Luckin Coffee Uses Small Footprint to Challenge Starbucks

I haven't done an analysis of Luckin and I've been told its a cash burning machine. It had to be to some degree because it opened its first stores in January 2018, and it listed on the Nasdaq this month with 1,700 stores. I've heard their coffee is decent.

TechCrunch: Luckin leaves bitter aftertaste, now trading below IPO price

Luckin has dropped around 25% since closing its debut trading day at $20.38 per share, and 40% from its intraday peak of $25.96. As of Friday’s open, Luckin stock sat at $15.44, now well below its IPO price.

Caixin: Three Things to Know About China’s Starbucks Challenger

What pops out to me looking at their rental costs is Happy Lemon. They are a popular drink seller in China and most of their shops have a similarly small footprint. It sounds to me like Luckin is more a tech-driven startup (most sales are through its app and delivered). I don't think that's the way to compete in this space, it's more important to have a quality product and build brand loyalty. Happy Lemon has that following. It also maximizes its small area with a large menu and wide variety of drinks.

FT: Luckin Coffee shares slide on investor fears over cash burn

“Previously you would have groups from offices going to buy coffee because of the discounts,” said Shaun Rein, founder of China Market Research Group, a Shanghai-based research consultancy. “But we saw consumers stop going from February, as they decreased subsidies. There is very little brand loyalty to Luckin.”

Investors are concerned about cash burn and I would be too given their low rental cost. They shouldn't be burning cash beyond store set ups. My hunch is they're wrong to go after Starbucks premium with a unknown brand. Better to have paired with a known brand. If they rebranded all their stores with a partner such as Lavazza, or with Dunkin and rolled out the Dunkin menu of coffee, iced coffees and slushies in summer, plus added some local flavor with teas (Dunkin may not have enough brand recognition in China but you get the idea), I'd be willing to bet they turn cash positive rather quickly.

Right now, it looks like the tried and failed "meatspace" application of the Internet startup strategy: giving away the product to build a user base. In the physical world, technology becomes a commodity, it blends into the background. Some companies such as Amazon and Wal-Mart can keep the technology in-house by building expansive networks, but Luckin doesn't really have a technology advantage here, or at least not one that overcomes their lack of branding.