It has been 20 years since the opening of China's first Starbucks Corp (SBUX.US) in Beijing on January 11, 1999. During this decade, Starbucks Corp has been invincible in China's coffee consumption market, with more than 3500 stores in China.

LUCKN COFFEE DRC opened its first store in Beijing's Galaxy SOHO in October 2017, and LUCKN COFFEE DRC had 2370 self-owned stores in China as of the first quarter of this year.

For a long time, LUCKN COFFEE DRC has made public his ambition to become the first coffee chain brand in China, which is undoubtedly a challenge to Starbucks Corp!

The fastest growing unicorn company in China

After completing the B+ round of financing, LUCKN COFFEE DRC formally submitted a prospectus to the US Securities Regulatory Commission on April 22nd and plans to list on NASDAQ under the symbol "LK".

Two people familiar with the matter told the media that the start-up might hope to raise $500m-$800m from the IPO planned for May. If it can raise money within this range, Ruixing will become the largest IPO conducted by a Chinese company in the United States so far in 2019, according to Refinitiv.

Another source said the company's valuation target is between $4 billion and $5 billion, up from the $2.9 billion announced last week.

Zhitong Financial APP has learned that the company aims to add 2500 stores in 2019, when the total number of stores will exceed 4500, making it the largest chain coffee brand in China.

According to its financial report, LUCKN COFFEE DRC had a revenue of 478.5 million yuan and a net loss of 551.8 million yuan in the first quarter of 2019. In 2018, LUCKN COFFEE DRC had a revenue of 841 million yuan and a net loss of 1.619 billion yuan. Among them, marketing expenses accounted for 30.6% of the total expenses in 2018, which accounted for the largest proportion of expenses. In the first quarter of 2019, the proportion of marketing expenses in total expenses declined significantly, to 16.7%.

There is always a Starbucks Corp by his side.

Zhitong Financial APP learned that Starbucks Corp's results in the first quarter of fiscal 2019 (as of December 2018) showed that revenue rose 9 per cent year-on-year to $6.63 billion, higher than market expectations of $6.49 billion, comparable sales in China rose 1 per cent, transactions fell 2 per cent, and there were nearly 600 new stores in China.

Starbucks Corp CEO Kevin Johnson said in an interview that Starbucks Corp is unlikely to cede his leading position in China to Chinese start-up Ruixing in 2019. China is Starbucks Corp's fastest growing major market. Starbucks Corp's china business accounts for an average of 15 per cent of its total revenue, according to analysts' calculations.

Asked if Ruixing could overtake Starbucks Corp by the end of 2019, Johnson said, "I don't think that's possible," noting that Starbucks Corp's new stores in China increased by 18% in the fourth quarter of last year. Johnson said many of Lucky's stores were much smaller "stores" that could not compete with the full-service Starbucks Corp coffee shop.

"just last quarter, we entered 10 new cities in China," he said, all of which are larger than Los Angeles.

According to Zhitong Financial APP, Starbucks Corp's stores are usually located in locations with high traffic and high visibility, including downtown and suburban retail centers, office buildings, university campuses, and so on. In fact,Starbucks Corp's main assets are his stores, which account for more than 30 per cent of his total assets on average.

For now, many of its competitors' stores are not located in prime locations.

The Coffee War

Research by the International Coffee Organization shows that China's coffee consumption is growing at an average annual rate of 16%. This means that all competitors in the Chinese coffee market have a big advantage. China's new retail trend is another important driver of LUCKN COFFEE DRC's rise.

Analysts believe thatThere are three key differences between Rui Xing and Starbucks Corp:

First, the affordability of consumers. Ruixing's price is 20%, 30% cheaper than Starbucks Corp. In addition, LUCKN COFFEE DRC also actively provides customers with "buy one get two free" or even "buy five get five free" coupons, which enables them to get price-sensitive users and first-time coffee drinkers.

Second, light assets. Most of Ruixing's stores are door-to-door and door-to-door pick-up stores, with few seats. This allows them to offer drinks at lower prices.

Third, convenience. All of LUCKN COFFEE DRC's orders can only be completed through his smartphone app, which largely takes into account the dependence of Chinese consumers on mobile payments.

According to media reports, consumers generally reacted, "although the price of Ruixing is much lower than that of Starbucks Corp, the taste of coffee is not as good as Starbucks Corp." Analysts sayLUCKN COFFEE DRC may not represent the coffee culture, but the fast food culture.The quality of its coffee beans is not comparable to that of Starbucks Corp. In fact, LUCKN COFFEE DRC's taste is between Starbucks Corp and McDonald's Corp. If you want to turn losses into profits, it is necessary to reduce costs and reduce discounts.Ben Cavender, head of China Market Research Group in Shanghai, said: "in the long run, a big question for the brand is whether enough customers will stay when it reduces discounts."

Bernstein's Sarah Senatore reviewed the four major brands operating in China ahead of Lucky IPO, reiterating the market performance ratings of Starbucks Corp and Yum China, as well as the outperformance ratings of McDonald's Corp and Yum Restaurant Group.

She believes that given its more aggressive pricing strategy and stores mainly located in higher-level markets, Lucky's gross margin is much lower than Starbucks Corp, who will have to better adapt to fierce profit margin competition.

"Coffee and tea have a very high gross profit margin-we estimate Starbucks Corp's gross profit margin is between 80 per cent and 90 per cent-so even if a substantial discount is offered, Lucky's revenue can cover its variable costs," Senatore said.

Senatore believes that Starbucks Corp can not be expected to have a long-term impact. The economic benefits of restaurant chains, especially coffee, are extremely attractive, and Lucky is just one of many chains competing in the market.

Analysts argue that coffee chains have profit margins of 30 per cent or more before interest, tax, depreciation and amortisation, meaning they are still profitable even if competitors try to fight a price war. His biggest concern for Starbucks Corp is that apart from acquiring existing franchisees or opening more stores, the company has not made a strong competitive response.