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.

TechCrunch returns to Shenzhen for our latest China event from November 19-20

We’re excited to announce our return to Shenzhen, which will host our next event in China later this month. Once again organized with our longtime local partner TechNode, the two-day event will run from November 19-20 at the Shenzhenwan Science and Technology Ecological Garden.

Our first TechCrunch event in Shenzhen — the city widely acknowledged as the global capital for hardware — took place in June 2017 and it featured the likes of Mobike (which later sold to Meituan for $2.7 billion), Hong Kong-listed Meitu, Klook (which raised $200 million this year), Ofo, Indiegogo, Xiaomi partner Huami (which went on to go public in the U.S.) and Kik, which gave details of its upcoming ICO.

The theme of this year’s show is “reshaping innovation” and it’ll feature industry leaders, movers and shakers that include, HTC, Walmart, Airbnb, WeWork, Suning, Royole, Huami and lots and lots of investors. More widely, speakers at the show will come from areas that include IoT, artificial intelligence, big data, e-commerce, co-working, the shared economy, online education and — of course — the hardware.

For the third TechCrunch China event in a row, we’re dedicating an entire afternoon to blockchain technology. This time around, the blockchain stage will focus on (actual) use cases, ranging from smart cities and governance, to supply chain and fintech, especially in China.

Alongside keynotes and panels from tech leaders, our Startup Alley exhibition space will host more than 150 startups — so, if you want to see what’s hot in the ‘Silicon Valley of Hardware,’ don’t miss it!

Mobike CTO Joe Xia was among the speakers at last year’s TechCrunch China event in Shenzhen

We will also once again host the VC Meetup program. That includes the ‘business blind date’ feature that gives startup founders 10-minute meetups with top VCs. It has repeatedly been one of the most popular aspects of our Chinese events based on feedback from both founders and investors, too.

As is the case with TechCrunch events, the Shenzhen 2018 show will kick off with a hackathon that takes place over the weekend, 17-18 November. Since its inception in 2011, TechCrunch’s China hackathon has always has been an exciting and busy place for local coders, makers and designers across our events in Beijing, Shanghai, and Shenzhen. No matter what ideas you think up or what skills you put to work, be sure to join us for a geeky weekend.

There’s plenty more going on beyond what we’ve highlighted above — you can check out the agenda for full details right here.

We look forward to seeing you in Shenzhen once again — don’t miss out, head here to get your ticket for the show!