China coffee expansion spree seen tapering off (OTCMKTS:LKNCY)

Getting a decent cup of joe in many cities in China isn’t a problem as heavyweights such as Starbucks (NASDAQ:SBUX) and Luckin Coffee (OTCPK:LKNCY) are ubiquitous throughout the country, but the coffee cafe boom may be winding down.

While expansion is now being seen in smaller Chinese cities — and along with it competition from other outlets — store revenue is seen as getting pinched, which will impact the rate of new store openings.

GlobalData noted that while the compound annual growth rate of coffee and tea shop outlets in China was in double digits from 2017 to 2022, it will decline to 1.4% from 2023 to 2027.

The data and analytics firm noted that Luckin Coffee (OTCPK:LKNCY) is the most prolific coffee shop operator in China after opening its 10,000th store recently. Starbucks (SBUX) has plans for 9K stores in the country by 2025.

GlobalData China Senior Business Development Manager Kiku Wu noted that smaller players, such as Hey Tea, Coffee Box, Pacific Coffee, and Manner Coffee are gaining traction.

Wu said that coffee businesses are expanding locations into smaller cities and town as rental costs in big cities continue to creep up. And they are facing other hurdles, including competition from direct-to-consumer brands such as Saturnbird Coffee and Yongpu Coffee, as well as convenience store brands, such as Convenience Bee Coffee, Family Mart Coffee, K-Coffee, and 7/11. Vending machines are also taking away market share.

A GlobalData consumer survey found that 42% of Chinese respondents said that their spending on coffee or tea was quite/very high.

GlobalData consumer analyst Bobby Verghese noted that due to the growing competition, some coffee outlets have unveiled unique drinks to distinguish themselves. For example, Luckin Coffee (OTCPK:LKNCY), in partnership with Kweichow Moutai, launched the Moutai Latte, a low-alcohol latte containing a local spirit.

Starbucks (SBUX) has been looking at technology to improve its Chinese operations. The company recently opened its $220M China Coffee Innovation Park “to digitize its supply chain and accelerate its sustainability initiatives in China,” according to Verghese.

Wu added that while inflation has not been as big an issue in China compared to the rest of the region, competition is leading companies to offer discounts and price promotions to appeal to and retain customers.

While home-grown coffee from Yunnan Province will help to lower costs and demand in smaller cities will boost sales, those living in these locations have lower disposable income, which will negatively impact coffee companies’ pricing power.

Several years ago, Yum China Holdings (YUMC) and Luigi Lavazza S.p.A formed a joint venture to open Lavazza cafes in China. While the arrangement eyed 1,000 stores by 2025, Verghese noted that there are fewer than 100 of the cafes currently operating.