Starbucks is 30 yuan a cup, but it can’t beat Luckin Coffee in the county

On the streets of county towns, Starbucks' green logo has gradually become a new landscape. The article deeply analyzes Starbucks' performance in the county market and explores how it finds its foothold in an environment where affordable coffee brands are everywhere. The article reveals the challenges Starbucks faces: how to maintain its high-end brand positioning in the county market where income levels and consumption habits are completely different from those in first-tier cities, and compete with local brands such as Luckin Coffee.

On the eve of the National Day holiday, the first Starbucks opened in a county town in Hebei with a permanent population of less than 800,000.

Before Starbucks, the county had already settled in many coffee brands including Lucky Coffee, Luckin Coffee, Kudi, T97, etc. under Mixue Ice City. Although the market has experienced a wave of affordable coffee education, Starbucks, with an average price of 30 yuan per cup, still challenges the consumption capacity of many county users. After all, the per capita GDP of the county in 2023 is only 22,000 yuan, which means that the annual income is only enough to buy more than 700 cups of Starbucks.

A week after opening, employees of the Starbucks store revealed that many young people were visiting the store, and at the peak of customer flow, there were nearly 100 orders a day. Starbucks, which has lost its charm in first-tier cities, is now attracting a large number of young people in county towns to check in.

Starbucks' expansion into lower-tier cities is not new. In the past two years, Starbucks has almost become a standard feature in county cities. As the coffee market intensifies, all brands regard the lower-tier cities as the key to a breakthrough, and have invested heavily in the lower-tier cities. Starbucks, which seems to be the farthest away from the lower-tier cities, is also frantically opening up the path of brand expansion into lower-tier cities.

According to Starbucks' third quarter financial report for 2024, 213 new stores were added in the third fiscal quarter (April-June 2024), with the number of new stores increasing by about 13% year-on-year, and 38 new county-level markets were entered. Currently, Starbucks has 7,306 stores in more than 900 county-level markets. Some people in the industry even joked that Starbucks is just short of opening stores in villages.

Taking a county as an example, the next challenge Starbucks needs to face after completing the competition is who will regularly consume a cup of Starbucks at 30 yuan? Can Starbucks continue to win over young people in small counties?

1. After the National Day holiday, sales volume dropped by half

During this year's National Day holiday, many fourth- and fifth-tier counties welcomed the opening of their first Starbucks.

The brand, which is common in first- and second-tier cities, still caused quite a stir when it appeared in county towns, which are famous for socializing among acquaintances and are particularly down-to-earth. On social media, many netizens posted pictures of themselves checking in at the newly opened Starbucks in their hometowns.

There are always some opening bonuses at the beginning. "Daily People" previously reported that a Starbucks store in a county town in a central province received as many as 1,500 orders on its opening day.

Of course, not all new Starbucks stores in counties are so popular. Economic differences can lead to some consumption biases. Li Yang, a Starbucks employee in a county in Hebei, revealed that since the opening on September 29, in less than a week, the best business and the most people were on October 1-2, with more than 100 orders a day. One order usually does not mean one cup of coffee, and some customers will order multiple cups at a time.

Li Yang previously worked at a Starbucks store in the city. When a Starbucks store opened in the county, he was transferred to the new store. Starbucks employees in the city work in two shifts, morning and evening. Starbucks employees in the county do not need to work in two shifts, and basically work one day at a time. There is no difference in salary, because employees are required to work 160 hours per month.

Compared with the urban area, the number of coffee orders in the county is obviously less, and many of them are at their peak right after opening. Li Yang said that the new store has a large flow of customers, many of whom are young people. Business is best in the afternoon. The new store has opening activities, such as the first recharge of 68 yuan membership can enjoy a free cup of coffee, as well as several buy one get one free, half-price coupons, etc., so there will be more people buying.

But at its peak, the new store can only handle the same amount of orders as the downtown stores. The downtown Starbucks store where he worked previously had a relatively balanced volume of orders, with more than 100 orders a day. However, the new store's volume has been gradually decreasing as the holiday season has passed, with only more than 90 orders at its worst.

After the National Day holiday, the store was even sparser. According to Tech Planet, the number of orders at the Starbucks store in Li Yang's county town was reduced by half.

The taste differences in the sinking market are also very obvious. Consumers in county towns prefer Frappuccino, one of Starbucks' flagship products. Li Yang said that customers in the city are basically office workers, who order more coffee, and the Latte series and Teavana series are very popular. Customers in county towns don't order coffee very often, but prefer Frappuccino, which has a higher sweetness. Frappuccino is one of the representatives of Starbucks' high-gross-profit large products.

