The world’s largest coffee chain Starbucks (NASDAQ: SBUX) continues to lose ground to Luckin Coffee (LKNCY) in China, the second-largest market for the company. Luckin first surpassed Starbucks’ revenue from China in the second quarter. The trend continued in the third quarter, with Luckin’s revenue growing 85% to nearly $987 million compared to Starbucks’ revenue of $841 million (up 8%). While Starbucks is taking several initiatives to boost its China business, the preference for a local brand and price competition might continue to hurt its business and strengthen Luckin’s position.
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Luckin Emerges as a Major Competitor to Starbucks
When Starbucks first entered China in 1999, the country was predominantly a tea market. However, over the recent years, customers have gradually opened up to coffee and other beverage options. China now is the second-largest market for Starbucks, where the company operated 6,806 stores as of the end of Fiscal Q4 (ended October 1, 2023).
While Starbucks is recovering well from the COVID-19-led slump in China, the company is losing market share to Luckin Coffee.
Luckin, founded in 2017, has surpassed Starbucks not only in terms of sales but also on the basis of its store network. Last year, Luckin emerged from bankruptcy that was triggered by an accounting fraud. The stock was delisted from NASDAQ in 2020 following the accounting scandal and currently trades on the OTC markets.
Luckin has revamped its business and rapidly built itself as a strong threat to Starbucks with its affordable coffee options. Also, the company’s heavy discounts and promotional offers and its convenient mobile ordering have helped in winning Chinese customers.
Luckin opened 2,437 net new stores in Q3 2023 and ended the third quarter with 13,273 stores, up 69% year-over-year. The company intends to end the year with more than 15,000 stores. In comparison, Starbucks aims to operate 9,000 stores in China by 2025.
Luckin is also attracting customers with its innovative offerings. The company’s cumulative customer base exceeded 200 million at the end of Q3 2023, thanks to new offerings and growing store footprint. The company launched 12 freshly brewed offerings in Q3 alone. In particular, Luckin collaborated with China’s luxury liquor brand Kweichow Moutai to create Jiangxiang Flavored Latte, which broke the company’s single-item sales record with a remarkable 5.42 million cups sold on the launch day itself.
Stock Performance
Luckin shares have risen 24.2% so far this year, outperforming the 7% rise in Starbucks’ shares. Wall Street is cautiously optimistic about Starbucks, with a Moderate Buy consensus rating based on seven Buys and 12 Holds. The average price target of $111.33 implies a modest upside potential of 5.5%.
Conclusion
While Starbucks aims to aggressively expand its network in China and win more customers, Luckin Coffee is giving it a tough time. Luckin has not only risen from the ashes following the accounting scandal but also regained the local customers’ trust with its offerings. It is also bolstering its position in China with an expansive store network that has already surpassed Starbucks’ presence. Overall, Luckin is brewing an interesting growth story in the lucrative Chinese market.
