Starbucks’ China Comeback Relies on the Right Partner, Brewing Back the Vibe

The best strategy for Starbucks to defeat intense competition and deflationary pressures in China is to revert to its roots and create an experience-based brand.

• As sales and earnings of the coffee giant are already declining globally, problems in its second-largest market have been compounded by a weak economy and a persistent property market downturn that has left consumers unwilling to spend.Starbucks’ Chinese market leader crown has been lost to Luckin LCAy.MU, surpassed Starbucks’ U.S. rival in domestic revenue in 2023.There have been many other coffee chains that have grown rapidly in China, offering prices lower than Starbucks’ 27 yuan ($3.70) Americanos as part of a bruising price war.Starbucks can’t brew its way back to success in China’s second-largest economy without a strategic partnership, says Yaling Jiang, CEO of ApertureChina.Jiang said the best-case scenario would be to find a venture capital firm like Centurium Capital to back Luckin Coffee.”They may be better able to meet consumer expectations when they make top decisions locally.”As CTR Market Research general manager Jason Yu remarked, a local partner could be advantageous in real estate, government relations, and land deals.Starbucks is already on that path. The company announced in November that it would explore strategic partnerships in China. This is perhaps following in the footsteps of McDonald’s, which sold the majority stake in its Chinese and Hong Kong operations to Citic. This deal has been widely considered successful.The Reuters news outlet reported last week that buyout firms KKR & Co KKR.N, Fountainvest Partners, and PAG have expressed interest in buying Starbucks’ Chinese business. This is along with Chinese companies like China Resources Holdings and Meituan 3690.HK.
• A company representative declined to comment on this story.

TURNAROUND

As Starbucks CEO Brian Niccol took over the chain in August, a successful turnaround in China would give the company a major boost in revitalizing its global business.

As a result of declining sales in China for the fourth consecutive quarter, the company cut 1,100 jobs to boost weak revenue in the latest quarter. Its global revenue in fiscal year 2024 was dominated by China, which totaled about $3 billion.

In China, Starbucks’ market share fell from 34% in 2019 to 14% in 2024, according to Euromonitor International, a market research firm. For a U.S. company that entered China in 1999 and introduced coffee culture to a predominantly tea-drinking nation, this is a precipitous decline.

Starbucks will become even less relevant in five years if it does not make any strategic changes, Jiang said.

The Seattle-based company must step up product innovation and bolster its traditional strength of being the coffee chain where customers meet and spend time, analysts contend.

There are now over 20,000 Luckin franchise stores in China, far ahead of the 7,596 Starbucks stores, but Luckin focuses on takeaway and delivery.

BACK TO BASICS

Jessica Gleeson, a former Starbucks China executive who now advises global businesses on China markets, said that focusing on being a human-centered business rather than a business that serves coffee can help create goodwill.

As such, Gleeson said, “mobile ordering makes perfect sense, delivery makes perfect sense.” However, Starbucks needs to refocus on playing its own game rather than competing with Luckin’s transactional business model of providing cheaper coffee to its customers.

According to Niccol, the “Back to Starbucks” plan aims to return Starbucks to its roots as a place where people can commune, relax, and enjoy coffee; condiment bars, which were removed during the pandemic, are back, and baristas will again handwrite the names of customers on coffee cups.

There will also be a simpler menu, ceramic cups, refills, and shorter wait times at the cafes as part of the global revival drive.

It is often claimed that Starbucks’s troubles are caused by a lack of product innovation and “newness” in China, where tea remains a big attraction.

China-centric drinks with flavor profiles favored by local consumers have been introduced in recent months. Molly Liu, former head of Starbucks China’s digital division, took over last September and contributed to a positive change, according to Gleeson and Jiang.

There is currently a 36 Yuan Jasmine tea mousse cake and a 38 Yuan white peach frappuccino on offer at the chain.

A more significant effort is needed, according to Zak Dychtwald, founder of Shanghai-based consultancy Young China Group.

The company should introduce new products into the market more often, he said, adding that Starbucks doesn’t lead the market.

Eventually, however, Luckin’s rise may even prove beneficial to Starbucks, Gleeson said.

“Starbucks should acknowledge their 20,000 locations… And give thanks for attracting all these new transactional coffee drinkers, which will increase the size of the future experiential coffee market.”