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Starbucks Facing Legal Battles in China

Starbucks, coffee shop leader around the world, is facing legal troubles in the Chinese marketplace. Recent lawsuits filed by a local competitor, Luckin, suggests that Starbucks is engaging in unfair business practices in the sales of their product. Luckin suggests that with the prices Starbucks is charging for their product line, competitors in the marketplace don’t stand a chance to compete with the monopoly.

As of 2018, the profit margins for Starbucks in China were astronomical against Luckin and any other competitor. With a total of $232,200,000, it more than tripled the profits of Luckin with a profit margin for the same calendar year of -$123,000,000 (for Asian markets). With the price of a latte coming in at $4.50, versus that of Luckin at $3.50, the coffee chain claims that Starbucks is engaged in gouging prices, to an unfair advantage. In 2018, Starbucks had a total of more than 3,500 shops in China, while Luckin had approximately 2,000. These figures are projected to hit 4,100 stores for Starbucks, and up to 4,500 total shops for Luckin by the end of 2019.

The Competitive Marketplace –

Approximately 40% of all Luckin coffee shops are located in Beijing. With a focus of serving the metropolitan areas, the Chinese competitor is looking to remain in stride with Starbucks. This is in comparison to only 23% of their shops being in areas which are known as leisure areas. Although China is a country which is known as a nation of tea drinkers, behind the United States, it has the most coffee shops in the world.

Where are Luckin Shops Located in Beijing? –

Statistics dating to June of 2018 show that a majority of the coffee shops which Luckin operates are in commercial locations. 23% of total shops are in leisure and shopping areas, 17% are located in nearby universities. A total of 12% of shops are in integrated areas, while 4% are in hotels. Transportation hubs and nearby tourist attractions have approximately 2% of the shops owned by Luckin in China.

The company is extremely popular in the Chinese marketplace. And, with projected growth of more than 500 stores per year, the company is seeing a loss of profits on an annual year. In fact, a loss of over $123,000,000 for 2018 was the estimated loss for doing business in China.

Where are the Chengdu shops located? –

Luckin also operates coffee shops in Chengdu to a lesser degree than in Beijing. 19% of shops are in commercial areas, while 46% are in leisure locations. Universities, nearby integrated areas, hotels, and tourists attractions, account for 35% of remaining shops in the area.

It’s not just Starbucks… –

Starbucks isn’t the only international contender that is located in China, that has a relatively strong share in the marketplace. In fact, Costa Coffee, a popular UK chain, has also made its presence in the Chinese marketplace. The company has a new plan in place, intended to help drive sales, increase profit margins, and to continue to grow the total number of coffee shops that they operate within the country. Currently, the chain holds the number two spot in China, as a leader in the marketplace.

This leaves Luckin well behind another major competitor. Although the stronghold that Starbucks holds in the marketplace is astronomical, there are other industry competitors that are also taking away from the profit margins that Luckin could be enjoying.

What is the Claim? –

Because of its competitive nature, Starbucks is and has always been a leader in the marketplace. This goes for the Chinese marketplace as well. Luckin’s claim that their pricing, which is $1 more than what Luckin charges, for a latte, results in an unfair competitive advantage for the company. The company claims that the monopolistic practices which Starbucks has employed have created an unfair level of competition in the country, which doesn’t allow other coffee shops and businesses to perform as well as the leading chain does.

Starbucks Exclusivity rights –

Another area which Luckin has taken issue with is that of the property exclusivity rights which Starbucks puts into place, with property owners. The monopoly places pressure on their suppliers so that they do not work with other competitor brands. Luckin claims that this practice eliminates their ability to compete in this marketplace, and allows Starbucks to charge the pricing they would like to charge, regardless of how it is going to affect the competition. Their claim alleges that customers have no choice but to go to Starbucks, because they have such a stronghold in the market with the practices that they employ in China, and worldwide.

Commercial exclusivity contracts –

Luckin makes such claims that Starbucks has signed contracts with their commercial property owners, which prevents them from granting leases to other coffee shops in the area. In turn, Luckin claims that they can’t compete with Starbucks, since they can’t rent a space in the same shop, or proximate location, due to the limits which Starbucks places on the commercial properties which they are doing business with. All of this affects Luckin’s bottom line, resulting in the loss of profit margins, and resulting in the unfair competitive advantage that Starbucks has created in the marketplace.

