Luckin Coffee, China’s high-flying coffee chain, has said it wants to challenge Starbucks’ leading position in the industry. Some may call it a boaster, but investors are actually backing the plan.
The young startup said Wednesday it has completed its Series B fundraising, raising $200 million from a group of investors including Joy Capital, Centurium Capital, CICC and GIC Private, Singapore’s sovereign wealth fund.
The investment came as a little surprise since the coffee chain has just raised another $200 million from its series A funding round five months ago, with Joy Capital, Centurium Capital and GIC Private both participated.
Luckin Coffee said its post-money valuation is $2.2 billion, more than double from the roughly $1 billion valuation it achieved in July. It said the proceeds will be used for product development and business expansion.
The coffee chain’s expansion was beyond anyone’s imagination. After 11 months of its operation, Luckin has already set up 1,700 stores in 21 Chinese cities, mostly in Beijing and Shanghai. It said its stores in downtown Beijing and Shanghai can be seen in every 500 meters.
The company adopts a business model that appears to fit young people’s lifestyle. For instance, it accepts only digital payment and does not have cashiers in its stores, which appeals to young people who spent an increasing amount of time on their phones.
Unlike Starbucks, Luckin Coffee offers on-demand delivery services, which become increasingly popular among those working in central business districts who often find themselves too busy to consume in-store.
It was perhaps largely a smooth ride since its inception, but Luckin Coffee is started to face some challenges.
For one, Luckin Coffee’s cash-burning business model has been criticised as not sustainable. The startup spent extensively on discounts and promotions to attract customers. It offers a free cup of coffee for first-time buyers and another free cup for those who introduce their friends to register. However, it is doubtful how many new customers will remain when these promotions end, analysts have argued.
At the same time, there are also concerns that Luckin Coffee could be sacrificing quality for speed since the coffee chain promises delivery within 30 minutes for takeaway orders.
Contrary to the general perception that Chinese coffee consumption is on a rise, some analysts suggest that demand for coffee could be falling with milk tea becoming an increasingly popular substitute.
As such, it suggests that Heytea, a rapidly-expanding milk tea chain known for its fancy drinks and refined decorations, could pose a direct challenge to Luckin Coffee in the near term. The startup completed its Series B fundraising and raised Rmb400 million ($58 million) in April.
