in, which appears now to have the greater momentum. Not only that, but Luckin has now opened two pilot stores in New York, indicating that it might be on the verge of invading Starbucks’ home turf and competing with it as a truly global brand. That’s still a ways in the future, but it isn’t good news for the guys in Seattle. When asked on the company’s investor call on July 29 what was the purpose of seeking a local partner in China — Starbucks has already been approached by 20 companies — CEO Brian Niccol seemed to waffle: “What we are hoping we can have is a partner, first of all, that shares our mission and values. And then I think, be a great partner to figure out how we can operate more effectively in that local market.” The company is reeling from the onslaught of its major competitors, particularly Luckin, and needs a partner to figure out how to respond in a way that resonates with Chinese consumers. Luckin making strides Xiamen, where Luckin Coffee is based, has a colourful history of piracy — back in the seventeenth century, it was used both as a pirate base and a stronghold of resistance to the Qing dynasty emperor — and Luckin is following in that tradition by raiding Starbucks’ market share. It had a very strong second quarter, with both operating a net income increasing materially, riding on a 47.1 per cent year-on-year revenue increase to $1.7 billion. Of course, new store openings had a lot to do with it: the company has opened 6245 stores over the last 12 months, including more than 2000 in the second quarter alone. Of these, six were in Singapore, 16 in Malaysia and the two in the US. Its strategy in China is to open self-operated stores in the Tier 1 and Tier 2 cities and franchise stores in lesser markets. Of the stores opened in the past year, more than one-third have been franchised. The company now has a total of 26,206 stores, and since its franchise model now has a track record for effectiveness, there is room for significantly more growth in China. A key metric for a retailer opening so many stores so fast is same-store sales, since it is an indicator of the degree to which new stores are stealing sales from existing ones. Luckin’s same-store sales grew by 13.4 per cent in the second quarter after 8.1 per cent growth in the first. This is a good outcome, though slightly tempered by the fact that the same metric was down almost 30 per cent in the base year.  A significant driver of Luckin’s revenue growth that differentiates it from Starbucks is its emphasis on takeaway and online orders: with respect to the latter, delivery costs soared 175 per cent from the same quarter a year ago. Prices are markedly lower than Starbucks’ and its store formats are a good deal smaller in accordance with its business model. The sharp pricing is a clear competitive advantage for Luckin in tertiary markets where the customers are apt to be more price-focussed and don’t value Starbucks’ premium brand as highly as in first- and second-tier cities. To top it off, Luckin has a nicely differentiated product mix with drinks that aren’t found elsewhere, including exotic milk teas and lattes. Cotti anchors the ‘affordable’ end Luckin doesn’t have the low-mid-end of the Chinese market all to itself. Cotti Coffee is still around, and it too has been opening stores at a frantic pace. One recent report put its store count at 15,000. Cotti’s pricing is rock bottom (under 10 RMB), resulting in a price war with Luckin and excessive reliance on food sales to prop up its margins. Some observers have been skeptical about Cotti’s chances of survival, perhaps with good reason. The chain was created by two former executives of Luckin, Lu Zhengya and Qian Zhiya, who were forced out of the company after a financial scandal in 2020. (They were found to have reported false sales numbers.) They launched Cotti in August 2022, and its store count quickly galloped past Starbucks’, which had been in the market for 25 years.  Starbucks still upbeat Meanwhile, at Starbucks, the tone was still upbeat when the company released its quarterly results on July 30. “In China, the near-term changes we made are paying off,” Niccol stated. “Through Q3, we achieved our third consecutive quarter of revenue growth and total comp turned positive. Beverage innovation and new customisation options drove customer frequency and our changes to non-coffee pricing broaden our customer base and bolstered afternoon and evening sales.” While comparable-store sales in China edged up modestly, global comps declined by 2 per cent, led by a 2 per cent decline in the US. The company ended the first half of the year with a global store count of more than 41,000, of which 17,230 were in the US and 7828 in China. The latter number now puts Starbucks at number 3 in China after Luckin and Cotti. Of Starbucks’ total fleet, a little over half is company-owned, and the rest licensed. (By comparison, Luckin’s percentage runs 65/35.) Across all its stores, Starbucks’ sales grew by 3.9 to $9.5 billion, but operating income was down and net income after tax almost halved, to $558.3 million.  While Luckin’s low-priced model is having success in lower-tier cities, Starbucks is still optimistic about going after, if not the same customer, at least better-heeled customers in the same cities. This may be part of the reason behind its desire to get a local partner. It doesn’t understand the customers in these markets as well as it does in the top-tier cities. Meanwhile, Luckin has, with little fanfare, opened in lower Manhattan — specifically, in Greenwich Village and Chelsea. It wants to get a feel for the US customer just as Starbucks does for the Chinese. Starbucks won’t be dislodged easily from its domestic perch, but Luckin could make genuine inroads in a country with a Chinese diaspora of about 6 million, 650,000 of them in New York itself.  In the coffee wars, interesting times lie ahead.