Luckin Coffee's current business model is not sustainable. And at a certain point, the investor funding has to stop flowing if nothing changes.
— Danni Santana
The Chinese startup, already regarded as Starbucks’ biggest threat in Asia, spent more than $111 million on advertising or “sales and marketing expenses” last year, equivalent to 89 percent of the chain’s total revenue generated over the same period.
Luckin Coffee’s commitment to promoting its brand has earned a lot of buzz since launching just over 18 months ago. The company, however, disclosed net losses of $241.3 million in 2018, despite completing more than 4 million monthly transactions.
Luckin Coffee’s business model is highly dependent on discounted drinks and special offers to lure customers away from rivals. More than 50 percent of its clientele are repeat customers, it says.
“We intend to further increase our brand awareness, expand our customer base and store network, and expect to continue to invest heavily in offering discounts and deals and other aspects of our business, especially sales and marketing expenses,” the company said in its filing.
Revenue may not grow at the rate shareholders may expect as a result, it added. Luckin Coffee generated $125 million in revenue last year. By comparison, 18 percent of Starbucks global $6.6 billion revenue came from China in 2018.
Aggressive Store Expansion
China’s coffee market is largely under-penetrated. Both Luckin Coffee and Starbucks know it, and each has plans to significantly grow their presence in the country over the next three years.
While Luckin Coffee operates three types of stores, including both traditional sit-down cafes and delivery kitchens, 91 percent of its 2,370 outposts are pick-up only locations, which offer limited seating and are typically located near office buildings and college campuses.
“This enables us to stay close to our target customers and expand rapidly with low rental and decoration costs,” the chain said, adding that a majority of its customers order and pay for drinks ahead of time via Luckin Coffee’s mobile app.
With the company expected to operate at a loss for the foreseeable future, a large portion of the funding for Luckin Coffee’s continued store expansion may come from private equity funding. The company announced a new $150 million investment led by BlackRock last week, upping its total funding to 550 million, according to Crunchbase.
Luckin Coffee plans to have the largest coffee network in China by store count by the end of the year. Not to be outdone, Starbucks, which already has 3,400 stores in the country, has targeted 6,000 total stores in 230 Chinese cities by 2022, it said in December.