Starbucks vs Dunkin - Luckin: China’s Coffee Dark Horse | 7

Audible subscribers can listen to all episodes of Business Wars ad-free right now. Join Audible today by downloading the Audible app. I'm David Brown and this is Business Wars. Today we conclude our series, Starbucks vs. Duncan. No doubt both companies have created empires throughout the United States and internationally. Starbucks has more than 15,000 locations in the US alone and Duncan Donuts is now in 43 countries. But there could be yet another brewing business, raring to make a dent in Starbucks' customer base, hailing from China. That new competitor is Luckin Coffee. The company's name is Anadu, yes you guessed it, Luck or Happiness. Some nice word association for your cup of Joe. Luckin has marketed itself as the convenient, gourmet coffee choice with a lower price point than Starbucks. Ha ha sounds a bit like Duncan's strategy right? And unlike Starbucks' European model of going to a coffee house and lingering for a bit, Luckin relies heavily on technology to build its customer base. Patrons order through an app, then get their morning kick at a kiosk or buy a delivery within 30 minutes. And yes there's a general issue with how hot coffee is when it's delivered just in case you were wondering. In May of 2019, the Chinese coffee giant made its initial public offering in New York. But something to note here is that Luckin is in hot water. The Chinese coffee giant is in the preliminary stages of an internal investigation. Luckin admitted to inflating its sales by about $310 million from the second quarter to the fourth quarter of last year. Now you should note that when we taped this episode, that information had not been made public. But despite this news, we still wanted to know, is it possible Luckin's business model of convenience and lower prices? Might ever be a competitor with Starbucks or Duncan. For some answers, our guest is market strategist Judy Gaines. Gaines is president of Jay Gaines Consulting where she focuses on products like sugar, cocoa, and of course coffee. All that's coming up next. Do you have a drink? No, I don't have a drink. What? I don't have a drink. Well, how did you get that? What? No, no. If you're a woman, you can buy a bank account or a drink. Gaines and Assuntoleina are married. They are married to Assunto and they are married to the same person. They are married to the same person, Mr. Fee. Judy Gaines, welcome to Business Wars. Thank you. We probably should mention here that Judy is joining us all the way from Panama and we're using Skype to make this connection. Judy, thanks so much for doing this. Let's start off by talking about these two business models. I mean, first, who is the Luckin customer and then maybe we can turn to the Starbucks customer. How would you describe the Luckin customer? So, the Luckin customer is the office worker. Someone who is looking for coffee on the go and they want it quick, they want it. Reasonably, good quality and they're not looking to linger and sit in a coffee house. As you mentioned at the start, it's not the European model. It's not a social occasion. It's that we want our coffee, we want it good and we want it now. We want that kick now. There's no dancing around it. But, you know, it's funny because Starbucks customers, I get a sense that some of them, I don't know, I shouldn't say this, maybe, but some of them may not be that interested in the coffee per se. Well, that's always been a question. How many times are people going to Starbucks because you're using their Wi-Fi or you're using their bathroom even? Or you're sitting there because it's convenient and it's a great place to meet someone. Hey, I'll meet you at Starbucks. Sure. And so you understand that that's part of the model. What I find is interesting is that when you go to China, the typical Chinese consumer in Starbucks is interested in the name brand and making it photo-worthy. And so it's the cachet of, wow, I went to Starbucks. And so a lot of it isn't necessarily that they're drinking the coffee and some of them might get many other products at Starbucks besides their coffee. Or originally what you had was you'd have four friends sitting together nursing the same drink for several hours to be seen. So that's part of the culture there is more so than in America is the status symbol of we went to Starbucks. So then let's talk about how Luckin tries to compete with Starbucks because of course once you've built a brand that has that kind of cachet, how is Luckin going about taking on Starbucks on its home turf, I guess you could say? Well, I think they understand the consumer very well and how they learn that is they started out. I would call them more technology company than a coffee company. You really want to know because what they did and extremely bright and very, very savvy in their model is that they start gathering all this data through their app. Forcing the consumers to pay through an app downloading the app, they're basically tracking their behavior. So they're figuring out exactly where their kiosks and their pop-up stores need to be for where their client base is. Starbucks is, I understand it. Correct me if I'm wrong here, but as I understand it, Starbucks was the first major player in the coffee game in China opening up a location there. I think it was like right around 1999. And for a long time it was kind of difficult to find coffee in China outside of some of these sort of western enclaves, right? Where you have a lot of business people congregating. But by the summer of 2018, we were hearing about a Starbucks store opening every, you know, almost every day, like every 15 hours or so in China. So what I'm curious about is how is luck enabled to thrive as a competitor in that kind of environment, especially since Starbucks? Well, maybe you can explain this. Is so synonymous, certainly with coffee here and in other parts of the world. Is it synonymous with coffee in China in the same way? Well, remember the Chinese coffee consumer is new to coffee. So I don't think they really have the same brand allegiance that they developed over time. So Starbucks developed their presence in the US market over a much longer time span. And it took a long time for the Chinese to embrace and appreciate coffee. It was a very young marketplace that Starbucks stepped into very early. And so if you want to say that they helped to get it off the ground, but that doesn't mean that there isn't room now that it's more developed for other players to come in. So they opened up the space. They got