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Starbucks was once the undisputed king of coffee in China. Having opened its first branch in the country in 1999, the company used its first-mover advantage to build and dominate a thriving coffee scene. More than two decades on, it is no longer the only caffeinated beverage game in town. Time to pack up its beans and focus efforts elsewhere.
Local and other foreign chains such as Luckin and Cotti Coffee have caught up with the Seattle-based caffeine-peddler. Starbucks’ revenue from China stalled at about $3bn three years ago and has barely moved. Worse, its share of the country’s $22bn-a-year coffee market has fallen precipitously, from a peak of 42 per cent in 2017 to 14 per cent last year, despite investing heavily to more than double its store count.
The result is a lot of branches, and not as much to show for them. Analysts at Bernstein reckon that while Starbucks’ 7,758 stores in China make up about a fifth of its total locations, they account for only 9 per cent of total revenue and 7 per cent of group operating profit.
Starbucks is now exploring bringing in a partner or selling a stake in its China business. That’s a path others have trodden, too. McDonald’s sold a majority stake in its China and Hong Kong operations to investors including Citic and Carlyle back in 2017. A year earlier, Yum! Brands, the owner of KFC and Pizza Hut, sold a minority stake in its China business to Primavera Capital and Ant Financial Services before spinning the unit off into a separate listed publicly traded company.
Going big on China was a bet that consumers there would behave increasingly like Americans. But now, the differences are growing, even as new CEO Brian Niccol is trying to turn around Starbuck’s US business. Back home, the problem is an overcomplicated menu. In China, it is the opposite. Competitors — including bubble tea chains such as ChaGee and Heytea — are coming out with cheap, new drinks every week, making Starbucks’ offerings seem staid and expensive.
Rivals also have an edge when it comes to using automation and technology to give Chinese consumers what they want: good, low-priced drinks that are made and delivered quickly. Starbucks’ efforts to cater to local tastes have also resulted in some flops — including a $9 pork flavour latte.
How much could Starbucks’ China business be worth? Yum! China and Luckin Coffee trade at an enterprise value of just under two times their forecast sales, according to S&P Global Market Intelligence. Starbucks China’s weak revenue growth and pressured profitability probably deserve less. But even at that multiple, the business would be worth just $6bn. That’s tiny for a company with a market capitalisation of more than $100bn. All the more reason to start the process of cutting it loose, so Niccol can focus his attention elsewhere.
