In China’s battle of the lattes, Luckin Coffee keeps beating Starbucks

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Luckin Coffee, the Chinese chain that has been rebuilding its business since a fraud scandal four years ago, has reported a commanding sales lead over rival Starbucks in the important China market.

In 2023, Luckin generated total net revenue of 24.9 billion yuan ($3.5 billion), up 87% from a year earlier, according to its financial results released on Friday.

It didn’t break down its revenue by geography, but the vast majority of its sales come from China. Internationally, it has only 30 outlets in Singapore, the first of which debuted last March.

Starbucks (SBUX), in comparison, reported total revenue of $3.05 billion in China for fiscal 2023 that ended October 1, according to a CNN calculation based on the company’s quarterly results. The US coffee chain has not reported a full-year figure for China sales.

Xiamen-based Luckin said its unaudited net income for 2023 reached 2.85 billion yuan ($396 million), compared to 488 million yuan ($68 million) in 2022, it said.

Luckin, which already calls itself China’s biggest coffee chain, says it had surpassed Starbucks in mainland China by number of outlets in 2019.

The surge in Luckin’s sales last year was partly driven by its rapid expansion. By the end of 2023, Luckin had 16,218 stores in China, nearly double its 2022 count of more than 8,200.

Starbucks, by contrast, had 6,975 stores in China as of the end of January, according to the company’s latest quarterly result published earlier this year. That number was up 14.5% from a year earlier.

Some of Luckin’s stores are self-operated, while others are run by partners. Starbucks’ outlets in China are entirely company-owned.

Globally, Starbucks is still by far the largest coffee chain, with 38,586 stores worldwide. The United States and China are its two largest markets.

China, once a tea-drinking nation, has become a global coffee industry powerhouse, despite grappling with numerous economic problems in recent years. Data from the International Coffee Organization last year showed that coffee consumption in the country grew 15% in the year ended in September.

Much of this demand is driven by the younger generation. As many as 36% of coffee consumers in the country were between 25 and 34 years old, and 30% were between 35 and 44 years old, according to a 2021 survey by Daxue Consulting, a Chinese market research firm.

The number of branded coffee shops in China jumped 58% in the past twelve months, reaching 49,691 outlets, according to a December report by World Coffee Portal. That helped China overtake the US as the world’s largest branded coffee shop market.

Luckin acknowledged the fierce competition.

“We remain focused on our pricing and expansion strategy to sustain our growth and market share,” said Jinyi Guo, chairman and chief executive officer of Luckin Coffee, in a statement that accompanied the company’s results.

Luckin was founded in 2017 and is backed by Chinese private equity firm Centurium Capital. It focuses on catering to young people, with mostly takeout booths and cashless payments. Its beverages are about 30% cheaper than those offered by Starbucks.

Its bare bones stores usually offer only the most basic services, which has allowed the company to expand rapidly at a lower cost. It also requires consumers to use mobile phones to place orders, enabling them to collect extensive costumer data.

By 2019, the company had outnumbered Starbucks stores in China, with more than 4,500 outlets, according to the company.

In 2019, Luckin went public in New York, where it was welcomed by investors who believed it could be a serious challenger to Starbucks.

But the company was forced to retreat a year later following the admission that its earnings had been fabricated. Luckin was ultimately delisted from the Nasdaq, and its then chairman and CEO were both fired. It was also slapped with a $180 million fine by the US Securities and Exchange Commission.

After that, the company pledged to rebuild its businesses. Centurium Capital, an early investor in the coffee chain, became its controlling shareholder.

Despite being surpassed in both store count and now sales, Starbucks still maintains a wide lead over Luckin when it comes to profitability. The Chinese company’s profitability has suffered as a result of its rapid expansion.

In response to the competition, Starbucks announced partnerships with Alibaba (BABA) and Meituan in 2018 and 2022, respectively, expanding its online reach to Chinese consumers.

While Luckin created buzz last year with a collaboration with Chinese liquor brand Kweichow Moutai, Starbucks is also attracting eyeballs with its innovative new drinks.

The American giant launched a pork-flavored coffee earlier this month, in an attempt to cater to local tastes and traditions. Priced at $9.45, the drink combines Dongpo Braised Pork Flavor Sauce with espresso and steamed milk, with extra pork sauce and pork breast meat for garnish.

Hassan Tayir contributed reporting.

Correction: An earlier version of this story incorrectly stated Luckin’s net income in 2023 and 2022.