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Starbucks Luckin Coffee

With new Online-Only Pick-up Shops, Starbucks is Copying Chinese Rival Luckin Coffee

Ran Yu

posted on August 13, 2019 8:30 amEditor : Chen Du

Starbucks announced a deal with restaurant tech Brightloom, formerly known as Eatsa, back in July, 2019. As part of the deal, Starbucks will take equity stakes and seats on the company’s board of directors in exchange for offering the company licensing deal of its cloud-based software solutions in Starbucks establishments worldwide.

Brightloom CEO Adam Brotman said in an interview with Business Insider that “Any restaurant brand now realizes that for them to be in the game, it's no longer a 'nice to have it' — they have to have a robust digital platform.”

What Brotman claimed crucial was exactly where Starbucks has been short at in the past. More recently, the global coffee chain has been ramping up efforts in cashless payment and other automated, streamlined services.

In China, mobile payment has been the most popular payment method. Besides, as a country with the third largest number of Starbucks stores, China is an indispensable marketplace for Starbucks. 

Additionally, the fast growth of Nasdaq-listed Chinese coffee startup Luckin Coffee, which was more or less the result of utilizing China’s mobile internet ecosystems, also raised Starbucks’ concern.

Starbucks’ Slowdown in China

Starbucks was keeping its traditional retail business model in China for a long time—selling beverages, mugs and bottles in store mostly. The coffee giant’s philosophy, as stated officially, is “Creating a culture of warmth and belonging, where everyone is welcome.” Inspired and guided by the philosophy statement, Starbucks has been standing firm on its role as the “third place” outside home and work to provide comfort to people.

The concept has been generally successful throughout the world, including in China in the past, until there was a turning point in the third quarter, 2018.

Starbucks saw its sales decrease for the first time after entering Chinese marketplace nine years ago, decreasing 2% year-on-year. Its operating margin dropped from 26.6% to 19% in Q3 2018.

Meanwhile, Luckin Coffee had been expanding dramatically across China. It opened 809 stores in August last year, after only 8 months of operation, according to Chinese state-owned media Securities Times. Starbucks has more than 3,400 stores in roughly 140 Chinese cities.

Creating the “Fourth Place”

In July 2019, Starbucks officially inked a membership with Ele.me, allowing customers to earn reward points every time they order food.

In the same month, Starbucks also opened its first Starbucks Now pick-up store in Beijing, featuring a format similar to that of Luckin, where there’s no line for ordering because it only serves customers who ordered online. Two baristas are usually enough to assist customers with their pickup or ordering. Only eight seats were installed by the window in a small size storefront of around 160 square feet.

Customers can place an order through Starbucks app by simply choosing “Starbucks Now”, followed by selecting the items and customizing them. The model helps save customers’ time and Starbucks’ labor costs. It only takes roughly 2 minutes or less for customers’ orders to be ready.

The new style of shop, dubbed the “fourth place” (after the “third place” which represents the original shops as stated above,) help Starbucks cope with the increasingly dominant trend of not only mobile payment, but also online ordering in China. While less people spend half or a whole day staying at Starbucks working, reading, or doing anything else, more people are simply grabbing a drink and en route to work or shopping.

Starbucks also incorporated a specially designed lid to help prevent beverage from spilling during transit, as well as ice packs to keep iced beverage cold, which has been a step up from that of Luckin.

As early as September 2018, Starbucks announced a strategic partnership with the tech ecosystem led by local internet giant Alibaba, including food delivery service Ele.me, Hema, e-commerce platforms such as Tmall, Taobao, and Alipay, one of the two ubiquitous mobile payment services in China, to launch its own coffee delivery services.

“I consider this strategic partnership to be one that will just be rocket fuel for Starbucks’ growth and continued expansion in China,” Chief Executive Kevin Johnson told reporters in Shanghai in August, 2018.

The coffee giant has expanded its delivery services to 2,000 stores across 30 cities by the end of 2018. 

Relationship between the increase of Starbucks delivery orders and the company’s revenue growth by Changjiang Securities Research Institute
Relationship between the increase of Starbucks delivery orders and the company’s revenue growth by Changjiang Securities Research Institute

A report from Changjiang Securities Research Institute based on Starbucks’ Q4 2018 earnings showed that as the portion of delivery orders increased 5%, net income gained 16.3%, a strong argument that the company’s efforts in delivery is working. As a result, Starbucks saw its net income for Q4 2018 and Q1 2019 back to positive.