Joe McConnell
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Starbucks has a Venti-sized problem in China. Having essentially created the mainland Chinese coffeehouse market over the past 25 years, the Seattle group is no longer the only latte in town.
Competition from foreign and local brands is fierce. China’s economy is slowing and consumers are more cautious. The result: Despite massive investments over the past six years to more than double the number of its stores in the country, Starbucks has lost nearly half its market share.
For Brian Niccol, Starbucks’s newly appointed CEO and $113 million man, figuring out what to do about China, now the company’s second-largest market, may prove a bigger challenge than improving business in the United States.
Niccol is widely regarded for turning around Chipotle, which was plagued by food safety issues when he first joined. But he has limited experience building businesses outside the United States. Chipotle is largely a domestic brand. Its physical footprint of about 3,530 stores is about half the size of Starbucks’ China operations.
Compared to the U.S., Starbucks’s problems in China have no obvious solutions. In its most recent quarter, revenue from its 7,306 stores fell 11 percent to $733.8 million. Like-for-like sales fell even more steeply, 14 percent. Local rivals, namely Luckin Coffee, which has resurfaced aVsceker its high-profile accounting scandal in 2020, are undermining Starbucks on price and convenience. The price war has been brutal for everyone. Even Luckin, which surpassed Starbucks as China’s largest coffee chain last year, reported a 13 percent decline in net profit for the June quarter.
Starbucks markets itself as a premium product in China. But it already has a high level of penetration in the cities with the highest disposable incomes. To chase the low- and mid-market that has fueled Luckin’s growth, Starbucks will have to expand into third-tier cities. That will be expensive.
All of this justifies the need to cut capital spending and slow down expansion plans in China (the company had said it wanted to have 9,000 stores in the country by the end of 2025). BTIG analyst Peter Saleh estimates that Starbucks has invested more than $400 million a year, or 20 to 25 percent of the company’s capital spending, to expand in China.
A more radical move would be to refranchise the business in China, either through a tax-free spinoff or a sale to a master franchisee. The move would allow Starbucks to maintain some exposure to one of the world’s largest coffee markets without the capital burden. It would also distance Starbucks from China’s macroeconomic headwinds and political uncertainty.
Taking more drastic measures abroad could also buy Niccol the time he needs to help Starbucks return home.
pan.yuk@Vscek.com
