$BJFOOD / 5196 (BERJAYA FOOD BERHAD): The Potential Operator of Luckin Coffee in Malaysia?

Chinese media reports indicate that Luckin Coffee, a rapidly growing coffee chain, plans to embark on a large-scale international expansion between the fourth quarter of 2024 and the first quarter of 2025, with a focus on Southeast Asia and the U.S. markets. Reportedly, the group has approached $BJFOOD / 5196 (BERJAYA FOOD BERHAD), the Malaysian franchisee of Starbucks, to explore the possibility of forming a joint venture.

Given Berjaya Food's extensive experience in operating coffee chains, this move isn't entirely surprising. The company currently runs Starbucks Malaysia, which has seen significant expansion, although recent boycott waves have led to some store closures and financial losses. Some skeptics argue that since Luckin Coffee is a direct competitor to Starbucks, Berjaya Food might not secure the franchise. However, this isn't necessarily the case—Jollibean Foods recently announced plans to challenge Starbucks by acquiring a 70% stake in South Korea's Compose Coffee. Interestingly, Jollibean Malaysia is owned by Berjaya Food, which contradicts the notion that being a competitor in one market precludes franchise opportunities in another.

Here are some reasons why Berjaya Food should consider securing the Luckin Coffee franchise:

- Expanding Market Share: Starbucks Malaysia once dominated the coffee chain market, but recent store closures have allowed ZUS Coffee to surpass it in terms of the number of outlets. This decline is attributed to several factors, including boycott waves, shifting consumer behavior post-pandemic, and premium pricing.

- Covering Mid to High-End Coffee Segments: The premium pricing of Starbucks has driven some customers to opt for more affordable alternatives like ZUS Coffee. By bringing Luckin Coffee into its portfolio, Berjaya Food could appeal to a broader customer base. Luckin’s pricing aligns closely with ZUS, allowing Berjaya Food to compete more effectively in the mid-range segment with Luckin, while Starbucks continues to target the high-end market.

- Potential for Profit Recovery: The boycott waves have pushed Berjaya Food into a loss-making situation, and it’s unlikely that geopolitical tensions will ease anytime soon. Therefore, the company needs to diversify its revenue streams to return to profitability. Luckin Coffee presents a promising opportunity. Given that Starbucks is the largest revenue and profit contributor to Berjaya Food, the company’s extensive experience and resources could help create synergies between its subsidiaries, potentially revitalizing its financial performance.