(Yicai Global) July 10 -- Coffee retailers are staring at intensifying competition in China as their numbers swell, opening new stores, launching new products, and forming collaborations to take a greater share of a market with great potential.

The number of coffee shops in China has reached 148,000, equal to 10.5 per 100,000 people, according to data from catering sector research firm Canyan Data. Some 53,000 new stores were opened in the country in the past year, a net increase of 19,500.

China's coffee sector has huge potential. According to a report released by Alibaba Group Holding's research arm AliResearch, the market is expected to exceed CNY1 trillion (USD138.5 billion) by 2025 from CNY381.7 billion (USD53 billion) in 2021.

Starbucks China aims to have 9,000 outlets in the country and raise its employee headcount to more than 90,000 from 60,000 by 2025, Laxman Narasimhan, global chief executive of the US chain, recently told Yicai Global.

China's Luckin Coffee had over 10,000 stores as of the end of last month, compared with 8,214 at the end of last year, thanks to the introduction of secondary franchising.

The cost of opening a franchised store in Beijing is between CNY500,000 and CNY700,000 (USD69,250 and USD96,950), higher than in other cities, the manager of a local Cotti Coffee shop told Yicai Global. The chain, set up by the same founder as Luckin, opened its first cafe last October and already has 4,000.

As the number of cafes increase, so does their proximity to one another. For example, Starbucks and Luckin each opened one in the headquarters building of Chinese brand Manner Coffee.

According to a senior industry source, big coffee chains previously held off from opening stores too close to each other. But now, everyone, even international brands, are opening stores regardless of the location to try to seize as large a market share as possible.

In addition to the faster pace of openings, coffee chains have turned to promotions, including price cuts and new products such as durian latte and avocado coffee. Starbucks, which initially shunned competing directly with emerging brands, has stepped up efforts to launch new products.

But many coffee firms lack research and development teams, so they rely on suppliers and operation service providers for new products. As the third parties aim to promote their own raw materials and do not care about product taste, many new market entries are not very successful.

Price War

Promotional pricing is the sales strategy mainly embraced by emerging coffee brands. Since February, Cotti cut the price of all products to CNY9.90 (USD1.37) per cup in February, and in May that was further lowered to CNY8.80. It offered new customers coffees for just CNY1 throughout last month.

The price war has seriously affected industry leader Starbucks, Luo Xianliang, vice president of consulting firm Ries China, told Yicai Global. On the one hand, Starbucks may lose ground in small cities because of higher prices than competitors, but on the other hand, it may lose its high-end positioning if new products are low-end, Luo noted.

Some coffee brands have tied up with other renowned brands to boost their appeal. For example, Yongpu Coffee joined with liquor maker Wuliangye Yibin to launch a special liquor-infused coffee product.

The partnership will bring brand and product exposure to Yongpu, founder Tie Pi told Yicai Global, adding that although it is difficult for the strategy to boost sales in the short term, Yongpu values the improvement of brand value.

Manner Coffee recently opened a time-limited bookstore with French fashion house Louis Vuitton. Previously, it launched joint products with French high-end skincare brand Helena Rubinstein.

Upstream suppliers and consumers are the ones who will benefit the most from the coffee war.

Affordable prices and the growing number of outlets will accelerate the popularity of coffee consumption in China, Fu Lin, founder of Fangye Cafe, told Yicai Global.

Upstream suppliers will definitely gain a lot, the senior industry source also agreed.

Editors: Tang Shihua, Futura Costaglione