Starbucks loses ground in the US and China

Starbucks recently made headlines with its decision to revise its annual sales forecast as demand for coffee experiences a cooling trend in key markets causing Starbucks to lose ground in the US and China.

The decline in in-store demand for coffee has “significantly missed shareholder expectations”, says Howard Schultz in his latest post on LinkedIn. “But it’s not the miss that matters. It’s what comes next.” Starbucks’ development signals a change in consumer preferences and behaviors and it will be interesting to see how it will recover.

Each of Starbucks’ geographic segments reported a decline – including all-important China, where sales fell 11 percent, and the U.S. home market, where sales fell 3 percent. The chain seems to expect a slow recovery, which drastically lowers its forecast for full-year revenue growth. The stock plunged by as much as 16 percent, the worst decline since March 2020.

The United States and China have historically been key markets for the chain, driving significant revenues and contributing to its global growth trajectory. In the United States, where Starbucks has long been a ubiquitous presence in coffee culture, there has been a noticeable decline in foot traffic and sales in its stores. This trend reflects changes in US coffee consumption, as consumers increasingly look for cheaper alternatives to match their disposable income.

Similarly, in China, a market that Starbucks has strategically targeted for expansion and growth, the company faces stiff competition from local players and emerging premium coffee brands.

While inflation and tough economic times may play a role in the sales decline, it appears to be more than that. In the US, the National Coffee Association’s latest report shows that coffee consumption has reached a 20-year high. In China, coffee consumption is also on the rise.

“Coffee consumption in China is still on the rise both in the home and outside the home,” says an analyst in China. “This is likely to continue over the next few years.” So if the demand is there, why are Starbucks sales declining?

Lower consumer spending and increased competition cause expensive Starbucks to lose its throne

Rising inflation rates and economic uncertainty may have affected consumer spending patterns globally, leading to reduced discretionary spending on premium coffee offerings. However, in both the US and China, the main sales driver is fierce competition from a growing number of specialty coffee chains, local coffee shops and premium coffee brands that offer similar value propositions and cater to changing consumer preferences.

“Many people would rather pay 9.9 Renminbi (official currency of the People’s Republic of China) for coffee from Cotti or 12 Renminbi for coffee from Luckin instead of the 30 Renminbi that Starbucks coffee costs,” said a source.

“Not only are these cheaper options available, but coffee shops are turning to the low-price segment. While unhealthy for their business, they are determined to take market share first and try to offset revenue with volume while doing so.”

Competition from national brands in China is Starbucks’ biggest threat, with Luckin leading the way – and the numbers speak for themselves.

“Starbucks’ biggest competitor Luckin Coffee has opened 18,590 stores in China and Starbucks only has 7,093 stores,” said one analyst.

Overall, consumers are more cautious about their spending and the Starbucks price point has become a sore subject in countries, and in the US in particular – something confirmed by the thousands of comments on Howard Schultz’s recent LinkedIn post. In China, consumer behavior has changed due to a lack of confidence in China’s current and future economy.

“Foreign policy, housing bubbles, the EverGrande real estate scandal and other potential defaults, low employment rates and job security are prompting many to start saving money and spending less,” said one Chinese analyst. “Cut the unnecessary and downgrade the necessary.”

In both Chinese and US markets, another factor driving a decline in sales is out-of-home (OOH) consumption. According to the National Coffee Association, in 2023, 83% of American coffee drinkers drank coffee at home – in stark contrast to 35% who drank coffee away from home.

After the 2020 outbreak, the United States also followed China’s example on delivery services, with orders for coffee deliveries increasing by a staggering 340%, with many offering the service for the first time. In China, delivery services are par for the course for national brands – Luckin offers delivery, while Starbucks uses third-party services.

“I think in-store coffee consumption may decrease slightly due to the large network of deliveries to your door available here in China in most places since covid” says Brian Clark, owner of Legacy Coffee and Wandering Moose Cafe in China.

“People got used to having things delivered instead of going out, and it was usually cheaper, which is an added bonus. They’re also more likely to brew at home on a more regular basis.”

Can Starbucks take back market share in the US and China?

Looking ahead, the future of Starbucks in China and the broader landscape of Chinese coffee consumption remains dynamic and unpredictable.

While Starbucks has made significant investments in expanding its presence in China and cultivating a loyal customer base, the changing competitive environment and shifting consumer trends pose a challenge to its market position.

Howard Schultz seems confident and makes a rather cheeky statement: “Starbucks will recover – of that I am sure (…) I am confident that China’s business will return to health and become the company’s largest market.”

While it can recover in the US with smart marketing and branding, targeted consumer research and a pivot in value propositions, Starbucks will need to step up its game significantly in China to compete with national brands.

“It depends on whether the business model of the likes of Cotti and Luckin can hold,” say several analysts. “Will it be something like the Uber and Didi rivalry? Where Didi’s strategy was to make drastic investments in consumer discounts to take part and drive Uber to its downfall. Interestingly, after Uber ceased its operations in China, it was “goodbye” time for these crazy discounts, no more price benefits for consumers. This seems to be what Cotti and Luckin are doing: taking market share by sacrificing profits or even making losses.”

The delivery service factor will also be one that the US chain will have to be careful about. One of the reasons why delivery has been able to develop at such a pace in China is that it is relatively cheap – food delivery costs are around 10 to 20% of the price in the US, which appeals to the country’s more price-sensitive population.

Ultimately, the problem with Starbucks’ sales in China is not linked to a decline in coffee consumption – which is actually growing steadily.

“Coffee consumption per capita is still only 9-10 cups, but growing fast,” says Winnie. “China’s population is 1.4 billion, so there is still a lot of room to grow. Through the influence of Western culture, younger generations are willing to embrace coffee. So I think the potential for the Chinese coffee market is huge.”

Starbucks’ challenges in the US and China markets reflect a time of economic distress and fierce competition. To maintain its iconic status and regain its power over these markets, Starbucks will need to drastically pivot its business model and pay close attention to what consumers want, rather than relying on its historical popularity.

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