Starbucks biggest Chinese competitor may turn out to be a major asset in its expansion
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Starbucks biggest Chinese competitor may turn out to be a major asset in its expansion

Coffeehouse kingpin Starbucks has been the dominant force in the Chinese market for two decades – no surprise, since it pretty much built it – but that might be set to change. Or at least, that’s what a spate of headlines have suggested over the past year or so.

The new contender, apparently set to topple Starbucks from atop its empire? Luckin Coffee, a homegrown brand that opened its first store in early 2018, and finished the year with 2,000 outlets. This year, it’s planning to open a further 2,500 stores – and if it succeeds, it will have become the largest coffee chain in China. Here’s why that might play in Starbucks’ favour.

Starbucks’ share price has risen by 14% so far this year

26 03 starbucks

Source: Yahoo Finance

According to Euromonitor, coffee consumption in China was 0.4 cups per capita in 2016. That’s an incredible 750 times lower than the US’s figure in the same year. What that shows is, despite Starbucks’ 58.6% market share in the country (last year), the company has plenty of room to grow. The reason for that is simple: China, despite embracing coffee over the past twenty years, is still predominantly a tea drinking culture. Starbucks itself has admitted that it could take years for the Chinese appetite for caffeine to increase to anything-like western levels.

That’s where Luckin comes in. The company has made its incredible bid for market share by offering deep discounts – it has run at a loss, and plans to continue doing so for years. Add to that its focus on digital and delivery, and the company is perfectly positioned to drive maximum growth in the Chinese market. What happens when those consumers decide to court more premium drinks, and the “coffee house experience” that Starbucks has pioneered in the country?

Summarising in The Motley Fool, Adam Levine-Weinberg writes: “Starbucks can sit back and allow Luckin to incur huge losses to drive growth in Chinese coffee consumption. Five or 10 years down the road, Starbucks could be the big beneficiary as consumers step up to its pricier coffee offerings.”

Disclosure

Dominion holds Starbucks in its Global Trends Managed Fund.


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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.