Summary of Key Points
Leading new tea beverage brands (such as Mixue Ice City, Gu Ming, and Tian Lala) are collectively entering the low-tier city coffee market through cross-industry strategies. They leverage their existing store networks, supply chain advantages, and low-price tactics to capture growth opportunities. This move is driven by the intensifying competition in the new tea beverage sector, with low-tier cities representing the only remaining area for significant expansion. However, this has sparked a price war in the coffee industry, putting traditional coffee brands and smaller players under pressure, extending the payback periods for franchisees, and accelerating market consolidation.
Detailed Analysis
1. Why are new tea beverage brands entering the low-tier city coffee market?
The new tea beverage (milk tea) sector has reached a stage where it’s difficult to acquire new customers: stores in first- and second-tier cities are saturated, and competition in low-tier markets is fierce, leading to stagnant revenue growth per store. Coffee, on the other hand, is seeing rapid growth in these areas. A report by Meituan shows that the number of coffee businesses in county towns has increased by 113% compared to 2022, with order growth rates far exceeding those in larger cities. Analysts estimate that the annual growth rate for low-tier city coffee markets exceeds 25%, making it the only sector still capable of substantial expansion. Additionally, consumers in low-tier cities have developed a habit of drinking coffee; returning youths bring this preference back to their hometowns, and orders for coffee during the Spring Festival have increased by 136%. Students and young professionals have become stable customer groups. Moreover, domestic全自动 coffee machines and locally sourced coffee beans are now affordable, making it profitable to sell coffee even at prices below 10 yuan.
2. How are new tea beverage brands entering the low-tier city coffee market quickly?
Their biggest advantage is the ability to use existing stores without incurring significant initial costs. They simply add coffee machines to their milk tea shops, avoiding high expenses such as rent and renovation. For example, Mixue Ice City’s “Lucky Cafe” has already opened 10,000 stores, and all of Mixue’s own stores will be equipped with coffee machines by the end of 2025. Gu Ming plans to equip over 10,000 of its stores with coffee machines by the same time. Tian Lala expanded from 50 pilot stores in Anhui to 1,000 within four months through subsidies for coffee machines and ingredients. Pricing is also strategic: they sell coffee for 5-9 yuan, targeting the price-sensitive consumers in low-tier cities. These brands already have a local presence, which helps generate initial orders, and they can leverage their milk tea popularity to introduce coffee—using fresh fruit blends that complement the taste of milk tea and attract customers during peak hours when milk tea shops are less busy.
3. Has a price war in low-tier city coffee markets begun?
Yes, with brands like Gu Ming offering 7.9 yuan and 9.9 yuan Americanos, and others reducing prices even further. The cost of producing a cup of affordable brewed coffee (around 6 yuan, though possibly lower for leading brands) plus rent and labor means that these strategies are essentially loss-making for traditional coffee brands. Traditional brands in low-tier cities, such as Luckin and Kudi, face a dilemma: if they don’t reduce prices, they risk losing customers to new entrants; if they do, their profits suffer. In county town shopping centers, these brands are competing fiercely, making it impossible to stop the price war.
4. Who is most affected by this price war?
Smaller coffee brands and franchisees are the hardest hit. New tea beverage brands have a competitive advantage due to their larger scale and lower supply chain costs, allowing them to sustain price cuts. Data shows that the closure rate of coffee businesses in China is 10.3% for 2024-2025, with a higher rate in smaller cities. Franchisees in these areas are facing extended payback periods, increasing the risk of investment losses.
5. What will happen to the low-tier city coffee market in the future?
The market will continue to consolidate, with survival depending on comprehensive strength. The entry of new tea beverage brands has indeed increased access to brewed coffee among residents in lower-income areas, but short-term imbalances (too rapid expansion versus limited demand) are causing price competition and profitability pressures. In the long run, only the strongest brands—those with lower supply chain costs, stronger brand recognition, and products that cater to local tastes—will survive. Smaller brands will either be eliminated or need to find niche markets.
In summary, the entry of new tea beverage brands into the low-tier city coffee market is a natural trend that will lead to market consolidation. While it may provide consumers with cheaper coffee options in the short term, prices are likely to stabilize as the market matures. Franchisees entering this space should choose established and capable brands wisely.