China's homegrown coffee giants are brewing up a U.S. expansion

CNBC

4 hours ago

Chinese beverage chains are redefining coffee culture in the country — and now they're trying to win over customers in the U.S. and beyond.
Luckin Coffee, China's largest coffee chain, has expanded aggressively in China and overtaken Starbucks on the mainland, with more than twice as many outlets.
Following an accounting fraud scandal that got the company delisted from the Nasdaq in 2020, Luckin has staged an unlikely comeback with quirky flavors and steep discounts — as low as $1.40 per cup during an earlier price war with rival Cotti Coffee.
The Wall Street debacle hasn't dampened Luckin's ambitions in the U.S., where it still trades over the counter. After venturing into Singapore, Hong Kong and Malaysia, Luckin is set to take its biggest leap yet with plans to open a branch in lower Manhattan.
The move mirrors Cotti's, which just opened outlets in Brooklyn and Manhattan. Founded in 2022 by former Luckin executives who were ousted over the scandal, Cotti has also grown rapidly in China and internationally, with stores in locations ranging from Southeast Asia to Dubai and California.
"New York is probably culturally the best testing ground for an international brand to expand into, especially a Chinese one," said Bernstein Senior Analyst Danilo Gargiulo, citing the city's diversity and large base of young consumers. "But it's also the most saturated, one of the most competitive markets."
Chinese chains combine budget pricing with unusual flavors that often blur the line between coffee and bubble tea — jarring to purists but extremely popular at home. Luckin said its alcohol-infused latte, developed with China's leading Moutai liquor maker, sold more than 5.4 million cups on its first day in 2023, generating over $13.7 million in sales. The company launched 119 different items in 2024 alone.
Luckin has built its business around technology, allowing customers in China to order and get deliveries through the country's ubiquitous WeChat app, replacing the traditional cafe experience with hyper efficiency. The company also runs large coffee-bean roasting and processing operations in China to help drive down costs.
The question is whether this will work in America.
Luckin and Cotti did not respond to requests for comment from CNBC. On an earnings call in April, Luckin's co-founder Guo Jinyi said the company plans to "adopt flexible, locally tailored models" to steadily expand overseas. Slowing growth and intense competition in China has pushed companies to seek opportunities beyond its borders.
From electric car makers to food delivery platforms, large-scale Chinese companies often follow a familiar strategy: burn cash, grab market share, worry about profit later. This helps them grow fast, but can infuriate global competitors.
In the latest sign of increasing competition in China, Starbucks on Monday said it will lower the prices of dozens of drinks in the country by an average of $0.70 this summer.
In New York, Cotti is selling drinks for 99 cents to first-time customers who download its app. Over time, analysts estimate that Luckin and Cotti will still be cheaper than Starbucks in the U.S., but the gap will be narrower than it is in China.
Manhattan may share major Chinese cities' love for efficiency, but businesses there face New York wages and may need to accept additional payment options, adding to costs, said Allison Malmsten, China strategy director at Daxue Consulting. Tariffs on Chinese businesses may further erode their supply-chain advantages, she added.
"There's a long list of things that could potentially drive the price up," Malmsten said.
If Luckin's New York debut proves successful, the company could venture further afield. HeyTea — a Chinese chain known for topping its teas with foamy cream cheese — landed in New York in late 2023 and has since spread to Boston, Seattle and Los Angeles.
Despite tensions between Washington and Beijing, Gen Z and younger Americans tend to perceive China differently to older generations, who may associate Chinese products with lower quality, according to Malmsten. Bargain coffee from Chinese chains could also appeal to New Yorkers facing rising costs on everything from groceries to coffee beans.
Still, coffee shops that run on thinner margins need volume, analysts say. This means appealing to a wider range of customers.
"If it's perceived as being only a touristy or exotic adventure, then it's not going to become part of your day-to-day consumption, it's not going to become part of your morning routine," Bernstein's Gargiulo said.