The Chinese Coffee Giant Taking on Starbucks

0:05I am here in front of Luckin Coffee in Manhattan on Broadway. Yesterday, I went to check out one of the newest coffee spots in New York City. It's called Luckin Coffee, and it's a giant coffee chain from China. Out on the sidewalk, signs touted a special deal for first-time customers like me. But there was a bit of a learning curve. Looks like I need to download an app first, so let me do that. The only way to order at Luckin is through its app. and they are saying that one of their best sellers is this iced coconut latte, which frankly sounds really good. It is really hot out here today, so let's do that.

0:49The app flagged a coupon, which made my drink only two bucks. All right, order received, and I have a new coupon, actually. Next drink is 40 % off. Within a minute or two, I got a ping that my order was ready. I walked in. scanned my phone, and just like that, I was out the door. Honestly, I'm not getting a ton of coffee flavor, but it's 95 degrees, it's cold, it's icy. I don't hate it. There are just two Luckin coffee shops in the U.S. right now, both in Manhattan. But the chain's proven that it can grow fast. It took just six years for Luckin to become the top-selling coffee chain in China, dethroning a coffee giant you're probably more familiar with, Starbucks.

1:43And now, Luckin has arrived in the U.S. on Starbucks home turf.

1:51Welcome to The Journal, our show about money, business, and power. I'm Annie Minoff. It's Wednesday, July 30th.

2:04coming up on the show the competition brewing between Starbucks and Luckin Coffee

2:25our colleague Hannah Miao has been writing about Luckin Coffee And she says the brand's meteoric rise in China might never have happened without Starbucks. The American chain was instrumental in creating a coffee culture in the country. Starbucks arrived in China in 1999. It opened its first cafe in Beijing. And this was before China was even part of the World Trade Organization. So this was early days in terms of China's development. And Starbucks really spread cafe culture in this country where tea is more so the traditional beverage of choice. Chinese consumers embraced coffee. And eventually, a homegrown competitor to Starbucks emerged, Luckin.

3:12The chain's Chinese name roughly translates to auspicious luck. It was 2017 and these entrepreneurs from a ride-hailing company decided to start Luckin to challenge Starbucks. If you go back and look at some of the press from the early days, there was, you know, an interview that one of the founders, Jenny Tian, did with Chinese State Media. And they basically said, you know, the Chinese market isn't only going to have Starbucks. We should have our own coffee brand. And Luckin's founders, being kind of tech people, brought a techie twist to the Starbucks business model. Exactly. They built everything around a mobile app.

3:56And their idea was to have these really efficient stores where you can order your coffee on this app, pick it up and go. And also they integrated coffee delivery pretty early on. So their pitch was that you should get your cup of coffee delivered in less than half an hour.

4:21Luckin wanted to be fast, efficient, and with the help of a ton of coupons, cheap. One of the brand's key strategies for growth is luring in new customers with all kinds of discounts. And they're using the same playbook in New York. After I grabbed my coffee, I ran into a group of women leaving the store with their drinks. What brought you all to Luckin today? Her. She wrote. Guys, I put them onto a deal. And I think they came from, like, China or something. So now they're doing a lot of promotions to, like, promote the drinks. So we came out to get the deals. What was the deal? $2 for a drink.

4:59And, like, that compared to, like, we're in the city, so, like,$2 for a drink is crazy. And the coupons don't stop there. After your first order, the app gives you another coupon, and then another coupon. It's kind of like a tech-forward update of the old, like, coffee punch card. Like, buy 10, get one free. Exactly, exactly. But you don't even have to really spend a lot to get a reward. You don't even have to get 10! It feels almost gamified. It really draws you in and you feel kind of addicted to getting more coupons. And it's the bread and butter of what Luckin does in China. And not just Luckin, but lots of other e-commerce slash food delivery platforms.

5:45In China, this formula seemed to work for Luckin. They just developed super quickly, opened up thousands of stores, and went public in less than two years. So it was a really enormous, rapid ascent for this company. But Luckin's rise wasn't all that it seemed. So Luckin Coffee is that Chinese company that was supposed to be a Starbucks killer. It turned out the COO fabricated around$300 million worth of sales last year. In 2020, a major accounting scandal brought Luckin's momentum to a screeching halt. Basically, Luckin had to disclose that more than$300 million of sales were faked. Whoa. And it was a big deal because Luckin had this really buzzy IPO.

6:40It listed on the NASDAQ. And basically, the revelation of the accounting scandal forced it to delist from the NASDAQ. It eventually filed for bankruptcy. Luckin removed its chairman and CEO and paid a$180 million settlement. But the company stuck it out. Its new CEO would later tell the Journal that Luckin was trying to redeem itself. And not just for its own sake. He said they were trying to repair the reputation of Chinese companies. That's how bad the Luckin scandal was. And it worked. Luckin staged a comeback. By 2023, it had surpassed Starbucks as the top-selling coffee chain in China. And by 2024, Starbucks market share in China was just 14 percent, according to Bernstein Research.

