China's coffee-drinking market is changing rapidly. Local chain Luckin Coffee and international franchise Starbucks offer a fascinating glimpse into the evolving landscape. Both companies announced their results on April 30. Luckin Coffee’s meteoric rise in China not only leaves Starbucks in its shadow but also underlines shifting consumer preferences and market dynamics. It highlights the power of innovation and adaptability in the competitive coffee-drinking market.
Luckin Coffee, which doubled the number of its stores last year to 18,590 – including 30 in Singapore, its only other market – added 2,342 more in the first quarter, all but two of which were in China. This rapid expansion hit Luckin Coffee’s margins and same-store sales dropped by 20% year-on-year. But it also doubled its customers to 60 million every month on average and boosted revenue to nearly CNY6.28 billion for the quarter, up 41.5% year-on-year. In just one year, Luckin Coffee has opened more stores in China than Starbucks in 25 years – and now has more than twice as many stores as Starbucks’ 7,093.
According to Statista, the Chinese drank, on average, just 11 cups of coffee in 2022. Compared to mature coffee-drinking markets like the United States (more than 700 cups a year), the Chinese market has enormous potential. Luckin Coffee’s success is driven by its adept use of social media and influencer marketing, which resonates particularly well with the younger, coffee-drinking crowd. Collaborations with celebrities such as Jackson Yee and partnerships with major Chinese brands such as Kweichow Moutai have boosted Luckin’s brand visibility and appeal.
In contrast, Starbucks reported revenues of USD706 million from China in the quarter, down 8% year-on-year. Its Chinese same-store sales contracted by 11%, with transactions falling by 4% and spending per transaction down by 8%. This divergence in performance between the two coffee companies can be attributed to several factors influencing consumer behavior and market trends in China.
Firstly, the consumption downgrade in China is real and the price difference between local and international chains is significant. The average price of a drink at Luckin Coffee and other local brands like Manner Coffee and Cotti Coffee is around CNY12 to CNY18, compared to Starbucks’ CNY25 to CNY30. For cost-conscious consumers, this is a substantial price gap.
Secondly, the shift towards working from home and satellite offices has also changed consumer behavior. More are favoring the no-frills takeouts offered by Luckin over the more luxurious sit-in experience Starbucks offers, especially as the pace of Chinese society picks up. The growing consumer preference for the efficiency of takeouts and pickups, coupled with a penetration pricing strategy, has driven Luckin Coffee to rapidly open small stores. This has made it much easier for customers to find a Luckin Coffee store, helping the chain to capture market share fast.
Finally and most importantly, local coffee chains have adopted innovative payment methods right from the get-go. Luckin Coffee’s order-ahead model means customers spend little to no time waiting in stores, making pickups and deliveries much more efficient. This has given local brands a competitive edge in terms of convenience and customer experience. Luckin Coffee’s app ecosystem, which integrates orders, loyalty programs and promotions, enhances customer engagement and loyalty, a critical factor in its rapid growth. Starbucks, on the other hand, has been slow to adapt to these changing market dynamics. Its traditional sit-down model, which focuses on providing a premium coffee experience in a comfortable setting, is less appealing to cost-conscious, convenience-seeking consumers with a fast-paced lifestyle. While Starbucks has made efforts to introduce delivery services and digital payment options, it has struggled to match the pace and scale of Luckin Coffee’s digital initiatives.
The rise of local coffee chains also reflects a broader trend of increasing consumer nationalism in China. Chinese consumers are becoming more supportive of home-grown brands that resonate with their cultural identity and offer products tailored to local tastes, Economist Kok How Lee writes in the South China Morning Post.
