Between 2016 and 2020, the number of people who ordered food online in China doubled to 400 million. The boom was in part thanks to the generous subsidies shelled out by the country’s food delivery contenders for customers and businesses. As two companies, Meituan and Ele.me, came to dominate the market, they began to raise fees on merchants. But a new regulatory change is about to hobble their profit model.
On Friday, a group of Chinese authorities announced that food delivery platforms should further reduce the service fees charged to restaurants in order to lower the operating costs for food and beverage businesses. The news sent Meituan’s stock down more than 15% on Friday, erasing over $25 billion in market value. Alibaba, which operates Meituan’s archrival Ele.me, saw its shares slide about 4%.
The proposal came in a directive led by China’s National Development and Reform Commission, the country’s state planner, to “help struggling service industries recover.” The new rule will likely taper the profits of the internet behemoths in the long run. Commissions contributed as much as 60% to Meituan’s revenues in the three months ended September 2021. The firm also charges commissions from other types of merchants like hotels, though food delivery remains its largest revenue driver. Food delivery has been one of Alibaba’s main businesses following the firm’s acquisition of Ele.me in 2018, but e-commerce is still the giant’s main revenue engine.
China’s food delivery platforms have grappled with other changes that could erode their profitability. A viral article from 2020 brought to light the high-stress environment that put China’s millions of food delivery workers in danger. Efficiency-optimizing algorithms that don’t fully factor in human capacity and road incidents mean riders are often running the light to complete assignments.
Chinese authorities have ordered food delivery platforms to improve the safety of their workers. Meituan and Alibaba began giving riders connected helmets that come with voice command functions, so drivers won’t need to check their phones while dashing down the street on their scooters. The platforms have also relaxed delivery time limits for riders. The challenge for Meituan and Ele.me is how to balance workers’ well-being and business profitability.
Meituan is already working to reduce its reliance on manual labor. It recently showcased a fleet of food delivery drones that have been running small-scale trials in several Chinese cities. The flyer is in its early stage of product iteration and regulations for low-altitude drones are still taking shape in China. The economic viability of drone-enabled food delivery is also unproven. But automation is at least one way for labor-intensive, on-demand services providers like Meituan to test out a safer, more cost-saving future.
For China’s food delivery workers, life can feel like a constant battle with algorithms, traffic police, and disgruntled customers.
An essay detailing the hazardous work conditions of China’s food delivery drivers went viral on the internet on Tuesday, causing a moment of national reckonings on algorithmic harms to people.
In China’s populated urban hubs, one won’t miss the army of express couriers speeding and honking on their scooters. Their reckless driving, according to the investigative report from China’s People magazine, is largely a result of stringent algorithms that penalize late delivery; what’s more, the machines fail to fully factor in real-life variables like weather and traffic and often put drivers’ lives at risk. Within hours, the story had gained over 100,000 views and was shared widely and discussed on the WeChat messenger.
While food delivery platforms boast increasingly fast delivery thanks to state-of-the-art machine learning, the lofty goals the algorithms set for drivers are often attainable only by breaking traffic rules and working extended hours. Sitting indoors, customers tap on streamlined apps, detached from the dangerous delivery journey. To avoid bad reviews and wage cuts, drivers dash and honk pedestrians out of their way to be on time.
Within the first six months of 2019, Shanghai recorded 325 injuries and deaths involving food and parcel delivery drivers alone, with Alibaba’s Ele.me and Tencent-backed Meituan, the food delivery leaders, accounting for nearly 70% of the accidents.
On the flip side is an enormous market opportunity. The food ordering industry in China is estimated to reach 665 billion yuan ($97 billion) by 2020. A total of 398 million or nearly 45% of China’s internet users ordered food online as of March. In contrast, online delivery penetration in the U.S. will reach about 9% by 2020.
Millions of drivers are powering China’s food delivery economy, with nearly 4 million on Meituan by 2019 and 3 million on Ele.me at last count.
This isn’t the first time that China has come to grips with safety for food delivery drivers. Following a series of road accidents in 2017, Chinese police ordered on-demand platforms to improve safety standards for drivers. A commentary from China’s state newspaper at the time called for “more humane” management for take-out couriers.
Alibaba has taken notice of the latest critique. About 12 hours after the article published, Ele.me announced it will add a feature that allows customers to voluntarily extend wait time by five or 10 minutes. It also promised that the platform won’t penalize couriers with good credit and service history even when they are occasionally late. Meituan, Ele.me’s main rival, has yet to respond to the issues brought up by the widely circulated article.
