Starbucks has long got a trouble. Now it’s official.

Luckin Coffee became China’s dominant coffee chain last year, outpacing the nation’s previous leader Starbucks Corp in annual sales for the first time.

The Xiamen-based company posted quarterly net revenue of 7.06 billion yuan (US$980 million), representing an increase of 91% from a year ago in a growing and increasingly competitive China market.

The latest revenue number in the three months through December brings Luckin’s total sales in 2023 to 24.86 billion yuan (US$3.45 billion), surpassing Starbucks’ comparable annual sales of US$3.16billion in China, making it the biggest coffee chain in the Asian nation.

The surge in Luckin’s saleslast year was partly driven by its rapid expansion.More than 8,000 new store opened last year, with over 16,200 stores located in China by the end of 2023.

Experts attributed Luckin Coffee's success to its industrialized process, exceptional marketing strategies, and innovative capabilities. Chinese market research firm iiMedia pointed out that Luckin's triumph over Starbucks is a testament to its deep understanding of the Chinese market and consumer preferences.

Luckin’s CEO Guo Jinyi commented during a Friday earnings call that while competition in China's coffee industry is intensifying, the market landscape is far from fully developed. He highlighted the accelerated development of China's coffee market and predicted fiercer competition as more brands enter the fray.

China’s coffee market is experiencing rapid growth, overtaking the US as the world's largest branded coffee shop market by outlets. The surge is being driven by increasing consumption and presents significant opportunities for both domestic and international coffee brands.

Luckin Coffee's innovative approach to catering to Chinese consumers' tastes has been a key factor in its success. Its collaboration with Kweichow Moutai to launch an alcohol-infused coffee in September 2023 was a hit, with more than 5.42 million cups of Moutai latte sold on its first day. This innovation set a new sales record for the company and showcased its ability to blend traditional Chinese elements with modern coffee culture.

Overtaking Starbucks in China

In the booming local coffee shop market, it is the big Chinese chains that are growing the most.It has been confirmed by figures for 2023, which mark the leadership in China of Luckin Coffee, which has overtaken Starbucks for the first time in sales, as well as in the number of its own establishments in the territory.

In the face of the Chinese people's new passion for coffee, which in just a few years has made it the world's largest market, the growth recorded by the brand in the last twelve months has been impetuous: sales have increased by 87% to reach 24.9 billion yuan, with profits of 3 billion yuan, more than doubled compared to 2022.

All this while Starbucks in the last quarter of 2023 saw its revenues in China drop by 12.5%.Starbucks 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.

In contrast to Luckin’s aggressive expansion, Starbucks has expanded at a relatively modest pace, with a China store count of nearly 7,000 through December.That number was up 14.5% from a year earlier.Globally, Starbucks is still by far the largest coffee chain, with 38,586 stores worldwide.

Starbucks is clearly feeling the heat.

While Luckin created buzz last year with Moutai latte, the US coffee giant recently rolled out a pork-flavored latte in China for the Chinese New Year season that started on February 10.

Starbucks' Reserve Roastery in Shanghai announced the pork-infused offering in a post on its verifiedWeibo microblog accounton February 5, promoting the beverage as a coffee "integrated with traditional New Year customs."

The limited edition beverage, whose name translates into "Abundant Year Savory Latte," is pictured with a slice of skewered pork perched on top of the mug. Its official English name is the "Lucky Savory Latte.”

The drink is priced at 68 yuan (US$9.45) and is offered at around 25 Starbucks Reserve stores around the country.Other Starbucks' new Spring Festival-inspired drinks include rice flavored macchiato and black sesame latte.

The recent innovation on Starbucks' menu is prompting discussion on social media. But over the long term, the company must prioritize the development of a flagship item capable of capturing consumers' enduring attentionthrough a differentiation strategy, such as the coconut-flavored latte, which has swiftly risen as a top seller for Luckin since its introduction, analysts noted.  

Starbucks is looking to grow its store base by 13% this year in China and operate 9,000 stores in the country by 2025. For its part, Starbucks is adding more locally relevant beverages to its Chinese locations. It is also trying to add more food options to foster expansion and is looking to expand delivery. 

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