（原标题：CBN Special丨Luckin beat Starbucks in China to be top coffee seller in 2023. What’s next?）

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Starbucks has long got a trouble. Now it’s official.

Luckin Coffee became China’s dominant coffee chain last year, outpacing the nation’s previous leader Starbucks Corp in annual sales for the first time.

The Xiamen-based company posted quarterly net revenue of 7.06 billion yuan (US$980 million), representing an increase of 91% from a year ago in a growing and increasingly competitive China market.

The latest revenue number in the three months through December brings Luckin’s total sales in 2023 to 24.86 billion yuan (US$3.45 billion), surpassing Starbucks’ comparable annual sales of US$3.16 billion in China, making it the biggest coffee chain in the Asian nation.

The surge in Luckin’s sales last year was partly driven by its rapid expansion. More than 8,000 new store opened last year, with over 16,200 stores located in China by the end of 2023. 

Experts attributed Luckin Coffee's success to its industrialized process, exceptional marketing strategies, and innovative capabilities. Chinese market research firm iiMedia pointed out that Luckin's triumph over Starbucks is a testament to its deep understanding of the Chinese market and consumer preferences.

Luckin’s CEO Guo Jinyi commented during a Friday earnings call that while competition in China's coffee industry is intensifying, the market landscape is far from fully developed. He highlighted the accelerated development of China's coffee market and predicted fiercer competition as more brands enter the fray.

China’s coffee market is experiencing rapid growth, overtaking the US as the world's largest branded coffee shop market by outlets. The surge is being driven by increasing consumption and presents significant opportunities for both domestic and international coffee brands.

Luckin Coffee's innovative approach to catering to Chinese consumers' tastes has been a key factor in its success. Its collaboration with Kweichow Moutai to launch an alcohol-infused coffee in September 2023 was a hit, with more than 5.42 million cups of Moutai latte sold on its first day. This innovation set a new sales record for the company and showcased its ability to blend traditional Chinese elements with modern coffee culture.

Overtaking Starbucks in China

In the booming local coffee shop market, it is the big Chinese chains that are growing the most. It has been confirmed by figures for 2023, which mark the leadership in China of Luckin Coffee, which has overtaken Starbucks for the first time in sales, as well as in the number of its own establishments in the territory.

In the face of the Chinese people's new passion for coffee, which in just a few years has made it the world's largest market, the growth recorded by the brand in the last twelve months has been impetuous: sales have increased by 87% to reach 24.9 billion yuan, with profits of 3 billion yuan, more than doubled compared to 2022.

All this while Starbucks in the last quarter of 2023 saw its revenues in China drop by 12.5%. Starbucks reported total revenue of $3.05 billion in China for fiscal 2023 that ended October 1, according to a CNN calculation based on the company’s quarterly results.  

In contrast to Luckin’s aggressive expansion, Starbucks has expanded at a relatively modest pace, with a China store count of nearly 7,000 through December. That number was up 14.5% from a year earlier. Globally, Starbucks is still by far the largest coffee chain, with 38,586 stores worldwide.

Starbucks is clearly feeling the heat.

While Luckin created buzz last year with Moutai latte, the US coffee giant recently rolled out a pork-flavored latte in China for the Chinese New Year season that started on February 10.

Starbucks' Reserve Roastery in Shanghai announced the pork-infused offering in a post on its verified Weibo microblog account on February 5, promoting the beverage as a coffee "integrated with traditional New Year customs."

The limited edition beverage, whose name translates into "Abundant Year Savory Latte," is pictured with a slice of skewered pork perched on top of the mug. Its official English name is the "Lucky Savory Latte.”

The drink is priced at 68 yuan (US$9.45) and is offered at around 25 Starbucks Reserve stores around the country. Other Starbucks' new Spring Festival-inspired drinks include rice flavored macchiato and black sesame latte.

The recent innovation on Starbucks' menu is prompting discussion on social media. But over the long term, the company must prioritize the development of a flagship item capable of capturing consumers' enduring attention through a differentiation strategy, such as the coconut-flavored latte, which has swiftly risen as a top seller for Luckin since its introduction, analysts noted.  

Starbucks is looking to grow its store base by 13% this year in China and operate 9,000 stores in the country by 2025. For its part, Starbucks is adding more locally relevant beverages to its Chinese locations. It is also trying to add more food options to foster expansion and is looking to expand delivery.  

