September 29, 2023
(press release)
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Multinational and regional café chains have rapidly proliferated across Mainland China over the last two decades. As the top-tier cities become saturated, more café chain operators, including Luckin Coffee and Starbucks, are expanding into smaller towns. However, intensifying competition is accelerating product innovation and triggering price wars among these operators. As per-outlet revenues are squeezed, the expansion spree will taper off. Following double-digit growth over 2017–22, the number of coffee & tea shop outlets in China will thereby, inch up at a compound annual growth rate (CAGR) of 1.4% over 2023–27*, according to GlobalData, a leading data and analytics company. Kiki Wu, China Senior Business Development Manager at GlobalData China, comments: “Luckin Coffee, a domestic food tech company, stole the lead from global giant Starbucks China, opening its milestone 10,000th outlet in China in mid-2023. Starbucks China is hot on the trail, striving to expand its network to 9,000 stores by 2025. Besides the two market leaders, a host of local and international dine-in, takeaway, and delivery chain operators, including Hey Tea, Coffee Box, Pacific Coffee, and Manner Coffee, are expanding their footprint in China. “With Beijing and Shanghai being packed with coffee and tea shops and rental costs surging, operators are spreading their roots into smaller cities and towns. Café operators also face competition from direct-to-consumer brands, such as Saturnbird Coffee and Yongpu Coffee; convenience store brands, such as Convenience Bee Coffee, Family Mart Coffee, K-Coffee, and 7/11 Coffee; and vending machines dispensing ready-to-drink coffees.” Bobby Verghese, Consumer Analyst at GlobalData, notes: “The intense competition is stimulating product innovation. Local operators are more agile, responding rapidly to changing consumer preferences. For instance, through a partnership with domestic beverages giant Kweichow Moutai, Luckin Coffee launched The Moutai Latte, a low-alcohol latte infused with Moutai baiju, an iconic local spirit. Millions of cups of Moutai Latte were sold at its launch, and the drink attained viral popularity on social media sites. Such unique offerings are designed to attract 50% of Chinese consumers whose product and service choices are often or always influenced by how enjoyable or unique the product/service is**. Not to be left behind, Starbucks recently opened its China Coffee Innovation Park at a cost of $220 million to digitize its supply chain and accelerate its sustainability initiatives in China.” Wu adds: “Under rising competitive pressure, domestic operators are also rolling out special discounts and price promotions to expand their consumer base. Though inflation has not been a concern for China as it has in the rest of Asia-Pacific, such budget-price offerings are gaining appeal among Chinese consumers in light of the economic slowdown. This ties in with GlobaData’s consumer survey finding, wherein 42% of Chinese respondents say their spending on coffee & tea shops is quite/very high**. However, a long-term price war can take a toll on operators’ revenue and profit margins, particularly for large-scale café operators, whose unique selling point lies in their premium dine-in experience.” Verghese concludes: “The increasing availability of high-quality domestically cultivated coffee from the Yunan Province will aid operators in lowering their product costs. Additionally, the rising demand from outlets in smaller cities will boost volume sales. However, these cities’ lower household disposable incomes will suppress operators’ pricing power. In this scenario, operators can apply the brakes on network expansion and consolidate revenues. For instance, in 2021, the Yum China and Lavazza partnership targeted 1,000 stores by 2025. However, the pace of new outlet openings has slowed, with the joint venture operating under 100 stores even as late as September 2023. Other operators can also follow suit and hold off on their ambitious expansion plans for the time being.” *GlobalData Consumer Intelligence Center – Market Analyzers, accessed in September 2023 **GlobalData 2023 Q2 Consumer Survey – China, with 716 respondents, published in May 2023
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