Starbucks is making a bigger bet in China – where competition is intensifying and new results are fueling bitterness – in one of Howard Schultz’s final acts before stepping down as chief executive this month.
The US chain plans to open a store in China every nine hours until it reaches 9,000 locations by 2025, up from just over 6,000 now. It also opened a $130m roastery this year in the city of Kunshan, its first in Asia, as it deepens into the market it launched a quarter of a century ago.
China accounted for $2.5bn of Starbucks’ $32bn in global revenue last year. But same-store sales in the country fell 29 percent year-on-year in the last three months of 2022, four times worse than expected, as China eased its Covid-19 restrictions and the virus spread across the country.
Schultz, who handed over the reins to Laxman Narasimhan on March 20, seemed unfazed. “We are still only in the beginning of the growth story in China,” he said on the earnings call. “Our belief . . . and our aspirations for our markets and partners have never been greater.
Like many consumer brands in China, Starbucks hopes for a big rebound in projections for a large market opportunity, but it is hampered by increased competition from international and domestic rivals and the often changing consumer habits.
Tim Hortons, the Canadian chain whose franchise rights in China are owned by a Nasdaq-listed company backed by private equity firm Cartesian Capital, opened its 600th store in January. Yum China, in partnership with Italian brand Lavazza, aims to have 1,000 stores by 2025.
Luckin Coffee, a Chinese company marred by an accounting fraud in 2020, is opening more than 2,000 stores on a net basis as part of its revival in fiscal year 2022, it said in its annual report.
Manner Coffee, originally backed by private equity firm China Today Capital, started with a single store in Shanghai in 2015 and has 150 stores nationwide by 2021, according to Daxue Consulting. Cotti Coffee, which former executive Luckin launched in October, has opened 1,300 stores and aims to reach 10,000 by 2025, surpassing Starbucks, according to local media reports.
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“It’s a very crowded market,” said Shaun Rein, managing director of China Market Research Group. “The success of Starbucks is huge, and it is changing the way coffee companies see China.
“It has basically become a price war,” he added. “Private equity money is coming in.”
Many small independent stores charge a fraction of the prices at Starbucks and other international rivals, who are also trying to capture changing consumer appetites in different markets.
Customers are “very dynamic, very demanding . . . you have to keep actively innovating”, said Peter Yu, managing partner of Cartesian Capital, the majority shareholder of Tims China. “Chinese consumers are learning about the coffee they like.”
He said Tims, which runs Tim Hortons in China, introduces products every two weeks and aims to have 2,700 stores across the country by 2026.
The coffee chain’s growth forecast is based on the discovery that Chinese consumption will become a daily routine rather than a social activity with friends. Yu said Tim Hortons will be targeting “a price point where coffee is not a semi-luxury that you treat yourself to every week but a daily pleasure”. The chain, which charges Rmb20-Rmb25 ($3-$3.60) for a latte, is also sold at gas stations and convenience stores.
This kind of adoption is especially important in smaller regional cities. In the big ones like Beijing, Shanghai and Guangzhou, people drink about 300 cups of coffee a year, close to the US level. But across mainland China, the average is just nine cups, according to Deloitte data.
“The market is far from saturated,” said Jason Yu, managing director of China at Kantar Worldpanel.
One of the competitors of the beverage competition is with the tea chain. Yu Kantar points to Mixue Bingcheng, a bubble tea company that has expanded into coffee under the Lucky Coffee brand. With thousands of stores in the franchise, it costs only Rmb5 for an Americano compared to Rmb30 at Starbucks.
While the zero-Covid lockdown puts heavy pressure on the consumer industry in China, analysts suggest well-financed coffee chains are better able to cope with the policy compared to their independent counterparts. John Zolidis, founder and president of Quo Vadis Capital, said there is a “land grabment mentality” among venture capital and private equity-backed food and beverage chains, which take the opportunity to expand while rent is still cheap.
Alex Huang, a 30-year-old office worker in Shanghai, said he has been drinking coffee regularly since 2016 and usually spends about Rmb30. “Compared to milk tea, coffee is quite expensive,” he said.
Kantar’s Yu noted that 10 years ago coffee was seen as an “exotic western drink” that provided a western lifestyle, but now there are many Chinese brands.
“The product is good about where it comes from and it’s more agile,” he said. “All Chinese brands source their coffee from Africa, from South America, so it’s the same.”