people talking about coffee. But when you go to China now, similar to other countries in the region and the Chinese are also traveling a lot more than they did in the past. And certainly the events of the past few months certainly shows that integration where the Chinese consumer counts for 20% of the travel in the world. And so they're seeing coffee in other places and coming to embrace it. I mean, I've been going to China in the past several years. And there's coffee festivals and the fairs and the expositions that are packed with people who are trying to learn about coffee, study it, develop the market there and are looking at all forms of how coffee is served. Okay, so let me ask you a personal question. Have you tried luck in coffee? Actually no. See, I was wondering because I wonder what it would taste like to a Western palate. You know, I mean, if in a way you're starting off in this marketplace where there isn't any great expectation about what coffee is supposed to taste like. In a way, they're in the same place that say Starbucks was when early on, you know, you had someone going to Italy tasting that coffee that no Americans had ever really tasted before because this was the real deal. And then wanting to come back and replicate it. And I wonder if somehow luck in is trying to recreate that sort of flavor. that's that you know since you don't have really a call culture that steeped if you'll pardon that expression in what coffee is quote unquote supposed to taste like. Oh, but remember the developers, I want to call them developers because it's all technology are extremely shrewd business people. And what they've done is they hired one of the world class baristas who's the world coffee barista champion, I think in 2014. To help them develop all their recipes for their drinks and also look at a month called storefront setting and what would work with the mindset of the typical consumer. So they're not leaving anything to chance on that one. And now they've also introduced some tea drinks because they're also figuring that during the summer months that if they have tea drinks that are with milk and fruit flavors that also will appeal to the Chinese consumer who maybe doesn't want the hot coffee drink in the summertime. As you describe Luckin, it seems to me that they would be more squarely competitive with say the Duncan brand which opened its first stores in China in 2008 because we're talking about lower prices and convenience and that's kind of Duncan's strong point. Right? I mean, why would Luckin go after Starbucks instead? Well, you're going to go after the Holy Grail. So I mean, I think that there's part of that also and Starbucks certainly has a lot more stores. I mean, remember Duncan is the second comeer into the game in China. So they're going after the first. Interesting. Yeah. So Luckin's only been around since 2017 and yet it seems to be moving really at breakneck speed. I mentioned earlier Luckin went public in May and the brands partnered with the Food Products Company Americana Group which is expanding its reach into the Middle East and India. Now what I'm curious about is why or what is it you think that has enabled Luckin to make these giant leaps in the marketplace in such a short period of time? How do you account for this rapid growth? Okay. So there's two things. One, they did have some very strong rounds of financing that helped to leverage them. They've had rapid growth but there's question as to whether they've turned a profit yet which of course is an entirely different situation. What they did was they said we're going to get loyal customers and we're going to come in and sell them on the cheap. So they offered a lot of couponing and discounting to get customers to be loyal to them and to let them catch on very fast. Take the losses up front. I know quite a few businesses that do that. So is this approach sustainable and if so, how long? Well I mean if you keep discounting and potentially selling all this coffee at loss then in the long run that isn't sustainable but I think that if they have enough repeat traffic and they're catching on then certainly they might be able to do that. And let's also look at the difference in the models. Their pop-up locations are built on the cheap. Everything is technology. They even have some technology where they're not going to have any staff. They were doing everything on the self-serve machine and they were looking at vending machines and therefore, competitively they could sell their product for much less than Starbucks. You look at a Starbucks, they spend an awful lot of money on the ambiance and when you look at the stores and the amount of equipment and everything else and the number staff they have is a huge huge expense. And to Starbucks credit also, Starbucks not only has the staff and they spend a lot on the brick and mortar but they also treat their employees extremely well with very generous benefits. You can even see that in their approach of what they're offering for the staff impacted by the coronavirus. Yeah, I was just going to ask about that because it seems to me that this would put Lunkin at a competitive advantage especially during a time like now. Well, absolutely it does because if you don't have to have staff then it's a lot easier and when you think about that people don't even want to go near someone then being a self-serve operation would benefit for them. But Starbucks has a very different price point because of the amazing benefits they give to their employees and they also do a lot for giving to coffee farmers. That's what you're getting when you're paying more for a cup of Starbucks coffee. The last question is from the school. The school's name is "Signia Audoteca" and the school's name is "Signia Audoteca". And the school's name is also called "Signia", which is currently the number of students who are in the school's percentage of 20% of the school's population. Let's shift gears for just a moment. We've been talking China. The big question I think for a lot of our listeners is this. Is Lunkin going to get lucky in the United States? Could they eventually put down roots right there in the same turf where Duncan and Starbucks have traditionally been dukened out? Well, I think it's possible and then there's other players that are coming in to the market and want to grow also. So if you look at Costa Coffee, there's another one who wants to push and grow and have had a very successful model. And they have Coca-Cola's marketing strength behind that. So I think that there's a lot of opportunities for coffee companies to find their niche. Coffee is growing, there's innovation. You look at cold-brood coffee, which a lot of people thought was going to be a fad and sort of die out. And it's not. I mean, people really, really are enjoying cold brew, nitro coffee. There's constant innovation within the industry. And we talk about blended coffee drinks, and some of the exotics and coffee is being used more in recipes. So there's room. You know, it's interesting because I think about the players in the market space today. 