2 China start-ups challenging Starbucks and Twitch are about to IPO in the US, and they have a surprising amount in common

  • Luckin Coffee and DouYu, two Chinese start-ups that just filed for IPOs in the US, have a surprising amount in common for a coffee company and a video-game live-streaming platform.
  • Both companies are growing fast, losing money, tapping into mushrooming markets, and taking on big US rivals.
  • Luckin and DouYu are also targeting younger consumers, attracting users via social media, and using live streams, mobile apps, and customer data in novel ways.
  • Their IPOs come at a tense time for US-China relations, and successful public debuts could give America more leverage in trade talks.

Luckin Coffee and DouYu, two Chinese start-ups that justfiled for IPOs in the US, seem very different- one sells coffee while the other runs a live-streaming platform for video gamers. Yet the pair have more in common than meets the eye.

First off, both companies are growing quickly. Luckin only opened its doors in October 2017, yet it boasted more than 2,000 stores by the end of last year and generated net revenues of $US125 million, according to its IPO filing. Meanwhile, DouYu grew its monthly active users by 14% to 154 million last year and nearly doubled its net revenues to more than $US532 million, according to its filing.

Yet both are losing money. Luckin recorded a net loss of $US241 million in 2018, while DouYu’s net loss widened by about 43% to 876 million yuan ($US127 million).

Both businesses operate in mushrooming markets. Annual coffee sales in China almost doubled from 4.4 billion cups in 2013 to 8.7 billion cups last year, and are forecast to reach 15.5 billion cups in 2023, according to a Frost & Sullivan report cited in Luckin’s filing.

The Chinese e-sports market is also booming: the number of eSports gamers more than tripled to 351 million between 2015 and 2018, while the number of domestic viewers jumped more than 150% to 288 million over the same period, according an iResearch data cited in DouYu’s filing.

Unsurprisingly, Luckin and DouYu face stiff competition. Luckin is taking on Starbucks, which controls more than 50% of the Chinese market and plans to grow its store count by two-thirds to 6,000 by 2023.

DouYu’s biggest threat is Amazon-owned Twitch, which boasted more than 15 million daily viewers and 2.2 million monthly streamers in 2018. Its main domestic rival is Huya, which grew its monthly active users by 35% to 117 million in the fourth quarter of 2018, according to its latest earnings, and more than doubled its net revenues to $US678 million last year.

Technology – specifically live streams, mobile apps, and user data – play important roles in both businesses.

DouYu delivers live streams of people playing video games, while Luckin lets customers watch live streams of baristas making their coffees.

The Luckin mobile app lets customers place orders and pay for them in advance, provides real-time updates, and offers a choice of pick up or delivery. DouYu’s app provides a version of its platform tailored to mobile users, and notifies them when a streamer they follow goes live.

Luckin uses customer data to customise in-app menus and offer tailored discounts based on order history, preferences, product costs, and current demand. DouYu uses data to personalise users’ front pages and recommend content to them. The company also allows advertisers to request streamers integrate specific promotions into their broadcasts, and helps its streamers determine pricing using a combination of data and industry knowledge.

Both Luckin and DouYu have tapped into social media to drive user growth. Luckin invested heavily in adverts on WeChat, one of China’s most popular social media apps, boosting awareness of its brand by offering free coffees and other perks to those who referred their friends. Meanwhile, DouYu highlights its “engaging social media features” as a driver of user growth in its IPO filing.

Both companies want to attract younger consumers, too. DouYu says the main users of its platform are “typically younger,” while Luckin is targeting university campuses to reach students thirsty for coffee, according to their IPO filings.

Finally, Luckin and DouYu are pursuing IPOs in America at a tense time for US-China relations. The nations remain locked in a trade war and China’s theft of intellectual property, forced technology transfers, and hostile treatment of foreign companies remain sticking points in their negotiations.

Successful public debuts for Luckin and DouYu could spark further interest from Chinese start-ups, giving the US additional leverage in its trade negotiations with China.

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