Canadian coffee-and-doughnut chain Tim Hortons has secured a heavyweight partner to further its China expansion. The company announced on its social media account (in Chinese) on Tuesday that it has landed funding from Tencent, the Chinese social networking and gaming giant, without disclosing the size of the proceeds.
Tim Hortons did not immediately respond to TechCrunch’s request for comment. A spokesperson for Tencent declined to comment on the investment.
The 55-year-old Canadian coffee chain entered China in February 2019. With Alibaba already tapped by Starbucks, its archrival Tencent became an obvious ally for Tim Hortons. The coffee firm said the fresh capital will go towards setting up digital infrastructure, such as a WeChat-based mini app, and opening more storefronts. It currently counts about 50 locations in China, most of which are in Shanghai, and aims to reach 1,500 stores without specifying a deadline for the plan.
Investors and businesses have in recent years been jostling to convert a nation of tea drinkers into coffee consumers by merging online and offline retail. Starbucks palled up with Alibaba on a series of “new retail” efforts, which include shared membership perks between the two, delivery carried out by Alibaba’s Ele.me, voice ordering, and a distribution partnership with Alibaba’s omnichannel supermarket Hema. Coffee upstart Luckin, which is recently ensnarled in an accounting scandal, was digital from day one and focuses on app orders and 30-minute delivery.
Hello and welcome back to TechCrunch’s China Roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world. Last week, we looked at how Alibaba and Tencent fared in the last quarter; the talk in Silicon Valley and Beijing this week is on Y Combinator’s sudden retreat from China. We will also discuss the enduring food delivery war in the country later.
Brief adventure in the East
The storied Silicon Valley accelerator Y Combinator announced the closure of its China unit just a little over a year after it entered the country. In a vague statement posted on its official blog, the organization said the decision came amid a change in leadership. Sam Altman, its former president who hired legendary artificial intelligence scientist Lu Qi to initiate the China operation, recently left his high-profile role to join research outfit OpenAI. With that, YC has since refocused its energy to support “local and international startups from our headquarters in Silicon Valley.”
What was untold is the insurmountable challenge that multinationals face in their attempt to win in a wildly different market. Lu Qi, who wore management hats at Baidu and Microsoft before joining YC, was clearly aware of the obstacles when he said in an interview (in Chinese) in May that “multinational corporations in China have almost been wiped out. They almost never successfully land in China.” The prescription, he believes, is to build a local team that’s given full autonomy to make decisions around products, operations, and the business.
A former executive at an American company’s China branch, who asked to remain anonymous, argued that Lu Qi’s one-man effort can’t be enough to beat the curse of multinationals’ path in China. “All I can say is: Lu has taken a detour. Going independent is the best decision. When it comes to whether Chinese startups are suited for mentorship, or whether incubators bring value to China, these are separate questions.”
What’s curious is that YC China seemed to have been given a meaningful level of freedom before the split. “Thanks to Sam Altman and the U.S. team, who agreed with my view and supported with much preparation, YC China is not only able to enjoy key resources from YC U.S. but can also operate at a completely independent capacity,” Lu said in the May interview.
Moving on, the old YC China team will join Lu Qi to fund new companies under a newly minted program, MiraclePlus, announced YC China via a Wechat post (in Chinese). The initiative has set up its own fund, team, entity and operational team. The deep ties that Lu has fostered with YC will continue to benefit his new portfolio, which will receive “support” from the YC headquarters, though neither party elaborated on what that means.
Alibaba’s food delivery nemesis
The food delivery war in China is still dragging on two years after the major consolidation that left the market with two major players. Meituan, the local services company backed by Tencent, has managed to attain an expanding share against Alibaba-owned Ele.me. According to third-party data (in Chinese) provided by Trustdata, Meituan accounted for 65.1% of China’s overall food delivery orders during the second quarter, steadily rising from just under 60% a year ago. Ele.me, on the other hand, has lost nearly 10% of the market, slumping to 27.4% from 36% a year ago.
This may not be all that surprising given Alibaba has arguably more imminent battles to fight. The e-commerce leader has been consumed by the rise of Pinduoduo, which has launched an assault on China’s low-tier cities with its ultra-cheap products and social-driven online shopping experience. Meituan, on the other hand, is fixated on beefing up its main turf of on-demand neighborhood services after divesting its costly bike-sharing endeavor.
