In the face of sluggish consumption and fierce pricing competition, Starbucks and Luckin Coffee have managed to regain momentum by focusing on lower-tier cities in China. For the quarter ending March 30, Starbucks reported flat same-store sales in China, with a 4 percent increase in transactions offsetting a 4 percent drop in the average transaction value. This comes after a challenging year, where the company saw an 8 percent decline in comparable-store sales in the country. Starbucks’ operating revenue rose by 5 percent to US$740 million in the same period, with the company adding 665 new stores in China over the past year, bringing its total to 7,758. These stores now cover over 1,000 county-level markets in China, positioning the company for continued growth.
Richard Lin, chief consumer analyst at SPDB International, pointed out that Starbucks’ strategy of accepting lower ticket sizes in exchange for higher transaction volume is a positive sign. This approach shows the company’s efforts to defend its market share amidst the ongoing price competition. However, Lin noted that the key challenge would be how much further Starbucks could expand into lower-tier cities, where the wealth of consumers may not fully support a premium brand.
The coffee shop market in China saw significant growth in the past year, with 66,920 new coffee shops opening, mainly in second and “new first-tier cities.” Cities like Chengdu and Hangzhou have seen substantial additions to their coffee shop counts. Meanwhile, county-level markets, including smaller urban and rural areas, have seen coffee orders surge by 97 percent in 2024, with the number of coffee shops in those areas growing by 159 percent.
Luckin Coffee, Starbucks’ main competitor in China, has also benefited from expansion. The company’s operating revenue grew by 41.2 percent year on year in the first quarter to 8.9 billion yuan (US$1.2 billion), and net profit reached 737 million yuan, a significant turnaround from last year’s loss. Luckin’s store count increased by 1,743, bringing its total to 24,097. The company’s same-store sales rose 8 percent, with much of the growth coming from first- and second-tier cities.
Both Starbucks and Luckin have recognized the growth potential in lower-tier markets and are adjusting their strategies accordingly, tapping into the rising coffee consumption in these regions. With China’s coffee industry poised to reach a market value of 1 trillion yuan in 2024, these companies are well-positioned to capitalize on the ongoing expansion.
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