Starbucks China Sales Under Threat From Price War and Substitution as Local Competitor Locations Surge

Starbucks’s most recent earnings report showed a particularly steep drop in Chinese comparable sales. Starbucks derived about 8% of its total revenues from China in the most recently reported quarter, but an economic slowdown and fierce competition in that market have slammed the American coffee giant’s local growth. Chinese consumers are cutting back on spending while Starbucks’s top domestic competitors, including Luckin Coffee and Cotti Coffee, are selling their coffee for less than a third of price of a comparable Starbucks beverage.

China is the world’s fastest growing retail coffee market in terms of in-store orders and locations. Starbucks used to have a footprint on par with competitors like Luckin, but the latter firm is set to expand its store count to more than 3x the current number of Starbucks China locations through year-end. Luckin was recently forced to slow its breakneck expansion to avoid a second consecutive quarter of losses, but its huge presence and ability to benefit from the substitution effect may be helping it pry Chinese consumers away from more premium Starbucks offerings.

Related Stocks: Starbucks Corporation (SBUX), Luckin Coffee Inc. (LKNCY)

Shares of popular coffee chain, Starbucks, have dropped by a fifth thus far in the year-to-date period. A short-lived rebound was spurred this week when third fiscal quarter results showed profitability to be as stable as expected by Wall Street analysts. A key drag on Starbucks’s earnings was their revenue from China, which saw same-store sales tumble by -14% – doubling the slowdown witnessed in the same metric in the North American market. China has been a key growth engine for the company, which still managed to open a net 785 new stores in the world’s second-largest economy throughout fiscal 2023, but it has been plagued by fierce competition and an economic slowdown in this locale as well.

Starbucks’s Chinese operation earned $733.8 million in the quarter, an 8.1% contribution to total consolidated revenues of $9.1 billion across the company. Though that is a somewhat narrow portion of the company’s sales, the potential upside in China’s coffee market remains massive. Bloomberg notes that China has just recently become the most branded coffee shops globally with nearly 50,000 outlets, overtaking the US after a…