When both contestants have the capital to burn through — as they have demonstrated through heavily subsidizing customers and restaurants — the race comes down to which has greater control of user traffic. Meituan holds a competitive edge thanks to its merger with Dianping, a leading restaurant review app akin to Yelp, back in 2015. Dianping today operates as a standalone brand but its food app is deeply integrated with Meituan’s delivery services. For example, hundreds of millions of users are able to place Meituan-powered food delivery orders straight from Dianping.
Alibaba and Meituan used to be on more friendly terms just a few years ago. In 2011, the e-commerce giant participated in Meituan’s $50 million Series B financing. Before long, the two clashed over control of the company. Alibaba is known to impose a heavy hand on its portfolio companies by taking up majority stakes and reshuffling the company with new executives. That’s because Alibaba believes that “only when you operate can you generate synergies and really create exponential value,” said vice chairman Joe Tsai in an interview. “Whereas if you just make a financial investment, you’re counting an internal rate of return. You’re not creating real value.”
Ele.me lived through that transformation. As of September, Alibaba has reportedly (in Chinese) completed replacing Ele.me’s management with its pool of appointed personnel. Ele.me’s founder Zhang Xuhao left the company with billions of yuan in cash and joined a venture capital firm (in Chinese).
Meituan’s founder Wang Xing had more unfettered pursuits. In a later financing round, he refused to accept Alibaba’s condition for portfolio companies to eschew Tencent investments, a strategy of the giant to hobble its archrival. That botched the partnership and Alibaba has since been gradually offloading its Meituan shares but still held onto small amounts, according to Wang in 2017, “to create trouble” for Meituan going forward.
Fast, affordable food delivery service has been life-changing for many working Chinese, but some still prefer to whip up their own meals. These people may not have the time to pick up fresh ingredients from brick-and-mortar stores, so China’s startups and large companies are trying to make home-cooked meals more effortless for busy workers by sending vegetables and meats to apartment doors.
The fresh grocery sector in China recorded 4.93 trillion yuan ($730 billion) in total sales last year, growing steadily from 3.37 trillion yuan in 2012 according to data collected by Euromonitor and Hua Chuang Securities. Most of these transactions still happen inside wet markets and supermarkets, leaving online retail, which accounted for only 3 percent of total grocery sales in 2016, much room for growth.
Ecommerce leaders Alibaba and JD.com have already added grocery to their comprehensive online shopping malls, nestling in the market with more focused players like Tencent-backed MissFresh (每日优鲜), which has raised $1.4 billion to date. The field has just grown a little more crowded with new entrant Meituan, the Tencent-backed food delivery and hotel booking giant that raised $4.2 billion through a Hong Kong listing last year.
Screenshots of the Meituan Maicai app / Image: Meituan Maicai
The service, which comes in a new app called “Meituan Maicai” or Meituan grocery shopping that’s separate from the company’s all-in-one app, set out in Shanghai in January before it muscled into Beijing last week. The move follows Meituan’s announcement in its mid-2018 financial report to get in on grocery delivery.
Meituan’s solution to take grocery the last mile is not too different from those of its peers. Users pick from its 1,500 stock keeping units ranging from yogurt to pork loin, fill their in-app shopping carts and pay via their phones, the firm told TechCrunch. Meituan then dispatches its delivery fleets to people’s doors in as little as 30 minutes.
The instant delivery is made possible by a satellite of physical “service stations” across neighborhoods that serve warehousing, packaging and delivering purposes. Placing offline hubs alongside customers also allows data-driven internet firms to optimize warehouse stocking based on local user preferences. For instance, people from an upscale residential area probably eat and shop differently from those in other parts of the city.
Meituan’s foray into grocery shopping further intensifies its battle with Alibaba to control how Chinese people eat. Alibaba’s Hema Supermarket has been running on a similar setup that uses its neighborhood stores as warehouses and fulfillment centers to facilitate 30-minute delivery within a three-kilometer radius. For years, Meituan’s food delivery arm has been going neck-and-neck with Ele.me, which Alibaba scooped up last year. More recently, Alibaba and Meituan are racing to get restaurants to sign up for their proprietary software, which can supposedly give owners more insights into diners and beef up customer engagement.
As part of its goal to be an “everything” app, Meituan has tried out many new initiatives in the lead-up to its initial public offering but was also quick to put them on hold. The firm acquired bike-sharing service Mobike last April only to shutter its operations across Asia in less than a year for cost-saving. Meituan also paused expansion on its much-anticipated ride-hailing business.
