This Local Coffee Chain is Challenging Starbucks in China Funding round values Luckin Coffee at $2.9 billion

China is Starbucks' biggest market, after the US. A local coffee chain, however, is trying to change that.

Luckin Coffee has raised US $150 million (1 billion yuan) in its latest round of funding, putting the company's valuation at an estimated $2.9 billion.

A private equity fund managed by BlackRock, a US global investment management corporation based in New York City, participated in the round by investing $125 million. In July last year, the company closed a $200 million funding round, with investors including private equity fund Centurium Capital, which is founded by the former China head of Warburg Pincus, and Singapore's sovereign wealth fund GIC. That round gave it a $1 billion valuation. In December 2018, it announced having raised $200 million in a Series-B round of funding, which pushed its valuation to $2.2 billion.

The Growth Story

By the end of 2018, the two-year-old coffee chain had a little above 2,000 stores in 22 cities, serving up more than 89.6 million cups of coffee to 12.5 million customers. In comparison, Starbucks has opened 3,500 stores in 150 Chinese cities since 1999.

Earlier this year, Luckin, which has openly declared its aim to overtake Starbucks in China, revealed its plan to build 2,500 more in 2019. The firm plans to outdo Starbucks in store and cup numbers in the country, said Luckin Coffee's founder Qian Zhiya at a news conference in January.

In 2017, the country's coffee shop sales reached $ 4.4 billion (RMB 30 billion) and are expected to hit $145 billion (RMB 1 trillion) by 2025, according to consultancy firm Qianzhan

What Works

According to the Luckin's founder, what makes the 2,500-plus goal achievable is the company's business model, which is already tackling the biggest challenges currently facing the coffee industry in China: expensive prices and inconvenience.

"With the development of the internet, Luckin has transformed the traditional coffee chain to a new retail model, integrating offline services and online delivery services," Qian said, in a release. "Thus, Luckin's new retail model strikes an excellent balance of price and services," he adds.

Luckin's delivery service likewise sets the brand apart. With in-app ordering, the company guarantees a delivery time of 18 minutes or less within major cities. Luckin recently partnered with China's largest food delivery giant, Meituan Dianping, and now allows customers to order Luckin Coffee products via the delivery app Meituan Waimai.

By the end of 2018, the company claimed to have achieved its "500-meters coverage" layout in downtown Beijing and Shanghai, meaning customers can walk to Luckin's stores within five minutes.

Qian said their established strategy is to race to grab market share through subsidies. "So far, the loss is in line with our expectation."