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Starbucks has a Venti-sized problem in China. Having virtually created the mainland coffee shop market over the past 25 years, the Seattle-based coffee group is no longer the only latte in town.
Competition from foreign and local brands is stiff. China’s economy is slowing and consumers are more cautious. The result: despite investing heavily over the past six years to more than double its store count in the country, Starbucks has lost almost half of its market share.
For Brian Niccol, Starbucks’ newly appointed chief executive and $113mn man, figuring out what to do with China — now the company’s second biggest market — could end up being a bigger challenge than fixing the US business.
Niccol is highly regarded for the turnaround at Chipotle, which was plagued by food safety problems when he first joined. But he has limited experience building businesses outside the US. Chipotle is largely a domestic brand. Its physical footprint of about 3,530 outlets is about half the size of Starbucks’ China operations.
Compared with the US, Starbucks’ problems in China have no obvious fixes. In its most recent quarter, revenue at its 7,306 stores there fell 11 per cent to $733.8mn. Like-for-like sales suffered an even steeper 14 per cent decline. Local rivals — namely Luckin Coffee, resurgent after its high profile accounting scandal in 2020 — are undercutting Starbucks on price and convenience. The price war has been brutal for everyone. Even Luckin, which overtook Starbucks as China’s biggest coffee chain last year, reported a 13 per cent drop in net income for the June quarter.
Starbucks sells itself as a premium product in China. But it already has a high level of penetration in the cities with the highest disposable income. To chase the low-end and mid-end of the market that have powered Luckin’s growth, Starbucks will need to expand in third tier cities. That will be costly.
All this makes the case for cutting back capital spending and slowing expansion plans in China (the company had said it wanted to have 9,000 outlets in the country by the end of 2025). BTIG analyst Peter Saleh reckons Starbucks has invested more than $400mn a year — or 20-25 per cent of the company’s capital spend — to expand in China.
A more radical move would be refranchising the China business, either via a tax-free spin-off or sale to a master franchisee. The move would allow Starbucks to keep some exposure to one of the biggest coffee markets in the world without the capital burden. It would also distance Starbucks from China’s macroeconomics headwinds and political uncertainty.
Taking more drastic action overseas could also buy Niccol time to help Starbucks get its buzz back at home.
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