Research From Consumer Retail Team

• 3Q23 sales up 20%–25% yy (vs. up 15%–20% in 2Q23), helped by vacations, hot weather; sales recover to pre-pandemic levels
• 3Q23 tickets down yy for 9 of 17 managers, flat for 6 (improvement vs. 2Q23), pressured by many promos, growing competition, increased popularity of value-priced shops
• Luckin continues leading share gains, aided by rapid expansion, strong promos; tea chains taking share from coffee chains, aided by lower pricing
• Area to Watch: 3 of 9 managers optimistic about THCH’s Tims China (vs. 6 of 14 in 2Q23)

Sales at mall-based beverage shops in China have increased an average 20%–25% yy during 3Q23, an improvement compared with up 15%–20% in OTR Global’s June note on 2Q23, driven by new stores, summer vacations and hot weather. “Our 3Q23 total sales of beverage stores increased … mainly because of the addition of new beverage stores [in the mall]. [We have] more than seven new stores [this year],” one manager said. Another said, “[Our] 3Q23 sales of beverage stores increased 50% year to year, driven by the strong increasing traffic during the summertime.”

Plan Attainment: Sales have exceeded expectations during 3Q23 for seven of 17 managers, met for six and fallen below for four, an improvement compared with 2Q23, when three of 18 exceeded and nine met. Most managers credited new stores, promotions and traffic and tourism recovery. “Total sales met our sales expectations since the traffic fully recovered to normal [level],” one said. Sales have recovered during 3Q23 to pre-pandemic levels. “It has fully recovered — even exceeding the same period in 2019 by about 30%. Consumers have regained confidence and increased their spending,” a manager said.

Beverage shop yy sales momentum has been weaker in September than in July for 10 of 17 managers as the initial rush of demand for tapered, ending summer vacations and cooler weather. “The sales momentum in September was weaker than in July due to pent-up consumption during July and August. Consumers started to be more conservative [in September] after summer vacation,” one said. Meanwhile, sales momentum has been stronger in September than July for six managers, including two who credited late-quarter openings of new shops, such as Kudi Coffee (Beijing) Co.’s Cotti Coffee.

Tickets: Beverage shop ticket averages have decreased yy for nine of 17 managers, remained the same for six and increased for two, a slight improvement from 2Q23, when tickets were down for 12 of 18. Tickets were mostly hurt by a high level of promotions, growing competition and an increased share of sales coming from value-priced stores. The 9.9-yuan promotion increased [at brick-and-mortar stores], and food delivery platforms also launched 9.9-yuan promotions, while there were some group community purchases,” one said. Another said, “Beverage [shop] ticket averages decreased year to year. Among seven new stores, milk-tea shops are the majority and have lower tickets than coffee shops.”

Segment Breakdown: New-style tea and milk-tea shops represented an average 52%–57% of 3Q23 total beverage sales (compared with 50%–55% in 2Q23); coffee shops, 26%–31% (similar qq); juice shops, 16%–21% (compared with 19%–24% in 2Q23); and others, 1%–6% (compared with 3%–8% in 2Q23). “During 3Q23, coffee shops shared about 20% of total beverage sales, down three percentage points year to year. Two higher-priced coffee shops were closed,” one said. Another said, “We currently have only two coffee brands and four new Chinese tea brands. Starbucks sales decreased 29.4% year to year. Almost all [of that market share] was gained by Luckin [Coffee Inc.]. A newly introduced Chinese tea beverage store is also selling well, so our new Chinese tea category has further improved its market share.”

