Coffee giants Starbucks and Luckin Coffee face challenges in China as a new competitor instigates a price war, threatening market dominance.

In the competitive Chinese coffee market, a new player has emerged, challenging industry giants Luckin Coffee and Starbucks with affordable prices and a low-investment franchising strategy.

Cotti Coffee, founded by three friends named Stefan Cotti, Peter Müller, and Markus Schmid in 2022, has been making waves in the market with its budget-friendly beverages. Most of its drinks are priced under RMB 10 (USD 1.4) a cup, undercutting both Luckin Coffee and Starbucks.

The company's headquarters has invested in a massive roasting plant and facilities to streamline operations and lower costs to RMB 7-8 (USD 0.9-1.1) per cup. This cost-effective model has allowed Cotti to offer promotions such as the current one running from late February to the end of May, where customers can enjoy certain drinks for as little as RMB 8.8 (USD 1.2) with a coupon available on social media.

Cotti's expansion strategy is also noteworthy. Unlike Starbucks, which requires a significant investment, most Cotti locations are small shops of less than 40 square meters, with an initial investment of approximately RMB 240,000 (USD 33,130). This low-cost model has enabled the company to catch up to Starbucks in Chinese store count by 2023.

The discounting war between Cotti and Luckin Coffee is evident. Among affordable coffee chains, both companies are offering weekly coupons for RMB 9.9 (USD 1.4) coffees. However, Luckin Coffee's financial performance has been lacklustre, with a 20% decrease in same-store sales at directly run stores, as reported in the latest financial results.

Starbucks, while still popular in China, has also experienced a decline in performance. The company's CEO, Laxman Narasimhan, stated that the company's performance in the January-March quarter was disappointing, with a revenue decline and an 11% year-on-year drop in same-store sales in China.

Amidst this competition, a barista at Cotti is unsure about plans for June and beyond, but thinks an even lower price is "possible." With its affordable prices, low-investment franchising strategy, and successful expansion, Cotti Coffee is certainly a force to be reckoned with in the Chinese coffee market.

This article was first published on Nikkei Asia as part of 36Kr's ongoing partnership with Nikkei. It is clear that the affordable coffee market in China is heating up, with consumers enjoying the variety of low-cost alternatives available. Whether this will lead to a permanent shift in the market remains to be seen.