Shrinking stores, expanding shelves: COSTA’s struggle to stay relevant in China

by Lu Yibei

COSTA Coffee has been quietly closing stores across China, reflecting its struggles in a competitive coffee market.

In Shenzhen, only the Ali Center location remains, while previously prominent outlets near major business districts, such as the Tencent Binhai Building, have shut down. Nationwide, COSTA's store count dropped from 453 in 2023 to 389 as of November 2024, marking the closure of 64 stores this year alone.

COSTA entered China in 2006, once competing closely with Starbucks by establishing locations in similar business districts. However, while Starbucks has continued to expand aggressively, COSTA’s growth has stagnated. Its store count has hovered around 400 since 2017.

Coca-Cola’s $5.1 billion acquisition of COSTA in 2018 brought hopes for expansion, but those expectations have largely gone unmet. In 2022, COSTA announced plans to reach 1,000 stores by 2025—a goal that now appears increasingly unrealistic.

In November 2024, COSTA appointed Lu Longhai as general manager of its China retail business. Formerly head of Haagen-Dazs China, Lu is credited with successful brand rejuvenation and digitalization initiatives. His task at COSTA is equally challenging, requiring product innovation, enhanced site selection, and refreshed store designs to revitalize the brand.

COSTA’s challenges are compounded by a surge in local Chinese coffee chains, which have aggressively expanded through financing. Competitors have diversified their offerings and adopted lower price points, while COSTA and Pacific Coffee have remained focused on a more premium market segment, with average prices above 35 yuan, limiting their appeal.

COSTA and Pacific Coffee, as established players in the market, have stuck to a traditional branding approach, offering little in terms of innovation, unique experiences, or co-branding campaigns, making them increasingly overlooked in a market teeming with fresh and dynamic options.

While store operations have struggled, COSTA has found success in the ready-to-drink market. Coca-Cola’s distribution network has helped the brand enter over 100,000 retail outlets in China, offering products such as instant coffee, drip coffee, and light milk tea. Coca-Cola’s 2023 Q3 report highlighted a 6% global coffee sales increase, driven by COSTA’s performance in the UK and China.

While COSTA has found success in its ready-to-drink segment, the ongoing closure of physical stores poses a risk to its brand equity and visibility in China. To sustain momentum, the company will need to revitalize its retail strategy, as reliance on packaged products alone may not ensure long-term stability in a highly competitive market.