But grocery delivery appears to be closer to Meituan’s heart, the “eating” business, to put in its own words. Meituan is tapping its existing infrastructure to get the job done, for example, by summoning its food delivery drivers to serve the grocery service during peak hours. As the company noted in its earnings report last year, the grocery segment could leverage its “massive user base and existing world’s largest intra-city on-demand delivery network.”
A big selling point of ordering food to the doorstep in China is price, which, in the early years, could be much cheaper than eating in-house. That’s arguably indulged a demographic of lazy, indoorsy eaters, but that may not last for much longer.
Over the past few months, users in China have noticed incremental price increases on their meals ordered via Ele.me and Meituan, the country’s largest food delivery apps. The trigger? China’s food heavyweights have gone about taking a bigger cut of each order — over 20 percent in some cases — as their priorities shifted following a major upheaval.
Three-way war
Ele.me and Meituan work just like their American counterparts Uber Eats, GrubHub, DoorDash and the likes. The apps list menu items from an assortment of local restaurants. When a user places an order, they pass it along to the restaurant and dispatch a driver — in China’s case, a scooter driver — to pick up the food. The customer can then see when their meal will arrive through a live map tracking the driver’s movement.
This new habit of ordering food via a marketplace app rather than calling a restaurant caught on rapidly in China, in part thanks to vast sums of subsidies from companies like Ele.me and Meituan to bring costs down for restaurants and users. The market was on course to reach 240 billion yuan ($35.8 billion) in transactions in 2018 with an 18 percent year-over-year growth rate, estimates research firm iiMedia. Total users would reach 355 million, which means a quarter of Chinese are now ordering food from their phones.
Meituan’s delivery driver pictured in an ad / Image: Meituan via Weibo
Food delivery startups willingly undertook the cash-intensive fight because they had deep-pocketed backers. For a few years, the sector was a three-way proxy war between China’s tech mammoths Baidu, Alibaba and Tencent, which are collectively known as the “BAT”. Baidu effectively quit the scene after selling its food delivery business to rival Ele.me in 2017. Last year saw more shakeup as Alibaba took over Ele.me, which subsequently merged with the parent’s local services unit Koubei, while Meituan went public with Tencent being a major shareholder.
Meituan led the game in 2018 with a 61.3 percent market share according to research firm TrustData, giving it a meaningful edge over Ele.me, which alongside its newly acquired Baidu Waimai commanded a total of 36.5 percent share.
Subsidies were helpful in enlisting restaurants and consumers early on, but as the market consolidates, investors will likely become more attuned to monetization. It’s thus unsurprising to see both major players scaling back from subsidy-powered growth. It’s too soon to know how the faceoff between Ele.me and Meituan will play out in the next few years, as the duo is now dealing with a fresh set of challenges and goals.
New adventures
It’s hard to nail down how much Ele.me and Meituan are charging restaurants from each transaction since fees vary on the location, type and size of a restaurant. What’s widely acknowledged is that both have been raising commission rates once every few months, forcing restaurants to rethink their strategy for ferrying food around.
“We’ve raised all our items by at least two yuan [$0.30]. We aren’t worried because we’ve built a loyal customer base over the years. For those who just started and focus on delivery, they may have a harder time,” a restaurant owner who operates a take-out kitchen in Hefei, the capital of China’s Anhui Province, told TechCrunch.
Ele.me’s delivery driver pictured in an ad / Image: Ele.me via Weibo
The subsidy-fuelled period cultivated a clan of “virtual restaurants” that operate only out of a kitchen. As subsidies shrink, those reliant on delivery as a lifeline are left with three options: close down, absorb the new costs to keep customers happy, or in some cases where the kitchen is well-functioning, shift the costs to customers.
TechCrunch spoke to more than a dozen restaurants and take-out kitchens in China’s major cities and found most are paying at least 20 percent of each order — a considerable bite to the low-margin business — to Meituan and slightly less to Ele.me. The discrepancy may speak to Meituan’s mounting operating losses — which tripled year-over-year to 3.45 billion yuan ($510 million) in the third quarter of 2018 — a soft spot that its rival poignantly pointed out.
“Ele.me promises it won’t further raise fees [on restaurants] and its rate will always be lower than that of Meituan,” Ele.me vice president Wang Jingfeng told news portal Sina in an interview in January. “Meituan is under financial pressure. But Ele.me understands the food delivery market is still in the phase of being educated. Reaping rewards from merchants too early can do great harm to the market.”
