Luckin Coffee to Keep Up Discounts Despite USD124 Million Hole in Its Pocket
Xu Wei
/SOURCE : yicai
Luckin Coffee to Keep Up Discounts Despite USD124 Million Hole in Its Pocket

 

(Yicai Global) Dec. 27 -- Starbucks' chief China rival, Luckin Coffee, has vowed to keep offering subsidies to consumers despite losing CNY857 million (USD124 million) over the first three quarters of the year.

The Beijing-based firm plans to maintain its strategy of increasing market share by offering cheap coffee, the 21st Century Business Herald reported today. The company made CNY375 million in revenue in the nine months, according to the financial data it published in order to raise cash in its B-round.

Luckin has sold over 85 million cups of coffee to more than 12 million customers since it began trial operations in January, the report added. It obtained USD200 million in its B-round earlier this month, giving it a post-funding valuation of around USD2.2 billion and USD400 million in cash.

But the firm's business model, despite being widely used by many Chinese internet startups, has come into question given the scale of its loss so far in 2018, which is expected to be even greater for the full year. Founder Qian Zhiya has said the firm will continue to offer discounts to build up its market share, but will adjust them as necessary over the long term.

The startup is losing money mostly from the costs of setting up new stores and the subsidies it offers, one insider said, adding that senior executives at the firm have experience in highly competitive markets like ride hailing, the field in which transport giant Didi Chuxing offered massive discounts to attract new users and drive Uber out of China.

The typical cost to acquire a New Retail user is about CNY300 (USD44), said Zhu Danpeng, a food industry analyst. Luckin spends just CNY80 for each new customer, by his estimation. China's coffee industry is just getting started, and there will be compound growth rates in the double digits for the next few years, he said. Given the current market size, there is space for Luckin to build plenty more stores, Zhu added.

Luckin still needs to expand further if it wants to earn first-mover advantages in the coffee delivery sector, the report added, suggesting it needs to invest yet more capital over the next few years to open up more outlets and market the brand.

Average per capita coffee consumption in China is just 0.003 cups a day, the report added, citing data from Euromonitor. That compares to more than 0.9 cups in the United States, a third of a cup in South Korea and a quarter in Japan.

Editor: James Boynton

Follow Yicai Global on
Keywords: Luckin Coffee , Food & Beverage