Recently, news has spread that Starbucks (NASDAQ: SBUX) is exploring different options for its business in China, including the possibility of selling shares in the business.
In response, a reporter from China Business News contacted Starbucks, and its global spokesperson stated that the company is taking the time to gain a deeper understanding of Starbucks' business operations and market competition environment in China. We are working hard to find the best growth path, including exploring strategic partnerships
It is worth mentioning that whether "strategic partners" introduce capital or open up franchising has sparked various speculations in the industry. Jiang Han, a senior analyst at Pangu Think Tank, believes that Starbucks' statement is already a prelude to diversified equity allocation. This exploration of a joint venture model is a key factor in Starbucks' current development trend. New partnerships may involve not only simple capital injections, but also deep cooperation in brand operations, market expansion, product innovation, and other aspects.
Renowned franchising expert Li Weihua believes that "directly opening up franchising itself is a good way of financing. Most of the time, introducing capital is to open direct operated stores, build headquarters and supply chains, and expand brand potential. For the current market, after introducing strategic investment, not only do you have to face asset liquidation, gambling, etc., but you may also have to listen to the franchisor's' pointing and drawing '. However, financing through franchising can obtain local resources, connections, and other support
Market strategy seeks change
Starbucks Chief Financial Officer Rachel Ruggeri explained the recent quarterly results by saying, "Despite our increased investments, we cannot change the trend of declining foot traffic." She also mentioned that plans are being developed to reverse the business, but it will take time.
According to Starbucks' financial report, its net revenue for the fourth quarter of fiscal year 2024 was $9.1 billion, a year-on-year decrease of 3%; Earnings per share were $0.8, a year-on-year decrease of 25%, lower than the expected $1.03.
Starbucks stated that the poor performance was mainly due to a decrease in customer traffic in North America and intensified competition in the Chinese market. From the perspective of same store sales alone, global same store sales decreased by 7%, US same store sales decreased by 6%, and this data decreased by 14% in the Chinese market. At the same time, the trading volume and average transaction price in the Chinese market have also decreased.
Based on the actions of seeking strategic partners, it has been reported that Starbucks has been discussing its business expansion strategy in China with consultants, including the possibility of introducing local partners, and has informally evaluated the interests of potential investors, including domestic private equity firms. Starbucks China did not respond directly to the reporter regarding this.
In the industry's view, the information released by Starbucks currently does not mean withdrawal, as China has become its fastest-growing and largest overseas market for Starbucks. However, it also reflects the many challenges and urgent needs for strategic adjustments that Starbucks faces in the current market environment. Starbucks China may undergo significant adjustments in the future, but it is currently unknown which specific cooperation model to adopt.
Localization pressure
As more and more Chinese consumers choose fast, affordable, and convenient coffee, Starbucks is facing pressure to adapt to local demands. In the past year, in addition to speeding up the launch of new products, Starbucks has also launched marketing methods such as IP co branding, short video, and further promoted them in combination with Meituan, Tiktok and other platforms.
Several industry insiders have pointed out that since opening its first store in Beijing in 1999, Starbucks has been one of the leading brands in the Chinese coffee market and a leader in coffee culture. However, the rise of local brands has increasingly challenged its market dominance.
However, the current coffee market in China is becoming increasingly competitive, with local brands such as Luckin Coffee and Koudi Coffee quickly occupying market share through strategies such as low-priced customer acquisition and open franchising, bringing considerable pressure to Starbucks. In addition, McDonald's and Yum! Brands China are also launching or even expanding their coffee brands, with significant advantages in location and supply chain scale. At the same time, other coffee brands such as Tim Hortons have entered the Chinese market, launching menus and store models that cater to local consumer tastes. The takeaway driven business model is constantly expanding, and high ping efficiency "pick up" stores have become a driving force for many brands' performance.
Previously, Starbucks China CEO Liu Wenjuan mentioned, "We maintain a high degree of restraint, avoid price wars, and Starbucks will not sacrifice operating profit margins for sales." Regarding store channels, she also mentioned that in the 2024 fiscal year, Starbucks China optimized its store expansion strategy and accelerated the pace of opening new stores in lower tier cities and new county-level markets. So Starbucks added 790 new stores in the 2024 fiscal year, and the total number of Starbucks stores in China reached 7596 as of September 29.
However, it is worth noting that Starbucks announced its 2025 China market strategy direction at the Global Investor Exchange Conference in September 2022: by 2025, the total number of stores in China will reach 9000, with over 95000 employees; Double the net income and increase the operating profit to four times the current level. Currently, to achieve this goal, Starbucks will need to open over 1000 more stores in the next year.
