Starbucks' Rival In China Raises More Cash

Starbucks (NASDAQ:SBUX) plans to add roughly a store a day in China through 2023. In the first quarter of 2019 alone, the chain grew its store base by 18%.

The company sees China as its biggest growth market and its second most important market behind its home base of the United States. Starbucks has been very aggressive in China, with CEO Kevin Johnson noting in the company's Q1 earnings conference call that the company offers "a rapidly evolving competitive landscape."

That may be a not-so-subtle reference to China's Luckin Coffee, which is a self-described Starbucks challenger. The start-up opened its first store in 2018 and has grown quickly, closing the year with 2,000 locations. It plans to open 2,500 more this year (which would make it larger than Starbucks in China) and now it has more cash to make that happen.

More capital to expand

Growing quickly requires capital. Luckin has found that capital through a recent $150 million cash infusion from investors including BlackRock Inc., according to Reuters. BlackRock was also part of a $200 million fundraising round in November. The new investment values the growing company at $2.9 billion, a significant increase from a $2.2 billion valuation in November.

Luckin has focused its business on delivery. It also uses an all-digital payment model. The chain prices its products cheaper than Starbucks which contributed to it losing roughly $100 million in 2018. The company has said that it plans to IPO in the U.S. in 2019, but no official announcement has been made.

Luckin's growth strategy includes losing money for the foreseeable future. The chain is trying to grow its store count as a way to introduce more of the market to coffee instead of tea, which has traditionally been the drink of choice in China.

Johnson is in the interesting position of leading the established, dominant market player which also happens to be an American company operating against a native one. He addressed the challenge during the Q1 earnings call. "As we have done over the past 20 years in China, we will continue to learn and adapt as we create a broader coffee culture, expand our presence in both new and existing cities and deliver a differentiated Starbucks Experience throughout China, whether it's serving customers in our beautifully designed stores or enabling new channels like Starbucks Delivers," he said.

Can both companies win?

With a nearly 60% share in 2018, Starbucks has dominated the coffee business in China. That's a big number, though if only a small portion of the population drinks coffee, then it's possible to lose market share but gain sales if the market can be expanded.

Luckin is working to bring coffee to more of the country and it's pricing its products accessibly. That may take some business from Starbucks but it may also create some demand for a higher-end experience. In some ways, Luckin may train customers who someday "graduate" to Starbucks.

There's probably room for both Starbucks (as the premium brand) and Luckin (as the everyday "value" player). In fact, the growth of each company probably helps the other as long as the two chains can drive added demand for coffee. That seems likely based on growth patterns so far, and in a country with roughly 1.4 billion people, it's going to be a long time before either exhausts the addressable market.

This article originally appeared in the Motley Fool.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.