Luckin Coffee's not-so-secret weapon in battle with Starbucks: Tea

(Reuters) - Luckin Coffee Inc's LK.O new teas pulled in more customers to its rapidly expanding network of stores in China in the third quarter, helping the Starbucks rival post a smaller-than-expected loss and sending its shares up nearly 14%.

FILE PHOTO: A barista packs a coffee for online sales at a Luckin Coffee store in Beijing, China July 17, 2018. REUTERS/Jason Lee/File Photo

Luckin, which also forecast fourth-quarter revenue above estimates, has benefited from a growing love for caffeine in China’s major cities such as Beijing and Shanghai, but tea still dominates smaller towns.

The company in July introduced fruit-flavored teas and tea macchiatos at its outlets, and teas constituted 20% of freshly brewed drinks in the third quarter.

Luckin attracted 8 million new customers during the period, “partly driven by the success of Luckin Tea products”, Chief Financial Officer Reinout Schakel said on a conference call.

Looking to build on the momentum, the company opened its first independently branded “Luckin Tea” store in October.

Luckin's results follow a strong show in China by Starbucks Corp SBUX.O, largely credited with making a nation of tea-lovers embrace coffee.

Since its launch in 2017, Luckin has not shied away from aggressively opening stores as part of its goal of overtaking Starbucks in China by the end of the year.

The company opened about 700 stores in the third quarter, taking its total in China to 3,680, while Seattle-based Starbucks took two decades to reach 4,125.

The expansion nearly tripled Luckin’s operating expenses to 2.13 billion yuan in the quarter, but that declined as a percentage of net revenue.

Luckin said a reduction in store pre-opening costs, rent payments and operating expenses due to its app-focused model helped cut relative costs.

“It is a good sign that expenses are falling. But the question will be how much farther they can push them down and if they can make individual stores more profitable,” said Ben Cavender, managing director at China Market Research Group in Shanghai.

Excluding certain items, Luckin reported a loss of 32 cents per share, smaller than the 38 cents analysts had expected.

Total net revenue rose over six-fold to 1.54 billion yuan.

Luckin forecast fourth-quarter net revenue of 2.1 billion yuan ($300 million) to 2.2 billion yuan ($314 million), while analysts were expecting $289.08 million, according to three analysts polled by Refinitiv.

Including the session’s gains, Luckin shares have gained nearly 27% over their initial public offering price in May. The IPO lockup period expires on Wednesday.

Reporting by Uday Sampath in Bengaluru; Editing by Sriraj Kalluvila