Starbucks braced for price war in China as rivals pile into coffee market

Starbucks is placing a further big bet on China — where competition is growing and recent results left a bitter taste — in one of Howard Schultz’s last acts before he stepped down as chief executive this month.

The US chain plans to open a store in China every nine hours to reach 9,000 locations by 2025, up from just over 6,000 currently. It is also opening a $130mn roasting plant this year in the city of Kunshan, its first in Asia, as it embeds itself more deeply in the market it entered a quarter-century ago.

China provided $2.5bn of Starbucks’s $32bn in global revenue last year. But its same-store sales in the country collapsed 29 per cent year on year in the final three months of 2022, four times worse than expected, as China abandoned Covid-19 restrictions and the virus spread across the country.

Schultz, who handed over the reins to Laxman Narasimhan on March 20, appeared undeterred. “We are still only in the early chapters of our growth story in China,” he said on an earnings call. “Our confidence . . . and our aspirations for the market and our partners has never been greater.”

As with many consumer brands in China, Starbucks’s expectations of a big rebound rest on projections for a huge market opportunity, but they are tempered by increased competition from international and domestic rivals and often fickle consumer habits.

Tim Hortons, a Canadian chain whose franchise rights in China are owned by a Nasdaq-listed company that is backed by private equity firm Cartesian Capital, opened its 600th store in January. Yum China, in partnership with Italian brand Lavazza, aims for 1,000 stores by 2025.

Luckin Coffee, a Chinese company derailed by accounting fraud in 2020, opened more than 2,000 stores on a net basis as part of its revival in the 2022 fiscal year, it said in its annual report.

Manner Coffee, originally backed by Chinese private equity firm Today Capital, started with a single store in Shanghai in 2015 and had 150 stores nationwide by 2021, according to Daxue Consulting. Cotti Coffee, which former Luckin executives launched in October, has already opened 1,300 stores and is aiming for 10,000 by 2025, surpassing even Starbucks, according to local media reports.

“It’s a very crowded market,” said Shaun Rein, managing director of the China Market Research Group. “The success of Starbucks was huge, and it transformed how coffee companies viewed China.

“Basically it’s become a price war,” he added. “The private equity money has come in.”

Many small independent stores charge a fraction of the price at Starbucks and other international competitors, which are also trying to grasp shifting consumer appetite across a varied market.

Customers “are very dynamic, they’re very demanding . . . you need to stay actively innovating”, said Peter Yu, managing partner of Cartesian Capital, the majority shareholder of Tims China. “The Chinese consumer is learning what they like about coffee.”

He said Tims, which runs Tim Hortons in China, introduces a product every two weeks and aims to have 2,700 stores nationwide by 2026.

Coffee chains’ growth forecasts are based on the view that Chinese consumption will develop into a daily routine rather than predominantly a social activity with friends. Yu said Tim Hortons would target a “price point where coffee is not a semi-luxury good that you treat yourself to once a week but becomes a daily pleasure”. The chain, which charges Rmb20-Rmb25 ($3-$3.60) for a latte, is also selling in petrol stations and convenience stores.

That kind of adoption is particularly critical in smaller regional cities. In big ones such as Beijing, Shanghai and Guangzhou, people drink about 300 cups of coffee a year, close to US levels. But across mainland China as a whole, the average is just nine cups, according to Deloitte data.

“The market is far from saturated,” said Jason Yu, greater China managing director at Kantar Worldpanel.

One rival area of beverage competition is with tea chains. Kantar’s Yu points to Mixue Bingcheng, a bubble tea company that has expanded into coffee under the brand Lucky Coffee. With thousands of stores in its franchise, it charges just Rmb5 for an Americano compared with Rmb30 at Starbucks.

While lockdowns under zero-Covid put severe pressure on consumer industries in China, analysts suggested well-financed coffee chains were better able to weather the policy compared with independent counterparts. John Zolidis, founder and president of Quo Vadis Capital, said there was a “land grab mentality” among venture capital and private equity-backed food and beverage chains, which took the chance to expand while rents were still cheap.

Alex Huang, a 30-year-old office worker in Shanghai, said he had been drinking coffee regularly since 2016 and usually spent around Rmb30. “Compared to milk tea, coffee is a bit expensive,” he said.

Yu at Kantar noted that 10 years ago coffee was seen as an “exotic western beverage” that conveyed a western lifestyle, but now there were many Chinese brands.

“Their product is good in terms of where it is sourced and they are much more agile,” he said. “All the Chinese brands source their coffee from Africa, from South America, so it’s really the same.”