7:39And it had been more than 40 percent when Luckin had just started in 2017. So this company really came back from the dead. And not only that, then superseded Starbucks in China. Exactly. Exactly. It's almost like a cat who has nine lives or something. Like, you can't get rid of it. Starbucks cannot get rid of this rival that's just coming for it. And now, that rival could be coming for Starbucks in the U.S. That's next.

8:33Luckin is arriving in the U.S. at a tough time for Starbucks. Starbucks, of course, achieved ubiquity in the U.S. by bringing premium coffee to the masses. But it wasn't just about what was in your cup. Starbucks' appeal also had to do with its vibe. Starbucks pitched itself as a place to settle down in a comfy chair to read, work, or chat with friends. What we're selling as a company is much more than a cup of coffee. Here's Starbucks then-CEO Howard Schultz. And I think coffee is a great conduit to conversation and social interaction. And we have tried to build our stores in a way that invites people not only to take the coffee to go, but to stay.

9:14But lately, the vibes at Starbucks have been a little off. One major pain point has been mobile ordering. Mobile orders are a crucial part of Starbucks' business. More than 30 % of its pickup orders are placed digitally. But also? Mobile ordering can get quite messy at Starbucks because the workers in the cafes are trying to manage the in-person orders and also mobile pickup orders and potentially also drive-through orders. So there's just a lot going on. And the former CEO, Howard Schultz, described as potentially a mosh pit at some points when all the mobile orders come in. Starbucks also offers customers a lot of options to customize their drinks, which can lead to longer wait times.

10:04You can do like caramel, frappuccino, low ice, foam, you know, dairy-free milk. You know, there's just a lot of factors. And when the workers are kind of trying to do all that customization while also taking orders from people inside the cafe, it can create this jam of a situation. And even as the customer experience at Starbucks has gotten worse, those drinks are still relatively pricey. Starbucks is trying to maintain that higher pricing for the premium customer. And this can create issues for customers when they feel like, you know, this cup of coffee is costing$6 to$8. What is the premium experience in that?

11:01And what has all of this meant for Starbucks' bottom line? It's been a bit of a rough period for Starbucks. It's reported several consecutive quarters of same-store sales declines. They poached the CEO of Chipotle and put in a new CEO to try to turn around the business. That new CEO, Brian Nickel, wants to go back to basics. He's focused on bringing back that classic coffeehouse vibe. And he's planning to shutter dozens of Starbucks locations that only handle mobile pickup orders. On an earnings call on Tuesday, he called those mobile-only stores, quote, overly transactional and lacking the warmth and human connection that defines our brand.

11:44It does sound like kind of a lot of the things that Starbucks has struggled with are strengths for Luckin. I mean, Luckin has figured out mobile ordering. Luckin embraces the grab-and-go model. Is that in their favor? I think it can be a big strength here if you have Starbucks customers who are wanting more of that quick, efficient, low cost experience. And so we'll kind of see how it plays out. I mean, what we've known about the U.S. economy for some time now is that it's the higher end customers, higher income segments of the population that continue to spend and power the economy. So that could be an advantage for Starbucks model with more of the premium pricing.

12:33But you do also have lots of people who are sick of paying so much money for everyday things. So that could play in Luckin's favor as well. In a statement, Starbucks said that the company is doubling down on what customers love. Quote, a warm and welcoming coffee house with high-quality beverages crafted by a skilled barista. So it seems like they're trying to draw that contrast with some of the strategy that Luckin is employing. And the size of Starbucks in the U.S. cannot be overstated. It's huge. It's, you know, 17 ,000 stores nationwide. so Luckin with its two stores is really just cracking into the U.S.

13:20market. So they're not shaking in their boots yet. I don't think they're concerned that Luckin is going to overnight overtake them in this market. I mean, it's Starbucks home market. They've been here forever. But I don't think they would count Luckin out. I mean, Luckin, again, was this plucky startup in China when it first started. And within years, it beat Starbucks in China. So there is something to be said about Luckin's ability to really rapidly grab market share. And is that Luckin's plan in the U.S. to rapidly grab market share? What has Luckin said about that? It hasn't said much about its overall plans, but there are some clues.

14:13So when Luckin launched its first two stores, they did post on Instagram saying that this is just the beginning. So we can expect to see more in New York and the U.S. And also in the stores themselves, they have a store number in each store in the corner of the counter. And it doesn't just say one or two. It says 00001 and 00002. So that could be a hint. That could be a hint that Luckin is looking to open more stores and fill up all those zeros in the U.S. This morning, on an earnings call, Luckin called the opening of its first two U.S. stores a significant milestone. It said the company is taking a disciplined and deliberate approach to the U.S.

15:11market.

15:21That's all for today, Wednesday, July 30th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in today's episode by Heather Hatton.

15:35Thanks for listening. See you tomorrow.