Fresh Grounds
Surpassing the US as the world’s largest branded coffee shop market, China’s chains are now taking their brews abroad. But experts warn that without improved supply chains, expansion overseas could leave investors with a bitter aftertaste
“Coffee sharpens my mind and speeds up my reaction time,” said Terrence, a regular at a Luckin Coffee location in Beijing’s suburban Changping District. But the English language instructor explained that coffee does more than help her stay energized at work.
“It’s important for socializing with people my age. Tea can do the same thing, but not many of my friends drink it,” she added.
Like Terrence, picking up a quick cup is the daily routine for a rapidly growing number of young Chinese. According to the Uk-based coffee information platform World Coffee Portal (WCP), China has overtaken the US as the world’s largest branded coffee shop market in terms of outlets, with a growth of 58 percent to 49,691 from December 2022 to November 2023.
Internationally, Chinese coffee chains opened approximately 18,000 new outlets, with the two largest – Luckin Coffee based in Xiamen, Fujian Province and Beijing’s Cotti Coffee – opening a combined 11,000 locations, the WCP said.
Following the report, CNN ran a story headlined “China, a nation of tea-drinkers now has more branded coffee shops than the US” on December 14, 2023.
Despite the growth, analysts warn that as these initial forays into foreign markets are still full of uncertainties, Chinese coffee chains should explore untapped markets within China to shore up their supply chains before forging ahead overseas.
Acquired Tastes
Tucked in a central Beijing block already crowded by major coffee chains Luckin, Cotti, Starbucks, Peet’s and Grid, independent cafe Make a Toast opened its doors in 2022. Co-owner and operator Zhao Wei said her business, which also serves cocktails at night, aims to survive the intense competition by carving out a unique niche.
“The coffee we brew has varied and unconventional flavors that fit flexible menus to cater for our customers’ different tastes,” Zhao told Newschina. “Demand can be created as long as entrepreneurs are innovative enough to establish their own unique styles.”
But chains are also taking this approach. Luckin scored a hit in April 2021 with its coconut milk latte. Selling about 70 million units by December that year, the beverage generated approximately 1.26 billion yuan (US$180M), 15.82 percent of the company’s total annual revenue. The same year, Luckin’s annual net income soared by 97.5 percent year-on-year to almost 8 billion yuan (US$1.1B), media outlet Yema Financial reported.
These were much-needed wins for Luckin. In 2020, the company had been
suspended from trading on the Nasdaq and agreed to pay a Us$180-million penalty over accounting fraud involving its top executives by the US Securities and Exchange Commission. But the scandal had more of an impact on its management than outlets, which numbered less than 4,000 across China.
By September 2023, Luckin Coffee had a whopping 13,273 outlets nationwide, 4,466 of which were franchise locations, nearly double Starbucks’ approximately 6,800, terminating the twin-tailed mermaid’s nearly 20-year reign over China’s coffee market in both number of locations and sales, Chinese newspaper Reference News reported in November 2023.
According to Luckin’s financial report, sales in China from April-june 2023 hit US$855 million, about US$33 million higher than Starbucks over nearly the same period.
On September 4, 2023, Luckin collaborated with renowned Chinese liquor distiller Kweichow Moutai to launch a three-day promotion of a baijiu-infused “sauce flavored latte.” Sales reached 100 million yuan (US$13.9M) with 5.42 million units sold across China in its first day.
The next day, Luckin stock prices on off-exchange “pink sheets,” overthe-counter markets long favored by retail investors, rose by 5.07 percent to US$33.60, resulting in a market value exceeding US$9 billion, Chinese media outlet The Paper reported on September 12, 2023.
With its rapid expansion in the Chinese market, Luckin is rivaling heavyweight domestic chains like newcomer Cotti. Helmed by former Luckin chairman Charles Lu Zhengyao, who the company ousted following an internal fraud investigation in 2020, Cotti opened 6,061 locations worldwide within a year of its launch in late 2022. The brand aims to reach 20,000 by 2025.
“Over the past two years, supply and demand of on-site fresh-ground coffee shops in the Chinese market have been on the upswing due to the quick expansion,” Liu Jiaren, deputy director of the research and development center at Beijing-based Cinda Securities, told Newschina. Factors that affected China’s coffee market in the past, such as relatively high prices and limited selection, have since been overcome, Liu added.
Unlike in major markets overseas, which emphasize bean quality in conventional coffee beverages such as americanos, lattes and espressos, Chinese brands feature varied ingredients, including teas, liquors and spices like Sichuan peppercorns.
One of the most common promotional tactics among Chinese brands is waging price wars. During the second half of 2023, Luckin issued a weekly digital voucher through its app for a
9.9-yuan (US$1.38) cup of coffee. Cotti responded by lowering prices across its menu to 8.8 yuan (US$1.22) in addition to a buy-one, get-one at half-price deal.
“Sales is of overarching importance to build up the competitiveness of a branded coffee industry, which enables them to wield strong influence upon the upstream (raw materials) and midstream (roasters and coffee equipment) sectors,” Liu said.
According to New York-based consultancy Frost&sullivan, the compound annual growth rate of the Chinese coffee market from 2020 to 2022 averaged 23.5 percent, substantially higher than the 2-percent global average.
Liu said that China’s annual consumption of on-site fresh-ground coffee averages 11 cups per person, far less than the 200 to 300 cups per capita in major overseas markets – a sign that the market remains largely untapped.
