Starbucks is losing ground in US and China markets, and other premium options are moving in

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  • Starbucks shares have plunged by 16%, with key market declines in the US and China
  • The iconic US chain has drastically cut its full-year revenue growth forecast
  • Fierce competition in both markets will make it hard for Starbucks to recover

STARBUCKS RECENTLY made headlines with its decision to revise its annual sales forecast as coffee demand experiences a cooling trend in key markets such as the United States and China. 

The slump in in-store coffee demand has “significantly missed shareholder expectations,” states Howard Schultz in his recent LinkedIn post. “But it’s not the miss that matters. It’s what comes next.” Starbucks’ performance signals a shift in consumer preferences and behaviours 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 by 11%, and the home US market where sales fell by 3%. The chain seems to expect a slow recovery, drastically cutting its full-year revenue growth forecast. Shares plunged by as much as 16%, in the worst drop since March 2020.

The US and China have historically been pivotal markets for the chain, driving significant revenues and contributing to the company’s global growth trajectory. 

In the US, where Starbucks has long been a ubiquitous presence in coffee culture, there has been a noticeable decline in foot traffic and sales at its stores. This trend reflects shifts in American coffee consumption, as consumers increasingly look for cheaper options to match their disposable income.

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

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

“Coffee consumption in China is still on the rise in both in-home and out-of-home,” says an anonymous local coffee business stakeholder in China. “This is likely to continue in the next few years.”

So if the demand is there, why are Starbucks sales declining?

Lower consumer means and increased competition are toppling pricey Starbucks from its throne

Rising inflation rates and economic uncertainties may have impacted consumer spending patterns globally, leading to reduced discretionary spending on premium coffee offerings.

But in both the US and China, the main sales slump factor is fierce competition from a growing number of specialty coffee chains, local cafes, and premium coffee brands that offer similar value propositions and cater to evolving consumer preferences.

“Many would now buy a 9.9 Renminbi (official currency of the People’s Republic of China) coffee from Cotti or a 12 Renminbi coffee from Luckin instead of a 30 Renminbi coffee from Starbucks,” says anonymous. 

“Not only are these less expensive options available, but coffee shops are going to the low price segment. Although unhealthy for their business, they are determined to gain market share first, and attempt to make up revenue with volume while doing so.”

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

“Starbucks’ biggest competitor Luckin Coffee has opened 18,590 shops in China and Starbucks only has 7,093 shops,” says Winnie Yeh, Project Manager at Torch Coffee.

Overall, consumers are being more careful with their spending and Starbucks’ price point has become a sore subject across countries, and in the US especially – something confirmed by the thousands of comments on Howard Schultz’s recent LinkedIn post. In China, consumer behaviour has changed because of a lack of confidence in China’s current and future economy. 

“Foreign policies, housing bubbles, the EverGrande real estate scandal and other potential defaults, low employment rate and job security concerns urge many to start saving money and spend less,” says anonymous. “Cut the unnecessaries and down-grade the necessaries.” 

Across both China and US markets, another factor driving a decline in sales is out of home (OOH) consumption. According to the National Coffee Association, 83% of American past-day coffee drinkers in 2023 had coffee at home – in stark contrast with 35% drinking coffee away from home. 

After the outbreak in 2020, the US also followed China’s example on delivery service, and  orders of coffee deliveries jumped 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 consumption of coffee may be declining somewhat due to the vast network of to-your-door delivery 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 getting things delivered rather than going out, and it was typically cheaper, which is an added bonus. They’re also more likely to brew at home on a more regular basis.”

Can Starbucks recover market share in the US and China?

Looking ahead, the future for 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 challenges to its market position.

Howard Schultz seems confident, making quite a brazen statement: “Starbucks will recover—of that, I am certain (…) I am confident the China business will return to health and become the company’s largest market.”

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

“It depends on whether the business model of the likes of Cotti and Luckin can sustain,” says anonymous.

“Will it be something like the Uber and Didi rivalry? Where Didi’s strategy was to make drastic investment in consumer rebates to gain share and to push Uber to its demise. Interestingly, after Uber ceased operation in China, it was ‘byebye’ time for those crazy rebates, no more price benefits for consumers. This seems to be what Cotti and Luckin are doing: to gain market share by sacrificing profit or even making losses.”

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

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

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

Starbucks’ challenges in the US and China markets reflect a time of economic distress and fierce competition. 

To keep its iconic status and recover its reign over these markets, Starbucks will need to drastically pivot its business model and pay close attention to what consumers want, rather than rely on its historical popularity.

Coffee Intelligence

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