Starbucks China: Facing Luckin, the local disruptor

• Main Authors: KUMAR, Nirmalya, BHARDWAJ, Sheetal
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Disruptive innovation; Retail; Value proposition; Marketing; Differentiation strategy; Brand positioning; e-commerce; Asian Studies; Sales and Merchandising
• Online Access: https://ink.library.smu.edu.sg/cases_coll_all/279; https://smu.sharepoint.com/sites/admin/CMP/cases/SMU-19-BATCH [PDF-Pic]/SMU-19-0027 [Starbucks]/SMU-19-0027 [Starbucks].pdf
• Institution: Singapore Management University

Set in 2019, the case describes the challenge Starbucks faces from Luckin coffee, a local start up in China. Having entered China in 1999, Starbucks was the undisputed leader with more than 70% market share and 3600 cafes by 2018. The brand’s success was rooted in its core proposition of providing consumers a ‘third place’, an escape from both home and the work place, to relax and indulge themselves. While China/Asia Pacific was Starbucks’ fastest growing market, the company faced a setback in the region in 2018. There was a decline in its third quarter sales, total number of transactions for the year, and the annual operating income. Starbucks’ sudden downturn in the region could be attributed to the threat to its third place positioning by Luckin. Launched in November 2017, Luckin grew to more than 2,300 stores in just 17 months. Unlike Starbucks, it offered lower prices and the convenience of having coffee anywhere - at home, the work place or a café. Its mobile app-linked order and cashless payment platform, and a store pick-up and delivery model appealed to the country’s digitally savvy millennials. Over 2018-2019, the company successfully raised US$550 million, and in May 2019, came out with its IPO. By the end of 2019, Luckin aimed to open a total of 4,850 stores to surpass Starbucks’ planned network of 4,200 stores. The sudden rise of Luckin raises serious questions to engage students. What should Starbucks do in order to maintain its dominance in China? Should it emulate Luckin and work towards building a stronger and wider delivery channel, or should it continue to pursue its premium priced experiential retail strategy? And, would Luckin’s cash burn business model that includes heavy discounting, aggressive advertising and a rapid store expansion fail or succeed eventually? The case will help students learn about how sustainable competitive advantage is key to creating and capturing value; and how specific resources and capabilities shape a firm’s value chain, and thus its ability to differentiate and deliver the desired value proposition. The students will get to compare the business models of two competing but radically different firms who are at the opposite ends of the value spectrum, and appreciate the role of technology as a disruptor.