Meituan said it had no comment on its increased fees for restaurants. But the Hong Kong-listed company, driven with the vision to become the “Amazon for services,” already showed signs of stress when it ceased expansions on its costly new ventures — car-hailing and bike-rental. Food delivery accounts for the majority of Meituan’s revenues, while hotel booking is its second-most significant revenue source. The company, however, assured investors that it’s in no rush to turn a profit.
“We are not focused on the short-term profitability, even though we have been proven that we are able to do so, to make it — continue improvement in our unit economics. We would rather focus on growth and improve the overall user and merchant experience and to continue to strengthen our leadership in this market,” said Chen Shaohui Chen, Meituan’s vice president of corporate development, during the company’s Q3 earnings call.
Despite enjoying support from consistently profitable Alibaba, Ele.me will also face pressure soon as parent company Alibaba copes with slowing revenue growth. For Ele.me, opportunities lie outside China’s megacities where eating via an app is not yet a norm. All told, Alibaba plans to hire 5,000 new employees in 2019 for Ele.me and Koubei to infiltrate the largely untapped Tier 3 and 4 cities, a source close to the matter told TechCrunch, and the team will focus not just on delivery but also work to digitally power up conventional restaurants.
Food delivery is just one way to generate income. Both Ele.me and Meituan are aiming to upgrade restaurants the way Alibaba and JD.com have transformed brick-and-mortar stores: from how data analytics can beef up sourcing efficiency to implementing scan-to-order for in-house diners. The hope is a data-centric practice will convert to cost-saving for restaurants, which will eventually boost their loyalty and willingness to pay for the tech giants’ tools.
A big selling point of ordering food to the doorstep in China is price, which, in the early years, could be much cheaper than eating in-house. That’s arguably indulged a demographic of lazy, indoorsy eaters, but that may not last for much longer.
Over the past few months, users in China have noticed incremental price increases on their meals ordered via Ele.me and Meituan, the country’s largest food delivery apps. The trigger? China’s food heavyweights have gone about taking a bigger cut of each order — over 20 percent in some cases — as their priorities shifted following a major upheaval.
Three-way war
Ele.me and Meituan work just like their American counterparts Uber Eats, GrubHub, DoorDash and the likes. The apps list menu items from an assortment of local restaurants. When a user places an order, they pass it along to the restaurant and dispatch a driver — in China’s case, a scooter driver — to pick up the food. The customer can then see when their meal will arrive through a live map tracking the driver’s movement.
This new habit of ordering food via a marketplace app rather than calling a restaurant caught on rapidly in China, in part thanks to vast sums of subsidies from companies like Ele.me and Meituan to bring costs down for restaurants and users. The market was on course to reach 240 billion yuan ($35.8 billion) in transactions in 2018 with an 18 percent year-over-year growth rate, estimates research firm iiMedia. Total users would reach 355 million, which means a quarter of Chinese are now ordering food from their phones.
Meituan’s delivery driver pictured in an ad / Image: Meituan via Weibo
Food delivery startups willingly undertook the cash-intensive fight because they had deep-pocketed backers. For a few years, the sector was a three-way proxy war between China’s tech mammoths Baidu, Alibaba and Tencent, which are collectively known as the “BAT”. Baidu effectively quit the scene after selling its food delivery business to rival Ele.me in 2017. Last year saw more shakeup as Alibaba took over Ele.me, which subsequently merged with the parent’s local services unit Koubei, while Meituan went public with Tencent being a major shareholder.
Meituan led the game in 2018 with a 61.3 percent market share according to research firm TrustData, giving it a meaningful edge over Ele.me, which alongside its newly acquired Baidu Waimai commanded a total of 36.5 percent share.
Subsidies were helpful in enlisting restaurants and consumers early on, but as the market consolidates, investors will likely become more attuned to monetization. It’s thus unsurprising to see both major players scaling back from subsidy-powered growth. It’s too soon to know how the faceoff between Ele.me and Meituan will play out in the next few years, as the duo is now dealing with a fresh set of challenges and goals.
New adventures
It’s hard to nail down how much Ele.me and Meituan are charging restaurants from each transaction since fees vary on the location, type and size of a restaurant. What’s widely acknowledged is that both have been raising commission rates once every few months, forcing restaurants to rethink their strategy for ferrying food around.
