Starbucks’ stock is up 18% this week after outperforming the S&P 500 all year. And all the while, the company’s been under close scrutiny in its performance against Chinese competitor Luckin Coffee.
Luckin Coffee went public earlier this month, and the stock quickly soared past its IPO price. The company is China’s second largest coffee chain, dubbed the ‘Starbucks of China.’
Going forward, the company plans to challenge Starbucks’ stronghold over the Chinese coffee market. But according to a recent report, Starbucks should be able to withstand competition from Luckin Coffee thanks to its differentiated business model.
Starbucks Faces Increased Competition in Chinese Markets
Luckin Coffee has already opened more than 2,400 stores and plans to surpass 4,500 by the end of the year. If the company can accomplish this, it would surpass Starbucks as the largest coffee chain in China.
This could be a serious concern for Starbucks — most of its growth is expected to come from this area. But according to USB analyst Dennis Geiger, as reported by Barron’s, Starbucks should be just fine.
Geiger reported on a survey of 1,000 Chinese coffee drinkers and found that customer overlap between the two companies is fairly low. Only about 23% of Starbucks drinkers buy Luckin Coffee and the two companies have very different business models.
Luckin Coffee focuses primarily on promos and mobile ordering. But according to Geiger, Starbucks leads in innovation and customer service.
Final Thoughts
One of the biggest challenges of the coffee industry is the low barrier to entry. It’s not difficult for new competitors to start up and build momentum.
And it’s unclear how the ongoing trade war with China will affect Starbucks. Negative attitudes among Chinese consumers could give Luckin Coffee the edge it needs over Starbucks in the coming year.
But in April, Starbucks released its second-quarter earnings report, showing that the company’s same-store sales are up 3% globally. And that’s largely thanks to a 3% increase in China.
Overall, the company’s strong brand recognition and exceptional service should leave it well-positioned to remain competitive in China.
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