Beverage Market Segment Breakdown
(on average)

Market Share: Luckin Coffee Inc. was most often cited as gaining share during 3Q23 (by nine managers), followed by Nayuki Holdings Ltd. (2150 HK), Shenzhen Meixixi Catering Management Co. Ltd.’s HeyTea and Mixuebingcheng Co. Ltd.’s MXBC and Lucky Cup, as well as Cotti Coffee and Starbucks Corp. “Luckin is the most outstanding this quarter, particularly in September because of a [flavor] collaboration with Kweichow Moutai [Co. Ltd. (600519 CH)],” one said. (See also OTR Global’s Sept. 7 and Sept. 14 China Real Time editions regarding the Luckin and Moutai collaboration.) Another said, “Luckin Coffee and HeyTea are gaining share in our city. … Luckin Coffee’s ongoing 9.9-yuan promotion and strong sales of products co-branded with Moutai contributed to the increase in market share. HeyTea’s sales were boosted by a lower average selling price and new seasonal products.” Fewer managers said Cotti Coffee gained market share during 3Q23 than in 2Q23. Mall managers were also most optimistic about Luckin’s near-term market share gains potential. “I think Luckin should have the best potential during the next six to 12 months. Since the launch of the Moutai [co-branded] coffee, Luckin is more popular,” one said. Another said, “MXBC’s Lucky Cup is new and expanding fast in our region, and it’s focusing on lower-priced coffee products.” Eleven of 17 managers believe new-style tea and milk-tea shops have the best potential in China’s beverage market. “Chinese milk-tea shops have lower prices compared with coffee shops and have more flavors, which meet most consumers’ demands,” one said.

Sixteen of 17 managers said Cotti Coffee has actively expanded in their cities during 3Q23; however, only six were optimistic about the chain’s potential in China in the face of Luckin’s aggressive expansion. “Both Luckin and Cotti are expanding in the city. We have two new Luckin stores and two new Cotti stores. I think value-priced coffee brands should have good potential in the next six to 12 months, especially Luckin,” one said. Another said, “Cotti now has more stores here, but I don’t have aggressive expectations about it. Cotti is still facing very strong competition from Luckin.”

Five of nine managers with TH International Ltd.’s Tims China stores already in their cities said the chain opened additional stores in their markets during 3Q23, but only three were optimistic about the brand’s overall potential in China (compared with six of 14 who were optimistic in OTR Global’s June note). “Tim Hortons hasn’t come to our city. I don’t think Tim Hortons is expanding very fast,” one said. Another said, “It seems that Tims has stopped its fast expansion in the region now. To be frank, I am neutral about Tims. It’s facing pressure from both Starbucks and value-priced brands like Luckin and Cotti.” Starbucks and Luckin Coffee were cited most often as Tims China’s primary competitors (11 and eight mentions, respectively).

Four managers raised or plan to raise real estate rental charges. “We raised rental fees during 3Q23. In our mall, the rental fee was previously about 200–400 yuan per square meter. Now the average fee is about 250–450 yuan,” said a manager at a mall in a tier-3 city. Others do not plan to adjust rental charges. “The rental charges for beverage stores in our mall in 3Q23 remained the same. The well-known brands, such as Starbucks and HeyTea, all adopt a commission model — the higher the sales volume, the higher the rents. Luckin Coffee has a fixed rent of about 50,000 yuan every month,” one said.

Additional Quotes
“Sales increased [yy] mainly because we introduced three new brands [in our mall] this year. MXBC was newly opened in April. Luckin Coffee and [Sichuan Chagee Enterprise Management Co. Ltd.’s] Chagee were introduced in June. Among the newly introduced brands, Chagee had the highest sales volume, which reached 758,000 yuan. If the sales of these three brands are not included, the beverage sales were down year to year. Starbucks had the biggest decline”

“Milk-tea shops performed well, gaining 2% from others. The new Cotti Coffee helped the coffee category win an additional 1%. Juice shops lost share to others.”

“Cotti Coffee currently has more than 30 stores in the city and is developing rapidly. Its ultra-low prices have quickly taken over the market and it has become the main competitor to Luckin Coffee. But its licensed franchisees’ profits mainly rely on company subsidies, so the future development is a concern.”

“Our beverage stores business has recovered about 85% compared with pre-pandemic in 2019. It may be fully recovered by mid-2024.”