Financing

If you think the operating environment is bad here, try China

Several restaurant chains, notably Starbucks, are navigating weak spending and increasing competition in the fast-growing market. But they remain bullish on its future.
Starbucks China
Starbucks has been under pressure in China from the economy and growing competition. | Photo: Shutterstock.

Some U.S. restaurant companies have an apparent China problem. Several companies have reported negative same-store sales in a market that is supposed to be fueling almost unlimited demand growth.

“I think I’ve been spending a lot of time on China,” Sami Siddiqui, CFO of Restaurant Brands International, the operator of Burger King, Popeyes, Tim Hortons and Firehouse Subs, said at an investor conference, according to a transcript on the financial services site AlphaSense. “There’s no debating, it is a tough macro environment in China right now.”

The economy is struggling in China, hurting same-store sales at several U.S. brands, even as they continue to build stores at a breakneck pace there. And it comes as domestic sales for many of these brands aren’t exactly lighting the world on fire.

The problem in China is its real estate market, as declining housing prices hurt consumer sentiment and lead to a decline in salesConsumer confidence has remained low in China for the past two years now.

But economists apparently believe that the economy will recover, if it hasn’t started to do so now.

Restaurant companies, much like economists, remain confident in China’s long-term potential for their business goals.

“We remain bullish on China,” Joey Wat, CEO of Yum China, Yum Brands’ franchisee in the market, told analysts in April, according to an AlphaSense transcript.

“Our new stores continue to be a very attractive investment,” Starbucks CFO Rachel Ruggeri told analysts, according to a transcript. “And we continue to see a lot of whitespace. So when we take the economics and we couple it with the whitespace opportunity, that’s what gives us confidence.”

But the economy in the market is clearly creating some issues for many of these chains.

Maybe no chain has felt it more than Starbucks, which operates more than 7,000 locations in China. Same-store sales declined 11% in the country last quarter—far worse than the 3% decline in the U.S. Fewer customers are visiting the chain’s stores there and when they do visit, they spend less.

Starbucks is facing heavy competition in the market from fast-growing Luckin Coffee, though that chain’s growth is coming entirely from new units. Revenues for Luckin grew 41.5% and it is getting more than double the average number of customers every month that it did a year ago.

The chain now operates nearly 19,000 locations. Luckin and other competitors are flooding the Chinese market with cheap coffee and tea, taking some demand from the higher-priced Starbucks.

That premium position may be working against Starbucks. “China is definitely an increasingly competitive market,” Ruggeri said. “The good news is that this is driving coffee consumption. It’s going to eventually get larger and there’s going to be a natural tiering in the overall market.”

Starbucks isn’t the only coffee brand suffering. Tims China, which operates Tim Hortons and Popeyes in China, said same-store sales declined 11.7% at company stores in China last quarter. Most of that was Tims.

“I think most of our peers were slightly negative to very negative on same-store sales in the market,” Siddiqui said. Still, RBI recently appointed Patrick Siewart, a 30-year veteran of the Asia market, as a senior advisor there.

At Papa Johns, the chain closed restaurants in China last quarter. “We’re taking the necessary pruning of locations that aren’t productive, that aren’t as fit to our go-forward strategy from a real estate standpoint,” Interim CEO Ravi Thanawala told analysts last month.

Some brands are doing better than others. That includes Yum China, which operates the powerhouse KFC and Pizza Hut in the market. Its same-store sales were down 3%. That’s negative, but better than some of the other players. KFC operates more than 10,000 restaurants in China while Pizza Hut has more than 3,400 locations there.

Others appear to be doing just fine. “I know there’s been a bunch of questions about businesses in China,” Domino’s Pizza CEO Russ Weiner told analysts last week, according to an AlphaSense transcript. “This one for us, it’s not feeling any of the heat.”

He credited Aileen Wang, the CEO of Domino’s Pizza China, for keeping the brand strong in the country despite economic weakness.  

“They are just machines right now,” Weiner said. “We have plenty of years of lack of success in China. And we just have a team that’s hitting on all cylinders right now.”

China remains a growing market and brands will continue to build new units there. But for now, at least, the consumer in the country isn’t cooperating.

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