SEATTLE, WA - MARCH 23: Starbucks CEO Howard Schultz speaks about the Christmas cup controversy during the Starbucks Annual Shareholders Meeting on March 23, 2016 in Seattle, Washington. Schultz also spoke about Starbucks in expansion in China. (Photo by Stephen Brashear/Getty Images)
PHOTO: Stephen Brashear/Getty Images
SEATTLE, WA - MARCH 23: Starbucks CEO Howard Schultz speaks about the Christmas cup controversy during the Starbucks Annual Shareholders Meeting on March 23, 2016 in Seattle, Washington. Schultz also spoke about Starbucks in expansion in China. (Photo by Stephen Brashear/Getty Images)
Now playing
01:42
Schultz: Tariffs on China won't help US jobs
screengrab australia wine
PHOTO: CNN
screengrab australia wine
Now playing
02:44
Australia's wine industry battered as relations with China sour
LONDON, ENGLAND - JANUARY 29: General View of BBC Broadcasting House on January 29, 2020 in London, England.
PHOTO: Peter Summers/Getty Images
LONDON, ENGLAND - JANUARY 29: General View of BBC Broadcasting House on January 29, 2020 in London, England.
Now playing
03:22
China bans BBC News after UK pulls CGTN's license
Biden US China tech war Wang pkg intl hnk vpx_00010025.png
Biden US China tech war Wang pkg intl hnk vpx_00010025.png
Now playing
02:37
US-China tech rivalry will likely continue under Biden presidency. Here's why
Jack Ma makes his first public appearance since late October in a new video published on January 20 by Tianmu News, a subsidiary of the Zhejiang government's official newspaper.
PHOTO: Tianmu News
Jack Ma makes his first public appearance since late October in a new video published on January 20 by Tianmu News, a subsidiary of the Zhejiang government's official newspaper.
Now playing
02:20
See Jack Ma's first public appearance in months
In this photo taken on September 5, 2020, people wearing face masks walk in a shopping mall in Wuhan, China's central Hubei province. - China is recasting Wuhan as a heroic coronavirus victim and trying to throw doubt on the pandemic's origin story as it aims to seize the narrative at a time of growing global distrust of Beijing. (Photo by Hector RETAMAL / AFP) / TO GO WITH AFP STORY HEALTH-VIRUS-CHINA-DIPLOMACY-WUHAN,FOCUS BY DAN MARTIN (Photo by HECTOR RETAMAL/AFP via Getty Images)
PHOTO: Hector Retamal/AFP/Getty Images
In this photo taken on September 5, 2020, people wearing face masks walk in a shopping mall in Wuhan, China's central Hubei province. - China is recasting Wuhan as a heroic coronavirus victim and trying to throw doubt on the pandemic's origin story as it aims to seize the narrative at a time of growing global distrust of Beijing. (Photo by Hector RETAMAL / AFP) / TO GO WITH AFP STORY HEALTH-VIRUS-CHINA-DIPLOMACY-WUHAN,FOCUS BY DAN MARTIN (Photo by HECTOR RETAMAL/AFP via Getty Images)
Now playing
01:32
China's economy grows 2.3% in 2020
A split of Chinese President Xi Jinping and US President Donald Trump.
PHOTO: Getty Images
A split of Chinese President Xi Jinping and US President Donald Trump.
Now playing
02:06
Trump administration dials up US-China tech tensions
NEW YORK, NEW YORK - NOVEMBER 24: People walk past the New York Stock Exchange (NYSE) on November 24, 2020 in New York City. As investor's fear of an election crisis eases, the DowJones Industrial Average passed the 30,000 milestone for the first time on Tuesday morning.  (Photo by Spencer Platt/Getty Images)
PHOTO: Spencer Platt/Getty Images
