As Starbucks tries to revive its faltering business in China, analysts say strategic partnerships and returning to its roots as a place where customers come for a coffee "experience" offer the best bet to beat intense competition and deflationary woes.
The coffee giant is already under pressure globally with declining sales and earnings, but problems in its second-biggest market after the U.S. have been compounded by a weakened economy and consumers unwilling to spend amid a prolonged confidence-shattering property market downturn.
That has seen Starbucks lose its market leader crown in China to local chain Luckin (LC0Ay.MU) - its domestic revenue surpassed that of its U.S. rival in 2023.
Others such as Cotti and even KFC's K Coffee have also grown quickly, offering prices less than Starbucks' 27 yuan ($3.70) Americanos in China as part of a bruising price war that analysts say the U.S. company should resist entering.
Instead, Yaling Jiang, founder of research and strategy consultancy ApertureChina, and others say a strategic partnership provides the strongest chance of Starbucks brewing its way back to success in the world's second-biggest economy.
"The best case scenario is that they can find a team like Centurium Capital behind Luckin Coffee," Jiang said.
"When the top decisions are made locally, they may be able to match consumers’ expectations better at China speed."
Jason Yu, general manager at CTR Market Research, concurred, noting that a good local partner could provide "some advantages in real estate, government relations and land."
That path is already in Starbucks' sight. In November it said that it was exploring a strategic partnership in China, possibly following in the footsteps of McDonald's which sold a majority stake in its China and Hong Kong operations to investors including Citic, a tie-up that has largely been seen as successful.
Reuters reported last week that KKR & Co (KKR.N), Fountainvest Partners and PAG are among buyout firms interested in acquiring a stake in Starbucks' China business, with Chinese companies, including state-owned conglomerate China Resources Holdings and food delivery giant Meituan (3690.HK) also in the mix.
The company declined to comment for this story.
TURNAROUND
For Starbucks CEO Brian Niccol, who took the top job at the coffee chain in August, a successful turnaround in China would no doubt provide strong impetus in revitalising its depressed global business.
The coffee chain's revenue slumped sharply in the latest quarter, and the company announced 1,100 job cuts as it revamps operations to shore up weak sales which in China alone fell for the fourth straight quarter. Its net revenue in China was around $3 billion in fiscal year 2024, accounting for one-fifth of global revenues.
Starbucks's market share in China has declined from 34% in 2019 to 14% in 2024, according to data from Euromonitor International, a market research provider. It's a precipitous fall for the U.S. company, whose entry into China in 1999 opened the door to coffee culture in a predominantly tea-drinking nation.
"If Starbucks doesn’t make any strategic changes, in five years, they'll be even less relevant and won’t even be considered a contender for the number one spot in China," Jiang said.
Those changes, analysts say, must include the Seattle-based company stepping up product innovation and shoring up its traditional strength of being the coffee chain of choice for customers to meet and spend time.
Luckin now has over 20,000 franchise stores across China, well ahead of the 7,596 stores operated by Starbucks, but its focus is take-away and delivery.
BACK TO BASICS
Getting back to being a "people business that serves coffee" rather than a coffee business that serves people helps engender goodwill, said Jessica Gleeson, a former Starbucks China executive who now advises global businesses on the China market.
"So mobile ordering 100% makes sense, delivery 100% makes sense," Gleeson added, but "Starbucks needs to regain focus on playing its own game" rather than trying to compete with Luckin’s transactional business model of providing cheaper coffee to customers.
That aligns with Niccol's "Back to Starbucks" plan, which in large part is an effort to return to the coffee chain's roots as a place to commune, relax and enjoy coffee; the condiment bars, which were ditched during the pandemic, are back and baristas will return to hand-writing customers' names on their cups using Sharpies.
The global revival drive also includes rolling out a simpler menu, ceramic cups, refills and cutting wait times at the cafes to under four minutes.
In China, rather than simplifying the menu, Starbucks's problems are often blamed on a lack of product innovation and "newness", with tea still a big draw for consumers.
It has made efforts in recent months to increase the number of China-centric drinks with flavour profiles favoured by local consumers. A positive change Gleeson and Jiang attribute in large part to Molly Liu, former head of Starbucks China's digital division, taking the reins of the China business last September.
Right now, the chain's limited time offers include a 36 yuan Jasmine tea mousse cake and a white peach frappuccino priced from 38 yuan.
However, Zak Dychtwald, founder of Shanghai-based consultancy Young China Group, says more needs to be done.
"That’s not leading the market, that’s barely keeping up with it," he said, adding that Starbucks should introduce new products into the market more quickly.
In the longer term, however, the rise of Luckin could even turn out to be positive for Starbucks, Gleeson said.
"I think Starbucks should say, ‘They have 20,000 locations, good for them'... And thank them for creating all these new transactional coffee drinkers, because that increases the size of the future experiential coffee market."
($1 = 7.2899 Chinese yuan renminbi)
