China’s coffee wars may be heating back up with McDonald’s $400 billion investment

The U.S. company plans to open thousands of McCafé stores in its second-largest market

BEIJING — Its meteoric rise, seemingly out of nowhere, made Chinese startup Luckin Coffee one of the most talked-about newcomers ever in the country’s vast beverage market. More notably, it grew so fast, opening thousands of stores across the country, that it seemed Starbucks finally had a serious competitor.

In the span of roughly two years, Luckin LKNCY, -0.20% opened more stores than Starbucks had in its 20-year reign in China, and Luckin’s cut-rate prices had consumers flocking to its grab-and-go locations.

That phase of China’s coffee wars came to a screeching halt, however, when the Chinese government accused Luckin of fabricating hundreds of millions of dollars in revenue and profit, leading to a slew of lawsuits against the company and resulting in its delisting from the Nasdaq.

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Starbucks has since faced more minor competition as Canadian coffee and donut chain Tim Hortons stormed into China last year and is rapidly opening stores selling coffee at a fraction of the premium Starbucks SBUX, -0.15% price point.

‘Our goal is clear: Where there is McDonald’s, there is McCafé.’

— Phyllis Cheung, McDonald’s China

But this week came news of a possible bigger threat to the dominance of Starbucks. McDonald’s MCD, -0.37% announced it will invest 2.5 billion yuan ($380 million) over the next three years to open 3,000 new McCafé stores on top of its existing 1,000. If successful, that would more than double its current number of roughly 3,500 McDonald’s stores, and put it close to leader Starbucks’ 4,700 locations.

“As China’s coffee market grows with speed, consumers will understand more about coffee and fall in love with it,” Phyllis Cheung, CEO of McDonald’s China, said in a statement. “Our goal is clear: Where there is McDonald’s, there is McCafé.”

Nearly 75% of all coffee consumed in China last year was instant, according to London-based research firm Mintel.

McDonald’s said its McCafé expansion will focus on lower coffee prices, deliveries and a selection of new food items. Cheung specifically mentioned the company’s ability to pair quick but hot snacks with drinks sold at McCafés, nearly all of which will be located within McDonald’s stores themselves.

It’s yet to be seen if lower-priced, less premium coffee will be a winning strategy against Starbucks’ higher-end offerings that average roughly 30 yuan ($4.60) per cup. Nearly 75% of coffee consumed in China last year was instant coffee, according to London-based research firm Mintel. Freshly ground coffee, whether at home or in-store, accounted for only 18%, but was the fastest-growing coffee segment and is expected to see continued rapid growth.

Store sales of coffee in China surpassed 42 billion yuan ($6.4 billion) last year, far lower than the U.S.’s comparable figure, but with a faster growth rate of roughly 15% annually, according to Mintel.

The news doesn’t seem to have boosted McDonald’s stock as yet. Its shares slid 0.19% to $215.11 on Thursday, amid an overall positive day for U.S. markets SPX, -0.05%. This was a third straight day of losses for McDonald’s, a weakening that comes a month after it shares hit a 52-week high.

On Wednesday, McDonald’s gave out what it said were 10 million free coffees in more than a dozen Chinese cities.

At a McCafé in central Beijing on Thursday, college student Wang Jian sipped an Americano while eating a sausage-and-egg breakfast sandwich. When asked about his coffee habits, he said, “I like the coffee. It’s fine. But I’m here for this,” he said, holding up his McMuffin before taking another bite.

This article was originally posted on MarketWatch.