Starbucks’ sales challenges last quarter weren’t limited to its domestic locations.
The Seattle-based coffee shop chain on Tuesday said that its sales in China were not recovering as strongly as the company had expected. The company lowered its expectations for same-store sales this year to the “low single digits” from the 4% to 6% it had projected.
“We experienced a slower-than-expected recovery in China, driven by a more cautious consumer,” CEO Laxman Narasimhan told analysts on Tuesday.
But there was something else at work, too. China is turning into a more competitive coffee market. “The market is going through a transition as we see an increase in mass market competitors, which we believe will shake out over time,” Narasimhan said. “The market will emerge looking very different than what we see today.”
The biggest of these mass-market competitors is Luckin Coffee, which has staged a remarkable turnaround from its near collapse to resume its takeover of the country. The company long ago surpassed Starbucks in terms of the number of stores in China—it now has over 13,000, compared with nearly 7,000 for Starbucks—but last year overtook the Seattle-based chain based on the most important metric, revenue.
Luckin has done this with a combination of affordability, technology and a knowledge of the China market.
The emergence of these mass-market competitors has put a crimp on Starbucks’ China strategy and came at the wrong time. The company’s U.S. market slowed down in the second half of last quarter, and appears to have struggled in January, too. A big, theoretical benefit behind the company’s focus on China is to give the company another big market to offset its domestic operations so it isn’t entirely dependent on a single economy for sales growth.
The China market has proven to be a tough one for many U.S. brands to navigate, and that was true even before COVID. Periodically, chains like McDonald’s, KFC or others have had encountered a variety of issues, from food safety fears there to rejections of U.S. brands. The country’s aggressive COVID strategy also proved problematic. Now brands are facing ultra-aggressive local competitors that are peppering the countryside with their locations.
But Starbucks executives remain steadfast that their strategy in the country works. “In China, we remain very confident in the long-term,” Narasimhan said.
The company has built a premiumization strategy in the market and believes that will be a benefit over the long-term as competitors like Luckin build share by targeting budget-conscious consumers.
“You see an influx of mass-market competitors focused on fast store expansion and low-price tactics to drive trial,” Belinda Wong, Starbucks co-CEO for China, said on Tuesday. “Yes, we’re operating under an increased promotional environment.”
“We’re not interested in entering the price war,” she added.
Starbucks believes that what will emerge in China will be a more tiered coffee market. The country still consumes less coffee per capita than the U.S. and other countries. As it consumes more of the beverage, customers will gravitate toward quality or affordability.
Executives said they are on track to have 9,000 stores in the country. What’s more, they say, their new stores are generating strong returns. The company’s revenue did grow 20% in China in the quarter, including 10% same-store sales. Digital now represents more than half of those sales and members and loyalty membership is growing there.
The country is also receiving plenty of attention from Starbucks’ top executives. “I’ve been to China three times in the last nine months,” Narasimhan said. He noted that the business there was able to reset during the pandemic, with a focus on supply chain improvements and a more digitally focused business.
“I’d love to bring some of that back to the U.S.,” Narasimhan said.
Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.