Quantifying the Impact of Digital Transformation: Starbucks and Luckin in China
Dr. Ping Xiao
Associate Professor of Marketing
Melbourne Business School
University of Melbourne
With the rise of the internet and recent advancements in digital technology, firms across various industries such as fast food, coffee, and retail, are increasingly embracing digital transformation. We analyze the case of Starbucks and Luckin to explore the impact of a digital entrant (Luckin) on the digital transformation of the incumbent (Starbucks) and to quantify the value generated by this transformation. We categorize the coffee stores into digital stores which facilitate services like “order online, pick up in store,” and traditional stores, which lack such features. Specifically, we address the following research questions: (1) How has a digital entrant (Luckin) affected the incumbent’s (Starbucks) development path, especially with regards to their digital transformation journey? (2) What benefits has Starbucks obtained from the digital transformation of their distribution channels? and (3) To what extent has either firm benefited from the strategic impact they’ve exerted on their competitors? We developed a dynamic model framework that considers both firms’ distribution adjustment decisions for traditional stores and digital stores as well as their strategic interaction. Our model incorporates unobserved market preference for coffee consumption, which affects firm profitability and therefore distribution adjustment decisions, into the model. We collected the entire development path of the major players in the coffee chain category across various markets in China to estimate the model. To the best of our knowledge, our study is among the first to structurally quantify the impact of digital transformation. Our research will also offer insights into the relationship between traditional stores and digital stores.