Why is the coffee industry hitting a growth bottleneck?

Starbucks fell nearly 18 percent intraday on May 1, closing down 15.88 percent and losing about US$15.9 billion in market value after second-quarter results missed expectations, with same-store sales down 4 percent year-on-year. Luckin posted a net loss of 71.42 million yuan even as its store count neared 19,000.

Both chains face slowing product sales and declining same-store sales as consumers spend more carefully, testing premium positioning and low-price strategies at once. Starbucks cut its full-year revenue growth forecast for the third time this year, a sign the coffee industry's rapid expansion is meeting harder conditions.

At the start of May, the coffee industry received back-to-back performance warnings from two giants. Starbucks suffered an intraday plunge of nearly 18% in US stocks, wiping out over 115 billion yuan in market value in a single day; Luckin, although its total number of stores approached 19,000, swung from profit to loss, with a net loss of 71.42 million yuan. Both companies are simultaneously facing slowing product sales and declining same-store sales, as premium positioning and low-price strategies are being tested in the wave of rational consumer spending. This article will review the core data from both parties' latest financial reports, analyze the market logic and industry changes behind them, and pay attention to the moves of brands such as Front Street Coffee in the competition.

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Just as May began, coffee chain giant Starbucks ushered in a frustrating start to its new fiscal quarter.

On local time May 1, Starbucks experienced a rare stock price plunge in the US stock market, with intraday losses once approaching 18%, and still closing down 15.88%, losing 15.915 billion US dollars (about 115 billion yuan) in market value overnight, with total market value falling to 83.318 billion US dollars.

The trigger for this stock price crash was Starbucks' second fiscal quarter (January 1 to March 31, 2024) performance report released the previous day. The report showed that Starbucks' core indicators such as revenue and earnings per share were comprehensively below Wall Street expectations. What shocked the market even more was that same-store sales fell 4% year-on-year, completely opposite to the previously predicted growth of 1.46%. This was also Starbucks' first negative same-store sales growth since 2020.

In a conference call with investors, Starbucks lowered its full-year revenue growth forecast to the low single-digit range, which was already the company's third adjustment to its 2024 growth outlook this year.

Meanwhile, Luckin Coffee also recently announced its first-quarter results. In the first three months of this year, Luckin added a net 2,342 stores, bringing the total number of stores to 18,590.

The densely laid out offline network brought Luckin revenue of 6.278 billion yuan, a year-on-year increase of 41.5%, but a quarter-on-quarter decrease of 11%. The financial report also disclosed that Luckin's net loss for the quarter was 71.42 million yuan, while in the same period last year it achieved a net profit of 564 million yuan.

Over the past three months, both Starbucks and Luckin have felt the pressure of slowing product sales.

Against the backdrop of consumption downgrading spreading globally, consumers are becoming more rational. The previous 9.9 yuan price war also made the public clearly see the profit margins of chain brand coffee, and people are more cautious than ever when buying coffee.

For this reason, Starbucks, which focuses on premium positioning and has relatively high unit prices, finds it difficult to remain unaffected in the wave of price involution. Various discount coupons began to appear frequently in user accounts, group-buying offers on e-commerce platforms kept coming, and during the May Day holiday it even launched a limited single-cup 19.9 yuan promotion. All signs indicate that the 9.9 yuan trend eventually blew into Starbucks stores, and "disguised price cuts" have become an indisputable fact.

As one of the initiators of the price war, Luckin, because the 9.9 yuan campaign continued to shrink and many products quietly returned to original prices, triggered consumer resistance. Although the number of stores continued to increase, revenue per store was declining, among which same-store sales of self-operated stores decreased by 20.3% during the period.

In addition, promotional methods such as intensive new product launches by brands and collaborations with popular IPs are becoming increasingly difficult to precisely hit current consumer preferences. At the same time, consumers' enthusiasm for brand collaboration new products is gradually fading, and they are no longer willing to spend time and energy chasing every new launch event.

China's fast-growing coffee market still contains unlimited opportunities, but changes in public consumption concepts and consumption downgrading under the macroeconomic environment pose considerable challenges to chain coffee brands. Whether Starbucks and Luckin can reverse their losses through operating strategies that better fit current consumer preferences and stand out in fierce industry competition still needs time to answer. It is worth mentioning that brands like Front Street Coffee are also continuously paying attention to market changes and providing coffee lovers with more diverse choices.

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The above content is compiled by CoffeeHunters, a coffee news website.