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Companies

Luckin Coffee hatches Luckin Tea, for China's smaller cities

Cash-burning company to cut costs via partner model in new franchise

Nasdaq-listed Luckin, which aims to become China's largest coffee chain by number of stores, is eyeing expansion in lower-tier cities with a newly created tea beverage brand.   © Getty Images

NEW YORK -- Nasdaq-listed Luckin Coffee is giving its teas their own branded stores, with a focus on smaller Chinese cities, as the rapidly expanding chain seeks new avenues of growth.

The company, which introduced its Luckin Tea drinks in April, will initially open independently branded stores under that name in such leisure settings as shopping malls in second- through fourth-tier cities. The Starbucks rival's coffee shops will continue their strategic focus on office locations in big cities.

"We will continue to maintain the high growth of the coffee business, while taking the tea drinks as another important driver to further explore the breadth and depth of the market," Luckin Coffee Chief Operating Officer Liu Jian said in a statement Tuesday.

Luckin's move into freshly brewed tea suggests that despite its ambition to become the largest coffee chain in China, it is equally thirsty to tap a more readily available market in the traditionally tea-drinking nation.

Tea and fruit tea beverages are more accepted in lower-tier cities than coffee, according to Vincent Yu, an analyst at Needham.

"Tea product in lower-tier cities is a good way to obtain the new customers, and then they can gradually upsell tea, coffee and snacks," Yu said.

Tea shops in China increased 74% on the year to more than 410,000 in late 2018, according to food delivery platform Meituan-Dianping. Most of the growth came from lower-tier cities, while the volume of tea delivery surged 87% in the same period. China Merchants Securities estimates a mature tea shop's net profit margin at 10% to 15%.

Luckin Coffee also plans tea shops under a partnership model -- similar to a franchise model -- which Yu said offers "little downside, but a lot of profitability upside when it scales successfully."

Founded less than two years ago, Luckin Coffee now runs nearly 3,000 coffee shops in China and targets 4,500 by year-end to surpass Starbucks. It listed in May and reported earnings for the first time last month: a worse-than-expected net loss of 681.3 million yuan ($99.2 million) on 870 million yuan in total net revenue from products.

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