The sinking market provides a lot of room for Starbucks' performance growth. Starbucks' past financial reports show that Starbucks stores in county towns have indeed increased the group's profitability. Not only have the single products with higher gross profit margins increased profit margins, but membership recharges have also become an important source of Starbucks' performance growth.

Starbucks' financial report shows that in the second fiscal quarter, the number of Starbucks' 90-day active members in lower-tier cities grew rapidly, with the growth rate exceeding that of higher-tier cities. Member sales also grew significantly, with the sales growth rate twice that of higher-tier cities. Starbucks China Chairman Wang Jingying previously revealed that "the new stores we have entered in county-level cities in the past few years have shown better profitability than new stores in higher-tier markets."

However, it is worth noting that the increase in membership sales is at the expense of a disguised price cut. In the 9.9 coffee price war, Starbucks repeatedly stated that it would not join the price war. However, the membership recharge activities launched at the opening of new stores in county towns are actually disguised price cuts. Buy one get one free and half-price coupons have lowered the price range of 30 yuan per cup to 15 yuan.

2. Tea and coffee are flourishing in the county

After the opening bonus, the real challenge begins.

In a county town in Hebei Province, other coffee brands that seized the market earlier than Starbucks include Lucky Coffee, Luckin Coffee, and Kudi. The early entrants have already experienced the economic downturn of the county town for Starbucks.

Zhang Chi, a franchisee of Kudi, chose to join Kudi in the county in the second half of last year. He invested more than 400,000 yuan in the start-up capital of the store, and another 200,000 yuan in the later period, totaling more than 600,000 yuan. However, after nearly a year, Zhang Chi is still in a loss-making state. Regarding the one-year payback period commonly circulated in the industry, Zhang Chi said pessimistically that it would be good if he could pay back in five years.

Compared with milk tea, coffee is more difficult to make back the investment. In Zhang Chi's opinion, milk tea can make back the investment in about a year. But in the coffee industry, it is good enough to make back the investment slowly after three years of operation. "Those who try to make back the investment in two years are simply unrealistic."

Although coffee is not a typical seasonal product and can be sold in both hot and cold flavors all year round, the market does have off-season and peak seasons. When business is good, Zhang Chi's store can sell more than 200 cups a day. Winter is the off-season, and the store only sells about 100 cups a day, with a turnover of about 1,000 yuan, and 100 cups is considered a "very good" level. Last winter, Zhang Chi's store lost more than 100,000 yuan and "didn't make any money at all." Zhang Chi has prepared himself for at least three years of losses.

Putting aside the taste of Kudi Coffee products, there are many reasons for the loss of stores, one of which is fierce competition. Zhang Chi said that the market is now saturated. "In our county, there are 3 Lucky Coffee stores, 2 Luckin Coffee stores, 1 Kudi Coffee store (and 2 more stores are being selected and are waiting to open), 1 Starbucks store, and 1 T97 store." There are stores of the same brand in surrounding counties. Even in the same county, there are too many categories of milk tea and coffee, such as Mixue Ice City, Luckin Coffee, Lucky Coffee, Cha Baidao, Shanghai Auntie, etc. The market is limited, and all brands want to get a piece of it.

Last year, Luckin Coffee and Kudi Coffee officially launched the 9.9 yuan coffee war. The price war spread from first-tier cities to county towns, and all players involved could not stay out of it. Zhang Chi said that at that time, almost every order was a loss. Franchisees are passively trapped, and they will definitely regret joining, but once they start, they can't press the withdraw button because the sunk cost is too high. So even if they lose money, they can only choose to continue to bet. Zhang Chi still has plans to expand stores next, from 1 to 3. The gambler mentality seems to be starting to work, and if you want to win, you can only keep investing.

According to Zhang Chi's single-store profit model, a store needs to sell more than 350 cups of coffee per day to make a profit. But now, his store sells only more than 100 cups per day, which is far from enough. In his opinion, county towns cannot be compared with big cities. Big cities have a large floating population, while county towns have an almost fixed population, except during the Spring Festival or the National Day holiday, when the number of people returning home increases. But those are temporary and unsustainable. After the peak period, it still needs to return to normal. Therefore, it is impossible to achieve profitability by selling only 3,000 cups of coffee a year. "That's like winning the lottery, the possibility is not great."

