China’s Starbucks has arrived on Wall Street. Luckin Coffee begin trading on Friday and provided an immediate caffeine jolt to the market. The stock surged nearly 50% to $25 a share before pulling back. Shares closed up about 20%.
Luckin Coffee (LK), which is growing rapidly thanks to a focus on cheaper drinks, priced its initial public offering on the Nasdaq at $17 a share. That was at the high end of its range and it values Luckin Coffee (LK) at more than $4 billion. Luckin raised more than $570 million from the stock sale.
Luckin Coffee has quickly taken China by storm. The company, which was founded in October 2017, already has nearly 2,400 stores in 28 cities. That makes it second only to Starbucks (SBUX) in China.
But Luckin Coffee is likely to soon pass its larger rival. Luckin Coffee has plans to open 2,000 additional stores in the country by the end of the year, bringing its total to about 4,500 locations.
It’s an ambitious goal, especially since Chinese consumers aren’t addicted to coffee as much as drinkers in the United States and other nations are. Tea is the beverage of choice.
Taking China by storm with cheaper coffee
Luckin Coffee cited data from consumer research firm Frost & Sullivan in its IPO filing with the Securities and Exchange Commission that showed Chinese consumers drank only six cups of coffee a year in 2018, compared to 279 for Japan, 388 in the US and a whopping 867 in Germany.
But Luckin Coffee is hoping that the popularity of Starbucks in China, coupled with Luckin Coffee’s plans to offer less expensive brews, will quickly create more coffee drinkers in mainland China.
After all, Frost & Sullivan said that consumers in nearby Taiwan and Hong Kong each drink more than 200 cups of coffee a year.
Still, Luckin Coffee is tiny compared to Starbucks, which plans to expand even further in China as the US market matures. And like many other startup firms that have recently gone public — including Lyft (LYFT), Uber (UBER), Pinterest (PINS)and Beyond Meat (BYND) — Luckin Coffee is bleeding red ink.
The company reported a net loss of $241.3 million last year on sales of just $125.3 million. Luckin Coffee lost another $82.2 million in the first quarter of 2019 on revenue of only $71.3 million.
Luckin will lose money to gain market share
Luckin Coffee says this trend will continue, as it plans more store openings and increased marketing while also keeping its coffee prices more affordable in order to steal customers from Starbucks.
“We intend to further increase our brand awareness, expand our customer base and store network, and expect to continue to invest heavily in offering discounts and deals,” the company said in its SEC filing.
Luckin Coffee chief financial officer Reinout Schakel reiterated this in an interview with CNN’s Julia Chatterley on Friday. He said the company wants to “help people save money.”
Schakel added that the company is investing a lot on technology and is confident that these investments will help keep costs down for the long-term.
He said the goal is to offer “high quality coffee for a much more affordable price and still become profitable.”
“The market is in its infancy. I think there’s a huge opportunity” Schakel said, adding that coffee in China is now viewed as more of a luxury product and that Luckin Coffee wants to make it “a part of everyday life.”
Chinese consumers love the coupons
He also brushed off concerns about the trade war with the United States, saying that because the company already does a good job of keeping costs low and is selling its coffee at a discount to Starbucks, there should be little impact on its sales and customer base.
To that end, Chinese consumers in Beijing told CNN that price is one of Luckin Coffee’s biggest selling points.
“It has great value. A Starbucks coffee usually costs around 40 yuan (nearly $6 USD). Here we use coupons a lot. It’s usually around 20 with discounts. So value is the first consideration,” said Terasa Wang, a sales manager.
Shilu Wang, a director and producer, added that she was first attracted to Luckin Coffee “because it gave me lots of coupons, like the first free orders. No other coffee brand does that.” She added that “the taste is good for the price” and that delivery was fast.
So it looks like Starbucks is going to have a tough battle with Luckin Coffee for the foreseeable future.
– CNN’s Serenitie Wang contributed to this report.