China's largest coffee chain slipped into same-store sales contraction in the first quarter, as the country's top takeout dining delivery companies eased a subsidy war that had boosted sales

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Key Takeaways:

  • Luckin's revenue rose 35% in the first quarter, driven by a 39% year-on-year rise in its store count to 33,596 shops at the end of March
  • The chain's average monthly transacting customers rose 25% in the quarter, far slower than its revenue growth, indicating it is having difficulty retaining customers

Call it a coffee hangover. That was the story for Luckin Coffee Inc. (OTC:LKNCY) in the first quarter, as China's leading coffee chain slipped into same-store sales contraction during the three-month period after reporting strong gains for that metric for most of last year.

In this case, the culprit behind the slowdown was unrelated to Luckin's own operations, and instead was the result of changes in a subsidy war that charged up China's takeout dining market for much of last year. That war saw e-commerce giant JD.com (NASDAQ:JD) enter the takeout dining market, while Ele.me, one of the two major existing players, underwent a big overhaul that included a major cash infusion from Alibaba, China's leading e-commerce company. The third major player, online-to-offline services leader Meituan, was forced to follow suit by offering its own major subsidies to hold on to its market share.

While those subsidy wars hit the food delivery companies, sending Meituan into the red, they were a boon to food and beverage operators whose business surged as consumers took advantage of bargains. Within the coffee and adjacent bubble tea sectors, consumers often used subsidies to get their drinks delivered for just pennies or sometimes for free.

The whole phenomenon of ordering such drinks for delivery is relatively unique to China compared with the West, where people tend to personally pick up their products at stores and either consume them on the premises, or grab them and go. Chinese, by comparison, often order a cup of coffee costing just 20 yuan, or about $3, for delivery. The local economics allow for that, since delivery costs are usually negligible, there's no tipping and many consumers don't seem to care if the product arrives lukewarm.

But all good things must end, which is now happening in China, as the three big delivery companies finally scale back their subsidies after repeated prodding by local regulators and also some desire to stem their own losses. As that happened, Luckin reported same-store sales for its self-operated stores fell 0.1% in the first quarter. The dip into contraction territory wasn't completely unexpected, as same-store sales growth already dropped to just 1.3% in the fourth quarter of last year, ending a streak of double-digit gains for the two previous quarters.

"In the following quarters, as we move into the comparison period impacted by last year's elevated delivery subsidies, our same-store sales may face some short-term volatility," CEO Guo Jinyi said on the company's earnings call.

The same-store sales decline capped a quarter for Luckin that included slowing customer stickiness and eroding margins as it continued its breakneck expansion amid intense competition in China's coffee market. The company opened 2,548 new stores during the quarter, increasing its overall footprint by 39.4% to 33,596 by the end of March.

Its performance diverged from top rival Starbucks (NASDAQ:SBUX), which last week reported its China same-store sales rose 0.5% in the first quarter. Starbucks reported 8% year-on-year revenue growth in the market during the quarter, faster than its far more cautious 3% store count growth, as it ended the three-month period with 7,991 stores.

Investors applaud

As we previously noted, the slip into negative same-store sales growth was probably expected as delivery subsidies subsided, and pressure on that metric for the rest of this year was also probably expected as well. At the same time, Luckin expressed a vote of confidence in itself by unveiling an aggressive $500 million share buyback program, its first ever, equal to about 5% of its current market cap of about $10 billion.

Investors applauded the overall report, sparking a rally that saw Luckin's shares jump 16% last Wednesday after the results announcement. That helped to lift the stock back into positive territory for the year, up 5.5% since the start of 2026. The stock currently trades at a fairly strong price-to-earnings (P/E) ratio of about 21, ahead of the 16 for Mixue (2097.HK), China's leading seller of bubble tea that had an even bigger 60,000 stores worldwide at the end of last year.

China's coffee market is huge, but has also become incredibly competitive, especially at the lower end, where Luckin competes with names like Manner Coffee, Cotti and even KFC and McDonald's (NYSE:MCD), which sell their products for as little as 10 yuan per cup. That group were stealing market share from the higher-end Starbucks, which in February sold 60% of its China operation to local private equity giant Boyu Capital it a bid to revive its local business.

Starbucks is currently contemplating its next steps in China, which quite possibly could include more efforts to grab some share at the lower end of the market where Luckin is king. That lower end of the market was a bright spot for Luckin in the first quarter, where the company mostly uses franchise partners rather than the self-operated stores it uses in big cities.

The company reported that revenue from its franchised business rose about 45% in the first quarter year-on-year to 3.02 billion yuan ($442 million). That was far faster than the 35% overall revenue growth the company reported for the period, which rose to about 12 billion yuan. The overall figure was dragged down by the 33% revenue growth for the company's self-operated stores that account for about two-thirds of its total.

The company's monthly transacting customers rose 25%, far slower than its revenue growth, which seems to show its having difficulty retaining customers at the same rate that it's growing. Its store-level operating margin has also been coming down steadily, standing at 13.6% in the first quarter from 17.0% a year earlier, reflecting the difficulty it is facing finding new locations in the oversaturated market.

On the bottom line, the company's profit fell 3.4% year-on-year to 506 million yuan in the latest quarter, though its non-GAAP profit, which excludes stock-based employee compensation, rose 6% to 687 million yuan. The bottom line for the company looks generally positive at this point, as it can generally leverage its position as the clear market leader to beat its rivals. But the loss of subsidies from the takeout dining wars, combined with intense competition that's likely to continue for at least the next year or two, will keep pressuring the company's margins and could ultimately force it to slow its breakneck expansion.

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