Regarding this, Wen Zhihong, an expert in the chain operation industry and the general manager of Hehong Consulting, stated that Starbucks' achievement of its goal of having 10000 stores in the Chinese market is not fundamentally a matter of capital, but rather a challenge in positioning itself as the "third space" in the Chinese market over the past two years, stimulated by price wars of brands such as Luckin Coffee and Kudi Coffee. For some Starbucks customers, their demand is not only for a cup of coffee, but also for a 'third space' service; but many customers may only want a cup of coffee themselves, so this potential consumer is quickly attracted by other brands
The reporter learned that there are many examples of foreign-funded enterprises expanding their business in China by selling some of their shares to private equity firms to achieve more growth, among which the most typical ones are McDonald's and Yum! Brands (parent company of KFC), whose transformation from direct operation to franchise operation is worth learning from.
As global companies with a relatively large share of performance in the Chinese market, McDonald's and KFC have faced challenges in terms of performance growth before the business split. However, after partnering with private equity firms and selling exclusive or franchise rights to their Chinese business, the most direct benefit is obtaining a considerable amount of funds.
Regarding this, Wen Zhihong bluntly stated, "On the one hand, this can also make the report look better. On the other hand, through the independence of its business in China, it can introduce more resource providers to help its business become more localized and flexible. From the subsequent practice and impact of McDonald's and KFC, this idea can also be achieved. However, compared to others, Starbucks currently faces greater problems and challenges in the Chinese market. Whether it can obtain sustained competitive advantages depends on its strategic response in the Chinese market
Jiang Han believes that compared to Yum! Brands China and McDonald's, independent business in the Chinese market can allow Starbucks to focus more on the development of the Chinese market, formulate strategies that better meet the needs of local consumers, and reduce communication and coordination costs with headquarters. In addition, independent companies may have easier access to financing and capital operations, which can help accelerate business expansion and innovation. However, business independence may also bring some challenges, such as the need to establish independent operational and management systems, as well as facing more complex market environments and competitive pressures.
How can China's business be independent?
Several industry insiders have mentioned that in the face of constantly being eroded market share, Starbucks must "burn money" to expand. The funds from selling franchise rights may help quench its temporary thirst, but further exploration may still be needed in conjunction with localization.
Wen Zhihong told reporters that initially Starbucks officially entered the Chinese market by authorizing local companies to operate through franchising. He pointed out that with the changes in the market environment, it is not ruled out that Starbucks may consider single store franchising in the entire or part of the Chinese market, but it is not only related to its chain expansion development model, but also requires corresponding adjustments to its products and marketing strategies in the Chinese market.
The reporter noticed that around 2017, international catering giants made different choices in the Chinese market.
In 2017, Starbucks Coffee Company reached an acquisition agreement with its long-term joint venture partners, Uni President Enterprises Co., Ltd. and Uni President Supermarket Co., Ltd., to acquire the remaining 50% stake of Starbucks East China Market Joint Venture (i.e. Shanghai Uni President Starbucks Coffee Co., Ltd.) for approximately $1.3 billion in cash. At that time, through acquisition, Starbucks acquired 100% ownership of approximately 1300 stores in Jiangsu, Zhejiang, and Shanghai, and began to fully operate all stores in the mainland Chinese market.
McDonald's and Yum! Brands, after introducing Chinese capital, have significantly increased the proportion of their franchise models to accelerate their expansion.
In September 2016, Yum! Brands announced an agreement with Chunhua Capital and Ant Financial to jointly invest $460 million in Yum! Brands China, which was synchronized with the spin off of Yum! Brands and Yum! Brands China. After the split, Yum! China became the franchisee of Yum! Catering Group in Chinese Mainland, with the exclusive operation rights of KFC, Pizzahut and Taco Bell. At the end of that year, Yum China was listed and traded on the New York Stock Exchange as an independent company, and achieved rapid growth in profit margins and stores in the same year, opening 575 new stores.
In 2017, McDonald's sold its franchise rights for its Chinese stores for a consideration of $2.08 billion. McDonald's formed a strategic partnership with CITIC Capital and Carlyle Investments to establish the company Golden Arches, which will be responsible for McDonald's operations in mainland China and Hong Kong for the next 20 years.
Regarding the question of whether Starbucks will open up franchising, Li Weihua explained, "Starbucks' products are priced higher and there are fewer competitors in the same category, which gives it a clear advantage in terms of profit. At that time, because we saw the potential coffee market in China in the future, we invested in taking back the franchise rights and changing to a direct sales model. Currently, Starbucks' operations in China are facing resistance, so it is entirely possible to open up franchising again
Li Weihua pointed out that the consumption of coffee in China is still on the rise, but there is demand for high, medium, and low-end coffee, so the market has not reached saturation. The occurrence of opening and closing stores precisely indicates that there are still opportunities in this track.
"If Starbucks wants to adopt the franchising mode in the future, it will need to make more localized adjustments. Many new changes have taken place in the franchising market, and the forms of franchising are more diversified. From the perspective of the store layout of international brands, the general first-line cities adopt the direct marketing mode in good sections, and the way of franchising in sinking markets. Due to the characteristics of high investment and long payback period of Starbucks, it is also necessary to open up the franchise in combination with new market trends, otherwise it is quite difficult to operate." Li Weihua said.