China's coffee market has witnessed a significant shift with the rise of Luckin Coffee, a homegrown brand that, in a short span of time, has managed to eclipse Starbucks, the long-standing leader in the Chinese coffee scene.
The Rise of Luckin Coffee
Founded in 2017, Luckin Coffee emerged as a formidable competitor to Starbucks by offering affordable coffee and convenient mobile ordering. This strategy, combined with an aggressive expansion plan, allowed Luckin Coffee to swiftly increase its footprint across China. By June 2023, Luckin Coffee had established over 10,000 stores, surpassing Starbucks' 6,480 locations in mainland China.
Luckin Coffee's growth strategy involved opening 1,485 new stores in the quarter ending June 30, 2023, which translates to an impressive rate of approximately 16.5 stores per day. The company's business model includes a mix of self-operated and partnership stores, with a total of 10,829 locations by the end of June 2023.
Starbucks' Presence in China
Starbucks, which entered the Chinese market in 1999, initially faced skepticism about its prospects in a predominantly tea-drinking country. However, it played a pivotal role in introducing and popularizing Western coffee culture in China. Over the years, Starbucks has expanded significantly, growing from 278 locations in 2011 to over 5,000 by 2021.
Despite this growth, Starbucks' expansion rate has been outpaced by Luckin Coffee's rapid strategy. Starbucks' global policy of not franchising its operations, preferring instead to operate company-owned stores or sell licenses, contrasts with Luckin Coffee's more flexible approach.
Different Strategies and Appeal
Luckin Coffee and Starbucks have adopted distinct business strategies and market appeals. Luckin's focus on affordability is evident in its pricing, with a cup of coffee costing between 10 to 20 yuan ($1.40 to $2.75), often accompanied by heavy discounts. Starbucks, on the other hand, positions itself as a premium brand, with its prices starting at 30 yuan ($4.10).
Furthermore, Luckin Coffee's business model emphasizes a grab-and-go approach, where customers order via an app and quickly pick up their purchases. This model results in lower operating costs and faster break-even times. In contrast, Starbucks offers a more traditional, cozy cafe environment, encouraging customers to linger and socialize.
Luckin Coffee's Market Strategy and Challenges
Luckin Coffee has also explored innovative marketing strategies, such as collaborating with Kweichow Moutai, a famous Chinese liquor maker, to create alcohol-infused lattes. This move reflects Luckin's efforts to differentiate its product offerings and cater to local tastes.
However, Luckin Coffee's journey has not been without challenges. The company was delisted from the Nasdaq in June 2020 following an accounting scandal involving fabricated sales figures. Since then, Luckin Coffee has worked to restructure its financials and improve governance, emerging from bankruptcy proceedings in 2021 under the leadership of CEO Guo Jingyi.
The Future of China's Coffee Market
As the coffee market in China continues to grow, with an expected 8.7% CAGR from 2022 to 2027, both Luckin Coffee and Starbucks will play crucial roles in shaping consumer preferences and market dynamics. The competition between these two brands highlights the evolving landscape of China's coffee culture, where traditional tea-drinking habits are increasingly making room for the burgeoning popularity of coffee.