China’s coffee industry is experiencing a rapid expansion, particularly in lower-tier cities, with specialty coffee and tea shops increasing by a remarkable 72% in 2023. This growth, reported by Retail Asia, surpasses both Asian and global averages and poses significant challenges for industry giant Starbucks.
In response, coffee brands in China are focusing on innovation to capture consumer interest. Luckin Coffee, for example, introduces new beverages almost every week, including unique offerings like the Jiangxiang-flavored latte. As health consciousness rises, companies are also launching lower-calorie options to meet consumer demand.
Chinese coffee chains are now setting their sights on international markets, especially in Southeast Asia. Although Starbucks currently holds a 30% market share in the region’s foodservice sector, competitors are gaining traction. Luckin Coffee has already launched its first overseas outlet in Singapore and plans to expand to Malaysia by 2024, aiming to boost brand recognition rather than competing on price. On the other hand, Cotti Coffee has adopted a more aggressive approach, mirroring its domestic strategy by offering a broad menu and competitive prices.
The expansion of these Chinese brands has ignited intense price wars. Since early last year, companies have been reducing prices, which has forced Starbucks to adjust its pricing strategy, despite its premium positioning. Reuters reported in May that Starbucks had been reluctantly drawn into this price competition by its fast-growing, cost-effective rivals, which have eroded its market share in China.
Starbucks China CEO Belinda Wong has publicly stated that the company is not interested in competing on price, preferring to focus on sustainable, high-quality growth. However, analysts and Chinese consumers have observed Starbucks increasingly offering discount coupons through its mini-programs, livestreams on Douyin, and popular delivery platforms. Although measuring the increase in discounts is difficult, reports show that consumers are finding it easier to purchase Starbucks drinks with 30% discounts or two-for-one offers, a rarity for the brand in the past.
Starbucks has also encountered shifts in consumer behavior in China. According to Coffee Intelligence, all of Starbucks’ geographic segments reported declines, with sales in China dropping by 11%. A major factor in this trend is the growing preference for home brewing and coffee delivery services. Since the pandemic, 83% of American coffee drinkers report brewing at home, and a similar trend is emerging in China. The convenience of delivery services has also altered consumption habits, leading to a reduced need for visits to brick-and-mortar cafes.
Looking ahead to 2024, China’s coffee market is projected to generate $16.42 billion in revenue, as estimated by Statista. Out of this, cafes and restaurants will account for $14.7 billion, while at-home coffee sales are expected to contribute $1.72 billion, with an annual growth rate of 3.77% through 2029. Globally, the U.S. leads in at-home coffee revenue with $11.7 billion. In China, coffee consumption is projected to reach 107.4 million kilograms by the end of 2024, with home brewing making up 78.08 million kilograms and out-of-home drinking accounting for 29.35 million kilograms.
As Chinese coffee brands continue to grow and adapt to evolving consumer preferences, they are reshaping the coffee landscape, pushing established players like Starbucks to rethink their strategies in one of the world’s most dynamic markets.
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