In addition to limiting coffee shop owners from signing a lease in the same building, property owners who do business with Starbucks, can’t sign a lease with any commercial business, which does at least 30% of their total sales, coming from coffees lines. Therefore, Luckin, Costa Coffee, or any other competitor which sells a majority of their profits in the form of coffee ( or coffee products) , isn’t able to sign a lease within a proximate location to where Starbucks operates their coffee shops. Furthermore, Luckin claims that this is an issue even in areas where Starbucks does not have a coffee shop which is yet open (it is planning on opening a new shop in the future). So, even if Luckin or other shops were to try and open a business in the neighboring areas, they would be limited from doing so because Starbucks has an exclusivity contract in place with the commercial business owners.

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Pressuring Suppliers –

The claims made by Luckin do not end with the monopolistic practices in terms of exclusivity, but also in terms of the pressures which Starbucks places on their suppliers in China as well. In their lawsuit, Luckin indicates that Starbucks does not allow its suppliers to limit the type of machinery, equipment, and even coffee beans that are sold to competitors. Luckin claims to also sell Arabica bean coffee to their customers; however, they are limited in terms of the equipment, coffee brewers, and machines which they can use in their shops, due to the pressures which Starbucks places on suppliers. If they do business with competitors, Starbucks threatens to avoid doing business with its suppliers in the future.

Starbucks has asked its suppliers not to work with Luckin. Therefore, the ingredients that the chain can use, as well as the types of coffee they can sell in their shops, is greatly limited by the unfair practices which Starbucks is employing in dealing with their suppliers.

Starbucks Claims –

Starbucks has fought back against the claims which Luckin has made against them. The coffee shop chain has indicated that they do not engage in unfair practices, and welcome the competition in the international marketplace. The chain has over 3000 shops in China, with more than half of these shops being owned by Starbucks, while the remaining coffee shops are a franchise, owned by private owners in the country. Furthermore, by 2021, Starbucks has plans of opening up a total of more than 2100 shops in China. The mega giant has no intention of stopping their development and growth in the coming years, because of the lawsuits which Luckin has filed against them.

Why Luckin Presents a Threat –

A major aspect of Luckin’s business practice is that the coffee shop retailer not only operates coffee shops, but they also have self-serving kiosks which are situated in different regions of the country as well. Therefore, they can utilize this front in an attempt to gauge a different demographic niche; and, the company can focus on selling a lower priced cup of coffee, since they do not require as much overhead, or costs to hire employees, when they are using kiosks to source and to sell their coffee in some locations to their customer base.

Starbucks Engaging in Delivery Services –

After the threatened lawsuit was announced by Luckin, Starbucks also made strides to further their competitive advantage in China. They paired with Alibaba, to provide delivery services to their customer base in China. Customers can place an order on the mobile app, and they can choose the location as well as the time which they would like to have their beverage delivered. Starbucks claimed they were not going to fall victim to the promotion hype which Luckin was engaging in. In fact, Starbucks claimed that the Luckin chain was simply filing the lawsuit against them, in order to garner more attention for their brand, in an attempt to compete with Starbucks.

Starbucks

Starbucks as a Premium Brand –

Luckin opened up 600 shops in China within five months of announcing they were going to begin serving coffee; this is something that Starbucks took over 12 years to do in the country. The advantage which Starbucks has presented to its customers over the years is that it is a premium coffee brand. It is a coffee shop that visitors want to go to, sit in for several hours, and want to enjoy a cup of coffee, food, and simply spend time there. The quality of the coffee and the premium coffee shop experience is what the customer is paying for.

Although Luckin has been able to open up shops at an astronomical rate, the number of profit losses the company is facing, along with the fact that Starbucks has the resources, and brand reputation, is likely to result in more damage than good to the brand.

Luckin promotions –

Luckin offers coffee at a price that is up to 30 percent cheaper than the coffee sold at Starbucks stores in China, in fact, in most regions in the world. Additionally, the company has several promotions in place, including buy five and get the sixth cup free, in an attempt to draw in a greater customer audience to purchase their drinks. The store, however, does not accept a cash payment. Customers who choose Luckin coffee are going to have to make payments through the app. It is seen as a coffee shop, tech-startup type of business.

There are several options that Luckin offers to its customers. This along with the lower price, are major selling points which the company can focus on, in an attempt to compete with Starbucks. Since they are not going to overtake Starbucks’ market share, it is possible that they do attract new customers by offering these, and other promotions to customers.

How about Costa? –

Costa Coffee is the second leading chain in China, ahead of Luckin as well. So, why is it that Luckin is not going after Costa Coffee in a lawsuit as well? For starters, the company does not engage in practices as Starbucks does. There are no stories which ring true to what Starbucks does, in terms of monopolizing the marketplace and having their suppliers limit the types of products they can sell to their competitors in the market.

