Starbucks Future plan for China

The new CEO of Starbucks, Laxman Narasimhan, recently embarked on a low-key tour of China.

This trip marks Narasimhan’s first visit outside of North America since assuming his role in March of this year. During his visit, he toured Starbucks stores in Beijing and Shanghai, where he had the opportunity to meet with Starbucks employees, referred to as “partners” within the company. source

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Notable highlights of the trip included participating in a coffee-tasting workshop conducted in sign language and visiting the Starbucks Coffee Innovation Park, which is scheduled to open later this year. Located in Kunshan near Shanghai, the Coffee Innovation Park represents Starbucks’ largest manufacturing investment outside of the United States.

As a new member of Starbucks’ senior leadership team, Narasimhan utilized this trip as an opportunity to establish personal connections with staff members in China. Recognizing the immense potential in the Chinese market, he praised the passion exhibited by the partners, stating, “I come with a great deal of respect…it’s amazing to see what you have done with coffee culture.”

Narasimhan also expressed his appreciation for the work of Belinda Wong, CEO of Starbucks China, acknowledging the challenges faced by her and the Starbucks China team over the past three years, and thanking them for their resilience.

Narasimhan faces significant challenges ahead, as Starbucks reported a 31% year-on-year decline in revenue in mainland China in the first quarter of 2023. This decline has raised concerns and led to the trending topic on Weibo, China’s equivalent of Twitter, questioning why the post-90s generation is not choosing Starbucks as their preferred coffee brand.

Starbucks has lost his prestige in China

Starbucks is no longer the status symbol it once was in China, as its large, glass storefronts now appear dated compared to the “new Chinese-style” teahouses and coffee shops. Moreover, Starbucks is often more expensive than many other coffee chains in China, without necessarily offering a noticeable increase in quality.

In an effort to compete with domestic chains like Luckin, which regularly introduce new menu options, Starbucks recently introduced its famous Pink Drink to mainland China in May. However, to achieve its goal of having 9,000 stores in China by 2025, the company may need to do more to maintain the interest of Chinese Gen Z and millennial coffee drinkers.

-29% for Starbucks in China

Starbucks, the American multinational coffeehouse and roastery chain, announced its financial results for the fiscal first quarter ending on January 1. While its revenue reached $8.71 billion, it fell short of market expectations. Global comparable store sales increased by 5%, but in China, comparable store sales saw a decline of 29%.

At the end of the first quarter of fiscal year 2023, Starbucks had 15,952 stores in the U.S. and 6,090 stores in China, which together accounted for 61% of the company’s global portfolio. Starbucks has faced ongoing challenges in the Chinese market, with its comparable store sales revenue in China declining by 24% year-on-year in fiscal 2022. This decline was driven by a 24% decrease in comparable transactions and a 24% decrease in average ticket.

Despite the setbacks, Starbucks remains optimistic about its growth in China. Interim CEO Howard Schultz stated, “Since January, we have seen significant month-on-month improvement in sales and customer flow, and people have begun to resume their previous routines, including gradually returning to our stores. We believe that the resurgence in consumer vitality will contribute to our business recovery in the second half of this fiscal year.”

Wang Jingying, Chairman and CEO of Starbucks China,

He emphasized their confidence in future business growth in China during the performance conference. They expressed their commitment to implementing the vision and strategy presented at the investor exchange meeting and achieving the goal of opening 9,000 stores by the end of 2025.

As a global coffee leader, Starbucks’ success has been largely attributed to its “third space” model, creating a unique space for leisure and relaxation apart from home and work. However, in China, Starbucks is exploring a more localized approach.

Starbucks has diversified its store types in China, with a significant increase in the number of small stores. In the second quarter of fiscal year 2022, mobile orders accounted for 47% of Starbucks’ total orders in China. According to Canyan Data, as of February 2, 2023, 60% of Starbucks stores were located in first-tier cities and emerging first-tier cities in China. Considering the limited availability of prime locations in top-tier cities and Starbucks’ goal of expanding into more cities, venturing into lower-tier cities is inevitable for their future development.

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