American coffee chains have lost their lead in the race to meet China's growing demand for coffee.
Luckin Coffee reported at the end of the second quarter that it had surpassed Starbucks to become China’s largest coffee chain in terms of both revenue and number of stores. The Chinese coffee chain has made an impressive comeback after an accounting fraud scandal that rocked the company a few years ago.
With the new capital and leadership, Luckin now has 13,300 stores, nearly all of them in China. That’s double Starbucks’ 6,800 locations.
Luckin also recorded $855 million in revenue in the second quarter, slightly more than Starbucks’ $822 million in China. Luckin’s sales are increasingly outpacing Starbucks’, according to the company’s November report.
A Starbucks store in Beijing (China). Photo: Reuters
Starbucks, the world’s largest coffee chain, had a first-mover advantage when it opened its first store in China in 1999. Founder Howard Schultz built relationships there himself. The chain opened branches in China’s largest cities, then expanded to smaller ones. They opened hundreds of new stores there each year, catering to those who preferred to drink coffee in cafes.
But the pandemic has hit Starbucks hard, with sales at stores open for more than a year falling 17% in 2020 compared to 2019. For now, many Chinese continue to tighten their belts, which were developed during the pandemic.
Luckin, meanwhile, was founded in 2017, during China’s tech boom. Luckin’s stores are much simpler in design than Starbucks’. Their strategy also focused on mobile apps and fast delivery from the start, while Starbucks only added a delivery option in China later. Luckin’s drinks are also cheaper than Starbucks’.
By fall 2019, Luckin had 3,680 stores, nearly matching the 4,130 Starbucks built there over two decades.
Starbucks has made China a top priority for years. Former CEO Howard Schultz said China offered a huge growth opportunity, despite the complexity of doing business there. China is now the company’s second-largest market by store count and revenue, behind the United States.
China is a country with a long tradition of tea drinking. People here consume less coffee than many other countries. However, businesses all agree that demand for coffee in China is increasing. Analysts predict that China will become the world's largest coffee consumer market in the next few years.
However, Western brands selling here are facing increasing competition from local brands, and consumers are also starting to show a preference for domestic brands.
Kiki Pang, a marketing manager in Guangdong, drinks coffee twice a week. She usually orders a Luckin latte delivered to her office in the afternoon, during work hours, and pays via WeChat.
"Starbucks used to be very popular among young Chinese people. But now they have more choices. The situation has changed," said Pang.
Starbucks executives remain steadfast in their commitment to China. This month, they said they aim to open 1,000 new stores in China each year, bringing the total to 9,000 by 2025. They said China will become Starbucks’ largest market. “I am very confident that this is just the beginning,” Starbucks China co-CEO Belinda Wong said at an event in November.
On WSJ , Starbucks also confirmed that their sales in China are still increasing, despite competition from domestic rivals.
Luckin went public in 2019. However, a year later, Luckin was delisted from the Nasdaq after an accounting fraud scandal. Luckin pledged to rebuild, bringing in new leaders and receiving investment from Chinese fund Centurium Capital. This summer, the chain opened its 10,000th store in China.
Luckin has been buoyed by its price points and some of its signature drinks, including a collaboration a few months ago with Chinese luxury liquor brand Kweichow Moutai.
Although Starbucks has made many strategies to boost its business in China, many people still prefer local brands. The price war also continues to affect Starbucks' business.
Another emerging competitor in China is Cotti Coffee, which launched last year and also has a strategy of selling cheap drinks to young people. In August, Cotti said it had opened 5,000 stores in just one year.
Starbucks has recently launched a number of new products in China, 28 this summer alone. Executives say Starbucks is now the only coffee brand in China with a full range of private-label drinks, food, and merchandise, with prime locations across the country. It is building more stores in smaller areas. In September, Starbucks opened a $220 million innovation center in China.
At a recent event, Starbucks CEO Laxman Narasimhan said that compared to competitors selling cheaper products, Starbucks offers a better experience and higher quality to Chinese consumers.
Sunny Shen, a consultant living in Jiangsu, said she drinks coffee several times a week. Lately, she has been enjoying Luckin’s limited-edition milk coffee. “With a coupon, Luckin drinks are half or a third of Starbucks,” she said.
Ha Thu (according to WSJ, Nasdaq)
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