It’s still early on in the lawsuit phase, however, there’s still time to see if Luckin is going to go after other major chains and if Costa Coffee is also going to fall victim to the lawsuit battles which lie ahead.

How will the lawsuit battle play out? –

As noted, it is still rather early in the legal battles, with the lawsuit being filed by Luckin at the end of 2018. Starbucks has responded, noting that the lawsuit is nothing more than a publicity stunt, and a way for Luckin to try to grow their market share, and try to increase their profit margins.

There are some valid points, which are made by Luckin in the lawsuit. If they are found to be true, it is possible that Luckin will soon have the option to open shops in areas which Starbucks is currently monopolizing, and will have the option to purchase some of the supplies they currently can’t use, due to the limits which Starbucks has put in place on their vendors. Only time will tell if the lawsuit is going to go forward, and what, if anything can be done to limit the growth and popularity of Starbucks in the Chinese marketplace.

What lies ahead for Luckin? –

As detailed above, Luckin has plans to open up to 4500 coffee shops in China by the end of 2019. If this lofty goal becomes a reality, the coffee shop is going to have more shops in place than Starbucks will. This is a major feat the company plans on completing. If they do, they can use this as a growth point for their brand going into the future. They will be able to market themselves as the largest coffee shop in China and will have an easier time to market to their customers with the lower prices that they charge for the coffee products they sell.

Where should Luckin Focus? –

Luckin has beaten Starbucks on various fronts in the Chinese marketplace. First and foremost, it is a Chinese brand. So, the company can use this to their advantage. They can target a new demographic, they can properly attribute their marketing efforts, and they can find the proper approaches to target the right customer in the marketplace. Using this as a major selling point is one option that Luckin has if it is going to be a competitor for Starbucks, and for Costa Coffee in that case, for the future.

In addition to this, Luckin can use the digital platform that the company has created. It is an app-based sales shop. This means that customers can only order their coffee using the Luckin app to make a payment. The coffee shop can use this to help drive their sales even higher and to offer even lower prices to their customer audience. By using this tool to lower overhead, the chain can provide a greater service to their customers, by offering a great tasting cup of coffee, for a price that is below the competitors’ pricing.

Luckin also has the distinct advantage of opening more stores than Starbucks, in a very short period of time. If they continue to grow at the rate they are growing at, they are likely going to gain some of the market shares that Starbucks holds. Even if this means they do not take any of the market shares that Starbucks currently holds, it does not mean they can’t target a new niche of coffee drinkers in China. So, taking advantage of the major growth, and finding ways to target a new audience in areas where they are opening up their shops, is something that the retailer can do in an attempt to beat out Starbucks in some locations where they operate.

Impossible to take down the giant? –

It is highly likely that Luckin, Costa Coffee, or any other chain for that matter, is ever going to defeat Starbucks outright. No matter what Starbucks does, in any country, they are likely to find success in it. The coffee house chain has found its niche in targeting the right audience. Furthermore, they have the best coffee products, they place a primary focus on the customer experience, and they learn the local customs and cultures, to ensure they are going to best serve their customers. So, it is highly unlikely that Starbucks is going to go out of business in China any time soon. Additionally, it is unlikely that Costa or Luckin are going to take away the market share that they possess in the country.

With this being said, there are alternative avenues which competitors can use, in an attempt to gain and grow their market share. What Luckin has to do is focus on those niche areas, focus on their strengths, and find ways in which they can gain a larger market segment, in the regions where they are currently operating.

Will the lawsuit go forward? –

It is possible that a settlement is going to come out of the lawsuit which has been filed by Luckin. Due to the nature of the industry, It is highly likely that the claims which Luckin has made against Starbucks, are going to see little to no resolution in the coming months, or years, as long as the litigation pushes forward. There are numerous ways in which the legal dispute will be resolved, possibly with a settlement by Starbucks, for the claims which Luckin has made as it relates to monopolizing the market. But, with this being said, it is important to note that Starbucks likely has the best legal teams, and is going to work to fight any legal claims which are made by Luckin, Costa COffee, or any other chain that decides to join in on the litigation battlefront.

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There are many ways in which the Luckin coffee shop brand name can grow in the Chinese market. In fact, what they have done in the period of one year, is far greater than the growth which Starbucks was able to do, in a period of over twelve years in the country. So, it is worth working off of this growth which Luckin has seen, to continue developing their brand in the coming months and years.

It is yet to see what is going to happen with the legal battle ahead. Although the claims have been made by Luckin, it is yet to see what is going to unfold in a court of law. So, although there are viable claims by Luckin, it is likely that Starbucks will keep fighting, and we’ll have to see how things are going to unfold ahead for the coffee shop battle in China.

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