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Luckin Coffee's massive loss creates doubts about its future

Logos are seen on cups for sale at a Luckin Coffee store in Beijing. Photo: Reuters

The recent media reports about Luckin Coffee suffering from a huge loss have laid bare the weakness of the Chinese nascent coffee brand's operation mode based on money-burning store expansion and customer subsidies which industry experts list as a major handicap for the coffee chain's future development and its competition with Starbucks.

According to a business plan made for its series B funding obtained by Chinese media outlet QDaily, Xiamen, Fujian province-headquartered Luckin Coffee, which started operation a year ago, posted a net loss of 857 million yuan ($123 million) in the first nine months of the year.

The QDaily report went viral and was cited by many bigger news providers, creating doubts about the sustainability of the company's business model.

Over the past year, domestic media outlets have hailed Luckin Coffee as an admirable young coffee brand not only because of its potential to challenge the dominance of US rival Starbucks in the Chinese market, but also because of its unbelievable business expansion pace. It has whetted Luckin Coffee's ambition to surpass Starbucks. However, some industry experts have kept cool and warned Luckin Coffee of a risk of the "domino effect" once it falls out of favor with venture capitalists.

Luckin Coffee has confirmed the QDaily report in a statement, which said that the full-year loss in 2018 would be much higher. "Grasping the market share rapidly through subsidies is our established strategy. So far, the loss is in line with our expectation. The company will offer different subsidies to customers at different phases," said the statement.

The company has sold more than 85 million cups of coffee and boasted a consumer base of more than 12 million in less than a year since its establishment, added the statement.

As of the end of November, about 1,700 Luckin Coffee stores have been opened in 21 major Chinese cities such as Beijing and Shanghai. The company has planned to establish 2,000 locations in China by the end of 2018. The crazy store expansion has astonished rival Starbucks, which spent nearly two decades to open over 3,400 stores in the country.

The exposure of the loss came after Luckin Coffee expanded its valuation to $2.2 billion earlier this month, when the coffee chain raised $200 million in its latest funding round led by investors including Singapore sovereign wealth fund GIC and China International Capital Corp Ltd. In July, its valuation just stood at $1 billion.

The coffee company's breakneck growth also came amid the "capital winter", during which Internet-based, subsidy-driven startups have been in hot water due to lack of funding. One of the examples is Ofo, once one of the biggest bike-sharing companies in China. Currently, Ofo is on the verge of bankruptcy due to capital chain rupture and users' sudden demand for deposit refund. The bike-sharing firm, on the back of several rounds of fundraising, ambitiously expanded presence at home and abroad. It has suspended operations in several foreign markets.

While the loss has led to the view that Luckin Coffee would follow in Ofo's steps, Zhu Danpeng, an independent food and beverage industry analyst, said that Luckin Coffee only spent less than 80 yuan to win a customer (the figure is calculated based on the net loss of 857 million yuan and the consumer base of 12 million), adding that it is much lower than many other Internet-based companies, which on average spent two or three hundred yuan to get a customer.

"The coffee industry is not a field everyone can enter because it needs technology and brand effect. With the coffee market becoming mature, Luckin Coffee could have an opportunity to make profit to offset subsidies," said Zhu.

Some industry experts echoed Zhu, saying that China's coffee market is far from saturation, citing statistics which showed that a Chinese person on average only consumes 5 or 6 cups of coffee every year, with the number in big cities such as Beijing, Shanghai and Guangzhou standing at 20 cups.

Qian Zhiya, founder of Luckin Coffee, has said that the company has not set a specific timetable for profitability as the coffee market needs some time to be cultivated.

But Luckin Coffee has taken steps this year to enhance its exposure to consumers.

The company is planning a partnership with on-demand service provider Meituan for delivery service. The planned cooperation comes after Starbucks announced a tie-up with Alibaba's food delivery unit in August for better fulfilment of its orders.

In September, the Chinese coffee chain built a strategic partnership with Internet giant Tencent to create a new lifestyle of smart retail through exploring robotic delivery of orders as well as facial recognition-enabled payment on WeChat Pay. Specifically, Luckin Coffee will capitalize on the WeChat platform and WeChat mini programs to improve its store management and delivery capabilities as well as the self-help ordering service. The coffee chain will also combine its order data with Tencent's big data technology for more accurate marketing.

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