Starbucks, Luckin Coffee gain sales momentum in China by tapping smaller cities

The China operations of the American beverage giant reported flat same-store sales for the quarter ended March 30, compared to an 8% drop in the same category for the year ended Sep. 29.

Operating revenue increased 5% year on year to US$740 million in the quarter.

People wait to get coffee at a mobile Starbucks set up next to a historic building at a temple fair on the second day of the Lunar New Year of the Snake in Beijing on January 30, 2025. Photo by AFP

"The fact that Starbucks is trading a lower ticket size for better transaction volume is a positive sign," said Richard Lin, chief consumer analyst at SPDB International, a Hong Kong-based investment bank, as reported by South China Morning Post.

"It shows that the company is making efforts to defend its market share in China as price competition persists."

Starbucks expanded its chain in China over the past year by adding 665 stores in China, reaching a total of 7,758 outlets, making the country its biggest non-U.S. market.

Luckin Coffee, Starbucks’ primary rival in China, also improved its performance through expansion and the introduction of milk-tea drinks, which captured sales from tea-drink competitors like Chagee.

Its operating revenue surged 41% year-on-year in the first quarter to CNY8.9 billion (US$1.2 billion), with net profit reaching CNY737 million, reversing a CNY65 million loss from the same period last year, the company reported last month.

Luckin added 1,743 stores in China over the past year, bringing its total to 24,097.

Same-store sales at company-operated locations went up 8%. Luckin directly manages around two-thirds of the stores.

With first-quarter store expansion "exceeding expectations," rising average customer spending, and the introduction of milk tea products tailored to afternoon-tea preferences, analysts at China Merchants Securities predict that Luckin is on track for positive same-store sales growth for the full year.

"While an [increase] in coffee bean prices is affecting Luckin’s costs in the short term, compared to its competitors, the company has a more stable supply chain and greater cost advantage, making it well-positioned to gain further market share."

Data shows that smaller cities in China are indicating more substantial growth potential for beverage chains than metropolises.

Over 66,900 coffee shops opened across China in the past year, and growth was particularly strong in second and "new first-tier cities" – urban centers less globally prominent than Beijing or Shanghai but growing in population and economic influence, according to food and beverage data provider Canyan.com.

Some examples of such cities include Chengdu, the capital of Sichuan province, which added almost 2,000 coffee shops, ranking third nationwide.

Hangzhou, the tech hub and capital of Zhejiang province, ranked sixth with more than 1,700 new shops.

Customers are walking into a Luckin coffee shop in Yantai, China, on July 26, 2024. Photo by AFP

Third-tier cities and smaller towns, where coffee consumption is increasing, now represent nearly 45% of China’s 216,000 coffee shops.

A similar trend was revealed in shopping platform Meituan’s data. Coffee orders in county-level markets – smaller urban and rural areas below the provincial level – soared 97% last year, while coffee shop numbers in these areas surged by 159%, as reported by SCMP.

"While the coffee market in higher-tier cities is already quite saturated, and the change we’re seeing is mostly trade-down of brands, there is still ample room for growth in lower-tier markets," said SPDB’s Lin.

"As coffee chains keep their prices low, making the drink more affordable, this actually creates a good opportunity to educate consumers in these growth markets."

China’s coffee industry reached a market value of CNY624 billion in 2024 and is expected to reach CNY1 trillion this year, according to a November report by iiMedia Research, a market intelligence provider.