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Starbucks hits back at Luckin with delivery expansion in China

US chain will not slash prices despite competition from upstart

Starbucks partnered with Alibaba to launch deliveries in China and beat local rival Luckin at its own game.   © AP

NEW YORK -- Starbucks is pouring more resources into its delivery service in China, launched last fall, as the U.S. giant looks to counter the strategy of local upstart Luckin Coffee in its second-biggest market.

Kevin Johnson, CEO of the Seattle-based coffee chain, said in a Thursday earnings call that Starbucks aims to expand deliveries to 3,000 stores in 50 Chinese cities by the end of this fiscal year. The company refused to quantify the investment required, but analysts expect that the costs of expanding the service could hit group margins in China. Starbucks has 3,600 stores in more than 150 cities in the country.

Last September, Starbucks started delivering its drinks on Ele.me, a platform backed by e-commerce giant Alibaba Group Holding. The move came almost a year after Luckin arrived on the scene with a strategic focus on deliveries from the start.

The Chinese chain, which filed for a U.S. listing this week, said in its prospectus that over 90% of its more than 2,000 stores focus on takeout orders. The company said these locations have limited seating and are situated in places where coffee demand runs high, like office buildings and university campuses.

Luckin plans to double its store network by the end of 2019.

Starbucks' same-store sales growth in China slowed to 3% in the second quarter of 2019, from 4% the year before. Still, its business is highly profitable, with an 18% margin in the Asia-Pacific region, up from 17.2% a year ago.

In contrast, Luckin recorded a net loss of $82 million in the first three months of 2019, while revenue in the same period came to $71 million.

Luckin is still investing heavily to keep prices low -- another driver of its rapid rise in China. In Thursday's earnings call, Starbucks acknowledged the intense "competition from discounting in China" but expressed confidence in its brand positioning and said it would not cut prices.

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