Move over Starbucks: Meet the new brands competing for China's growing coffee market

Like it or not, Starbucks dominates the world's coffee market. However, in China, a rising brand is now challenging its throne. What is it? Where does it come from? And how is it taking on a globally-known brand?

Since opening its first store on the Chinese mainland in 1999, Starbucks has expanded to more than 6,500 stores in 250 Chinese cities – and plans to hit 9,000 by 2025. 

But there's a Chinese challenge rising. In June, Luckin Coffee, a homegrown brand founded in 2017, overtook Starbucks as the country's largest coffee chain brand – hitting 10,000 stores. 

In the second quarter of 2023, Luckin also surpassed Starbucks in net revenue for the first time. 

In early September, Luckin made a splash again for debuting a "liquor-flavored" latte in conjunction with China's most high-end alcohol brand Moutai. It's not new, but for young Chinese commuters, it's appealing enough to spend around $5 for a jolt of the baijiu which can cost more than $400 a bottle. 

The red-and-blue co-branding was everywhere on social media. On September 4 alone, the first day the Moutai latte was launched, more than 5.42 million cups were sold. The single-day turnover exceeded 100 million yuan – $13.7 million. 

Once again, Luckin was making headlines globally, with many wondering how it had turned the tables at such a short notice – and not just on a globally powerful brand like Starbucks, but recovering from its own past troubles. 

Only three years ago, it was deeply entangled in an accounting fraud scandal and was delisted from the Nasdaq with a penalty of $180 million.

And besides, in a country where tea has dominated for thousands of years, how has a coffee brand managed to capture a large slice of the market despite ferocious competition?

Unveiling the secrets of Luckin's rise

As is often the case in business, Luckin's success is built upon a deep understanding of its customers. 

The main consumers in China's coffee market are young people aged between 20 to 35 – they account for nearly 80 percent of the consumers. 

In one survey, more than half of young respondents said they drank coffee at work, while a quarter said it was what they drank socially with friends.

Members of Generation Z – those born between the late 1990s and early 2010s – want to drink ground coffee without spending a fortune. Luckin's low prices – often reduced further by a popular coupon strategy – is proving preferable to Starbucks' higher costs. 

Depending on the type, a cup of coffee from Luckin costs roughly $1.40 to $3; at Starbucks, the same would be more than $4.10.

Unlike Starbucks stores, which provide a cozy and comfortable environment, Luckin's stores are usually small and compact. Most rely heavily on the grab-and-go model, or food delivery. Since the very beginning, the new brand has embraced digitalization – many of its consumers order from mobile apps before pick-up, or simply get coffees delivered to their workplace.

The compromise on the coffee-shop environment is a commercially savvy one. Luckin's model fits into the fast-paced life of young commuters who are always in a hurry to their workplaces. 

Luckin hasn't just embraced digitalization in its sales. The company relied heavily on big-data algorithms in picking areas with dense populations of potential consumers. 

It also allowed customers to customize coffee based on their own preferences in flavors, sweetness, ice… good for the customer, but also in an era of big data, great for the company to have such a volume of natural feedback.

It's not just with coffee that Luckin has been trying hard to please its young customers. The huge success of the liquor-flavored latte continues a co-branding strategy begun a long time ago.

From the American animation seriesTom and Jerry to fashion brand Victoria's Secret – even popular memes like the little Maltese dog – each of Luckin's ever-growing list of campaigns has brought in a new group of cheering fans. 

Promotional ideas haven't just come from abroad. Traditional Chinese culture is also being adopted as an inspiration, with the brand promoting a type of tea-flavored coffee.

But over the past few decades China has changed in many ways – and a traditionally tea-drinking country is experiencing a rapidly growing market for coffee. 

China's coffee market on rise

Remember how 80 percent of China's coffee consumers are aged 20 to 35? As in so many ways, that generation has turbo-boosted the country to the forefront of world affairs.  

By the end of 2023, according to World Coffee Portal, China overtook the U.S. as the country with the most branded coffee shops. During that year, the number of stores increased by 58 percent to nearly 50,000.

Of those 50,000, we know that Luckin now has 10,000 stores, and Starbucks 6,500. A quick bit of mental arithmetic will tell you that those two leading brands only represent a third of an increasingly competitive – and crowded – market.

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Chinese brand Cotti Coffee – only established in 2022 – has already opened more than 6,000 stores. Starbucks aims to have 9,000 stores in China by 2025, while Canada's Tim Hortons wants to reach 3,000 stores in the next four years. 

The companies are expanding because there's gold in the coffee market – and more of it every year. According to Statista data, China's coffee market was $11.4 billion in 2020, is growing by 27.2 percent per year and is expected to exceed $27.8 billion by 2025. 

There's also scope for further penetration. While much of the coffee consumption so far has centered on the major metropolises like Beijing, Shanghai and Guangzhou, there's a largely untapped market in China's many smaller – but still sizeable – cities.

Depending on whether you include the surrounding urban areas, the country has somewhere between 65 and 120 cities of over 1 million population. Luckin, Cotti and other domestic brands have already started targeting these markets, while Starbucks wants to open stores in 70 cities by 2025. 

In this expanding arena, veterans are trying to maintain their momentum while newcomers spring up one after another. 

Besides its coffee shops, Starbucks is seeking to root deeper in China by expanding its "bean-to-cup" supply chain capacity. By investing $220 million into the innovation park in east China's Kunshan city, Starbucks is trying to complete its manufacturing and distribution chain: Coffee beans, including those from southwest China's Yunnan, will be processed and exported to the world from here.

In such a competitive and expanding market, it's hard to predict who is likely to end up as the market's dominant force. The good news for China's thirsty population is that with so many companies fighting for their business, it's getting ever easier to enjoy a cup of fresh ground coffee at a much more reasonable price.

Supervisor: Mei Yan

Chief Editor: Qian Fang

Presenter: Li Jianhua

Producer: Ai Yan

Camera/Video Editing: Tom Triebel

Script Editor: Elizabeth Mearns

Motion Graphics: Butchy Davy, James Sandifer, Ilze Juhnevica

Copy Editor: Gary Parkinson

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