- Tencent is a Chinese technology conglomerate founded in 1998
- In 2018, it started investing in coffee companies, including $50m in Luckin Coffee
- The relationship is mutually beneficial, but some worry it could lead to a price war
FOR 20 years, Tencent showed little interest in the coffee industry. The Chinese technology conglomerate was keener to pursue its interests in multimedia and, specifically, the video game industry, of which it is the world’s largest player.
But when, in 2018, Alibaba, a Tencent competitor from Hangzhou, announced a deep, strategic “New Retail” partnership with Starbucks, it opened a frontier that would cost Tencent millions in investments – and go on to irrevocably shape China’s coffee industry.
Over the last five years alone, the conglomerate has invested vast sums in a host of coffee companies: shortly after the announcement of the Alibaba-Starbucks partnership, it dropped $50 million on Luckin Coffee; the following year, it partnered with Tim Hortons; and in 2021, it made Algebraist Coffee one of China’s most talked about coffee chains after ploughing millions into the brand, giving it a market value of more than 1bn yuan.
Tencent Group is known across China for its portfolio of companies, not least the staggeringly popular messaging platform WeChat. But its aggressive movement into the coffee industry has come as a surprise to many, particularly given its supposed lack of knowledge about what makes the sector tick.
However, for others, it is a far more astute decision than at first it seems, as consumers across China look not only for a better cup of coffee, but one that is seamlessly integrated into existing tech.

Partners with benefits
Coffee represents big business in China. In the last decade alone, consumption has soared as an expanding young middle-class demographic has fuelled a shift away from tea to coffee. According to a report by Euromonitor International, the country’s coffee market has grown at an average rate of 16% per year since 2010, with few signs of it slowing.
This has naturally attracted interest from several sectors looking to diversify into coffee. Since 2021, several venture capital firms, including Sequoia Capital, Eastern Bell Capital, and Temasek Holdings have all invested in coffee businesses, while some of China’s largest – and oldest – oil and pharmaceutical companies have also set up their own brands.
Even at the height of the pandemic, some 70 coffee companies were being registered every day, according to the China Coffee Industry Development Report from Ali Research.
However, while many have reaped the rewards, tech giants’ movement into the sector makes more business sense than pharma or oil firms.
For one, the digital ecosystems that have become so valuable to consumer-facing companies are already in place. Alibaba launched its digital wallet and financial services platform, Alipay, in 2004; WeChat, Tencent’s multi-purpose ecommerce platform, has been around since 2011 and boasts more than 1.2 billion monthly active users globally.
On top of this, both conglomerates also have stakes in food and drink delivery firms. Alibaba invested $1.25 billion in Ele.me, the country’s second-largest food delivery platform, in 2015, while Tencent bought a 17% stake in Meituan in 2014.
For coffee companies in China, partnering with the country’s tech giants is clearly an attractive prospect and one that can transform their fortunes. For the likes of Tencent and Alibaba, coffee companies can offer profit margins and future scalability that keep their shareholders happy.
Indeed, when Tencent joined forces with Luckin Coffee, the two immediately set about exploring how big data, mobile apps, AI, and other tech solutions could build Luckin Coffee’s “smart retail” solution.
This collaboration helped augment Luckin’s app capabilities and to develop innovative technologies such as image recognition, facial recognition payments, and AR interaction to offer customers a more immersive and refined consumption experience. Investment in Algebraist Coffee followed a similar logic, only in a different segment: small boutique coffee shops as opposed to Luckin’s fast-paced takeout model.
In the case of Tim Hortons, loyalty has played a key role. In China, coffee has a high repurchase rate, which means increasing the number of loyal consumers is important to maintain strong sales. Tim Hortons (now known as Tims China) reported that 80% of its sales come from its members, with nearly a million registered across China.
Cooperation with tech giants and their digital ecosystems to strengthen membership systems and data analysis is, therefore, a big win for coffee companies.

A price war looms
The impact of Tencent’s investments is already evident in many facets of China’s coffee industry. In particular, the speed at which it has not only integrated technology but grown in tandem with its developments has impressed observers both inside and outside of the country.
“In China, the coffee industry is evolving rapidly, with technology serving as a major driver of growth,” said the CEO of Coffee Box, Ethan Qi, in a recent interview. “From mobile payments to artificial intelligence, it is leveraging technology to enhance the customer experience and drive sales.”
Belinda Wong, the CEO of Starbucks China, also recently hailed the impact that tech giants were having on the sector, suggesting that their involvement had been vital to the Seattle-based company’s achievements in the country.
“The adoption of innovative technologies, such as AI, machine learning, and big data, has enabled us to better understand our customers and tailor our offerings to their preferences,” she said. “This has been a key factor in our success in China’s coffee sector.”
However, not everyone is so excited. Fears that coffee businesses in China, after receiving lots of capital investments, will descend into a price war are strong. Most agree that the market is becoming oversaturated, with Shanghai home to 3.16 coffee shops per 10,000 people – more than New York and London.
There is also a belief that, as the number of coffee shops grows and profit margins fall, tech giants may pull back on cash injections and seek opportunities elsewhere. According to Gene Bochkar, the founder of Bites & Brews restaurants in Shanghai, this is more likely to happen as China’s economy rebounds from the effects of Covid-19.
“When the economy is slow, people tend to get more into lower investment threshold businesses like cafés and restaurants,” he says.
The future, it seems, will rest not solely on those who can leverage technology, but those who can appeal to the increasingly discerning Chinese consumer. After several years of high exposure to coffee, most consumers (61%) can now reportedly tell differences between coffees, while 15.4% say they can fully distinguish flavour notes.
This is an advantage for small boutique and independent coffee shops in China. In 2022, nearly 30% of coffee consumers were willing to have coffee at small coffee shops due to the quality and characteristics of the drinks on offer.
If Tencent – and others like Alibaba – can leverage this fact effectively, they stand a good chance of maintaining high profits and driving the sector forward. The top sectors have made things work up until now – there is no reason the relationship cannot continue.
As one owner of a boutique coffee roaster in Chengdu notes, “Coffee is fashionable. It matches big tech companies’ brands and customers – and, for now, it has good profit margins.”