On the surface, at least, a new Hong Kong IPO application last week from Gemilai Holdings Ltd. looks quite attractive, including hot-roasted expansion for China’s largest homegrown espresso machine maker. But beneath the impressive story, headlined by 44% revenue growth and a fivefold profit increase last year, are a host of warning signals coming from a Chinese economy and coffee market both showing signs of overheating.
On the commercial side, China’s coffee shop sector is becoming quite saturated, despite a shockingly low penetration of coffee drinking in this traditionally tea-oriented culture. The landscape is currently dominated by big names like Luckin and Starbucks, which had 29,000 and 8,000 stores in China as of last September, respectively. But the space is also crowded with a host of second-tier names like Manner and Cotti, not to mention standalone cafes that pop up like weeds in big cities like Shanghai.
On the consumer side, China’s rapid economic slowdown is resulting in growing consumer caution. That means that while consumers still have to eat and drink, many are opting out of some of life’s smaller luxuries by dining out less and spending less on more discretionary items like a home espresso maker.