Luckin Coffee is opening 3 locations in China per day, but growth path is risky

2 weeks ago by James Mattone in Features, Trends
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Two months ago, we profiled Luckin Coffee ($LUCKINCOFFEE), the China-based coffee chain that has quickly become a home-brewed competitor to Starbucks ($NASDAQ:SBUX) and other Western coffee shops that are trying to enter and expand in that country's market.

Today, according to store data from Luckin Coffee, the chain has expanded its number of storefronts by over 11% from Janaury 15 of this year to April 2. In other words, during that time period, there were 255 stores opened, or over three stores per day.

And Luckin isn't done yet; according to 36kr.com, the company is planning to have 4,500 operating locations by the end of 2019. For perspective, Starbucks currently has 3,600 locations in the country, and Luckin has 2,550 locations as of April 2.

If Luckin Coffee wants to open 1,950 more stores at its current rate, it would take about 18 months. So, therefore, it would need to take its already ridiculous expansion rate to ludicrous speed.

How is Luckin Coffee able to do this? Not all locations are sit-down cafes. Some of the locations are small kiosks that act as takeaway windows where either delivery drivers or customers can grab a cup and go.

Combined with super-fast delivery and cheaper pricing per cup than Western competitors, Luckin is primed for continued rapid expansion within Chinese borders.

A focus on the "New Tier 1" Cities

Within this data of recently opened stores, there is a clear divide into the company's expansion strategy across all different tiered cities. 

When expanding within China, companies look at what "tier" a city is. For example, a brand may look to expand more in New York City (Shanghai, the finance capital of China, is a Tier 1) rather than to Boston (Xiamen, a port city, is Tier 2) or vice versa.

Out of the 181 stores that Luckin Coffee has opened from February 1 to April 1, 92 were in "New Tier 1" cities. These are cities outside the big four Tier 1 cities — Shanghai, Beijing, Guangzhou, and Shenzhen — but are still big enough in terms of economic opportunity to not be considered Tier 2 cities.

City

Stores open Feb-Apr 2019

City-Tier

Shanghai

18

1

Beijing

14

1

Nanjing

13

new 1

Chengdu

11

new 1

Hangzhou

9

new 1

Ningbo

9

new 1

Wuhan

9

new 1

Guangzhou

9

1

Qingdao

9

new 1

Suzhou

8

new 1

Xiamen

7

2

Shenzhen

7

1

Tianjin

5

new 1

Xian

5

new 1

Fuzhou

5

2

Wuxi

4

2

Wenzhou

4

2

Changsha

4

new 1

Kunming

4

2

Chongqing

4

new 1

Changzhou

4

2

Yangzhou

3

3

Nantong

3

2

Zhengzhou

3

new 1

Shaoxing

2

2

Quanzhou

2

2

Jinan

2

2

Dalian

2

new 1

Dongguan

1

new 1

Foshan

1

2

Insight from Chinese media outlets: pump the breaks... or not?

While this growth is incredible, this is all happening as the company is taking RMB 45 million ($6.7 million) worth of movable assets as collateral to Zhongguancun Technology Lease Co., Ltd, according to Chinese data and analytics company Qichacha.

In other words, it is taking the value of its coffee machines, milk boxes, and other items as a loan to have more free-flowing capital. On top of this, during the first nine months of 2018, the company reportedly lost RMB 800 million ($119.2 million). 

This loss and loan move, however, may not be too much cause for concern among those who want to invest in the company. As investors know, plenty of startups operate at a loss. And, even if that was a concern, Luckin's executive board include Qian Zhiya, who helped make UCar into a household name in China as its COO.

As economic critics begin to write that the Chinese economy is stabilizing, we'll continue to monitor Luckin and its potential to upset Starbucks in the global market.

Stella Weng contributed to reporting in this article.

James Mattone

James is the Associate Editor at Thinknum Media, and he has an interest in video games, music, and tech news. You can find him on Twitter @TheJamesMattone.

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