Although Starbucks has a high average customer spending, if we assume that a cup of Starbucks is three times the average price of a cup of Kudi, Kudi needs to sell more than 350 cups a day to make a profit, while Starbucks needs to sell about 120 cups a day to make a profit. At present, it seems that it may be difficult for Starbucks in county towns to reach the profit standard in terms of daily order volume.

3. The “volume kings” are attacking the lower-tier markets

In terms of brand premium and brand influence, Starbucks' advantages are self-evident, which is unmatched by other coffee brands. For young people in county towns, Starbucks not only serves as a social currency, but also satisfies their vanity of showing off their status.

There is no shortage of rich people and ladies in county towns, and their spending power is no worse than that of first-tier cities. However, the user profile of Starbucks in county towns is not consistent with Starbucks' core base.

According to Huxiu, Starbucks member sales currently account for more than 75% of total sales, with a total of 120 million members in China and about 21 million active members in 90 days. Among them, there are hundreds of thousands of Starbucks China "Diamond Star" level users, who spend an average of about 4,000 to 5,000 yuan a year in the Starbucks China market, making them the core base of Starbucks China.

Annual consumption of 4,000-5,000 yuan means annual consumption of about 130-160 cups. But it is difficult for a county to cultivate core users with such high loyalty. According to the 2024 China Urban Coffee Development Report, the scale of China's coffee industry will reach 265.4 billion yuan in 2023, with an average annual consumption of 16.74 cups per person. In a county with insufficient coffee market education, the average coffee consumption per person will only be lower.

In addition, if the high-end brand's decline is separated from promotional activities, it seems difficult to be optimistic about its future trend. Starbucks has abandoned the "low-price strategy" globally. Brian Niccol, the CEO of Starbucks who officially took office in September, was recently reported to have completely canceled the "buy one get one free" and "50% price reduction" activities that the previous CEO had strongly promoted.

Although Starbucks China claims that it has not joined the low-price war like the North American market, in fact, the membership recharge activities launched by Starbucks China at its opening, such as "buy one get one free" and half-price coupons, are essentially the same as the group's low-price strategy. With Starbucks' global strategic adjustments and the cancellation of promotional activities, if Starbucks China makes the same adjustments, its ability to attract customers in the sinking market will be greatly reduced. How to ensure the repurchase rate of Starbucks, which maintains the original price of 30-40 yuan per cup, will become a major challenge.

In addition to the mismatch between brand pricing and the lower-tier markets, Starbucks also has to compete with a number of affordable coffee brands for users in the lower-tier markets.

If we classify by product price range, Starbucks, which sells for around RMB 30 per cup, is high-end, Luckin Coffee and Kudi, which sell for RMB 9.9 to RMB 16 per cup, are mid-range, and Lucky Coffee, which sells for RMB 4.5 to RMB 8.8 per cup, is low-end. In the sinking market, Starbucks not only has to face the diversion of mid-range brands, but also has to face the low-price competition from the king of the sinking market.

The sinking market is the main battlefield of Lucky Coffee, with the largest number of stores and the highest number of business hours. Chen Chen, the store manager of Lucky Coffee, which is located in the same county as Starbucks and Kudi, said that Lucky Coffee has the longest business hours, from 8:30 am to 11 pm. In comparison, Luckin Coffee's business hours are from 9 am to 9 pm, and Starbucks' business hours are from 9:30 am to 9 pm.

There were originally two Lucky Coffee franchisees in Chen Chen's county, but one of them quit, leaving only her boss, who now runs a total of three stores. Her store has been open for nearly three years, and the other two were newly opened this year.

She told Tech Planet that compared with the past, the number of people consuming coffee in county towns has increased significantly. During the peak season, her store can make 4,000-5,000 yuan a day. During the off-season, the daily turnover can reach about 2,000 yuan. Customers are mostly between 20 and 30 years old, and high-frequency customers can buy up to 4 cups of coffee a day.

At present, Lucky Cafe is copying the store opening speed of Mixue Ice City. The store manager of Lucky Cafe said that her boss will open three new stores after the Chinese New Year. Kudi franchisees are also planning to expand stores.

How many coffee brands can a county accommodate? How to ensure repeat purchases after the opening bonus? How to survive in a county with fierce price wars? These are all challenges for Starbucks.

Text | Zhai Yuanyuan This article is written by the author of Operation Party [Tech Planet], WeChat public account: [Tech Planet], original/authorized to be published on Operation Party, and any reproduction without permission is prohibited.

The title image is from Unsplash, based on the CC0 protocol.