Growth Opportunities for Chinese Coffee Shops

China's coffee culture has thrived, transforming coffee into a daily routine for many consumers.

In 2023, specialist coffee and tea shop outlets in China grew by 72%, exceeding the average levels in Asia and globally

^{Source: Euromonitor International}

Chinese coffee shops have expanded rapidly into lower-tier cities, fuelled by chain expansions, leading to fierce price competition.

Brands such as Cotti and Luckin have adopted a long-term price war strategy of RMB9.9 per cup since early 2023, lowering the average transaction price. This has resulted in other international brands like Starbucks following suit, even though it has emphasised its intention to maintain its premium positioning.

For coffee shops to thrive in China, strategies such as product differentiation and innovation are crucial for brands to maintain profitability. It is imperative for companies to invest in unique offerings that resonate with consumers.

Luckin Coffee, an example of strategic innovation, has released new products weekly over the past few years. This is evident in its latte, which is blended with various milk bases, providing consumers a less bitter taste. Other innovations include incorporating traditional tea culture with tea-coffee series as well as the light coffee lemonade, providing a novel taste experience for consumers. Furthermore, cobranding and partnerships with other brands as well as gaming, film enthusiasts, or animations helps brands tap into new demographics and foster a sense of exclusivity. An example is the famous Jiangxiang flavoured latte co-created by Luckin Coffee and Kweichow Moutai, a combination of coffee and alcohol.

Furthermore, with the rising health consciousness of Chinese consumers, who are looking for zero-fat, low-calorie and healthier options, it is important for brands to offer healthier options. Among brands, Luckin has launched its light milk tea product with low calories, while NOWWA has also introduced lower-calorie lattes.

Expansion of Chinese coffee shops into Asia Pacific

To further strengthen their brand positioning, Chinese coffee shops seek to expand beyond their domestic turf in order to increase their presence in Southeast Asia, which is still largely dominated by international coffee shops like Starbucks.

In 2023, Starbucks remained the dominant international player, accounting for 30% of foodservice value sales in Southeast Asia

^{Source: Euromonitor International}

To strengthen its presence against international brands, Luckin opened its first overseas outlet in Singapore in March 2023, offering a wide range of coffee, including its famous coconut latte, at affordable prices and expanding its small kiosk format outlet. In late 2024, it is foreseen that the brand will expand to other markets, such as Malaysia, offering local consumers more options. However, the pace of opening new stores is much slower compared to its strategy in China, highlighting its cautious approach overseas as well as not engaging in a price war. This reflects the company’s focus on building its brand name among overseas consumers first.

Similarly, Cotti Coffee has expanded overseas in Asia Pacific, starting in August 2023. Its aggressive expansion plan overseas seems similar to its strategy in China, where it seeks to compete on a price war level, besides offering consumers premium coffee at affordable prices, customised drinks as well as food as a more profitable category along with a line of baked goods. Furthermore, it partners with financial technology platform Adyen to aid in its expansion with a simple payment solution.

As Chinese coffee shops expand overseas, this is set to strengthen their brand share overseas, providing a wider range of distinctive options for coffee consumers through convenient online payment options.

How can Chinese coffee shops thrive overseas?

Chinese coffee shops need to understand the local consumer taste in overseas markets which differs from that of domestic consumers in China. Furthermore, the competitive environment is stiff with affordable pricing, especially from local coffee shops which are expanding rapidly.

In order to differentiate themselves from local players, Chinese coffee shops have to position themselves differently, highlighting features that are unique such as their coffee offerings, convenient outlet locations, or loyalty programmes. Moreover, affordable pricing is critical to win consumers especially for emerging markets where they are more price-conscious. This is especially challenging with the surging prices of coffee due to climate change.

At the same time, the viability of the business model of small kiosks with limited seating and rapid expansion needs to be evaluated in the long term, especially when it comes to cost operations. For example, having multiple coffee shops within close proximity might result in loss of sales, so brands have to be strategic in locating their outlets.

To thrive in the long term, partnerships with local players in a foreign market remain key for Chinese coffee shops to increase their brand awareness. Exploring new channels requires partnerships such as with a non-coffee retailer/foodservice to launch lunch food boxes. This serves to tap into the partner’s existing consumer base and widen the consumer base, maximising revenue amidst an inflationary environment.

Read our article, Southeast Asia Holds Growth Potential for Chinese Food Firms, for more analysis on the expansion of Chinese food firms into Southeast Asia.

Learn more about local coffee shops in the Euromonitor International report, Coffee Shops in Asia Pacific, for further analysis on the strategies of coffee shops.