Starbucks under pressure as it loses ground to rivals’ cheaper brews
Starbucks has been under pressure on the mainland for years from less expensive rivals such as Luckin Coffee and Cotti Coffee, but the US chain’s latest results in the market make that challenge look more like an existential threat.
The Seattle-based coffee purveyor said revenue from its 7,306 mainland stores tumbled 11 per cent year on year to US$733.8 million in the quarter ended June 30. Same-store sales slid 14 per cent in the same period amid a 7 per cent drop in transaction volume and average order value.
Once seen as a status symbol for China’s middle class, coffee has taken on a more functional role amid a nationwide spending decline. As a result, Luckin, Cotti and others are steadily eating into Starbucks’ market share by selling brews at a fraction of the price, winning the hearts of cost-conscious consumers.
The shift has added to pressure on the American coffee giant, which opened its first shop in China in 1999, especially as China has overtaken the US as the world’s biggest market for branded coffee shops in terms of outlet numbers, according to a World Coffee Portal report. The total shot up by 58 per cent last year to 49,691 outlets.
Founded in 2022 and helmed by Luckin Coffee’s former chairman Lu Zhengyao, Cotti has taken the market by storm with its all-encompassing 9.9 yuan (HK$10.80) coffee menu and aggressive franchise-focused expansion strategy. Meanwhile, a tall latte, one of the most popular items, costs about 30 yuan in Starbucks.
Cotti has opened 7,500 stores in just under two years and pledged to build an additional 8,000 “express stores” in the second half of this year. Its tiniest shops, some as small as a square metre, are nestled inside convenience stores and restaurants, with minimal staffing and low costs.
Starbucks, in contrast, added only 826 new stores so far this year, representing a 13 per cent annual expansion, a pace that analysts describe as “much slower” than its domestic peers.
“Starbucks will continue to lose market share in China over the near term, driven in no small part by consumer trade-down and more cost-effective options widely available with local competitors,” Sean Dunlop, a senior equity analyst at Morningstar, wrote in a note.
The US coffee brand’s same-store sales in China are expected to decline by 12 per cent in the fiscal fourth quarter, resulting in a 7.2 per cent drop for the full year. Meanwhile, the company’s new stores were estimated to generate a 50 per cent cash return on investment, much lower than the 70 per cent enjoyed just a couple of years ago, Dunlop said.
Starbucks’ global chief executive Laxman Narasimhan expressed dissatisfaction with the results in an earnings call last week, attributing the fall in China to “significant disruptions” in the operating environment owing to “unprecedented expansion and a mass segment price war”.
Cotti Coffee’s aggressive pricing and expansion strategies are hurting more than just Starbucks. Luckin, China’s biggest coffee chain with more than 20,000 outlets, saw its second-quarter profit drop 12.8 per cent year on year to 871 million yuan, despite a better-thanexpected 35.5 per cent increase in revenue to 8.4 billion yuan.
“Luckin’s profit has seen a noticeable decrease since the third quarter of last year, after it began slashing prices to compete with Cotti,” said Richard Lin, chief consumer analyst at SPDB International.
The competition has resulted in a slump of about 10 per cent in the average order value in Luckin’s self-operated stores. The drop in its franchise stores – a key component of its strategy to compete with Cotti in lower-tier markets – was likely to be even greater, Lin said.
In recent months, Luckin has dialled back its discounts and slowed its pace of expansion.
Meanwhile, Starbucks, having lost its coffee crown to Luckin in 2023, has been scrambling to cut costs. It also vowed to continue its expansion efforts in lower-tier cities to defend its market share. But analysts are sceptical.
“The growth potential of China’s coffee market definitely lies in lower-tier cities, given that the higher-tier cities are already saturated,” Lin said. “But frankly, I don’t think Starbucks can gain a lot of traction in China’s small towns and villages.”