Luckin vs Starbucks in China — Part 3: The Turnaround and What Comes Next
Luckin turned its first profit in Q1 2022 and opened 1,137 stores in Q1 2023 as Starbucks' China comparable sales swung from -29% to +3%. Part 3 of a three-part series.
This is the third and final part of a three-part series about Luckin vs Starbucks in China. Read Part 1 and Part 2 first.
In this third part, we explore Q1 and Q2 2022 (a period under zero-covid measures) vs Q1 and Q2 2023 financial results, and some final thoughts about Luckin’s financial recovery and both companies’ future in a more competitive Chinese coffee market.
Is Starbucks still too traditional in its approach?
The quick adaptation to Chinese coffee market trends and being able to get out of its comfort zone (plus having very competitive prices or well-timed discount promotions) are some of the key factors behind 2022 and 2023 financial results of both companies.
In May 2022, Starbucks released key financial data for Q2 of 2022 fiscal year. The results showed that Starbucks’ overseas market performance was not great, affected by the sharp sales decline of its second largest market, China: its international comparable store sales decreased by 8%.
During Q2 2022, 72% of Chinese cities (including Shanghai) with Starbucks stores had an outbreak of Omicron virus, and during 13 weeks in Q2, about one-third of Starbucks stores in China had temporarily closed or were only accepting online coffee delivery orders due to zero-covid measures and policies.
Not only Starbucks was affected by this, but many coffee shops had also a significant decline in sales, because the epidemic has changed people’s habit of consuming coffee: freeze-dried coffee, coffee liquid bags, drip coffee bags and other RTD products are now quite popular in Chinese e-commerce.
This translated into a fall of Starbucks store sales by 23% in the Chinese market in Q2 2022, due to a 20% decline in store sales and a 4% decline in the average customer unit price. The decline in sales of Starbucks in China was a trendy topic in Chinese social media.
One of the comments from Chinese coffee consumers was that Starbucks seems to be “lagging behind” in the introduction of new products; and constant replacement of flavor syrups = new products can no longer meet the standards of some Chinese coffee consumers for beverage innovation.
By comparison, Luckin’s financial results of Q1 and Q2 of 2022 have been the opposite of Starbucks’. According to its financial statements for Q1 of 2022 fiscal year, Luckin achieved profit for the first time, with a net income of RMB 2,404.6 million (around US$ 379 million), an increase of 89.5% compared with net income in the same period of 2021.
Following its successful Q1 financial results, more good news came during its second quarter financial report of 2022: its operating profit (under GAAP standards) was 241.6 million yuan (US$ 36 million), which represents approx. 7.3% of total revenue.
In its Q2 financial report, Luckin also reported a total of 7,195 stores: 4,968 were self-operated stores and 2,227 were affiliated stores. The company opened 615 stores in one quarter, compared to 107 new stores opened in China by Starbucks in the same quarter of 2022.
Moving to 2023 data, in February Starbucks released its key financial data for Q1 of 2023 fiscal year. The results show a negative 29% for comparable store sales in China, four times worse than what Starbucks expected. The cause of the short-term headwinds was the end of zero-covid in China and its first Omicron infection wave.
For Q2 fiscal 2023 results, Starbucks finally saw a positive recovery of sales in China, with a 3% increase in comparable store sales. According to Starbucks China Supplemental Data, the company had a total revenue of US$ 763.8 million dollars, with a total count of 6,243 stores.
In contrast to Starbucks’ Q1 and Q2 2023 results, Luckin saw an increase of 84.5% in net revenue, with a total RMB 4,436 million (around US$ 646 million) for its Q1 2023 financial results. New stores opening during Q1 2023 reached 1,137 stores (with 2 stores in Singapore), for a total 9,351 stores: 6,310 self-operated stores and 3,041 affiliated stores.
Moreover, Luckin’s frequent launch of trendy products and marketing campaigns has been an important driving force in the turnaround of Luckin’s finances and success in these difficult times, in which its Product R&D department has greatly contributed.
Luckin’s financial recovery after the fraud case, and both companies’ future in the Chinese coffee market
For Luckin, the future looks bright currently, after its financial fraud scandal made headlines around the globe. In its Q2 2022 financial report, the company also announced some major milestones about its legal issues in the US stock market and NASDAQ.
In April of 2022, Luckin completed the financial debt restructuring and it officially ended the bankruptcy protection procedure as a debtor, emerging from previous difficulties and on track for more stores and positive revenue in the Chinese market.
Luckin also reported that it paid 276.8 million yuan (US$ 41.4 million dollars) of reserves for equity litigants and 101.8 million yuan (US$ 15.2 million dollars) of income tax expenses for taxable income in Q2. The expenses are said to be a one-time expense and they should have little impact on its overall business and finances.
Although it’s true that Chinese coffee market is very large and there’s enough room for healthy competition, the market is gradually maturing, with large and new small local coffee brands rapidly rising: an example is the newcomer Cotti Coffee, with currently over 2,500 stores in China and aiming for 10,000 stores by 2025.
For Starbucks, its strategy in China should quickly be adjusted to address the Chinese coffee consumers critics and its brand positioning in the market.
Investment in smart technology and improvement of Starbucks’ mobile apps (or its WeChat mini-program) should be considered, and its Starbucks NOW express retail coffee stores should expand more, especially in new first tier cities, along with second and third tier cities to gain ground against Luckin, Manner Coffee and Cotti Coffee stores.
For Starbucks, another way to improve its brand positioning would be having more partnerships with Chinese brands and celebrities, while also continuing to promote on Chinese social media its use of Yunnan coffee beans within its stores in China.
The market is not limited to well-known competitors such as Luckin, Starbucks, Peet’s and Costa, but also local coffee brands such as Manner, Cotti Coffee, Seesaw Coffee and M Stand (among others) which are constantly competing for having a bigger portion of the market; therefore, Luckin and Starbucks must continue adjusting and improving their game in China’s coffee market.
This is the end of the third and last part of the series; hope you have found this series interesting or valuable to your research.
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