How Starbucks Lost the Top Spot in China’s Coffee Race

Starbucks is losing its prime spot among chains racing to meet China’s growing thirst for coffee.

Luckin Coffee has surpassed Starbucks as China’s biggest coffee chain by sales and units, company reports show, a comeback for the Chinese company after an accounting scandal that stalled its growth.

Flush with capital and under new leadership, Luckin now operates about 13,300 stores, with all but a handful located in China. That is roughly double Starbucks’s 6,800 locations in the country. To fuel its growth, Luckin has tapped rapid delivery services, mobile payment options and offerings such as a cheese-flavored latte that has been a hit with Chinese taste buds.

Seattle-based Starbucks, the world’s largest coffee chain, for decades has counted expansion in the world’s second-most-populous nation among its top priorities. Former CEO Howard Schultz has said China represents one of Starbucks’s biggest opportunities for growth—although it is a complicated place to do business. China is now Starbucks’s second-largest market by stores and revenue after the U.S.

Traditionally a tea-drinking society, China consumes little coffee compared with many other countries, but Chinese demand is growing, companies say. Analysts expect China to become the world’s largest consumer market in the next several years. Big Western brands selling to Chinese consumers face rising competition from local brands, as consumers begin to show a preference for them.

Coffee drinkers gather outside of a Starbucks in Beijing. PHOTO: MARK R. CRISTINO/EPA/SHUTTERSTOCK

Starbucks sales in China are growing, the company said, along with competition from Chinese rivals. Luckin declined to comment.

Kiki Pang, a Guangdong-based marketing executive, drinks coffee about twice a week. She often orders a Luckin latte for delivery to her office in the afternoon while working, and pays through the WeChat app.

“Starbucks used to be quite popular among young Chinese consumers,” said Pang, 26. “Now that young people in China have more beverage options, the dynamics have changed.”

Starbucks sought to establish a first-mover advantage after opening its first cafe in China in 1999. Schultz personally cultivated relationships in the country. The chain branched out from the country’s largest cities into smaller ones, building hundreds of new stores a year in the country and catering to coffee drinkers looking to linger in cafes.

The pandemic badly hurt Starbucks’s Chinese business, with its same-store sales in the country falling 17% in its 2020 fiscal year compared with 2019. Now, many Chinese consumers are continuing belt-tightening habits formed during the pandemic.

Starbucks executives have remained steadfast on China. The company said in November that it aims to add around 1,000 stores in China a year, growing to 9,000 by 2025. Executives said China would one day become Starbucks’s largest market. “I am very confident that is only the beginning,” Starbucks China Co-CEO Belinda Wong said at the November investor event.

Luckin, founded in 2017 and backed by venture capital during a tech funding boom in China, opened bare-bones stores at a faster clip than Starbucks’s more-elaborate cafes did. It centered its strategy around its mobile app and integrated delivery services from the outset, a to-go option Starbucks later added to its Chinese operations. Luckin had 3,680 stores by the fall of 2019, nearing the 4,130 Starbucks had built over two decades by that year. Luckin went public in 2019.

Former Starbucks CEO Howard Schultz recognized the potential for growth in China. PHOTO: CHINA PHOTOS/GETTY IMAGES

In 2020, Luckin admitted that it had fabricated around $310 million of its previous year’s sales. The

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delisted the company later that year. Luckin vowed to rebuild, bringing in new executives and investment from Chinese private-equity firm Centurium Capital. The chain opened its 10,000th store in China this summer, and celebrated by offering millions of customers coffee deals.

Luckin reported $855 million in sales for the quarter ended June 30, ahead of the $822 million Starbucks generated in its China business for the three months ended July 2, company filings show. Luckin’s sales lead widened in company reports in November.

Luckin has touted its value for consumers and some hit flavours, including a collaboration with popular Chinese luxury liquor brand Kweichow Moutai this year.

Another rising competitor is Chinese company Cotti Coffee, launched last year by Luckin founders no longer with the company. Cotti Coffee offers low-cost beverages geared toward young people, and in August said it had opened 5,000 stores in roughly a year.

Luckin uses a strategy that emphasizes integrated delivery services.JADE GAO/AGENCE FRANCE-PRESSE/GETTY IMAGES; YAN CONG FOR THE WALL STREET JOURNAL

Starbucks is pumping out its own new beverages in China, launching 28 there this summer. Executives said that Starbucks is the only coffee brand in China offering a full suite of beverages, food and merchandise, with prime locations around the country. It is building stores in smaller counties and in September opened a $220 million innovation center in China.

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Starbucks CEO Laxman Narasimhan said at the investor event that Starbucks provided a better experience and higher quality to Chinese consumers, compared with lower-priced rivals.

Sunny Shen, a business consultant living in the coastal Jiangsu province north of Shanghai, said she drinks coffee several times a week. Recently, she indulged in one of Luckin’s limited-edition Tom and Jerry mascarpone lattes. She also appreciates Luckin’s value.

