China's Booming Coffee Market: Competition Intensifies as Demand Surges

Published 2024년 9월 26일

The coffee industry in China has grown rapidly, with over 50,000 new stores opening each year, according to Bloomberg. In recent months, thousands of branded shops opened in China, surpassing the number of coffee stores in the United States (US). Analysts predict that China's growing demand for coffee will be a major driver of future demand for beans. As coffee shops expand beyond Beijing and Shanghai into numerous mid-sized cities, young professionals are increasingly choosing coffee over traditional tea. Chinese coffee consumption is rapidly increasing, resulting in fierce competition between local and multinational coffee chains, such as Starbucks, Luckin Coffee and Cotti Coffee.

Luckin Coffee's Rapid Expansion and Financial Setback

Formed in 2017, Luckin Coffee saw remarkable development and was listed on the US stock exchange within two years. Luckin Coffee opened its first outlets within a year of its establishment and quickly expanded to over 4,000 locations by 2019, outpacing Starbucks in terms of store count in China. As of Dec-22, Luckin Coffee has introduced 65 new products, about twice the number introduced by Manner and Costa, two popular chains in China. The figure is also more than what Cotti Coffee and Starbucks offer, which sell 51 and 47 products, respectively. As of Jul-24, Luckin Coffee has almost 20,000 stores across the country.

Cotti Coffee's Strategic Expansion and Market Positioning

Former Luckin Coffee executives quickly started a new company and announced the opening of a new coffee chain shop named Cotti Coffee via WeChat on Oct-22. Within a year, Cotti Coffee ranked third in China in terms of shop count. The company strategically places its locations near Luckin Coffee branches to attract customers away from its main competitor. In a struggle for every consumer, Cotti Coffee used a low-price tactic, offering the "Summer Ice Drink Season, RMB 9.9 a Day" campaign at around 5,000 outlets until July 30, 2023. Customers were given RMB 9.9 (USD 1.41) all-day drink coupons to stimulate excitement, raise brand awareness, and attract new customers.

In addition to sales promotions, Cotti Coffee gained significant attention in 2022 by sponsoring the Argentinian national football team during the World Cup. The company also boosted its profile through support for sporting events like the 2022 Chengdu Marathon. In Feb-23, Cotti Coffee partnered with the TiMi Studio Group, the developer of the game Honor of Kings, on a co-branding project that included aspects from five beloved characters in the game in limited-edition coffee items. Cotti Coffee stressed the brand's commitment to preserving a fashionable and youthful image while developing unique product concepts tailored to its target market.

Despite its quick development, Cotti Coffee faces pushback from franchisees over late payments and low salaries, prompting criticism on platforms such as Xiaohongshu and Douyin. The primary issue is a lack of supply chain and operational competencies, which leads to inconsistent product availability and dissatisfaction among franchisees and customers.

Starbucks' Expansion and Market Strategy in China

Renowned coffee company Starbucks focuses on providing local, creative items while improving social media connections to enhance product awareness and consumer frequency. The corporation is also growing its market footprint by building stores in lower-tier cities around China. Starbucks presently operates over 6,500 outlets in over 250 cities across the Chinese mainland, employing over 60,000 partners. Starbucks invests extensively in technology to enhance its omnichannel capabilities and operational efficiency. Starbucks targets higher-income clients and focuses on providing high-quality items and a great shopping experience. Despite tough competition from local companies, like Luckin and Cotti Coffee, and new entrants, such as Blue Bottle, a renowned coffee roaster and retailer that originated in Oakland, California, Starbucks remains a significant player in China's coffee market.

Figure 1. Comparison between Cotti Coffee, Luckin Coffee, and Starbucks in China

Source: Daxue Consulting

Operational Challenges Amid Rapid Growth

China’s ‘’thirst’’ for coffee is increasing, which Tridge covered previously in Opinions such as China Looking to Import Coffee as Demand Brews Stronger and Asia’s love for coffee opens door to new opportunities. As China's coffee culture grows rapidly, fierce competition among domestic and international coffee chains is reshaping the market. As brands like Luckin Coffee and Cotti Coffee expand aggressively and Starbucks maintains its strong presence, operational challenges and shifting consumer preferences will play a critical role in determining their long-term success.