Starbucks on the slide in China?

Key Points

  • China is the second most important market (19% of all stores) for Starbucks, only behind the US
  • During Q4 2021, Starbucks’s China store sales are showing a decrease of 7%.
  • Increased direct competition could pose potential threats to Starbuck’s market share in China

Is Starbucks losing its stronghold in China?

During Q4, Starbucks saw a decline in its sales as it missed its own targets in China. Whilst they have been quick to blame COVID, they were also quick to revise their comparable sales to growing 18-20% in China, down from a previous range of 27-32%. In this article we attempt to look at some other drivers behind this trend.            

1. History

In 1999, Starbucks opened their first store in Beijing. Since then, they have opened 5,100 stores in 200 different cities within China. In the 1990s, foreign-owned companies were not allowed in the retail and F&B sectors in China, so Starbucks entered the market by collaborating with local enterprises.

Starbucks had 3 partners to start with:

  • Beijing Meida Coffee Limited had the rights in Northern China.
  • Taiwan Uni-President Enterprises had the rights in Suzhou, Zhejiang and Shanghai.
  • Hongkong Maximโ€™s Caterers Limited had the rights in Southern China.

Starbucks initially went profitless for its first 9 years within China, before turning larger profits off the back of the rising middle class and the influx of multinational companies.

2. Competition

During the recent years, Starbucks has seen increasing competition from both domestic and international chains. Starbuckโ€™s commanding market share previously came from 1) being affordably priced while maintaining its quality; 2) its large brand recognition. However, the competitive landscape in the coffee industry is rapidly changing as more chains that focus on either being cost-effective (Manner) or quality oriented (Lavazza) are appearing.

Source: ไธญๅ›ฝ็Žฐ็ฃจๅ’–ๅ•ก่กŒไธš็™ฝ็šฎไนฆ (Deloitte whitepaper on the coffee industry in China)

Overall there seems to be a general trend sliding towards boundaries of each spectrum, away from large chain brands.

3. Where is the damage coming from?

  1. COVID restrictions and the resurgence of the delta variant

Starbucks themselves have attributed the decline to the effects of COVID restrictions and the delta variant, despite the minimal number of full lockdowns. Consumers are clearly still being cautious, shown by the 25% reduction in spending during a recent national holiday compared to pre-pandemic levels, according to government data. This stunt in growth has been seen across the coffee industry and is not just unique to Starbucks in China.

2. Change in type of demand

Within China, not only has the competition for Starbucks increased, but the type of demand has also changed. As the lifestyles of many Chinese people evolve, coffee drinking has become more of a daily fix rather than a casual luxury. As a result, larger global chains that provide more expensive mid-to-high end coffee (such as Starbucks) are losing market share to cheaper alternatives. This is especially true among the younger generation, who tend to opt for domestic competitors that can match Starbuckโ€™s quality while offering a discount. (e.g. Manner).

Source: ไธญๅ›ฝ็Žฐ็ฃจๅ’–ๅ•ก่กŒไธš็™ฝ็šฎไนฆ (Deloitte whitepaper on the coffee industry in China)

3. Lack of market penetration

In general, Starbucks has seen its efforts to make substantial inroads into the larger general market slowed. There is a clear struggle to penetrate the market in 2nd, and 3rd tier cities, as seen by the slowing growth of new branches in these cities. In particular, small-to-midsize chains are grabbing substantial market share in these regions. The graph below indicates new stores in each region.

4. Social Media exposure reduction

Starbucks has been losing social media traction in China rapidly, with the 90-day figures being quite startling. They are not only just losing out on market share in terms of sales, but also in terms of volume on Chinaโ€™s most popular search engines.

Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha is not liable for any losses that may arise from relying on information provided.

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