Starbucks China brewing more growth opportunities in lower-tier cities

Starbucks China delivered solid results for the first quarter of fiscal year 2026, reporting 7 percent growth in comparable store sales and an 11 percent year-on-year increase in total revenue, which reached $823.4 million.

The coffee giant's robust performance in the Chinese market was powered by its product innovation, effective marketing and the continued growth of its delivery services, according to Cathy Smith, chief financial officer of Starbucks, during the company's earnings call on Wednesday.

This marks the third consecutive quarter of positive comparable sales growth, highlighting Starbucks' strengthened competitive position in one of its largest and most dynamic markets.

"The Chinese market remains a standout, reflecting our ongoing progress in solidifying our position as the leading premium coffee brand in the region," said Brian Niccol, chairman and CEO of Starbucks, during the earnings call.

In the first quarter, Starbucks China's comparable transactions grew by 5 percent, while the average ticket increased by 2 percent. The growth was driven by strong performance in business district locations, breakfast hours and the brand's expanding footprint in lower-tier cities.

"This double growth in transactions and average ticket indicates that consumer demand remains evident," said Jason Yu, general manager of CTR Market Research. "Additionally, product flavor innovation and successful IP collaborations have further enhanced the brand's appeal."

As Starbucks continues to tap into evolving consumer preferences, the brand has kept its product offerings fresh and relevant, especially during the winter festival season. The relaunch of the Toffee Nut beverage series, the introduction of sugar-free options, and the growing number of brand collaborations have all contributed to the company's success.

One of the standout initiatives was Starbucks' high-profile partnership with the Harry Potter franchise. The collaboration transformed 38 stores into "Hogwarts Starbucks Branches". These themed locations offered limited-edition beverages, exclusive merchandise and immersive experiences, drawing in thousands of fans and creating a wave of nostalgia. In just one week, 194,000 magical wands were distributed to customers.

Starbucks has also expanded its customer engagement efforts, particularly through joint membership programs with partners like Hilton Group, China Eastern Airlines and Atour Group. These collaborations offer members a wider range of benefits and experiences that go beyond the coffee cup, Starbucks said.

The company's store expansion strategy is also paying off. In Q1, Starbucks opened stores in 13 new county-level cities, bringing the total to 8,011 stores across 1,103 county-level cities in China, a 4 percent increase from the previous year. Over half of these new locations are in lower-tier cities or specialized business districts, where sales performance has consistently exceeded expectations.

Meanwhile, Starbucks' main competitor in the Chinese market, Luckin Coffee, is also expanding rapidly. The company recently signed a strategic agreement with Ccoop Group, a retail operator with a strong presence in lower-tier cities, to extend its footprint into county-level and rural markets. This partnership is expected to leverage regional strengths while combining Luckin's operational expertise with Ccoop's extensive retail network.

In November, Starbucks formed a joint venture with Boyu Capital to accelerate store growth and extend its reach into more cities. Under the agreement, Boyu will acquire a 60 percent stake in Starbucks' retail operations in China, while Starbucks retains a 40 percent interest. The deal is expected to close in spring 2026, subject to regulatory approval. Afterward, Starbucks plans to convert its 8,011 company-operated stores into licensed outlets under its international segment.

"This partnership with Boyu will allow us to further expand into new cities, offer exceptional coffee experiences, create new career opportunities, and reinforce our long-term position as a global leader," said CEO Brian Niccol.

The competitive landscape in China's on-premise coffee chain market is intensifying. Domestic competitors like Nowwa Coffee, which recently raised billions in series C funding, are rapidly expanding. With a focus on "healthy coffee" and a self-established supply chain, Nowwa Coffee is continuing its domestic expansion and is also targeting international markets such as Australia and Southeast Asia.