Pumpkin spice lovers rejoice! Fall is finally here. As everyone flocks to Starbucks to grab their favorite PSLs, one of its competitors is left scratching its head. Luckin Coffee, the Chinese chain that was once predicted to take down the Goliath, is currently shaking due to a recent loss in profits. While all hope is not yet lost for the new startup, there have been some serious missteps on their part. Take a look at the biggest mistakes Luckin Coffee has made and how you can avoid them for your business.
A Little Bit of Luckin Coffee
Founded in 2017 by Jenny Qian Zhiya and Lu Zhengyao, Luckin Coffee has an ambitious plan: become China’s leading high-quality coffee brand and professional coffee service provider. From the start, their key selling points have been affordability and high convenience. Their products are priced 25% cheaper than Starbucks and the majority of their thousands of locations are relatively small, almost like kiosks. The purpose of these tiny shops is for customers to solely pick up coffee they have ordered off their app and go. By doing so, Luckin’s goal is to save money on retail space while still covering every corner.
For the first two years, business seemingly went well. However, in June Luckin announced a total net revenue of 909.1M Chinese yuan ($132.4M) for its second quarter. This is an increase of 648% from 2018. While these numbers are certainly impressive for any new business, it falls short of the 940M yuan it projected. By August, Luckin lost 681.3M yuan, which is more than double the loss of last year. Currently, Luckin Coffee is the 2nd largest coffee chain in China, but still resides in the red. So how did this promising new company get to this point?
In April 2019, Starbucks had around 3,600 locations in China while Luckin had 2,700. After taking their company public in May, Luckin Coffee was reportedly opening 8 coffee shops per day. According to CFO Reinout Shackel, Luckin’s plan is to grow as much as possible and figure out demand as they go along. Their target for the end of 2019 is to have 4,500 stores or more as they see fit.
Currently, Luckin has around 3,000 locations with plans to expand overseas through a partnership with Kuwait-based company The Americana Group. Expanding your business is a fantastic ambition, but the key is to start slow. Imagine opening millions of restaurants to directly compete with McDonalds, only to find out that people don’t care for it as much as you hoped. By not building a strong consumer fanbase first, Luckin is greatly overestimating the demand for their product.
They’re also forgetting one crucial thing about coffee culture. It isn’t always about getting coffee on the go. The perks of coffee shops are the given chance to sit and relax away from work, school, or home. TV shows like Friends and Frasier greatly influenced the appeal of coffee shops during the 90s. By only having pick up stations available, Luckin is eliminating what made Starbucks so successful in the first place.
In order to purchase anything from Luckin, customers are forced to download their app. While customers can still pay in cash, all transactions must be made through barcode scans. Shackel states this is to create a connection with customers and drive retention rates through their app. Luckin has also littered Chinese billboards with ads featuring actors like Chang Chen and Tang Wei. Their intention is to appeal to younger adults who prefer to pay using their phones with minimal personal interaction. However, this isolates older generations who aren’t as tech savvy. In addition, people don’t like being forced into doing things. Even something as minuscule as downloading an app can make people fee like it’s too much trouble. Not to mention it calls into question cyber security.
Also, apps cost money. A lot of money. According to FierceWireless, the standard rate for software maintenance on an app is about 15 to 20 percent the original development cost. SavvyApps reveals that apps for small businesses can cost anywhere from $50,000 – $100,000, while huge corporations spend anywhere from $500,000 – $1M to develop apps. If you’re trying to compete with a monster like Starbucks, you’re likely spending $200,000 per year to maintain your app. Costs like these certainly add more to Luckin’s deficit.
Luckin loves giving perks to first-time customers. While the app shows listing prices, new customers are given buy-two-get-one-free coupons. Some deals even let customers pay as little as 60 cents for coffee. Shackel claims it costs around 11 yuan ($1.54) to make a cup of coffee. By selling it at 16 yuan, they were still turning a profit and hoped to break even by their second quarter. Luckin came close, but it seems all those discounts may have led to more losses than they were counting on.
Discounts are great and a fantastic way to draw in new customers. But the important thing is not to over do it. One way to turn a profit while still offering perks is to have fewer, but bigger discounts. Small Business Trends also says it’s best not to spend all your resources acquiring new customers, but instead focus on loyalty rewards. As we’ve seen through Strabucks’ success and other companies like it, the #1 priority of any business should be to offer quality service to customers, not crush your competition.
Is There Still Hope for Luckin?
Luckin’s accomplishments are admirable. Rising to the 2nd largest coffee chain in China is no small feat, so it is too soon to write the new startup off. However, they need to rework their spending strategy if they ever hope to dethrone Starbucks. By the end of this year, Starbucks is expected to have 4,121 stores in China—just under Luckin’s 4,500 goal. But time is still on their side. Even with Luckin’s booming popularity, Starbucks has been around long enough to know how to properly utilize its resources and keep the #1 title if they choose. Whether or not they adopt Luckin’ aggressive expansion strategy remains to be seen, but one thing is clear. As long as they have their pumpkin spice lattes, customers will keep coming back for more.
Do you think Luckin Coffee can beat Starbucks? Let us know down in the comments.
This article originally published on GREY Journal.