The American-listed Chinese technology giants are finding new turfs for business competition. Tencent Holdings Ltd. ADR (TCEHY) is now challenging its home country rival Alibaba Group Holding Ltd. (BABA) to gain market share in China’s coffee stores business. (See also, What Is Tencent?)
Tencent-Luckin Against Alibaba-Starbucks
To capitalize on the growing coffee-drinking market in China, Tencent has signed an exclusive business agreement with local start-up Luckin Coffee, a coffee-and-bakery chain, according to the South China Morning Post. Luckin Coffee currently operates 1,003 stores across 13 different cities of China, and hopes to expand to 2,000 stores by the end of this year.
While the terms of the deal were not disclosed, the strategic partnership is expected to explore the use of robotics for rapid delivery of customer orders as well as instant payment processing using facial recognition using Tencent’s WeChat payment system.
The move by Tencent comes a month after Alibaba’s Ele.me, an online food delivery service of China, joined hands with Starbucks Corp. (SBUX) to begin delivery of its drinks and food items in the Asian nation. The delivery service is expected to start this fall in the key cities of Beijing and Shanghai and will eventually expand to cover 2,000 Starbucks stores by the end of the year. With Starbucks expecting to triple its revenue over the next five years in China, it continues to bet big in the large Asian market.
Interestingly, Tencent also has a partnership with Starbucks for mobile payments and social gifting on the coffee chain’s WeChat app.
The strategic partnerships by both Tencent and Alibaba figure under the category of on-demand local services. Beyond the standard sale of coffee and other food items, such ventures serve as key leads to other services, like mobile payments, and create the necessary platform for gaining significant market insights like consumer spending patterns. (See also, How Starbucks Can Profit From Alibaba Alliance?)
“We hope the cooperation with Luckin coffee will create a new lifestyle of ‘smart retail’ through tie-up on user traffic, technology exploration, application scenarios, and management abilities,” said Lei Maofeng, deputy general manager of Tencent's payment platform WeChat Pay. “Coffee has become a popular drink for young people nowadays and there are more coffee industry practitioners.”
China's local market for coffee products is estimated to be worth around 100 billion yuan ($14.62 billion), and instant coffee accounts for 72 percent and freshly brewed coffee constituting 18 percent, SCMP quotes a July report by research firm JingData. While average per-person coffee drinking is comparatively lower in China, the large population makes up for the big market potential. JingData reports that a U.S. consumer drinks an average of 269 cups of coffee annually, while the average in China was 4.5 cups. (See also, Walmart Replaces Alipay With Tencent's WeChat in Blow to Alibaba.)