Almost every day, Liu Szuwei buys two or three coffees, usually Americanos, from his local Luckin Coffee shop in Beijing. He pays about half of what he would pay at Starbucks, and says the service is faster.

“You can find a Luckin in almost any office building here in Beijing,” says the product director, who is in his late 20s. “You can sit in Starbucks for hours but at Luckin, it’s pick up and go. It’s really convenient for someone who works at an office, and wants to pick up their coffee on their way to work.”

That convenience has, in about a year and a half, helped turn Luckin into a hugely visible brand in China. The company began operations in October 2017 and had just nine stores in December of that year. It now has almost 2,100.

On Friday, the company’s US depository shares started trading on the Nasdaq exchange. The stock opened at $25 a share, well above the company’s initial public offering (IPO) price of $17.

But Luckin faces an identity crisis: analysts can’t quite decide whether to treat it as a coffee chain, a tech company or something in between. That dilemma could be its biggest hurdle as it tries to stop bleeding cash and turn a profit, analysts say. And the timing of its IPO, shortly after a dismal debut by ride-hailing firm Uber, may also not augur well for the firm.

The cost of convenience

Luckin Coffee shops have no cashiers. Customers order and pay for their drinks through an app. They can choose to pick them up at one of the company’s sparsely decorated locations or have them delivered within a guaranteed 30 minutes.

In its IPO prospectus, citing a Frost & Sullivan report, Luckin claims to be China’s second-biggest and fastest-growing coffee chain in terms of number of stores opened and cups of coffee sold.

“The company aims to become the largest coffee network in China, in terms of number of stores, by the end of 2019,” it adds.

Few people outside China have heard of Luckin, much less tried its drinks, and yet the company founded by former car-rental executive Jenny Qian Zhiya has attracted hundreds of millions in investment. Just a few weeks before its April IPO filing, it raised $150m. United States private equity firm BlackRock was one of the investors in that round of funding.

But its finances remain firmly in the red. In the first three months of this year, Luckin lost $85bn on sales of $71bn.

Luckin Coffee has raised $561m in advance of its Wall Street listing [File: Wang Zhao/AFP]

Luckin behaves more like a technology company than a chain of coffee shops. It is growing ridiculously fast, opening locations at an average rate of more than four per day. The company is burning through cash, as technology companies often do. And it is marketing itself as a technology company, even choosing to list its shares on the tech-heavy Nasdaq exchange.

While Starbucks positions itself as a company that offers affordable luxury, Luckin’s coffee products are mid-range, and sold at deep discounts.

Luckin caters to Chinese tastes. Its focus is more on pick-up and online orders rather than creating a comfortable place to sit and sip, as Starbucks aims to do. (Although most Starbucks stores in China also deliver, as Liu pointed out.)

‘A cool brand’

“Luckin has a cool brand backed by popular celebrities, but it’s a different business model from Starbucks,” said Dan Wang, an analyst at The Economist Intelligence Unit. “Starbucks provides an ambiance for business meetings, friend hangouts and a sense of community. Luckin is just a provider for mid-quality coffee and fast food and thus not able to gain much customer loyalty.”

“Luckin has reached deeper on its online sales and delivery services than Starbucks. Its customers are in a way subsidised by the capital poured into the company,” Wang told Al Jazeera.

Its performance on its first trading day will be closely watched – it comes days after a lacklustre showing by Uber. Since going public on May 10, Uber’s shares fell more than 10 percent, before regaining some ground.

“This year is difficult for tech IPOs, due to economic uncertainties and a lack of liquidity. Luckin has been making huge operational losses and is lacking in both technology innovation and platform attraction,” said Wang. “Given how Uber undershot in its IPO, foreign investors will be exceptionally cautious towards unicorns, especially those from mainland China.”

Analysts say Luckin has little chance of competing against Starbucks outside China on the basis of its products or restaurants. But its extensive use of technology could give it a cost advantage over Starbucks, especially in developing countries.

“Luckin coffee is not top-quality coffee,” said Wang. “Maybe the company can fare better in mid-income countries along the Belt and Road Initiative, where a coffee culture is forming.”

Still, others are more optimistic about Luckin’s future.

“Luckin is still a young company but they have made enough investment efforts over the past year, so the chances of succeeding is quite likely,” said Yuwan Hu, COO of Daxue Consulting, which focuses on consumer products.

“Luckin is offering a different experience. It is focused more on takeaway, delivery and digital services. Their prices are better suited for price-sensitive consumers and office workers,” said Hu. “Starbucks has bigger stores and is more about the consumer experience in the cafes. It is also focusing more on the premium side of things.”

Coffee shops have expanded rapidly in top-tier cities in China, but the market is far from mature. Hu says there are 8,000 coffee shops in Shanghai, 5,000 in Beijing and more than 3,000 in Guangzhou and Shenzhen. Starbucks has about 3,600 locations spread across 150 cities in China.

“At the moment, Starbucks has better brand recognition. But Luckin is investing heavily in that and growing brand recognition through rapid expansion,” Hu said.

“Luckin needs to concentrate on succeeding and turning a profit in China first,” Hu said. “When they do expand abroad, they would need to cater to local tastes and standards. However, I do believe they would be bringing something innovative to Western markets with their digital-ordering service.”

The question many are asking, though, is whether the Luckin model that relies on big discounts will work. For now, the company is relying on investment capital. Starbucks has taken 20 years to build its market. Luckin has been at it for a year and a half and, despite the buzz, it barely has a track record.

David Ho and Cornelia Zou contributed to this report