Luckin, Tim Hortons: Is there still room in Singapore's coffee scene?

SINGAPORE: Competition in Singapore’s coffee scene is heating up with the entry of two new mega players.

China’s largest coffee chain, Luckin Coffee, opened its first two outlets in Singapore last month while Canadian chain Tim Hortons is set to make its debut this month.

Nicknamed the “Starbucks of China”, Luckin has more than 8,000 stores in its home country and is already planning for more in Singapore, which is the first market in its overseas expansion.

In addition to its two outlets at Marina Square and Ngee Ann City, it reportedly plans to open another eight in Singapore by the end of April, including one at Guoco Tower in Tanjong Pagar.

Tim Hortons – best known for their coffees and doughnuts – plans to expand to hundreds of locations across Singapore, Malaysia and Indonesia from April, according to a report by Nikkei Asia.

When CNA visited Luckin’s outlet at Marina Square at lunchtime on Friday (Apr 14), all 15 seats were occupied and at least a dozen people were waiting outside for their drinks. 

In comparison, crowds were thin at other coffee chains in the mall including Starbucks and Gloria Jean’s, both of which have an area larger than Luckin's. Less than half of Starbucks' tables were occupied while only one table was occupied at Gloria Jean’s.

With no shortage of cafes in Singapore, is there still room for brands to gain a foothold in the market? CNA spoke to industry experts to get their take.

GOING AGAINST THE MATHS

While chains such as Luckin and Tim Hortons might have enjoyed success in their home countries, new players may face significant hurdles in Singapore, given the country’s high rental and manpower costs.

“There will always be demand for new brands but the question is whether they can survive long enough because currently, the maths is against them,” said F&B expert Alvin Sabai, the chief executive officer of Strategic Consultants.

“When it comes to F&B, the rule of thumb is that your sales should be at least four times your rental costs. Even if you manage to do this, you might only just break even because of all the other costs you have to pay,” he added.

Echoing his sentiment, F&B consultant Karen Lam said companies hoping to break into Singapore’s market have to be strategic and clear in their goals to reduce overheads.

“I definitely have more optimism for Luckin because just looking at their business operation models, their strategy is actually very clear-cut – minimise manpower as much as possible via digital apps and keeping their shop sizes small,” she said.

“A business model like Tim Hortons requires more real estate because they need sofas and comfortable seating for people to hang out, and given Singapore’s high rental costs, this will significantly increase their costs.”

The ongoing labour shortage, as well as recent changes under the progressive wage model for F&B workers, have also driven up staff costs.

Announced in February, workers in the food services industry will receive annual pay increases over three years, with entry-level local workers to be paid at least S$1,750 (US$1,300).

“Whenever a company recruits a new employee, there is a base salary that they now have to consider. Even then, they still might not be able to get new hires due to the current manpower shortage, which means they have to keep increasing the starting pay until they find someone,” said Mr Sabai. “All these will eat into the company’s profit margins.”

NEW COMPETING WITH THE OLD

New players also face steep competition from other international and local brands such as Huggs, Starbucks and The Coffee Bean and Tea Leaf, all of which are well-established in Singapore.

According to their websites, Starbucks has 149 outlets in the country, The Coffee Bean and Tea Leaf has 72, and homegrown chain Huggs has about 20.

“If you walk down the (central business district), through Marina Bay Sands to Tanjong Pagar, you can already see a lot of places selling coffee, whether they are takeaway or dine-in coffee cafes. So it’s really a matter of whether there’s enough space and demand for more coffee outlets here,” said Ms Lam.

Most of the well-established companies would have already anchored themselves in places with higher footfall, making it harder for new entrants to compete, Mr Sabai pointed out.

“If they want to go up against the big boys like Starbucks, the only way a company like Luckin or Tim Hortons can beat them is to open as many outlets as them or more in a single day, which is near impossible,” he said.

To hook more customers, some new players could offer attractive discounts at the start but experts cautioned that this might not be enough.

Luckin prices range between S$4.80 and S$6.80, which is cheaper than Starbucks, where drinks cost S$4 to S$9.

Discounts create an "initial euphoria", which has been done by companies such as Grab when it first entered the market offering cheap rides, he said.

“But the question is how long can companies play this game, because offering discounts impact them directly. Once their marketing budget is finished and exhausted, what’s next?"

Luckin may be cheaper than Starbucks now, but if it decides to raise prices later on, it could lose customers, he added.

To survive and even thrive, Ms Lam said new entrants would have to find ways to set themselves apart from their competitors such as having a strong loyalty programme or offering high-quality and innovative products.

“Singapore consumers, in particular, can be quite picky and it could be because they are very well-travelled so perhaps they expect and demand a certain quality,” she said.

“Companies need to keep improving and innovating to keep people interested.”

However, despite the odds stacked against them, both experts noted that this has not deterred companies from setting up shop in the country.

Data from Statista shows that coffee consumption in Singapore grew nearly 6 per cent to 5.7 million kg between 2021 and 2022, with the growth largely driven by an increase in international and local coffee players.

“Generally, the take that most of these companies have is that if they manage to succeed here, expanding to the region will be easier because they have already shown that they can survive in an affluent cosmopolitan place like Singapore, where there are all kinds of very high and intense competition,” said Mr Sabai.

“Because of this, some of these companies use Singapore as a stepping stone because the country has a lot of people coming and going, so for them, it’s a good place to showcase their brand and get a lot more awareness.”