Luckin Coffee to Launch Tea Series in October With Franchisees

The Starbucks challenger has diversified into the tea business, which it will sell through partnering companies as soon as mid-October.
Belinda ZhouAug 23,2019,06:55

Luckin Coffee Inc. (Nasdaq: LK) is working to challenge China's to-go tea cafes with its operating partners as soon as mid-October according to a Chinese business website Thursday.

The Xiamen-based coffee chain claimed all its stores are directly operated and emphasized that it rejected merchants to join Luckin in any form in an official release on October 25, 2018. However, the company is reported to recruiting new business partners as mentioned in leiyunwang.com.

Luckin hasn’t officially announced its operation partners plan which is still in the stage of “internal testing”, a representative from Luckin said to the media. Most of the partners are internal employees of UCAR Inc., a car services platform, which shared the same Chairman with UCAR of Zhengyao Lu. Like UCAR, Luckin shared the focus on marketing strategy where massive discounts and promotions have been running long before the initial public offering in the U.S. and that has caused the company to spend a $1 for every 50 cents of coffee.

“The partnership recruitment plan is being launched recently, and the merchants conference will be held at the headquarters of the UCAR every Monday, Wednesday and Friday,” said leiyunwang.com.

Under the operating partnership model, the partners and Luckin will jointly operate the tea arm. The partners need to initially invest approximately $40,000 per store, consisting of the equipment purchase fee including coffee machine and milk tea equipment, the decoration fee and the guarantee.

The company, which sought to outnumber Starbucks' (Nasdaq: SBUX) locations in China this year, introduced four tea products including cheese foam tea, fresh tea and milk tea in its application in April for operation testing. In July 8, Luckin has launched the Xiaolu, or "deer," tea series with more than 10 tea products in its 3,000 stores across China, marking its official debut. 

"Coffee and tea are the two most popular drinks in the office. However, there are currently few renowned brands of milk tea in China, the quality of franchise stores is inferior, and supply chain management is deficient," Jinyi Guo, the vice president of Luckin, said at a media conference in Beijing in July, as reported by Chinese media.

Xiaolu tea series are directed at young white-collar workers in China, Fei Yang, the chief marketing officer of Luckin, said at the conference. "We want to transform the tea series from traditional tea drinks into creative ones and we hope people drink it in the offices instead of streets," Yang added. The technology-driven company also gathered data via an easy-to-use app and boosted sales of coffee and tea to customers. 

The company saw its revenue in the second quarter reached $126.7 million, representing an increase of 698 percent from the corresponding period in 2018. Its net loss reached $176.9 million, or 96 cents per American depositary share, in the second quarter.

“Furthermore, we opened 593 net new Luckin stores during the quarter, providing enhanced convenience to our customers, and strategically launched our new freshly-brewed tea drinks ‘Luckin Tea’ to capture different consumption moments and benefit from strong demand for freshly-brewed tea drinks in China,” Zhiya Qian, the chief executive officer of Luckin, said in its release in August. 

The Starbucks challenger has been aggressively pushing its expansion strategy with 3,000 stores in the country and plans to add 2,500 locations this year according to its prospectus filed ahead of its U.S. public offering. Luckin completed its initial public offering in New York on May 17, raising $561 million

The stock in Luckin was trading down 3 percent, at $18.94 per American depositary share, by midday Thursday.


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