Take-Out Vs. Sit-In: The $5.8 Billion War for China’s Coffee Drinkers

The battle for China’s coffee culture is heating up—and the warring factions are attacking the market in very different ways.

Starbucks Corp. may call China its “second home market,” but as the nation’s appetite for cappuccinos grows, local upstart Luckin Coffee Inc. is challenging the American giant’s dominance. Luckin started trading in the U.S. this week after raising $561 million in an expanded U.S. initial public offering. The company aims to build China’s biggest network of stores before the end of this year.

Despite explosive year-on-year growth, Luckin is still dwarfed by its Seattle-based rival, which opened its first Beijing store 20 years ago. The Chinese company’s revenue soared to $71.3 million for the quarter ended in March. But it’s fought hard for those gains and relied heavily on discounts to lure customers, which contributed to a net loss of $85.3 million over the same period. Operating expenses last year were more than double sales.

The company, based in Xiamen, Southern China, plans to open another 2,500 stores this year, overtaking Starbucks. But sheer numbers don’t tell the whole story: Luckin focuses on small “pick-up kitchens”—delivery points—while its American rival’s stores are almost all much larger sit-in cafes. And Starbucks is also targeting rapid growth, with a goal of 6,000 Chinese stores by 2023.

Starbucks is moving into the delivery business now too. In August, it launched a partnership with Alibaba Group Holding Ltd., and orders for delivery can also be made at more than 2,000 of its stores. But deliveries aren’t the only point of difference between the two coffee firms. While Starbucks can leverage its reputation for premium coffee, Luckin emphasizes convenience and affordability. Its transactions are entirely cashless and orders are made through an app designed for fast pick-up and delivery, made possible through a partnership with Tencent Holdings Ltd.

Tea-loving China’s appetite for coffee is small in global terms, but it’s grown fast in recent years. The market reached $5.8 billion last year, up from $2.7 billion in 2014, according to Euromonitor. As China gets richer, there’s big growth potential for both Luckin and Starbucks—and plenty of big-name investors, from Bill Ackman to BlackRock, are taking notice of each.