“We’ve raised all our items by at least two yuan [$0.30]. We aren’t worried because we’ve built a loyal customer base over the years. For those who just started and focus on delivery, they may have a harder time,” a restaurant owner who operates a take-out kitchen in Hefei, the capital of China’s Anhui Province, told TechCrunch.
Ele.me’s delivery driver pictured in an ad / Image: Ele.me via Weibo
The subsidy-fuelled period cultivated a clan of “virtual restaurants” that operate only out of a kitchen. As subsidies shrink, those reliant on delivery as a lifeline are left with three options: close down, absorb the new costs to keep customers happy, or in some cases where the kitchen is well-functioning, shift the costs to customers.
TechCrunch spoke to more than a dozen restaurants and take-out kitchens in China’s major cities and found most are paying at least 20 percent of each order — a considerable bite to the low-margin business — to Meituan and slightly less to Ele.me. The discrepancy may speak to Meituan’s mounting operating losses — which tripled year-over-year to 3.45 billion yuan ($510 million) in the third quarter of 2018 — a soft spot that its rival poignantly pointed out.
“Ele.me promises it won’t further raise fees [on restaurants] and its rate will always be lower than that of Meituan,” Ele.me vice president Wang Jingfeng told news portal Sina in an interview in January. “Meituan is under financial pressure. But Ele.me understands the food delivery market is still in the phase of being educated. Reaping rewards from merchants too early can do great harm to the market.”
Meituan said it had no comment on its increased fees for restaurants. But the Hong Kong-listed company, driven with the vision to become the “Amazon for services,” already showed signs of stress when it ceased expansions on its costly new ventures — car-hailing and bike-rental. Food delivery accounts for the majority of Meituan’s revenues, while hotel booking is its second-most significant revenue source. The company, however, assured investors that it’s in no rush to turn a profit.
“We are not focused on the short-term profitability, even though we have been proven that we are able to do so, to make it — continue improvement in our unit economics. We would rather focus on growth and improve the overall user and merchant experience and to continue to strengthen our leadership in this market,” said Chen Shaohui Chen, Meituan’s vice president of corporate development, during the company’s Q3 earnings call.
Despite enjoying support from consistently profitable Alibaba, Ele.me will also face pressure soon as parent company Alibaba copes with slowing revenue growth. For Ele.me, opportunities lie outside China’s megacities where eating via an app is not yet a norm. All told, Alibaba plans to hire 5,000 new employees in 2019 for Ele.me and Koubei to infiltrate the largely untapped Tier 3 and 4 cities, a source close to the matter told TechCrunch, and the team will focus not just on delivery but also work to digitally power up conventional restaurants.
Food delivery is just one way to generate income. Both Ele.me and Meituan are aiming to upgrade restaurants the way Alibaba and JD.com have transformed brick-and-mortar stores: from how data analytics can beef up sourcing efficiency to implementing scan-to-order for in-house diners. The hope is a data-centric practice will convert to cost-saving for restaurants, which will eventually boost their loyalty and willingness to pay for the tech giants’ tools.
A one-year-old Chinese startup called Luckin is busy waging war against Starbucks as the new year unfolds. At an event on Thursday, Luckin announced that it aims to be the largest coffee chain in China by number of cups sold and outlets by 2019.
Caffeinated drinks are taking off in the tea-drinking nation. Average coffee consumption per Chinese consumer is expected to grow 18 percent between 2014 and 2019, well above 0.9 percent in the US. Starbucks is currently the largest player in China’s coffee market with 3,300 stores as of last May and a goal of topping 6,000 outlets by 2022.
Loss-making Luckin vows to more than double its number of locations from just over 2,000 to over 4,500 by the end of this year. It sounds like some kind of mission impossible given it took Starbucks 20 years to reach its current scale, but not all of Luckin’s facilities are the size of Starbucks’ sit-down shops.
Rather, Luckin operates a combination of cafes, tiny booths for customer pickup and take-out kitchens that dispatch deliverymen who bring drinks to people within 30 minutes, a big selling point of the company.
It also helps that Luckin has nailed powerful partners like food delivery giant Meituan Dianping after Starbucks teamed up with Ele.me. These moves in a way represent a proxy war between China’s two largest internet companies — Tencent and Alibaba, which backs Meituan and owns Ele.me, respectively.
