What Wall Street Is Getting Wrong About Starbucks in China


Much of the Wall Street discussion about Starbucks in China seems to fall into two main groups.

  • The bulls talk about the big China consumer trend and the increases in Mainland outlets.
  • The bears (or the less bullish) mostly point to slowing same store growth (about 5%) and the high PE multiple.

I think both groups are mostly off target. The bulls are actually not bullish enough. And the bears are not worried about the right things.

My take is 4 points.

Point 1: The amazing thing about Starbucks China is not just the consumer trend. It is that plus the absence of a major China competitor.

Starbucks is a very successful Western business that, for some reason, has no clone or serious domestic competitor in China. This is really stunning.

Try to think of another China situation like this. Nike fights against Lining. Samsung fights against Huawei and Xiaomi. KFC fights against virtually everyone. And so on.

There is no “Starbucks of China”. There isn’t even a dominant regional player, say in Hunan or Tianjin. There is no “Juan Valdez Coffee of Hunan”? Note: Juan Valdez dominates Colombia and pretty much wiped out Starbucks there.

Starbucks does have smaller competitors in China, such as Gloria Jean, UBC Coffee, 85 Degrees, Costa Coffee, and others. But these are small and mostly foreign. There is no well-funded, hyper-aggressive China giant with +1,500 outlets. Starbucks is not locked in an expensive war with this type of China heavyweight. Unlike say Uber vs. Didi in 2016.

Note: One competitor I do keep a close eye on is Hong Kong-based Pacific Coffee. They are now owned by China Resources Enterprises and could, in theory, access their +4,000 retail Mainland locations quickly.

Point 2: CEO Howard Schultz is not being aggressive enough in China.

CEO Schulz has said they will open 500 stores a year in China, for the next five years. That would take them from about 2,600 today to 5,000 China outlets by 2021. That sounds big. It’s not for China.

The urban middle class is going to shift dramatically in the next five years – with “new mainstream” consumers (a McKinsey term, report here) replacing value consumers. These new mainstream consumers are exactly the type of middle-class urbanites that buy lattes. And they are going to be 50% of urban families by 2020. Starbucks should be thinking in terms of +10,000 China stores.

Also note in 2015, Starbucks opened about 690 new outlets in the US – and closed about 110. In China, they opened about 400 outlets and closed only 12 (about 3%). That 12 number is a red flag. If they’re not closing +10% of new stores in China, they’re probably not expanding aggressively enough.

Point 3: Changing consumer behavior is what Wall Street should worry about.

Chinese consumers are the most fickle group I have ever encountered. The behavioral differences between age brackets is vast. And the rate of change within each bracket is fast. Brands and products rise and fall all the time in the PRC. Take a look at the wildly swinging market shares of Samsung and Xiaomi over the past couple of years.

Starbucks is somewhat more exposed to these swings than most. First, their drinks are much higher priced in China. They are priced about the same as in the West and are more of a luxury item. Luxury tends to be more vulnerable to consumer shifts than strong value brands.

Second, Starbucks in China is still a lot about selling the “Starbucks experience”. They are now as much selling tons of drinks to people on their way to work. They are a destination, a place to sit and talk. But this “experience” aspect probably makes them more susceptible to changing behavior about where it is “cool” to go right now.

In contrast, none of this is a problem for Nestle, the uncrowned prince of China coffee. Instant coffee is +80% of all China coffee consumption and Nestle has 75% of this market. Their coffee products are cheap (under $1), affordable to everyone and available absolutely everywhere in the country.

I haven’t heard anyone on Wall Street seriously discuss potential +10% drops in customer volume for Starbucks China. Changing consumer behavior could make this happen (note KFC in the past year). Also keep in mind, Starbucks is still quite new to most in China (under five years for most consumers). So there is the risk some of this is a shorter-term fad.

Point 4: Management is still largely untested in China.

The other big risk here is management. No offense to the local team. China CEO Belinda Wong is awesome. But they have had it pretty easy in China thus far.

They haven’t fought for each customer against a sea of competitors or against a real China heavyweight. They haven’t had a money war where they have to spend $1B a year to subsidize customers and protect market share. They haven’t really weathered any major media or political issues or attacks. The one CCTV expose on their pricing was a negligible event in terms of doing business in Chinese State capitalism. And they haven’t yet faced any major changes in consumer behavior, like most retailers have. E-commerce also isn’t wreaking havok on their business, like it is for other retailers.

Starbucks got to the Mainland early for coffee (1999) and while they did reportedly lose money for like 8 years, they have had a surprisingly painless China existence thus far. Most companies that win in China are battle-scarred survivors. And you can see it in their management teams. Starbucks’ local management has not really been tested in this way yet. And eventually a significant crisis will probably hit.

Final Point: They should get bigger as fast as they can, while they can.

Starbucks has an unbelievable business in China. I think it is far better than even the Wall Street bulls realize. Starbucks arrived early and gained an early lead. They have no major competitors. They are mostly off the political / SOE radar. They have built a solid operating platform. And they have a very long runway for growth and reinvestment.

Overall, that is amazing and the exception in China business. But I wouldn’t count on it lasting forever. My advice is:

  • Run much faster while you still can. Go for dominant market share (and consumer capture) in as many cities / regions as possible. Don’t focus on China profits today. Go for market share dominance.
  • Keep as close to your Chinese customers, and their changing moods, as possible. They are basically a moving target.
  • Keep an eye out for well-funded competitors that can scale quickly in real estate. Note: Pacific Coffee / CRE GM Joyce Chan has said: “Our goal is to become the number one coffee house in China.”

Thanks for reading. Any comments appreciated. – jeff


I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.

Photo by Jeff


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