NEW YORK, NEW YORK - NOVEMBER 24: People walk past the New York Stock Exchange (NYSE) on November 24, 2020 in New York City. As investor's fear of an election crisis eases, the DowJones Industrial Average passed the 30,000 milestone for the first time on Tuesday morning. (Photo by Spencer Platt/Getty Images)
Now playing
02:20
Chinese firms face delisting threat
Screengrab Ant group
PHOTO: CCTV
Screengrab Ant group
Now playing
02:35
Chinese government halts Ant Group's giant IPO
HONG KONG - 2019/04/06: In this photo illustration a Chinese online payment platform owned by Alibaba Group, Alipay, logo is seen on an Android mobile device with People's Republic of China flag in the background. (Photo Illustration by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)
PHOTO: SOPA Images/LightRocket/LightRocket via Getty Images
HONG KONG - 2019/04/06: In this photo illustration a Chinese online payment platform owned by Alibaba Group, Alipay, logo is seen on an Android mobile device with People's Republic of China flag in the background. (Photo Illustration by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)
Now playing
02:40
How China's Ant Group built a $17 trillion payments machine
A pedestrians walks past HSBC signage in the Admiralty district of Hong Kong on July 31, 2017.
HSBC said on July 31 pre-tax profit for the first half of 2017 had risen five percent to 10.2 billion USD compared with the same period last year, in what it called an "excellent" result following a turbulent 2016. / AFP PHOTO / ISAAC LAWRENCE        (Photo credit should read ISAAC LAWRENCE/AFP via Getty Images)
PHOTO: Issac Lawrence/AFP/Getty Images
A pedestrians walks past HSBC signage in the Admiralty district of Hong Kong on July 31, 2017. HSBC said on July 31 pre-tax profit for the first half of 2017 had risen five percent to 10.2 billion USD compared with the same period last year, in what it called an "excellent" result following a turbulent 2016. / AFP PHOTO / ISAAC LAWRENCE (Photo credit should read ISAAC LAWRENCE/AFP via Getty Images)
Now playing
03:31
HSBC may have to choose between China and the West
PHOTO: Photo Illustration: Shutterstock / CNN
Now playing
02:50
The moral dilemma of doing business in China, explained
BEIJING, CHINA - OCTOBER 27: A Chinese soldier stands guard in front of Tiananmen Gate outside the Forbidden City on October 27, 2014 in Beijing, China.  (Photo by Kevin Frayer/Getty Images)
PHOTO: Kevin Frayer/Getty Images
BEIJING, CHINA - OCTOBER 27: A Chinese soldier stands guard in front of Tiananmen Gate outside the Forbidden City on October 27, 2014 in Beijing, China. (Photo by Kevin Frayer/Getty Images)
Now playing
01:56
China censors a lot, from Winnie the Pooh to the NBA
SHANGHAI, CHINA - SEPTEMBER 17: Alibaba Chairman Jack Ma speaks during the opening ceremony of the 2018 World Artificial Intelligence Conference at West Bund on September 17, 2018 in Shanghai, China. The 2018 World Artificial Intelligence Conference is held on September 17-19 in Shanghai. (Photo by Zhao Yun/VCG via Getty Images)
PHOTO: Zhao Yun/VCG via Getty Images
SHANGHAI, CHINA - SEPTEMBER 17: Alibaba Chairman Jack Ma speaks during the opening ceremony of the 2018 World Artificial Intelligence Conference at West Bund on September 17, 2018 in Shanghai, China. The 2018 World Artificial Intelligence Conference is held on September 17-19 in Shanghai. (Photo by Zhao Yun/VCG via Getty Images)
Now playing
03:02
How Jack Ma changed China
PHOTO: Yum China
Now playing
01:43
Why American fast food chains will do anything to win in China
Now playing
01:51
What you need to know about Tencent
(CNN Business) —  

