A delivery man gives a Starbucks takeaway to a consumer in Shanghai on August 2 (VCG) 

To Chen's surprise, the usually blue coffee cup looked different. It had a bright-colored abstract painting, designed especially for the Christmas season. When she turned the cup around, she saw the message printed on it: "We don't have to wait for Christmas to love others." She felt touched and on an impulse, took a photograph of the cup, sharing it on her WeChat account.

The blue coffee cup has gone viral on mobile phones, either put by the company's marketing campaigners or young consumers. In only one year since its inception, the fledgling local brand, Luckin Coffee, has thrown the gauntlet to the reigning barista in China, Starbucks, which accounted for 51 percent of specialist coffee store chains in China at the end of 2017, according to market research company Euromonitor International.

Explosive growth 

With a large latte priced at 24 yuan ($3.5), Luckin is about 20 percent cheaper than Starbucks. Moreover, its promotional blitzkrieg persuades consumers to take a trial sip. The "first cup is free," "buy two, get one free," and "buy five, get five free" campaigns plus free delivery that promises to arrive within 30 minutes if ordered within a certain distance are extremely persuasive.

"I tried it out after my friend shared a WeChat link with me," Chen Peixin, who works for an online education company in Beijing, said. "There are discount coupons and free coffee during the campaigns. It's also convenient because there is a shop right below my office and we can pick up the coffee ourselves."

Qian Zhiya, founder and CEO of Luckin Coffee, is also the co-founder of ride-sharing firm UCAR. She told KrASIA, a new digital media, that her company can address two weak spots in China's coffee shop industry: high prices and inconvenience.In four months, Luckin had opened more than 500 stores in 13 cities. The number increased by October 24, with more than 1,400 stores in 21 cities. Although the number still can't compete with Starbucks, by June 13, its service coverage in all the first 13 cities had outperformed its bigger competitor, spearheaded by its delivery service.

The rapid expansion makes Qian's ambition to win a place in China's coffee industry crystal clear. "The market will have not just Starbucks," Qian said. "Every country has its own coffee brand."

Different from Starbucks, Luckin has a new retail model, complementing brick-and-mortar stores with online campaigns and free delivery. Information technology plays an indispensable role in this model.

Qian gave an example of the application of the technology. To select sites, the company analyzes big data to assess the areas where there is most demand.

On September 6, Chinese tech giant Tencent announced a partnership with Luckin Coffee to take on rivals in China's growing coffee-drinking market. "The partnership will create a smart retail solution through tie-up on user traffic, technology exploration, application scenarios and management abilities," Lei Maofeng, Deputy General Manager of Tencent's payment platform WeChat Pay, said.

Overtaking curve 

The past years have seen Starbucks retain its formidable position in China's coffee market, despite challenges from Costa, Pacific Coffee or Zoo Coffee. None of them came close to posing a real threat to the coffee king. However, Starbucks' Q3 report in 2018 showed its sales had slipped 2 percent, the first time in nearly a decade in the Chinese market. This was also the time after Luckin was born and began to boom and some people attribute Starbucks' loss to the emerging brand. The crux of the problem, however, lies in the model.

Starbucks' model is challenged by the rapid development of the Internet, which has altered the ways of consumption and social networking. The young generations prefer high-efficiency purchases and they share their lives online, which explains how Luckin gained popularity through WeChat. Qian has seized the opportunity presented by the new era.

She also noticed the price issue in the Chinese coffee market. In Western countries, a cup of coffee costs only 0.1 percent of a person's monthly income, while it is almost 1 percent for people living in China, according to her.

So Qian priced her coffee between Starbucks and McDonald's prices and attracted customers by offering "subsidies." On July 11, the company completed raising $200 million in funds, taking its valuation to more than $1 billion and becoming the first coffee chain unicorn in China. A new round of fundraising is on the way, according to a Reuters report on November 6, though the information has not yet been confirmed by the company. But it remains a question how long the subsidy will last.

Liu Zhanxi, a 26-year-old entrepreneur in Wuhan, central China's Hubei Province, and a coffee fan, posted a WeChat message on May 22: "Luckin's way of gaining users boils down to offering subsidies, but the final profit still depends on the offline operation, since coffee by nature is not suited for delivery."

Nevertheless, Starbucks and China's e-commerce giant Alibaba formed a new retail partnership on August 2 to stave off the growing competition in China's booming delivery industry. Since September, Starbucks coffee is being delivered to different destinations through the use of apps.

"If a traditional retailer expects to do new retail, the only thing it does is to break the bottleneck of its online channel," Liu Hui, chief consultant of Beijing Huiyi Retail Management Consulting Co., told Jiemian.com. "But if an Internet company wants to do new retail, they make great efforts."

Starbucks joining new retail will undoubtedly pose a challenge to the newcomer. Liu added that user retention can also be a big issue for Luckin after the subsidy is withdrawn. So high-quality products are of crucial importance in future competition.

There is huge potential in China's coffee market and to get a bigger piece of the pie, the players need to grasp the wisdom of operations in the hi-tech age.

Copyedited by Sudeshna Sarkar 

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