Starbucks Seeking Partners In China Amid Struggle Against Luckin – CoffeeTalk

Starbucks is considering returning to a partnership-based business model in China, its second largest market after only the U.S. The Seattle-based company has faced multiple challenges in China, including severe restrictions during the pandemic, growing consumer caution, and fierce competition. Starbucks is working to find the best path back to growth in China, which includes exploring strategic partnerships, moves aimed at navigating increasing challenges in a country that was once its fastest growing market.

Starbucks is fully committed to its business and partners, and to growing in China. In addition to global private equity, Starbucks might also consider a sale of part of its China operation to Chinese conglomerates or other local companies with experience in the industry. Starbucks’ shares edged up slightly after its announcement last Thursday. The stock is roughly flat over the past 12 months, and still trades at an elevated price-to-earnings (P/E) ratio of 31 – ahead of a 25 for McDonald’s (MCD.US) and 21 for Yum China (YUMC.US; 9987.HK), operator of KFC and Pizza Hut restaurants in China.

When Starbucks opened its first store in Beijing in 1999, it found itself not only facing a more regulated environment than it was used to, but also the equally big challenge of selling to a tea-drinking culture where Nestlé instant coffee defined most people’s understanding of its signature product. It formed a series of joint ventures with local partners to better find its way in the market, but later bought all of them out. Fast forward to the present, where, with over 7,500 stores, the company is now grappling with more frugal consumers and intense competition from local rivals, prompting it to consider a return to partnerships to weather difficult times. Such partners not only offer more resources but can also help spread the risk of owning such a large operation worth billions of dollars.

Starbucks’ China U-turn sounds familiar because it’s not the first major foreign chain to change tack midway through its China story. In 2017, after nearly three decades in the country, McDonald’s sold a majority 52% stake in its China and Hong Kong operations to a consortium led by state-owned conglomerate Citic and American investment firm Carlyle (CG.US), after sales started declining and a food scandal dragged down its global sales.

The company’s global same-store sales declined 7% in its latest quarter through September, dragged down by a 14% decline in its China operation. China contributed about 9% of Starbucks’ total revenues of $36.2 billion in the 12 months through September. In the company’s latest earnings call, newly installed CEO Brian R. Niccol told investors he needed to spend more time in China to understand the challenges.

The food and beverage industry has taken one of the harder hits, following an initial boom in dining out after China reopened in early 2023. More than 1 million restaurants reportedly closed in the first six months of 2024, according to media reports, citing business registry searches. The coffee sector is taking a harder hit than many of its catering peers as the aggressive Luckin and Cotti Coffee engage in a price war by selling much of their premium coffee for just 9.9 yuan, or about $1.40, per cup.

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