Luckin has also scooped up loads of investments to power its lightspeed expansion. The company secured a $200 million series B funding round in December that valued it at $2.2 billion, only five months after it raised $200 million. It ventured into the market by shelling out large subsidies for consumers, with deep discounts like “buy five get five free.” It’s thus not surprising to see the company operating in the red. Luckin’s net loss amounted to at least 850 million yuan, or $124 million, within nine months in 2018, the company recently told local media.
“Our chief strategy is to quickly grab market share through subsidies, so losses are expected,” said Luckin, adding that it will press on with its subsidy-powered expansion.
A one-year-old Chinese startup called Luckin is busy waging war against Starbucks as the new year unfolds. At an event on Thursday, Luckin announced that it aims to be the largest coffee chain in China by number of cups sold and outlets by 2019.
Caffeinated drinks are taking off in the tea-drinking nation. Average coffee consumption per Chinese consumer is expected to grow 18 percent between 2014 and 2019, well above 0.9 percent in the US. Starbucks is currently the largest player in China’s coffee market with 3,300 stores as of last May and a goal of topping 6,000 outlets by 2022.
Loss-making Luckin vows to more than double its number of locations from just over 2,000 to over 4,500 by the end of this year. It sounds like some kind of mission impossible given it took Starbucks 20 years to reach its current scale, but not all of Luckin’s facilities are the size of Starbucks’ sit-down shops.
Rather, Luckin operates a combination of cafes, tiny booths for customer pickup and take-out kitchens that dispatch deliverymen who bring drinks to people within 30 minutes, a big selling point of the company.
It also helps that Luckin has nailed powerful partners like food delivery giant Meituan Dianping after Starbucks teamed up with Ele.me. These moves in a way represent a proxy war between China’s two largest internet companies — Tencent and Alibaba, which backs Meituan and owns Ele.me, respectively.
Luckin has also scooped up loads of investments to power its lightspeed expansion. The company secured a $200 million series B funding round in December that valued it at $2.2 billion, only five months after it raised $200 million. It ventured into the market by shelling out large subsidies for consumers, with deep discounts like “buy five get five free.” It’s thus not surprising to see the company operating in the red. Luckin’s net loss amounted to at least 850 million yuan, or $124 million, within nine months in 2018, the company recently told local media.
“Our chief strategy is to quickly grab market share through subsidies, so losses are expected,” said Luckin, adding that it will press on with its subsidy-powered expansion.
Luckin, a startup that vows to topple Starbucks’ dominance in China, announced on Wednesday that it’s lifted its valuation to $2.2 billion after raising $200 million in a series B funding round.
That came only five months after the coffee upstart, which soft-launched in January, picked up $200 million in investment. Luckin has been on a spending spree to open shop and burnt through $150 million within the first six months in operation, its founder said in July when the company had a cash reserve of 2 billion yuan, or roughly $290 million.
Luckin currently operates across 21 major Chinese cities, totaling more than 1,700 shops. For comparison, Starbucks’s footprint spanned 3,300 stores in China as of May, though one has to take into account that the Seattle coffee chain entered China nearly 20 years ago.
Different from Starbucks, Luckin’s brick-and-mortar facilities are a mix of sit-down cafes and pickup booths, which double as delivery hubs, and take-out kitchens that are solely for delivery staff to pick up caffeine-infused orders and put them in customers’ hands within 30 minutes.
As a result, Luckin managed to build a dense network targeting office workers who may be drawn to the idea of coffee delivery because they can’t leave their desk. There’s at least one Luckin location within a 500-meter radius anywhere in downtown Shanghai and Beijing, the company claimed.
The light speed at which Luckin has expanded in less than a year probably got on the nerves of Starbucks, which went on to team up with Alibaba-owned food delivery giant Ele.me in August to bring coffee to people’s doorstep. The American company aims to expand its delivery services to 30 cities in China by the end of 2018.
Luckin’s co-founder and chief executive officer Qian Zhiya, who is the former chief operating officer at one of China’s largest auto rental firms CAR Inc, said her startup will continue to invest in products, technology and business development to improve user experience following the new round.
Luckin raised the fresh capital from existing investors Singapore sovereign wealth fund GIC, Chinese government-controlled China International Capital Corporation, Joy Capital and Dazheng Capital. Liu Erhai, founding and managing partner of Joy Capital, joined Luckin’s board of directors following the close of the round. Liu’s investment portfolio includes Car Inc, Facebook’s old Chinese rival Renren and Hong Kong-listed game publisher iDreamsky.