She said: “Especially when they issue coupons, Luckin can be a half or a third of a Starbucks coffee.”

A converted oil tank houses a Starbucks store in Hangzhou. PHOTO: CFOTO/ZUMA PRESS

What’s more important than being a good employee right now? Looking like a good employee in the eyes of AI productivity trackers that more managers are using to evaluate their teams.

Employee-monitoring systems are especially popular at tech companies and are also used by other white-collar firms that want to probe how people spend company time. The scary thing: You might not even know you’re being watched because many states don’t require disclosure.

Metrics can include performance data that is undoubtedly relevant, such as sales results. But it also can employ dubious proxies like keyboard strokes and how often your computer screen goes into sleep mode.

We generally accepted, or at least understood, heightened surveillance during the work-from-home era. Back then it seemed reasonable for bosses to keep tabs on employees they couldn’t see.

Yet the oversight has only escalated, and tensions are rising, too.

A group of former Meta Platforms employees alleges in a lawsuit that the company used a “constellation of internal artificial-intelligence systems” when it began laying off about 10% of its workforce in May. Meta says humans make termination calls.

However that case shakes out, a couple of things are clear. Companies eager to gauge which employees are locked in now have sophisticated AI monitoring systems at their disposal. And they believe they have leverage in a tepid labor market.

So while we may chafe at having our worth reduced to numbers on the boss’s productivity dashboard, we have to play the game as it’s being played. Here are some tips, based on conversations with people who make employee monitoring systems—and others who game the systems.

Be meticulous about your calendar

Calendar integration is one way that productivity trackers have gotten more advanced and, ostensibly, fairer.

Let’s say you make an old-fashioned phone call or attend an in-person meeting. Your Outlook or Slack status may switch to “away,” making you appear as inactive as if you were taking an extended coffee break.

Employee monitors like one made by a company called Insightful cross-check your online status with your calendar to see whether there is a valid reason for your apparent inactivity. If that call or meeting is on your schedule, then the system will recognize that you are busy offline. If nothing is on the books, it could look like you’re slacking off.

Hit the activity sweet spot, around 80%

Let’s not go any further without addressing the underlying question: How much downtime is permissible during the workday? After all, people have been scared to let managers see anything non-work-related on their screens since personal computers first arrived in offices.

No one knows this better than Roger Wagner, who is widely credited with creating the first “boss button” in the early 1980s. He designed a keyboard shortcut to instantly display a spreadsheet if the boss walked by your cubicle while you were playing a computer game. Boss buttons have been features of countless diversions since. (I confess to using one built into a March Madness streaming app.)

Wagner, the founder of computer-education company 1010 Technologies, says his original design was a joke—more of a commentary on overbearing managers than a cover for lazy employees. Good bosses understand workers need mental breaks throughout the day, he says.

This matches what I heard from Insightful Chief Executive Ivan Petrovic. He says customers that use his company’s workforce-management platform don’t expect employees to stay on task 100% of the time.

“On average companies are aiming for 60% to 80% of your time being utilized for work during the day,” he says.

Go ahead and exhale. It’s probably OK to watch an occasional YouTube video at your desk.

And if you’re going to artificially inflate your activity level, be careful. Hitting 90% could look suspicious.

Get physical

So don’t leave your mouse jiggler on all day. Choose the right one if you must resort to shenanigans.

There are lots of software applications that mimic the movements of a computer mouse, so you can appear to be working while away from your desk. There are also devices that plug into computer ports and do the same thing.

Corporate cybersecurity systems increasingly block these apps and devices, and productivity trackers claim to be able to detect them. But some workers swear by mouse docks, like one made by Tech8 USA, that keep cursors moving. The company originally made mouse-moving software but now focuses on physical jigglers.

“People are drawn to mechanical solutions because they’re so simple and don’t require software,” says Tech8 Marketing Director Sam Matthews. “As monitoring technology becomes more sophisticated, that distinction has become even more relevant.”

Use AI, but not too much

Another popular metric for employee-monitoring systems is AI usage. Companies want to know who is embracing new tools, and it can be tempting to think more is better.

“There’s a performative aspect where employees overblow their usage of AI so that they appear relevant in the organization,” says Andrea Derler, principal researcher at Visier, which helps companies track and analyze employee work habits.

In a recent Visier survey of 1,000 U.S. workers, 48% admitted to exaggerating their AI usage.

This is already an outdated strategy. Using AI for everything used to score points for experimentation. Now it can seem wasteful because many companies are watching AI token spending more carefully.

Look, productivity theater has always been part of work. Most of us aren’t trying to cheat the system, but expectations are changing so quickly that we need to be savvy about what the latest employee trackers are looking for.

Sometimes it takes a little gamesmanship to get full credit for our contributions.