By Julie Wernau and Julie Jargon
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (March 14, 2019).
Starbucks Corp. built its empire in China on the idea that
consumers there would want to be seen inside its posh cafes.
Now the Seattle-based company is struggling to keep up as local
upstart Luckin Coffee wins over a new kind of Chinese customer --
one who wants their caffeine jolt delivered in minutes. The
company's sudden rise has put Starbucks, Luckin and McDonald's
Corp. in a race to build the delivery system best tuned to the
frenetic Chinese market.
In Beijing's Wudaokou neighborhood, 24-year-old manicurist Luo
Fei started ordering from Luckin earlier this year. One week last
month she had a hazelnut latte delivered from Luckin every day. She
was impressed that each arrived in under 20 minutes.
"It's pretty fast every time," Ms. Luo said.
The battle to bring on-demand coffee to China shows how
important delivery has become for Western companies doing business
in the country, as well as how quickly competitors can emerge in
the world's second-biggest economy.
Consumers in the densely packed cities of the world's most
populous nation have grown accustomed to ordering meals and
consumer goods for rapid delivery. In some cities, so many orders
arrive simultaneously that office and apartment buildings have
installed robots to receive deliveries and avoid crowding
elevators.
During its two decades operating in China, Starbucks has focused
on the country's wealthiest consumers, building thousands of
well-appointed stores where customers can linger over expensive
drinks. Delivery was a recent addition. Unofficial outfits had been
delivering Starbucks coffee previously, but in August 2018
Starbucks teamed up with Ele.me, the food-delivery platform owned
by Alibaba Group Holding Ltd., to offer delivery from an initial
150 stores starting in September.
By then, the coffee giant had spent nearly two years developing
special lids and packaging to protect drinks from spilling or
cooling during the mad dash to customers in China.
Luckin, backed by venture capital and run by local managers,
integrated delivery into the service at its bare-bones stores from
the outset. Since its founding in October 2017, Luckin has raised
$1 billion and opened 2,000 stores mainly offering delivery or
pickup -- many just feet away from a Starbucks cafe, according to
financial analytics company Thinknum.
"We know that Starbucks have done their homework," said Reinout
Schakel, Luckin's chief strategy and financial officer. "We know
they sit in locations where there's a lot of demand."
Luckin is currently in talks to get a loan of around $200
million from a few Wall Street banks, said a person familiar with
the matter. The company is also preparing for an initial public
offering in New York that could happen as soon as the first half of
this year, the person said, adding that the company will target a
valuation of $3 billion.
Starbucks Chief Executive Kevin Johnson has touted the coffee
giant's expanding opportunities in China -- its largest market
outside the U.S. -- while acknowledging the challenges of
navigating an evolving landscape and shifting consumer behaviors.
"We expect competition to remain highly promotional and
disruptive," he told investors in January.
Starbucks and Luckin guarantee delivery within a half-hour in
major Chinese cities. McDonald's, which launched coffee delivery in
Shanghai last year, guarantees orders will arrive within 28 minutes
from a more limited number of its restaurants.
Starbucks plans to open nearly 600 stores in China this year on
top of the 3,700 it operates there now. Luckin plans to open about
2,500 stores in China this year, which would bring its total to
4,500. Both companies hope delivery will entice consumers to crave
coffee more often and make more profitable purchases at physical
stores.
It is a big bet, considering China is still developing a taste
for coffee. Annual coffee consumption per capita is roughly 5 to 6
cups in China, compared with the more than 300 cups per capita
consumed by Americans annually, according to Sanford C. Bernstein
researchers.
And like food delivery in the U.S., analysts say, sending coffee
to customers in China is mostly a money-losing endeavor.
Starbucks and Luckin wouldn't say how much it costs to deliver
their coffee or how much they have invested in those services. But
Starbucks charges a lot more for its coffee than Luckin, which has
appealed to cost-conscious consumers as China's economic growth has
slowed.
In Beijing, a 16-ounce Americano costs 37 yuan ($5.52) to have
delivered from Starbucks and 27 yuan ($4.02) from Luckin. Starbucks
orders include an added charge of 9 yuan ($1.34) for Ele.me, whose
drivers fill the orders. Luckin's orders include a 6 yuan ($0.89)
fee for its courier partner, SF Express.
Delivery companies charge Starbucks and Luckin an average of 7
yuan ($1.04) per order, according to David Dai, senior analyst at
Sanford C. Bernstein in Hong Kong.
Starbucks surprised investors last year when same-store sales in
China fell 2% in its fiscal third quarter ended in July, partly
because of tough competition for deliveries. Sales improved in the
past two quarters, but growth is considerably slower than before
Luckin began expanding.
Starbucks expects its profit margin in China this year to be
hurt by costs associated with delivery. It is making a big push on
the service, aiming to offer it at about 90% of Starbucks stores in
the country by September. The company derived approximately $2.5
billion in fiscal 2018 revenue from China, or 10% of overall
revenues, Sanford C. Bernstein estimated.
Luckin is a privately held company and hasn't released sales
figures.
Getting coffee from shop to consumer is no small feat in a city
like Beijing, where coffee is delivered by scooter. Delivery
drivers face oppressive traffic and jostle one another in building
lobbies as they hustle toward customers.
Each Starbucks delivery order requires sealing a drink with the
special spill-proof lid and delivery bags that show a customer
their order hasn't been tampered with. A caramel macchiato served
in stores with a drizzle of caramel syrup on top is delivered with
a more durable caramel-flavored foam instead.
Dong Leng, 25, said she splurges on a cappuccino at a Beijing
Starbucks in the morning because she likes the sound the machine
makes and the warmth of the cup in her hands.
In the afternoon, she gets a cheaper pick-me-up delivered from
Luckin. "Luckin is much less expensive than Starbucks," she
said.
--Xiao Xiao, Chunying Zhang, Bingyan Wang and Julie Steinberg
contributed to this article.
Write to Julie Wernau at Julie.Wernau@wsj.com and Julie Jargon
at julie.jargon@wsj.com
(END) Dow Jones Newswires
March 14, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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