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Luckin Coffee joins hands with Tencent to boost sales after Starbucks-Alibaba tie-up

A Luckin Coffee shop Photo:

China's young coffee brand Luckin Coffee has built a strategic partnership with Internet giant Tencent, upping the ante in its push to break what it calls the monopoly of Starbucks in the country's growing coffee-drinking market.

Luckin Coffee, the Beijing-based coffee startup in operation for nearly a year, and Tencent, which owns the country's popular social media app WeChat and mobile payment service WeChat Pay, have signed a strategic cooperation agreement in the hope of creating a new lifestyle of smart retail through exploring robotic delivery of orders as well as facial recognition-enabled payment on WeChat Pay.

Luckin Coffee will join hands with Tencent to develop technologies related to big data and artificial intelligence and use it in its smart marketing campaigns, according to the agreement.

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 orders data with Tencent's big data technology for more accurate marketing.

Since the beginning of this year, Luckin Coffee has been placing advertisements on WeChat's Moments in a marketing activity in which each potential customer can have a cup of coffee for free if he or she submits his or her mobile phone number.

Yang Fei, cofounder and chief marketing officer of Luckin Coffee, has a strong confidence in the cooperation with Tencent, which he said would be helpful in increasing Luckin Coffee's popularity, streamlining its current smart operating system and strengthening customers' loyalty to the brand.

"We hope that the cooperation with Luckin Coffee would create a new lifestyle of smart retail through tie-up on user traffic, technology exploration, application scenarios and management abilities," said Lei Maofeng, deputy general manager of WeChat Pay.

The partnership between Luckin Coffee and Tencent came a month after Starbucks chose Alibaba-owned food delivery app as an exclusive partner to run its delivery service, which will be piloted in 150 Starbucks stores in Beijing and Shanghai in September. The delivery service will be expanded to more than 2,000 Starbucks locations across 30 Chinese cities by the end of this year.

The US coffee chain will also take advantage of Alibaba's supermarket chain Hema to establish "Starbucks Delivery Kitchens" in an effort to better fulfil its orders. The first "Starbucks Delivery Kitchens" are expected to start business in selected Hema supermarkets in Shanghai and Hangzhou in September at the earliest.

Over the years, Tencent and Alibaba have launched a full tit-for-tat race in nearly every industry ranging from high technology and Internet finance to new retail and on-demand services, and have become the financial and technological backers of many startups in the country due to their strong capital strength and market dominance.

Tencent's support would, to a large extent, uphold Luckin Coffee's ambitious store expansion plan, according to which the Chinese coffee chain will open 2,000 outlets across China by the end of 2018. At the same time, Luckin Coffee adopts a favorable pricing strategy, which makes its coffee and healthy snacks much more affordable for Chinese consumers.

So far, Luckin Coffee has joined the club of unicorns and opened more than 800 stores across China.

Luckin Coffee's ability to open new stores in a short time is incredible in the face of competition from Starbucks, which has vowed to annually establish 600 new stores in the next five years in China where it currently operates nearly 3,400 stores, an achievement that the US coffee chain took 19 years to make.

China's coffee-drinking market is valued at about 100 billion yuan, with instant coffee accounting for 72 percent and freshly brewed coffee 18 percent, according to statistics from JingData. The Chinese coffee-drinking market is still a blue-ocean market as each Chinese consumer drinks an average of 4.5 cups of coffee per month, said JingData.

In May, Luckin Coffee made clear its intent to challenge Starbucks in an open letter, in which it said that it would sue Starbucks for violating China's Anti-monopoly Law, which some analysts say could be used by Beijing to pressure US firms doing business in China as US President Donald Trump threatens to impose a new round of harsh tariffs on Chinese imports.

The escalation of the China-US trade disputes might be an opportunity for Luckin Coffee to catch up with Starbucks, with some industry analysts predicting that a growing anti-America sentiment among Chinese consumers would take toll on the sales of American brands like Starbucks.

In its latest financial report, Starbucks said that it suffered a 2 percent drop in China's same-store sales in the third quarter, versus 7 percent growth a year earlier.

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