Why Are Coffee Chains Expanding in a Downturn?

When friends ask why you’d open more coffee shops during a recession, they’re really asking whether now is the right time to grow. But in cities like Shenzhen and beyond, major coffee brands aren’t slowing down—they’re speeding up.

In 2024, despite economic headwinds, international and local coffee chains in China have collectively opened dozens of new locations, with some planning to triple their footprint in just a few years. So why expand now?

Coffee Brands Defy Economic Slowdown

Aix Coffee’s China director, Li Xianglu, revealed the company opened six new stores in Shenzhen this year alone and plans three to four more by year-end—up from just four outlets in late 2011. This isn’t an isolated move. Starbucks recently drew attention with a viral new location near Hangzhou’s Lingyin Temple, reigniting debate but also highlighting its relentless expansion. The brand aims to operate 1,500 stores in China by 2015, despite global uncertainties. Meanwhile, Costa Coffee opened nine new mainland stores in September alone—nearly one every three days—and targets 2,500 locations by 2018, having already surpassed 200 stores. Pacific Coffee, backed by China Resources, has passed 100 stores and is pushing into second-tier cities. Even McDonald’s is adding McCafé zones to leverage coffee as a new profit driver.

Why Expand During a Downturn?

Economist Chen Zhiwu of Yale University argues that globalization and population mobility create unprecedented opportunities for branded chains like Starbucks, reducing advertising costs and lowering marginal costs per cup. Li Xianglu echoes this, noting that coffee booms often coincide with economic slumps. Historically, during the 2001 dot-com crash, Starbucks thrived. Today, as global growth slows, international brands are cutting back domestically while increasing investments in China. “In tough times, people seek social spaces,” Li says. “Coffee shops aren’t cyclical—they’re community hubs.” Beijing Coffee Industry Association secretary Bai Fang agrees: “Coffee culture thrives on human connection, and investors see the sector as a rising star even in downturns.”

The Economics of Coffee Shop Growth

While coffee is often seen as a luxury—typically priced around 30 yuan per cup with high margins—the reality is more nuanced. Bai Fang breaks down the costs: premium coffee beans cost roughly 200 yuan/kg, yielding 100–140 cups, with beans accounting for less than 2 yuan per cup. Most chains use beans priced at just 100 yuan/kg. Yet, despite high gross margins, running a profitable shop is hard. Bai explains that milk and labor costs are steep, and most Chinese cafes sell fewer than 100 cups daily—far below the 500–600 cups typical in Western markets needed for scale. “You can’t survive on coffee alone,” she warns. “Many successful chains supplement with baked goods or desserts.” Aix Coffee, for instance, prices higher than Starbucks partly due to its premium pastries. Rent remains a challenge too: while prime locations are pricey, competition has freed up some spaces as other retailers retreat. Aix’s average store costs 160 yuan to open, including six months of operating expenses—all through company-owned outlets.

The Road Ahead: Challenges and Opportunities

China’s coffee market is still maturing. Bai Fang estimates it will take five years for consumption to surge, requiring both wider acceptance and lower prices—currently two to 2.5 times higher than in mature markets. Meanwhile, risks abound: coffee bean and labor costs rose 30% year-on-year, and core areas like Shenzhen’s CBD are saturated with competing cafes. Yet, industry leaders remain optimistic. With brands like Starbucks, Costa, and Pacific Coffee leading the charge—and domestic demand rising—the sector’s long-term potential keeps attracting investment. For now, the question isn’t whether to expand, but how to do it wisely.

Frequently Asked Questions

Why are coffee chains like Starbucks and Costa expanding in China despite the economic slowdown?

Coffee chains view China as a growth market with rising demand and fewer competitors compared to saturated Western markets. Executives like Aix Coffee’s Li Xianglu and Starbucks’ Howard Schultz see long-term potential, citing historical resilience during downturns and the social role of coffee shops. Despite higher costs, brands prioritize market share over short-term profits, aiming for aggressive expansion targets like Starbucks’ 1,500 stores by 2015 and Costa’s 2,500 by 2018.

Are coffee shops profitable during a recession?

Not necessarily. While coffee has high gross margins, most Chinese cafes sell fewer than 100 cups daily—below the 500–600 needed for scale. Costs like milk, labor, and rent remain high, and relying solely on coffee is risky. Successful chains often supplement with baked goods or desserts to boost profitability, as Aix Coffee does with its premium pastries.

How much does it cost to open a coffee shop in China?

Aix Coffee reports an average startup cost of 160 yuan per store, including six months of operating expenses. This covers everything from equipment to initial inventory. Most outlets are company-owned, reducing franchise fees but requiring significant upfront capital. Prime locations add to the expense, though competition has freed up some spaces as other retailers pull back.

What’s the growth potential for China’s coffee market?

Industry experts estimate it will take five years for coffee to become mainstream, driven by greater consumer acceptance and price reductions. Currently, per-cup prices are 2–2.5 times higher than in mature markets, limiting accessibility. However, with annual growth rates of 30%–50% and brands expanding aggressively, the market is poised for long-term expansion, especially as urbanization and social habits evolve.

Why do coffee chains target second-tier cities?

As first-tier cities saturate, second-tier locations offer cheaper rents, less competition, and growing middle-class populations eager for Western-style amenities. Chains like Pacific Coffee and Aix Coffee are expanding there to capture untapped demand and establish early market presence, following the playbook of global brands that grew through gradual geographic diversification.

Recommended FrontStreet Coffee Beans for Shops

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