China’s coffee market is experiencing rapid growth and is likely the world’s largest. In 2023, Luckin Coffee doubled its store count, solidifying its market-leading position ahead of Starbucks and Cotti Coffee. With a gross margin of 55%, Luckin has remained profitable despite high SG&A costs associated with its rapid expansion. Even with a China discount, Luckin’s shares appear extremely inexpensive.
Coffee Culture in China
China’s urban centers, including Shanghai (population 26 million), Hangzhou (10 million), and Suzhou (8 million), are teeming with coffee shops of all kinds. From small, two-seat Manner coffee outlets catering to delivery workers to high-end establishments like Starbucks Roastery in Shanghai, offering premium drinks and spirits, coffee culture is diverse and thriving. Delivery is a significant aspect of this market, with 85% of consumers ordering coffee via delivery at least once a week.
Market Analysis
According to JDE Peet’s 2023 Annual Report, the USA remains the largest coffee market by dollars, and Brazil leads in cups consumed. China’s market, valued at $2.1 billion in 2023, grew by 58% and is now considered the largest market globally. With nearly 20% of total operations consisting of newly opened shops, the market is rapidly expanding.
Key Players
- Luckin Coffee Inc. (OTCPK)
- Market Leader: With 32% of all coffee shops in China, Luckin leads the market.
- Store Count: Over 16,200 stores as of the end of 2023.
- Growth Strategy: Aggressive expansion with a focus on profitability, boasting a gross margin of 55%.
- Ownership and Corporate Structure: Controlled by Centurium Capital, a Chinese private equity firm.
- Starbucks (SBUX)
- Second Largest in China: With 7,093 stores, China is Starbucks’ second-largest market.
- Growth: Opened 857 new stores in 2023, growing 15%.
- Pricing: A Grande Americano is priced at RMB 30 (USD 4.20), with similar prices for other drinks and food items.
- Cotti Coffee
- Rapid Expansion: Founded in 2022, with over 6,000 outlets opened in 2023 alone.
- Competitive Strategy: Opening stores near Luckin outlets, offering aggressive pricing and franchise terms.
- Manner Coffee
- Niche Player: Founded in 2015, with around 1,000 stores primarily in major cities like Shanghai.
- Pricing: Coffee prices range from RMB 20-30 depending on location and type.
- Costa Coffee
- Global Presence: 459 stores in China, part of The Coca-Cola Company.
- Potential Threat: Strong global backing but limited presence compared to Luckin and Starbucks.
- Tim Hortons (THCH)
- Struggling: With 800 stores, it faces operational inefficiencies and financial losses.
- Pricing: Coffee is more expensive in China than in Canada, affecting its competitiveness.
- JDE Peet’s N.V.
- Slow Growth Strategy: Focused on organic growth with 250 stores in China.
- Quality Offering: Known for high-quality coffee.
Financial Overview
Luckin Coffee Inc.
- Post-Scandal Resurgence: After a major accounting scandal and restructuring, Luckin has emerged stronger with improved corporate governance.
- Strong Financials: Despite high expansion costs, Luckin remains profitable with a low Long-Term Debt to Total Capital Ratio of 21.67%.
- Valuation: With a P/E Ratio of 18.48 and a PEG ratio of 0.16, Luckin’s shares are undervalued compared to competitors like Starbucks.
Comparison with Competitors
- Starbucks: Higher P/E Ratio of 22.46.
- Tim Hortons: Significant market cap loss, struggling with high operational costs.
- JDE Peet’s: Slow but steady growth, with less aggressive expansion plans.
Conclusion
Luckin Coffee is well-positioned in the booming Chinese coffee market, with a robust growth strategy and strong financials. Despite past challenges, it has emerged as a market leader with significant potential for future growth. Given its current valuation and market position, Luckin Coffee is rated as a Speculative BUY, considering the usual risks associated with investing in Chinese companies.
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