Will Luckin Coffee overtake Starbucks as the largest coffee chain in China?
Shares of Luckin Coffee have been on fire ever since the company posted its third-quarter earnings. The stock is currently up more than 50% from a month earlier.
The Chinese coffee chain has been expanding rapidly since it launched in 2017. Its revenue continues to increase, and it has opened over 3,000 stores across China.
This store growth puts the company on track to overtake Starbucks as the largest coffee retailer in China. Luckin has stated that it plans to hit this milestone by the end of 2019.
Let’s look at what’s going well for Luckin Coffee, as well as a few caveats to keep in mind.
Things are looking up for Luckin Coffee
Luckin Coffee has experienced impressive growth in just a couple of years. Its revenue increased by 558% from a year earlier. And at more than $30 a share, the stock price is well beyond its $17 IPO price.
Company management believes it is on track to surpass Starbucks as China’s largest coffee chain. And just by looking at the number, they may be right.
Luckin earns most of its revenue by opening new stores. Over the past year, its store count grew from 1,189 stores to 3,680 stores across China.
In comparison, Starbucks has 4,125 stores across China. Luckin is opening new stores at a faster rate than Starbucks, and its customer base continues to grow as well.
By all accounts, it seems like Luckin Coffee is set to surpass Starbucks very soon. But the question is, is this growth sustainable?
Is Luckin Coffee’s Growth sustainable?
There’s a lot to be optimistic about when it comes to Luckin Coffee. Its stores are popping up all over China, and its revenue continues to increase year over year. However, the company’s operating expenses continue to grow as well, and it’s still a long way from profitability.
And it remains to be seen whether Luckin Coffee’s stores have what it takes to maintain sustainable growth. Unlike Starbucks, Luckin Coffee attracts new customers by offering deep discounts and promotions. This will continue to eat into the company’s profit margins.
In the next couple of quarters, Luckin Coffee will probably “beat” Starbucks in terms of total store count in China. But the stock is still far too uncertain to be able to make any long-term predictions.