China, once a tea-drinking nation, has become a global coffee industry powerhouse. Data from the International Coffee Organization last year showed that coffee consumption in the country grew 15% in the year ended in September.

According to market research firm Mintel's estimates, total sales of on-premises coffee are expected to reach 74.1 billion yuan in 2023, up 29.5% year-on-year, and will continue growing with a compound annual growth rate (CAGR) of 24.5% over 2023-28.

Much of this demand is driven by the younger generation. As many as 36% of coffee consumers in the country were between 25 and 34 years old, and 30% were between 35 and 44 years old, according to a 2021 survey by Daxue Consulting, a Chinese market research firm.

Luckin’s got a bigger headache

Founded in 2017, Luckin initially rose to prominence by undercutting Starbucks’ prices, as it focuses on catering to young people, with mostly takeout booths and cashless payments. Its beverages are about 30% cheaper than those offered by Starbucks.

Its bare bones stores usually offer only the most basic services, which has allowed the company to expand rapidly at a lower cost. It also requires consumers to use mobile phones to place orders, enabling them to collect extensive costumer data.

However, Cotti Coffee, founded by the same duo behind Luckin, decided to take the competition even further. 

Cotti strategically positioned its stores near Luckin outlets and began charging 1 yuan less for the same drink. Last year, Cotti launched a campaign to lower latte prices to 9.9 yuan, prompting Luckin to match that price and commit to maintaining it for two years.

Cotti later slashed latte prices again to an even more enticing 8.8 yuan. This aggressive low-price strategy paid off: in less than a year since its founding, Cotti has opened over?5,800 stores, selling an average of more than?400 cups of coffee per day per store.

The marketing battle of selling coffee for "8.8 yuan" and "9.9 yuan" has been ongoing for over half a year, completely transforming the landscape of China's coffee industry. 

By digging deeper into Luckin’s seemingly extraordinary profit growth, there’s a catch.

In the three months ended in December, Luckin’s profit margin dropped 10.3% compared to the previous quarter due to low-price competition with rival Cotti having no sign of abating.

The Chinese chain recorded a 3.9% profit margin, also a 7.6% decrease from a year earlier, which the company’s CEO Guo Jinyi attributed to seasonal factors and that decline aligns with “the objective industry trends” in the earnings call.

Earlier this month, many customers found Luckin quietly narrowed its 9.9 yuan special offer that previously applied to all drinks in its stores to only eight standard beverages, nearly nine months after the coffee chain launched the price-cut promotion to celebrate hitting the milestone of 10,000 stores in China in June.

With the campaign “exceeding expectations,” Guo committed to continuing the offer for at least two more years when the company released its earnings report in August. However, the company took a dent in profit margin by a drop of 5.5% to 13.4% in the third quarter last year.

While Luckin rolls back on discounts, Cotti is doubling down on the price war.

On February 26, Cotti Coffee announced the launch of an unlimited 9.9 yuan offer, which will last for three months, as the number of stores worldwide reaches 7,000.

During a recent interview, Li Yingbo, chief strategy officer of Cotti Coffee, said the promotion will continue subsidizing stores, with the maximum subsidy for a single cup reaching 14.5 yuan. He expects that the total subsidy amount will reach 300 million yuan.

The jostling over coffee prices captures an emerging trend among Chinese consumers who are price conscious. The coffee price battle isn’t just about beans and brews—it’s a reflection of larger economic shifts in China and the quest for differentiation in the coffee industry. And while the aroma of freshly brewed coffee fills the air, consumers are carefully counting their yuan while enjoying their daily cup of joe. 

But some Chinese businesses see an opportunity in the new frugal ways of consumers. Mixue Ice Cream & Tea, a Chinese tea chain known for its iced coffee and bubble tea drinks that sell for less than $1, has opened 36,000 stores by the end of last year.

Pinduoduo, a discount shopping website, said revenue grew 63 percent in the first half of 2023 from a year earlier. The company’s growth rate is surpassing that of Alibaba and JD.com, China’s two-biggest e-commerce companies.

 

Executive Editor: Sonia YU

Editor: LI Yanxia

Host: Stephanie LI

Writer: Stephanie LI 

Sound Editor: Stephanie LI

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