7/11 actually is not one to be dismissed. They're a major player in this coffee space. But there have been others that have been sort of regional favorites and some that have tried to expand beyond. I can remember once upon a time when I was living in Southern California, Dietrich Coffee was a place that I used to. I love that place. And in fact, it had a lot of the same sort of socially aware caches at least. And there's coffee bean and tea leaf, I believe, is another, right, which is expanded. But some say has expanded perhaps too rapidly in certain parts of the United States. And again, just sort of playing this out, thinking about luck in and how that model might work. I've seen sort of robotic coffee serving companies. There's one that it's in fact based in Austin, Texas called Brigo. They use sort of robot coffee makers and servers. And that's part of the the stick and the coffee is quite good. But what I'm wondering is with all of this competition, if you have a company like Luckin trying to make inroads into a place like the United States, how long would it take for them to really make a mark? I mean, is there something about the US coffee market that makes it substantially different from the Chinese coffee market in terms of the ability to kind of punch a hole through and be felt as a brand? Well, I would say one of the key differences is the size of the population. So they have huge potential volume just based on the population of some of their major cities compared to what you have in the US. So there aren't that many places in the United States that will have that same volume. But of course, if you have lower overhead and it's just the pickup and go, then maybe that doesn't matter as much. But they were lying on their technology to point to where is the most traffic? So do you think that there's a place where Luckin, I mean, if you were advising Luckin, would you say what? Go to the big apple because there you're going to have the kind of density, the population density that might make your model more of a winning approach right from the get go. Well, I mean, that's the same thing that Starbucks tried to do. So if you went to a. any Wall Street office for a long time. There was a Starbucks kiosk in Laby. - Right. - And then alongside it became crispy cream. (laughing) I mean, it's the same approach. You put yourself right where the traffic flow is. And so they could position themselves even in subway stations. - Let me do a little riff on this. I mentioned 7/11. What if, you know, it seems like there was a company called Green Mountain Coffee, which tried to, you know, it used to be at every gas station, a movie theater, it seemed like for a while there. I'm sort of wondering if you couldn't have a sort of partnership with Luckin and a convenience store, maybe 7/11 or Walmart. Who knows? I mean, Walmart's not exactly a convenience store. It's more of a, obviously a department store, sort of giant. But what I'm wondering is if it's possible for Luckin to develop a partnership like that that could perhaps get that brand out there quicker? - Well, I think absolutely they could. So you're looking at movie theaters, post office, any place gas stations, any place where people are going on a regular basis and passing through and they want their cup of coffee. So what happened with Green Mountain, you're right about remembering that they were everywhere. And, you know, they were also one of the front runners with providing better cup of coffee, quality coffee to make it convenient for everyone to have coffee out of home. They became an equipment company because they sold to Cureg. And so Green Mountain was absorbed by Cureg and now you have all the cake-ups and the single serve appliances. And that's where that business model went to. So there is that space now that used to be filled by Green Mountain. - Very interesting. Well, Judy, you've been awfully generous with your time, but I'm wondering if I couldn't invite you just to Blue Sky for a moment. Where do you think Luckin is gonna be in five years? Is it gonna be just in China? Is it gonna be a bigger deal than Starbucks? Is it going to be the prime competitor? How do you see it all developing, say, over the next five years? - Well, I think that there's still a lot of room in the specialty coffee industry and for having coffee placed where consumers want it. And especially at a reasonable price point. So that's one of the reasons why some people might shy away from Starbucks or there's that middle level consumer. Who doesn't want to break the budget? Every time, you know, every week when they add up how much they've spent on coffee drinks. And so there is that market. I mean, it's very expansive. Coffee continues to grow. You look at other beverages, start from water that have come and gone over the years. And you have coconut water and you have all the fruity beverages and everything else, but coffee's a mainstay. - Yeah, it's not going away. We've been speaking with Judy Gaines. She's president of Jay Gaines Consulting and she focuses on products like sugar cocoa and, of course, coffee. Ms. Gaines, thanks so much for taking a few minutes out and talking with us on business wars. - You're very welcome. (upbeat music) - From Wondry, this is Business Wars. And hey, we hope you enjoyed this episode. Coming up on our next series, we're bringing you a story that celebrates the love of the great outdoors. American climbers Doug Tomkins and Ivan Schenard were two friends who turned their love of nature into what would become the biggest names in outdoor apparel. The North Face and Patagonia, as Tomkins wrestled with how to maintain his quote, "Dirt bag, hiker lifestyle and run his store." Schenard struggled to reconcile his passion for environmentalism with the realities of making a successful business. We hope you can join us for the North Face versus Patagonia. And hey, can't get enough of business wars. You know what to do? Scroll on over to Business Wars Daily. 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