrofoam cup containing a double-shot latte.

Also, Luckin has the potential to capture other 'coffee occasions' such as on-the-run, take-to-work or afternoon pick-me-up coffees.

So, Starbucks should continue to strengthen its in-store experience through service improvement. Arguably, Starbucks’ presence in major Chinese cities has reached a point of saturation. What was once a premium choice has now become relatively mass for local urbanites. Adding to the brand's drift is long queues at peak times that increasingly create a zero-sum ultimatum for time-poor millennial workers.  

Starbucks should be very concerned about Luckin.

Jerry Clode is head of digital insight and director of SMART Research at Resonance China.