Competition and trade war may shatter Starbucks’ China dream

Starbucks’ (SBUX) reputation as the undisputed leader in the caffeinated beverage market was challenged in recent years due to the growing competition, both on the home turf and abroad. The company has renewed its focus on the Chinese market, hoping to capture the untapped areas, even as global sales growth continues to weaken.

However, the coffee giant’s China initiatives are facing setbacks due to the emergence of several new players in the local market, with the most prominent among them being Luckin Coffee. Latest reports suggest that too much dependence on China for future growth could prove disastrous for Starbucks.

Meanwhile, the company’s stock made strong gains in the latter part of last year, after maintaining a downtrend in the first half, and hovered near the all-time highs seen a few years ago. Over the past three years, the stock witnessed a lot of volatility and often underperformed the S&P 500 index.

Recent developments indicate that too much dependence on China for future growth could prove disastrous for Starbucks

The lingering pessimism in the market was evident on Thursday when the stock lost about 4% soon after trading started. There is a growing concern that the unique branding strategy and premium products, which once helped Starbucks stand out in the non-alcoholic beverage segment, are losing their appeal.

Realizing the huge potential of the Chinese market, Luckin Coffee is all set to launch 2,500 outlets across the country this year, raising its store count to about 4,500, according to media sources. It is expected that the large-scale expansion will make the early-stage startup the number one coffee chain in the region, pushing Starbucks to the second position. In comparison, it took Starbucks about two decades to build its network of 3,600 coffee outlets in China.

Starbucks lays out growth plans for key markets

In less than a year after commencing operation in early 2018, Luckin has already made a mark in the Chinese coffee market. However, having invested heavily in technology and promotional activities, the company’s operating loss is rising steadily.

Meanwhile, Starbucks is pushing ahead with its ambitious mission in China, a market that is crucial for the American coffee chain to regain the weakening growth. With the goal of rolling out around 6,000 new outlets in China in the next couple of years, the Starbucks management will have a tough time dealing with competition while also tackling potential headwinds form the US-China trade war.

 

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