每日跟讀#599: Viewing China through the coffee cup
Once acclaimed as a “Starbucks destroyer” and “superpower brand,” Chinese start-up Luckin Coffee has, within the short space of one year, opened almost as many outlets as its American rival, which entered the Chinese market nearly two decades ago. However, Luckin Coffee has, in the process of this rapid expansion, burnt through more than NT$14bn (approximately US$454m) in capital. Recently it was revealed that the company has been using the coffee machines within its stores as collateral for loans. The company has begun to be dubbed “Unlucky Luckin” with some saying the coffee chain has already reached the end of the road. Starbucks isn’t doing much better though, achieving only 1 percent growth in sales in China during the first quarter of this year — compared with the global average of 4 percent — and the company’s annual growth rate in the Americas.
The US has Google and IBM, while China has created Baidu and Lenovo. However, not only has Luckin Coffee failed to supplant Starbucks, it may also become the next Ofo, a Chinese bike sharing company currently teetering on the edge of bankruptcy.
If one inspects the financial numbers, Luckin Coffee appears to be China’s newest “lame unicorn.” In the third quarter of last year, the company racked up a net loss of 850m yuan. In the final quarter, it hemorrhaged a further 700m yuan. Chinese media has reported that if one disregards sales costs and focuses just on rent, wage and raw material costs, it is possible to calculate that each cup of coffee costs the company at least 10 yuan to make, while sales revenue estimates show that the company is selling coffee at an average price of only 8.3 yuan per cup. This means that the faster Luckin Coffee opens new stores and the more coffee that it sells, the greater its losses will become. If Luckin Coffee is unable to attract sufficient revenue to cover its losses, the company will eventually run out of road.
The US-China trade war has been rumbling on for over a year. US President Donald Trump is closing in on victory while Chinese President Xi Jinping is beating a retreat. From this coffee example, we can see that the trade war has degraded China’s consumer buying power. Chinese citizens originally began drinking fewer cups of Starbucks coffee, switching to the more affordable Luckin Coffee. As China’s investment-led bubble economy wanes, Luckin Coffee and other Chinese unicorns are falling by the wayside and are between themselves creating a vicious cycle for China’s economy.
Source article: http://www.taipeitimes.com/News/lang/archives/2019/04/16/2003713441