Is coffee retail in China shifting as Starbucks explores partnerships?

Starbucks reported third-quarter fiscal 2024 China revenue of $730 million, down 11% year on year, with comparable store sales down 14% and both average ticket size and transaction volume down 7%. CEO Laxman Narasimhan said the company is in early talks on strategic partnerships, prompting speculation about franchising.

Group net revenue was $9.11 billion for the quarter, down 1%, and net profit fell to $1.05 billion. Narasimhan described unprecedented store expansion and large-scale price wars in China. Co-CEO Liu Wenjuan said the brand stays restrained on promotions and avoids a price war, even as Luckin and Cotti keep expanding.

Starbucks' latest financial report shows that in the third quarter of fiscal year 2024, its China revenue fell 11% year-on-year, with comparable store sales down 14%, and both average ticket size and transaction volume declining. Facing store expansion and price competition from local brands such as Luckin and Cotti, Starbucks CEO Laxman Narasimhan revealed at the earnings call that the company is in the early stages of exploring strategic partnerships and may accelerate growth in the future through a more open model. This statement has sparked speculation about whether it will open up franchising. Notably, Starbucks China co-CEO Liu Wenjuan emphasized that the brand has remained restrained in an environment of frequent promotions and refuses to be drawn into a price war. Front Street will also continue to follow this coffee giant's shift in strategy in China.

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Recently, Starbucks released its third-quarter financial report.

Data shows that in the third quarter of fiscal year 2024 (April 1 to June 30), Starbucks' consolidated net revenue was $9.11 billion, down 1% year-on-year; net profit attributable to the company during the same period was $1.05 billion, down from $1.14 billion a year earlier.

Performance in the Chinese market is equally unoptimistic. The financial report shows that Starbucks China revenue was $730 million, down 11% year-on-year, comparable store sales fell 14%, and both average ticket size and comparable transaction volume declined 7%. Among these, the decline in average ticket size has now lasted for three consecutive financial quarters.

On the earnings call, Starbucks CEO Laxman Narasimhan said bluntly, "Over the past year, (the Chinese market) has seen unprecedented store expansion and large-scale price wars, even at the expense of same-store sales and profitability, causing significant and permanent changes to the market environment."

In other words, the impact of the price war on Starbucks' profits is quite obvious. Even so, Starbucks China co-CEO Liu Wenjuan still said when releasing the latest quarterly earnings that in a competitive environment with frequent promotional activities, Starbucks remains highly restrained and avoids a "price war."

On the other hand, Starbucks is under greater pressure in terms of store scale. In July, Luckin officially announced that its total number of stores had exceeded 20,000, and Cotti, founded only a little over two years ago, is also approaching Starbucks' total store count after Starbucks has deeply cultivated China for more than twenty years.

As a result, under pressure, Starbucks gradually increased its pace of store openings this year, and its total number of stores has recently shown an upward trend, but there is still a considerable gap from its previously announced goal of "reaching 9,000 total stores by 2025." Therefore, for Starbucks at this stage, increasing the speed of store openings is undoubtedly an important task.

Narasimhan revealed that over the past 25 years, Starbucks has relied on different strategic partnerships to develop its business, such as joint ventures and strategic partners in technology, real estate, and supply chain. In the future, Starbucks is in the early stages of exploring strategic partners in order to strengthen its competitive position and accelerate growth and revenue generation. Narasimhan's statement seems to suggest the adoption of a more open operating approach in various regions.

It is understood that in the early days of entering the Chinese market, Starbucks adopted an agency and joint venture model: Hong Kong and Guangdong and other places were developed by Hong Kong Maxim's Group; Jiangsu, Zhejiang, and Shanghai were jointly operated with Taiwan's Uni-President Group; and the northern market was operated by H&Q Asia Pacific and Sanyuan Group.

It was not until 2017 that Starbucks regained control of all stores from the joint ventures and converted all stores in the domestic market to company-operated ones. However, since 2019, Starbucks' store scale has nearly doubled, reaching more than 7,000, yet this has not translated into more meaningful growth.

As a result, some investors have called for Starbucks to open its China business to local operators and adopt a franchising model like Starbucks in other countries, so as to increase the speed of store openings and better adapt to the local market environment.

However, regarding whether Starbucks will next open franchising, engage in licensed operations, or return to the old path of expanding with other companies through joint ventures, Narasimhan gave no specific response. He said it is still unclear what form future cooperation will take and did not disclose more details of later plans.

Image source: Internet

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