After barely a year in business, Luckin Coffee is challenging Starbucks in one of the US coffee giant’s top markets.

About 2,000 Luckin outlets have sprung up across China over the last year. That includes a store in Beijing’s Forbidden City, the historic cultural site from which Starbucks (SBUX) was famously evicted more than a decade ago.

Luckin plans to have 4,500 outlets by the end of 2019, which would take it ahead of Starbucks to become China’s biggest coffee chain. It’s luring customers with cheap prices and savvy use of technology, which is forcing Starbucks to up its game.

The rapid of ascent of Luckin to challenge the US chain shows how Chinese upstarts are increasingly rivaling Western brands in one of the world’s top consumer markets.

While both serve coffee, the similarities largely end there. Unlike Starbucks’ trademark coffee shops, most of Luckin’s outlets are tiny booths in out of the way spots that take orders online for both delivery and pickup.

Luckin Coffee stores have spread rapidly in China this year. It plans to open hundreds more.
PHOTO: JASON LEE/REUTERS
Luckin Coffee stores have spread rapidly in China this year. It plans to open hundreds more.

More important, Luckin has placed technology at the heart of its business from the start. Its outlets don’t accept cash, instead customers can only pay through the Luckin app, which offers loyalty bonuses.

“It’s very convenient and time-saving,” said Hans Wang, a 33-year-old researcher in the eastern city of Hangzhou. He places his order using the app and then picks it up in a store.

Customers demand these kinds of services in an increasingly connected China. But until recently, Starbucks didn’t offer them.

“Starbucks had a weak point,” said Jeffrey Towson, a professor at Peking University and China business expert. “The fact they didn’t have delivery is ridiculous. And their app sucked.”

Growing rivalry

China is Starbucks’ second biggest market after the United States. With around 3,000 stores across the country, it’s still bigger than Luckin. Starbucks plans to more than double that number by the end of 2022.

But in June, the company reported a sudden slowdown in growth in China. One of the things it blamed was increasing competition, which analysts interpreted as a reference to Luckin.

There is a growing sense of rivalry between Luckin and Starbucks. In May, Luckin sued the Seattle-based company, claiming it had unfairly monopolized the market.

In response, Starbucks told Chinese state media: “We welcome orderly competition, mutual promotion, continuous innovation, continuous improvement of quality and service, and creating real value for Chinese consumers.”

Starbucks is now fighting back. In August, it teamed up with Alibaba (BABA), China’s largest e-commerce company, to launch home delivery services. A month later, Luckin announced its own tie-up with another major Chinese internet company, Tencent (TCEHY).

Yuwan Hu, an analyst at Daxue Consulting in Shanghai, said that competition from Luckin is also prompting Starbucks to go more upmarket by focusing more on its Reserve brand in China. The outlets offer consumers more premium coffee options in a larger, more luxurious retail space.

Starbucks’ Reserve Roastery in Shanghai, which opened in late 2017, is the company’s biggest store in the world.

The world's biggest Starbucks, a 30,000-square-foot store, is in Shanghai.
PHOTO: -/AFP/Getty Images
The world's biggest Starbucks, a 30,000-square-foot store, is in Shanghai.

Luckin is focused on competing on price, according to Hu. The company promotes discounts on Tencent’s popular social network, WeChat, and its coffee is generally cheaper than Starbucks’.

Suyu Meng, 25, who works at a tech startup in Beijing, said she’s torn between the two brands. She is drawn to Luckin’s cheaper prices, but also likes the more high-end experience at Starbucks, where she can meet up with friends.

Coffee’s answer to Xiaomi

Towson described Luckin as the coffee industry equivalent of Xiaomi, the upstart Chinese smartphone maker that became one of the country’s top brands by selling cheaper alternatives to Apple’s (AAPL) iPhone.

To succeed, Luckin doesn’t necessarily have to overtake Starbucks as China’s top coffee brand. Analysts say the market is big enough for both of them.

For the time being, Luckin is losing money as it seeks to grow, a common situation for young startups.

“We haven’t set a timetable for profit,” spokesman Du Yang told CNN.

In December, the company raised $200 million in new funding from investors, giving it a valuation of more than $2 billion, according to Du.

The long-term challenge for both Luckin and Starbucks is converting more of China’s traditionally tea-drinking population to coffee.

People in China consume just five cups of coffee a year on average. Americans guzzle about 400.

“The question for them now is, ‘How much do Chinese like coffee?,’” Towson said.

Serenitie Wang contributed to this report.