Why Coffee Shops Keep Expanding Despite Economic Slowdown

When the economy slows, people still need a place to think—or talk business. In China’s slowing markets, coffee shops aren’t closing up shop. Instead, brands like Starbucks, COSTA, and smaller players such as (Alex Coffee) are opening stores at record pace, especially in second-tier cities. But why invest in bricks-and-mortar cafés when consumers are tightening belts?

Despite rising costs and competitive pressure, coffee shop openings are accelerating: Starbucks aims for 1,500 stores in China by 2015; COSTA plans 2,500 by 2018; and Alex Coffee alone opened six new outlets in Shenzhen this year. The quick answer? Coffee isn’t just a drink—it’s become a social and economic anchor.

Coffee Chains Bet Big on China’s Second Cities

While global markets waver, international coffee brands see opportunity in China. In September alone, COSTA opened nine new stores on the mainland—nearly one every three days. The UK-based chain has set an ambitious goal of 2,500 stores by 2018 and is gunning for a third of the Chinese market. Its Asia president declared: “Take down Starbucks or go home.”

Starbucks, meanwhile, plans to hit 1,500 stores in China by 2015, up from around 230 in 2011, despite slower U.S. growth. The company’s CEO has called China its key growth driver. Not to be left out, Pacific Coffee (backed by Hong Kong’s China Resources Enterprise) has surpassed 100 stores and is pushing into second-tier cities. Even McDonald’s is adding “McCafé” corners to leverage coffee as a profit center.

Even lesser-known brands like Alex Coffee are expanding. “We opened six new stores in Shenzhen this year and plan three to four more by year-end,” says Alex Coffee China chief Li Xianglu. One new location is in Shenzhen’s Huaqiangbei electronics district—a move some find counterintuitive, but Li argues it’s about creating demand, not just following it.

Why Coffee Shops Thrive When Economies Slow

Economic downturns don’t always mean doom for cafés. “In 2001, during the dot-com bust, Starbucks saw rising sales,” notes Yale economist Chen Zhiwu. “The same pattern often holds true: coffee shops offer affordable luxury and social space when times are tough.”

Li Xianglu agrees: “People still want places to meet, talk, or work. Coffee shops aren’t cyclical—they’re community hubs.” Beijing Coffee Industry Association secretary Bai Fang adds that coffee culture thrives on human connection—brainstorming, dating, networking—all of which intensify in slower economies. Investors also see coffee as a sunrise industry compared to struggling sectors.

The High Costs of Going Indie

But running a successful coffee shop isn’t easy. While a single cup can have high gross margins, most cafés struggle to turn a profit. “The average standalone café sells fewer than 100 cups daily,” says Bai Fang. “In Europe or the U.S., that number is 500–600, enabling economies of scale.”

Here’s the math: high-quality coffee beans cost just ¥1–2 per cup (using ¥200/kg beans yielding 100–140 cups). But milk, labor, rent, and utilities pile up. Alex Coffee’s Li notes that while prime-location rents remain high, competition has freed up some spaces. Yet even with lower competition, average startup costs for a new Alex Coffee store are ¥1.6 million—including six months of operating expenses.

“Most independents focus only on coffee and fail to cover costs,” Bai warns. “Successful chains add pastries or cakes—items with higher margins—to subsidize brewing.” Alex Coffee, for example, prices above Starbucks partly due to premium baked goods. She adds that hybrid models like “coffee + bakery” or “coffee + light meals” have historically helped build local coffee habits.

The Road to Affordable Coffee

China’s coffee market is still young. “Annual growth is 30–50%, but per-capita consumption remains low,” says Pacific Coffee CEO Tang Guojiang. The country has over 1 million acres of coffee farms, mainly in Yunnan—known for its small Yunnan Arabica beans—but most coffee remains expensive, averaging ¥30 per cup, or 2–2.5× the price in mature overseas markets.

Bai Fang predicts it’ll take five more years for coffee to become mainstream: “Two things must change: consumer acceptance and price. Right now, coffee is still a luxury.” Until then, chains are betting on scale and ancillary sales to offset high costs. But even giants face risks: coffee bean and sugar prices rose 30% in 2014, and prime locations are getting crowded. In Shenzhen’s Futian CBD, one building hosts four similar cafés.

“Some areas are over-saturated,” admits Li Xianglu. “But overall, we’re optimistic.” Bai Fang agrees big brands can absorb losses during market development, but cautions individuals against opening unsupported cafés: “Without professional planning, most fail. Running a café takes 101% effort.”

Frequently Asked Questions

Why are coffee chains expanding in China despite the economic slowdown?

Coffee shops offer affordable luxury and social spaces, which become more valuable during downturns. Chains like Starbucks and COSTA see long-term growth potential in China, where annual coffee shop growth rates range from 30% to 50%, and view expansion as a strategic investment despite short-term economic pressures.

How many coffee shops does Starbucks plan to open in China by 2015?

Starbucks plans to have 1,500 stores in China by 2015, up from approximately 230 in 2011, focusing on urban expansion as part of its strategy to offset slower growth in the United States.

What is COSTA’s target number of stores in China and by when?

COSTA aims to open 2,500 stores in China by 2018 and is targeting one-third of the Chinese coffee market, opening nearly one new store every three days in some months to accelerate growth.

Why is it hard for independent coffee shops to make a profit?

Most independent cafés sell fewer than 100 cups per day, below the 500–600 cup daily average needed for economies of scale in Western markets. High costs for rent, labor, milk, and utilities, combined with a lack of supplementary high-margin sales items, make profitability difficult without additional product lines like pastries.

How much does it cost on average to open a new Alex Coffee location?

The average startup cost for a new Alex Coffee store is ¥1.6 million, including six months of operational expenses, even though prime commercial rents remain high in many areas.

Will coffee ever become an everyday drink in China?

Experts predict it will take at least five more years for coffee to become mainstream in China. This depends on increased consumer acceptance and a significant reduction in price, as current prices are 2–2.5 times higher than in mature coffee markets overseas.

Recommended FrontStreet Beans for Café Use

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