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Why China’s Home-Grown Companies are Increasingly Competitive

Not many investors may be aware but Chinese brands such as Luckin Coffee Inc (NASDAQ: LK) and ANTA Sports Products Ltd (SEHK: 2020) are now increasingly competitive versus Western companies such as Starbucks (NASDAQ: SBUX) and Nike (NYSE: NKE) in their own country.

Given many Western multinationals had more experience in marketing and utilising technology, foreign brands also had advantages in terms of branding and perceived quality over local Chinese brands.

The advantages in better branding and higher perceived quality allowed Western companies to win more market share and charge higher prices – appealing to the local population in China that their goods were “quality” you paid for. However, this is now changing.

Local brands have caught up

Now, Chinese companies are increasingly competitive in China. Because China is wealthier than before, middle-class Western brands no longer benefit from the “luxury” perception. Chinese companies now also have enough experience to advertise effectively and increasingly, they are making high-quality products that are as good as, if not better, than their foreign rivals.

Furthermore, Chinese companies also benefit from increasing nationalism. Just as a Harley Davidson motorcycle benefits from the “buy American” call, Chinese companies increasingly benefit from the “buy Chinese” crowd.

Luckin vs. Starbucks

Although China has generally always been more of a tea-drinking countr rather than a coffee-drinking one, demand for coffee has taken off due to the increasing middle class in China. Both Starbucks and Luckin coffee have benefitted from the trend.

Starbucks ended the third quarter with 3,900 locations in China and the company hopes to add around 3,000 more in the next five years. In the long run, Starbucks hopes to have an even larger operation in China than in its home market of the US.

Luckin Coffee, meanwhile, which many consider the biggest threat to Starbucks, has around 3,000 stores. The company has mastered branding as many consumers are now picking Luckin Coffee over Starbucks.

As a result of their tech-first approach, a focus on growth, and solid execution, Luckin Coffee has grown extremely fast. Although it was founded just two years ago in 2017, it had 2,963 stores at the end of the second quarter of 2019, up 374.8% from the second quarter of 2018.

Luckin also uses technology in every aspect of the business from supply chain management to data analytics to customer engagement. By focusing more on online ordering and cheap delivery, Luckin also has some advantages versus Starbucks – which generates most of its business in-store.

As Luckin grows and utilises its technology, it will reduce its store operating loss due to benefits of scale and better bargaining power. In the long run, Luckin hopes to have more stores than Starbucks. That’s quite an ambitious goal given that Starbucks had around 30,000 licensed or company-operated cafes globally at the end of 2018.

ANTA vs. Nike

Although Nike has a bigger market share and its products are seen as status symbols, ANTA Sports is quickly catching up. The company is the number three player in the sports market behind Nike and Adidas and the number one among Chinese brands by offering high-quality clothing, basketball and running shoes.

In terms of branding, ANTA has mastered some of Nike’s techniques by striking a deal where Chinese athletes wear its clothing in the closing and opening ceremonies of the Olympic Games.

The sports market in China is expected to grow fast due to the growing middle class. Nike realised US$1.7 billion in sales in the fourth quarter from China, up 22% year-on-year. In 2018, ANTA realised sales of RMB 24.1 billion (US$3.4 billion), which was up an impressive 44.4% year-on-year.

Buying local

While owning Western multinationals with substantial China exposure can be a great way for investors to capture some of China’s future growth, owning shares of private Chinese companies can be equally as promising.

By owning a Chinese company, investors will have a mostly China pure-play that might be growing a lot faster, like Luckin Coffee, rather than a multinational such as Starbucks where growth outside of its China operations is anaemic.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.