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What if any comparative advantage do you think that Starbucks still has in the Chinese market?

PHOTO: PHOTO ILLUSTRATION BY JOHN KUCZALA

Starbucks Corp. built its empire in China on the idea that consumers there would want to be seen inside its posh cafes.

Now the Seattle-based company is struggling to keep up as local upstart Luckin Coffee wins over a new kind of Chinese customer—one who wants their caffeine jolt delivered in minutes. The company's sudden rise has put Starbucks, Luckin and McDonald's Corp. in a race to build the delivery system best tuned to the frenetic Chinese market.

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In Beijing's Wudaokou neighborhood, 24-year-old manicurist Luo Fei started ordering from Luckin earlier this year. One week last month she had a hazelnut latte delivered from Luckin every day. She was impressed that each arrived in under 20 minutes.

"It's pretty fast every time," Ms. Luo said.

The battle to bring on-demand coffee to China shows how important delivery has become for Western companies doing business in the country, as well as how quickly competitors can emerge in the world's second-biggest economy.

Consumers in the densely packed cities of the world's most populous nation have grown accustomed to ordering meals and consumer goods for rapid delivery. In some cities, so many orders arrive simultaneously that office and apartment buildings have installed robots to receive deliveries and avoid crowding elevators.

Starbucks developed a specially designed lid to prevent drinks from spilling in transit. PHOTO: Raul Ariano for The Wall Street Journal

During its two decades operating in China, Starbucks has focused on the country's wealthiest consumers, building thousands of well-appointed stores where customers can linger over expensive drinks. Delivery was a recent addition. Unofficial outfits had been delivering Starbucks coffee previously, but in August 2018 Starbucks teamed up with Ele.me, the food-delivery platform owned by Alibaba Group Holding Ltd., to offer delivery from an initial 150 stores starting in September.

By then, the coffee giant had spent nearly two years developing special lids and packaging to protect drinks from spilling or cooling during the mad dash to customers in China.

Luckin, backed by venture capital and run by local managers, integrated delivery into the service at its bare-bones stores from the outset. Since its founding in October 2017, Luckin has raised $1 billion and opened 2,000 stores mainly offering delivery or pickup—many just feet away from a Starbucks cafe, according to financial analytics company Thinknum.

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"We know that Starbucks have done their homework," said Reinout Schakel, Luckin's chief strategy and financial officer. "We know they sit in locations where there's a lot of demand."

Luckin is currently in talks to get a loan of around $200 million from a few Wall Street banks, said a person familiar with the matter. The company is also preparing for an initial public offering in New York that could happen as soon as the first half of this year, the person said, adding that the company will target a valuation of $3 billion.

Starbucks Chief Executive Kevin Johnson has touted the coffee giant's expanding opportunities in China—its largest market outside the U.S.—while acknowledging the challenges of navigating an evolving landscape and shifting consumer behaviors. "We expect competition to remain highly promotional and disruptive," he told investors in January.

Starbucks and Luckin guarantee delivery within a half-hour in major Chinese cities. McDonald's, which launched coffee delivery in Shanghai last year, guarantees orders will arrive within 28 minutes from a more limited number of its restaurants.

Starbucks plans to open nearly 600 stores in China this year on top of the 3,700 it operates there now. Luckin plans to open about 2,500 stores in China this year, which would bring its total to 4,500. Both companies hope delivery will entice consumers to crave coffee more often and make more profitable purchases at physical stores.

It is a big bet, considering China is still developing a taste for coffee. Annual coffee consumption per capita is roughly 5 to 6 cups in China, compared with the more than 300 cups per capita consumed by Americans annually, according to Sanford C. Bernstein researchers.

And like food delivery in the U.S. , analysts say, sending coffee to customers in China is mostly a money-losing endeavor.

Starbucks and Luckin wouldn't say how much it costs to deliver their coffee or how much they have invested in those services. But Starbucks charges a lot more for its coffee than Luckin, which has appealed to cost-conscious consumers as China's economic growth has slowed.

In Beijing, a 16-ounce Americano costs 37 yuan ($5.52) to have delivered from Starbucks and 27 yuan ($4.02) from Luckin. Starbucks orders include an added charge of 9 yuan ($1.34) for Ele.me, whose drivers fill the orders. Luckin's orders include a 6 yuan ($0.89) fee for its courier partner, SF Express.

Delivery companies charge Starbucks and Luckin an average of 7 yuan ($1.04) per order, according to David Dai, senior analyst at Sanford C. Bernstein in Hong Kong.

Starbucks surprised investors last year when same-store sales in China fell 2% in its fiscal third quarter ended in July, partly because of tough competition for deliveries. Sales improved in the past two quarters, but growth is considerably slower than before Luckin began expanding.

Starbucks expects its profit margin in China this year to be hurt by costs associated with delivery. It is making a big push on the service, aiming to offer it at about 90% of Starbucks stores in the country by September. The company derived approximately $2.5 billion in fiscal 2018 revenue from China, or 10% of overall revenues, Sanford C. Bernstein estimated.

Courier Zhang Yongxu picks up a delivery box on his way to fulfill orders in Beijing. PHOTO: Yan Cong for The Wall Street Journal

Luckin is a privately held company and hasn't released sales figures.

Getting coffee from shop to consumer is no small feat in a city like Beijing, where coffee is delivered by scooter. Delivery drivers face oppressive traffic and jostle one another in building lobbies as they hustle toward customers.

Each Starbucks delivery order requires sealing a drink with the special spill-proof lid and delivery bags that show a customer their order hasn't been tampered with. A caramel macchiato served in stores with a drizzle of caramel syrup on top is delivered with a more durable caramel-flavored foam instead.

Dong Leng, 25, said she splurges on a cappuccino at a Beijing Starbucks in the morning because she likes the sound the machine makes and the warmth of the cup in her hands.

In the afternoon, she gets a cheaper pick-me-up delivered from Luckin. "Luckin is much less expensive than Starbucks," she said.

Xiao Xiao, Chunying Zhang, Bingyan Wang and Julie Steinberg contributed to this article.

A Starbucks order reaches a customer in Shanghai. PHOTO: Raul Ariano for The Wall Street Journal

Answer 1

We may analyze the conduct of Starbucks Corp in serving the consumers in Chinese market to arrive whether it still has a comparative advantage in the market. In this regard, we may consider the following components-

1. Delivery of coffee

Similarity:

• Both Starbucks and Luckin guarantees delivery with-in half an hour in major Chinese cities.

Advantage of one over other:

• Starbucks developed special lids and packaging to protect coffee from spilling or cooling during the transit.
• While Luckin used the services of SF Express to courier its product, Starbucks has partnered with Ele.me which offers the benefits of going digital.

   

2. Price

The cost of coffee from Luckin is much cheaper than that of the Starbucks. Starbucks, being an international brand, is known for high quality of its products and services. Reducing prices for its products in order to widen its market won’t be a good idea as it may lead a fall in consumer belief for the brand.      

3. Location of stores

It is given that Luckin has opened up nearly 2000 stores mainly for delivery or pick-up of coffee while Starbucks has focused on opening the stores where there is a lot of demand. The company has built thousands of stores where customers can linger over expensive drinks. Thus the latter offers the services of home delivery, pick-up and delivery at stores.

To sum up, it may be said that besides the pricing of coffee, Starbucks provides efficient delivery systems for its customers and thus has a comparative advantage over Luckin in the market of China.