“With efficient supply chains and reliable quality products, the cap for China’s branded coffee industry is substantially higher,” Liu said.
Cold Brewing
In contrast to major Chinese cities, coffee shops in smaller cities and towns are still waiting out the winter chill that has set in the market.
Chen Mo, who owns a Cotti franchise in a county-level city in Jinhua, Zhejiang Province, has faced bleak winter sales, which dropped to just 100 cups a day. Netting about 2 yuan (US$0.28) in profit per cup, Chen can barely afford to pay rent.
This stands in stark contrast to the 400-500 cups a day he sold during the summer, profiting up to 30,000 yuan (US$4,170) in a month. Chen is now considering closing up shop.
On lifestyle app Xiaohongshu (Little Red Book), numerous coffee franchisees in smaller cities or towns are posting for-sale ads for their stores.
By September 2023, nearly 35,000 out of 77,000 coffee outlets had closed within a year of opening, food and beverage market analysts canyandata.com reported.
“Since there are fewer coffee drinkers in counties, our business is looking particularly gloomy this winter,” A Cai, who opened a franchise Luckin outlet in Liangshan Yi Autonomous Prefecture, Sichuan Province, told Newschina.
However, more young Chinese entrepreneurs are opening independent cafes in their county-level hometowns. On app Xiaohongshu, over 30,000 posts are hashtagged “county coffee.”
In July 2023, Bao Qiang opened a cafe that serves cocktails at night. Located in central Tieling, northeastern Liaoning Province, his daily revenue across a fiveday period this winter ranged between 30 yuan (US$4) and 163 yuan (US$23).
Bao said that since a Luckin location opened nearby, winter business has dropped off. His cocktails are outselling his coffee drinks, he said.
Despite the sluggish markets in small cities and towns, major coffee chains have the will and financial backing to expand.
According to Guangxi-based Sealand Securities, the number of coffee chain outlets in third- and fourth-tier cities selling on delivery platform Meituan grew by 78 and 74 percent over the first nine months last year. The top-four fastest-growing brands on the platform
were Henan-based Lucky Cup, Shanghai’s Nowwa Coffee, Cotti and Luckin.
Luckin expanded to 33 third- and fourth-tier cities, according to its franchise package released in January 2023. Earlier this year, Cotti announced plans to roll out autonomous 24-hour shops around the globe.
But Chen argued the equipment required for automated shops, which costs around 150,000 yuan (US$20,850), is too cost-prohibitive for franchisees in smaller cities.
In December 2023, Cotti was roasted on apps like Xiaohongshu as franchise owners complained about its unstable supply chains, low gross margins and unprofessional staff. “You can hardly ever get the hottest products from its supply chains,” Chen said.
Speaking with Newschina on condition of anonymity, a Cotti spokesperson said the discrepancies in consumption between smaller and larger cities will narrow as China’s untapped markets are further explored.
However, some cannot wait that long. On New Year’s Eve 2023, Chen numbered among the many other young entrepreneurs who had entered the coffee market with high hopes by putting up his cafe for sale on Xiaohongshu.
Global Takeaway
On March 31, 2023, Luckin became the first Chinese chain to venture beyond its home market with two soft openings in Singapore. Four months later, Cotti opened its first overseas location in Seoul, South Korea.
By December 2023, Luckin had 30 locations in Singapore, while Cotti expanded to Japan, Southeast Asia and North America. Cotti is seeking partnerships in South America and Europe, according to the company’s posts on Xiaohongshu.
The success of Chinese instant coffee products in overseas markets also provide hope for the industry. Since October 2022, brands such as Saturnbird, Yongpu and Tasogare appeared on e-commerce platform Yami and online supermarket Weee!, both of which target Asian American markets. Saturnbird and Chinese brand Hotmorning are also available on Amazon.
However, coffee chains face many more obstacles abroad.
“In addition to covering the costs of a complete industrial chain, renovations, utility bills and labor, investors must also consider local tastes, laws and labor unions, particularly regulations concerning trademark and business operations,” advertising expert Li Tong told Newschina.
A Thai court ruled against Luckin in December 2023 after they sued Thai company 50R Group for trademark and copyright infringement. Luckin was ordered to pay compensation of 10 billion baht (US$280M) for 50R Group’s economic losses caused by the trial.
According to the World Intellectual Property Organization (WIPO), 50R Group registered Luckin’s logo – a white deer head silhouette on a blue field – in Thailand in 2018, a year after Luckin’s establishment. Apart from the Thai script, they look nearly identical.
Luckin denies the legitimacy of the “counterfeit” stores in Thailand operated by 50R Group, and said in a statement released in August 2022 that the stores in Thailand were damaging its brand.
“Malicious rush-registration trademarks mislead consumers and deprive the original brand of first-mover advantage in the target market,” a trademark planner told Newschina.
According to attorney Yuan Yuan with Dacheng Shanghai Law Firm, due to rush registrations like these, the faster Luckin grows, the more popular copycat chains in Thailand could get.
Trademarks are not the only challenges Chinese coffee chains face internationally.
Some experts warn that the novel flavors and pricing tactics that won over the Chinese market could fall flat in countries with more mature coffee cultures and higher operating costs.
“Business overseas relies heavily on potential demand and complete industrial chains, which enable investors to take firm control of upstream raw material supplies and good command over price negotiations,” Liu said, adding these conditions are what make coffee chains so competitive.