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Jennifer Wells: Beating China rivals will be a tall order for Tim Hortons

Jennifer Wells: Beating China rivals will be a tall order for Tim Hortons
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The plan to expand Tim Hortons into China — Canada branding, maple leaf and hockey stick imagery — was received with a fair bit of hoopla when it was originally announced in July of last year. Opening 1,500 Timmies across a decade was the goal, Tim Hortons president Alex Macedo announced last summer, a promise that was followed with the opening in February of the chain’s first China outlet, in Shanghai.

But even a year ago Tim Hortons looked late to the party. In reaffirming its march on the People’s Republic this week, part of a broader global growth announcement by parent company Restaurant Brands International Inc., the fast-service coffee chain appears worse than laggardly. And that’s not just because Starbucks, which entered China two decades ago and today has 3,600 stories stationed in more than 150 cities, re-emphasized this spring that China continues to take pride of place in its expansion plans. And not just because the purchase of Costa Coffee, still the top coffee chain in Europe, by Coca-Cola Ltd., is bound to mean aggressive expansion of Costa’s already established China footprint with 420 outlets.

What really underscores the challenge ahead for Tim Hortons, which is starting from scratch in building brand recognition, is the lightning fast growth of a company you’ve likely never heard of.

Luckin Coffee Inc. Ring a bell? Not with me it didn’t.

In just a year and a half Luckin, which has gained investment backing from the likes of BlackRock, has grown from a first trial outlet, in Beijing, to 2,370 stores in 28 cities. On Friday three Luckin baristas, backed by the company’s executive team, ran the opening bell at the NASDAQ, celebrating one of the largest IPOs in the U.S. this year: 33 million shares at $17 (U.S.) a share.

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Behind the warp speed growth is the kind of story that should give a company like Tim Hortons pause.

Luckin co-founder and CEO Jenny Zhiya Qian was the chief operating officer at UCAR Inc., the ride hailing spinoff of CAR Inc., a chauffered car service provider. The founder of that company, Charles Zhengyao Lu, is chairman of Luckin.

We are going to be hearing more from these two as they transfer their experience in industry disruption to freshly brewed, takeout coffee.

Luckin’s prospectus didn’t take the Starbucks route of emphasizing the aroma of freshly ground beans and the importance of shop esthetics, or the appeal of relaxing in what Starbucks’ CEO Howard Schultz termed a comforting “third place” — your home away from home. Instead, the upstart is almost clinical in its description of pioneering a “technology-driven new retail model” that operates in a “100 per cent cashier-less environment.” The target: China’s mobile internet user base, which is expected to surpass a billion users within the next five years. More than 90 per cent of new customers made their first purchases with the Luckin mobile app.

Capturing that market has meant opening a mere 109 “relax stores,” which the company flatly states are there for branding purposes. Pick-up stores are where it’s at, concentrated in or near three target areas: office buildings, commercial hubs and university campuses. The company was the first to offer in-app ordering with promises of swift delivery. That caught the eye of Starbucks, which tested “Starbucks Delivers” in Beijing and Shanghai last fall and is now aggressively rolling out the delivery service across the Starbucks chain. Luckin has used stand-alone delivery kitchens as a way to test a market area. Once demand is deemed sufficient to support a pick-up store, the delivery kitchen is closed.

Luckin branding has been promoted by brand ambassadors, including actress Wei Tang and actor Zhen Zang. Promotions include “send coffee” mobile vouchers, which arrive — I’m quoting the prospectus here — “as red packets with personalized blessing messages.”

That’s the soft side.

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The disruptive side sounds more like this: “We leverage big data analytics and AI to analyze our customer behaviour and transaction data, which enables us to continuously enhance our products and services, implement dynamic pricing and improve customer retention.”

Also, the Luckin offerings are less expensive than Starbucks. So the pitch is a threefold promise: affordability plus quality plus convenience.

The market appears ready for conversion. Data from U.S. research firm Frost & Sullivan points to a near doubling of per capita coffee consumption in China across the next five years, to 10.8 cups. In 2013, the per capita consumption was 3.2 cups.

The notes of caution? Luckin recorded a loss of $241.3 million (U.S.) for the year ended Dec. 31, on sales of $125.3 million. Worryingly, a graph displaying new customer transactions shows a serious tumble to 4.3 million in the first quarter of this year from 6.5 million in the final quarter of last year. And then there’s Starbucks, which won’t cede its title easily.

Earlier this year Jenny Zhiya Qian made clear her company’s ambitions. In 2019 alone Luckin plans to open an eye popping 2,500 outlets. “Luckin aims to become China’s biggest coffee chain brand by the year end,” she said, “totally surpassing Starbucks by cups of coffee sold and number of shops.”

That could make for a titanic battle.

With Starbucks and Luckin in opposite corners, where does that leave Tim Hortons? The chain’s leaders like to remind home-grown consumers of its “iconic” status. Yet they’re a long way from proving that the chain’s DNA can be successfully transferred to a land far, far away. It’s been 10 months since the company first announced it was counting on China for growth.
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