Despite suffering massive losses in China in the second quarter, Starbucks plans to boost its storefronts in the country by 50% to 9,000 by 2025.

During the months of April to June, COVID- 19 preventive and control measures in major Chinese cities have had a massive impact on the hospitality industry. "Shanghai, our largest market with more than 940 stores, was closed for approximately two-thirds of the quarter due to the lockdown." Starbucks China reported that 150 stores in Beijing, or one-third of the total, have been closed for nearly six weeks.

Consequently, same-store sales in China fell 44% in the quarter. However, despite the headwinds, the coffee chain has decided to boost its presence in China, its second-largest market after the US.

In the past ten years, Starbucks stores on the Chinese mainland have grown by nearly 10 times and have been on track to reach 6,000 stores by the end of this year. 

Belinda Wong, chairperson of Starbucks China, stated at the September 13 biennial Investor Day conference that the firm plans to add 3,000 new locations in about 300 cities by 2025, which equates to the opening of one new store every nine hours.

Considering that Chinese consumer spending in recent quarters has been rather sluggish and has not been gaining momentum, this is an audacious approach. The Conference Board reported that in the second quarter, total household spending fell 2.4% year over year, driven by a 9.3% drop in discretionary spending, and that going forward, they anticipate Chinese consumers to remain cautious about spending on non-essential items and increase their savings in the face of growing economic uncertainty.

Why, then, would Starbucks disclose the expansion plan during a period of sluggish consumer demand? This may be the result of both increased rivalry and the country's rapidly expanding coffee market, especially for freshly ground coffee.

In the past 14 years, China’s overall coffee consumption has risen more than 1,000%. In 2021, the value of China’s coffee market reached 381.7 billion yuan and is predicted to surpass 1 trillion yuan by 2025, a representative from Alibaba's food delivery platform Eleme told China Daily.

While the average Chinese person only drinks nine cups of coffee each year, coffee lovers in the country's top and second-tier cities consume well over three hundred. Coffee consumption is on the rise not just in metropolitan areas, but also in third and fourth-tier cities.

In 2021, around 25,900 new businesses entered the coffee market, representing a year-over-year increase of 12.5%. There were 159,000 coffee-related businesses in China as of August of this year. During this time period, there has also been a growth in the quantity of home-grown coffee labels.

It's no secret that homegrown coffee chain Luckin has jumped onto the bandwagon, expanding its presence in more cities. By growing franchisees in lower-tier cities, innovating new beverage products, and raising prices, the once trouble-ridden company showed impressive growth and increased profitability. With 7,195 locations at the end of the second quarter, these efforts also made it China's largest coffee chain.

Identifying and capitalizing on the trend was the turning point for a previously struggling business. Luckin was asked to be delisted from the Nasdaq in June 2020 for accounting fraud. The business agreed to pay the Securities and Exchange Commission $180 million in December 2020 for deceiving investors by "materially overstating sales, costs, and net operating loss."

In the second quarter, the company increased its revenue by 72.4% year over year, on the back of 41.2% growth in same-store sales and a 69.6% increase in transacting customers. Adjusted non-GAAP operating margins grew from 1.2% to 10.4% as store-level profits rose from 23.1% to 30.6%.

In the meantime, local coffee chain entrepreneurs are also accelerating their expansion. Manner Coffee stated in March that it would open 173 outlets. The coffee shop chain that started in Shanghai has 455 outlets in twelve cities today. According to its website, as of February of this year, Nowwa Coffee had more than 1,500 locations, having established 100 stores in June and July.

Other well-known international coffee chains are aggressively pursuing the market's rapid expansion. Tim Hortons China is aiming to open nearly 3,000 stores in China by 2026, banking on technology and localization to fuel its rapid expansion. In March, the company, which is backed by Chinese tech giant Tencent and Sequoia Capital China, raised $194 million at a valuation of $1.4 billion.

Bloomberg reported in July that the China operator of coffee chain % Arabica is considering a fresh investment round and could seek a valuation of up to $1.2 billion for its operations in the country. In its most recent investment round, Lucky Ace, which possesses the exclusive franchise of the Japanese coffee retailer in Greater China, was valued between $800 million and $900 million.

Even though large-scale COVID-19 control efforts had a substantial detrimental impact on the consumer market in the first half of 2022, the coffee industry secured 14 financing events totaling more than 1.8 billion yuan.

Starbucks, a pioneer that joined the Chinese coffee market in 1999, must continue to grow or risk losing its leading position as the market expands and the number of competitors rises.

Photo by Vaishnav Chogale on Unsplash