Coffee Proving To Be Latest Battle Ground For Tencent And Alibaba

Retailers in China are taking sides in the rivalry between Alibaba and Tencent, and the latest battle ground is coffee: Chinese upstart Luckin Coffee is teaming up with Tencent on the heels of a partnership between Starbucks and food delivery service Ele.me, which is a unit of Alibaba. With Tencent and Luckin’s relationship, WeChat payments will be available at the coffee chain’s store and through online orders. In addition, the companies plan to look into payment innovation, such as facial recognition technology and robotic delivery.

WeChat Pay Deputy General Manager Lei Maofeng was quoted in South China Morning Post as saying that the company hopes “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.”

As of now, Luckin Coffee already offers some innovative technology: Customers can monitor the progress of their orders through a livestream and have them delivered in an average of just 18 minutes. Those capabilities haven’t been ignored by Starbucks, which is taking on Luckin’s delivery service through its tie-up with Alibaba.

These latest developments in China’s coffee space come as Starbucks was seeing a slowdown, which it is now blaming on third-party delivery services just weeks after boasting about its expansion in China, it was reported in late July. The coffee retailer also saw a decline in third-party companies placing big orders for delivery to their customers, which had been resulting in long in-store lines. But Starbucks’ partnership with Ele.me could give the retailer a boost in the country, as it aims to nearly double its number of stores in China by 2022. Sharon Zackfia, an analyst for William Blair, said in July that “an imminent announcement of a delivery solution is an important first step, as is a rollout of mobile ordering.”

In China, the market for coffee is valued at roughly 100 billion yuan annually. Instant coffee comprises 72 percent of the market, and fresh-brewed coffee makes up only 18 percent. Chinese consumers drink an average of 4.5 cups per year, while U.S. consumers drink an average of a whopping 269 cups of coffee per year. Even so, these latest coffee partnerships show the importance of delivery.

On-demand services are not just important to customers looking for their morning cup of coffee without having to wait in line at their local coffee shop. They have also become “an entry point to other services, such as mobile payments, and also provide further insight into consumer spending patterns,” South China Morning Post reported in an article about the Tencent and Luckin tie-up.

The Race to Reach Retailers

The battle over coffee shops comes as archrivals Alibaba and Tencent have invested more than $10 billion in retailers since the beginning of last year. Their efforts have left retailers feeling they need to align with one of those players. As Kantar Worldpanel’s Jason Yu told CNBC, “All of the retailers in the brick-and-mortar world are very worried. They have to take a side. Otherwise, they are afraid they will be eaten alive in the future.”

That push is driven by the large cash piles and rising share prices of Alibaba and Tencent. At the same time, those eCommerce companies are locked in a race to get consumers and merchants to join their payment, logistics, social media and Big Data platforms. Working with Alibaba and Tencent comes with its benefits: Merchants can access payment systems and logistics services, as well as Big Data. When Alibaba invested $486 million in February into one retail-centered Big Data firm, in particular, Alibaba said the deal could “help brick-and-mortar retailers succeed in the digital age.”

Like their American counterpart Amazon, Alibaba and Tencent are fashioning identities that have less and less to do with online shopping and more to do with an integrated life approach. The companies are rolling out mobile payments at even more physical stores. Alibaba took an 18 percent stake in supermarket and convenience store operator Lianhua Supermarket Holdings in 2017. At the same time, Alibaba and its financial services arm, Ant Financial, invested over $1 billion in Chinese food delivery service Ele.me.

How will the battle between Alibaba and Tencent over retailers turn out? Many coffee and food deliveries could help determine that.