Starbucks' No. 1 challenger in China stirs coffee wars with an IPO

Luckin Coffee Inc, Starbucks' main challenger in China, made its US market debut on the Nasdaq and saw its share price soar 53 percent to $25 a share, serving up a piping-hot Wall Street opener.

The Beijing-based coffee chain raised $570 million by selling 33 million shares — 3 million more than planned — for its initial public offering (IPO) on Thursday, giving it a market value of $4 billion. It also offered shares to Louis Dreyfus, the agricultural commodities supplier it is in partnership with.

At the opening bell on Friday, "LK" shares, which had been priced at $17 a share, surged to $25, before settling at around $20, up 20 percent. Luckin traded 47 percent above its original pricing, making it one of the top 15 hottest IPOs this year.

"We have done what most people do in 15 or 20 years," CFO Reinout Schakel told CNBC ahead of the opening.

Luckin is, however, operating at a loss. During the first nine months of 2018, the company lost $119.2million. For the first three months of 2019, it posted a net loss of $85.3 million.

On Friday, rival Starbucks hit another all-time high, closing at $78.91, up more than 35 percent from a year ago, giving the company a market cap of nearly $96 billion.

The money raised from Luckin's IPO will go toward growth. "We intend to further increase our brand awareness, expand our customer base and store network," the company said in its SEC filing.

The coffee chain founded in October 2017 has 2,370 stores in 28 Chinese cities and said it will open 2,500 additional stores this year. Starbucks has 3,900 stores in China and has a goal of nearly doubling that number by 2022.

Although Chinese are predominantly tea drinkers, coffee sales in the country are expected to reach $8.2 billion this year, increasing 11.3 percent a year over the next five years, according to Statista.

Starbucks holds more than half of the Chinese coffee and specialty tea market, according to Euromonitor International, a market research provider. By the end of 2018, Luckin held just over 2 percent of the market, according to Euromonitor estimates. The next-biggest competitor to Starbucks, the McDonald's-owned McCafe, has just 5 percent of the market.

Luckin has smaller stores than Starbucks; they don't accept cash, just payments on the Luckin app. Its prices are similar to Starbucks' but it offers deep discounts, pickup locations or delivery of hot coffee in 18 minutes. To meet the delivery challenge, Starbucks formed a partnership with e-commerce giant Alibaba to provide delivery of its coffee through Alibaba's subsidiary, Ele.me.

"Luckin…has aggressively pursued the white collar convenience seeker market that Starbucks previously owned and has been able to lure away consumers through use of heavy promotions, ease of ordering, and lack of wait times for coffee," Ben Cavender, Shanghai-based principal at China Market Research Group, told China Daily.

Luckin co-founder Jenny Qian Zhiya was previously COO for Chinese ride-hailing service Ucar.