Why Starbucks is another brand that needed to change to survive in China

A decade after Starbucks’ then-CEO Howard Schultz stated that China had the potential to become the American coffee chain’s biggest market, the company is radically changing its strategy in the country.

The company will sell a majority stake — 60% of its China business — to Hong Kong-based investment firm Boyu Capital in a deal valued at about $4 billion. Analysts say that the local partner is better able to help the brand prosper.

Also read: Starbucks sells 60% of its China operations in US$4 billion deal

Several factors made it difficult for Seattle-based Starbucks to maintain its original strategy: the loss of steam during the Covid-19 pandemic, the emergence of strong local competitors, especially Luckin Coffee, and the weakness of the North American market.

Boyu is expected to be essential in expanding Starbucks’ presence beyond megacities like Shanghai and Beijing, helping to control costs. “Boyu’s deep knowledge and local experience will help accelerate our growth in China, especially as we expand into smaller cities and new regions,” said CEO Brian Niccol.

Starbucks currently has 8,000 stores in China, and Niccol said that number could reach 20,000 with the new partnership. The agreement also aims to strengthen competition with Luckin, which already has more than 20,000 units and has attracted its American rival to a price war.

Despite having been a pioneer in the Chinese market, Starbucks’ share fell from 34% in 2019 to 14% in 2023, according to Euromonitor International.

The vast Chinese market has long seduced Western brands, but it has also been a challenge. Ralph Lauren had to leave the country in 2010 and only returned after redesigning its stores. Nike also struggled before consolidating, but now faces falling sales and more cautious consumers.

Starbucks’ decision follows precedents from other fast food chains. In 2017, McDonald’s sold 80% of its operations in China and Hong Kong to conglomerate Citic for US$2.1 billion. KFC operates in the country through Yum China, created in 2016 to give the group more agility.

Although Starbucks continues to receive 40% of profits and royalty fees in China, the deal represents a major change in direction — and a sign that the company has given up on achieving the potential it envisioned in the country. Just eight years ago, Starbucks had bought out its local partners in some Chinese regions.

According to analysts, the partnership will allow Starbucks to focus its efforts on its recovery in the United States. “Having a partner in China reduces operational complexity and geopolitical exposure, freeing up resources to focus on business recovery in North America,” said John Zolidis, president of Quo Vadis Capital.

Starbucks closed about 550 stores in North America last quarter as part of its restructuring, leaving it with about 17,000 locations. Last week, the company reported that U.S. comparable store sales were stable — breaking a six-quarter streak of declines.

Niccol, who took over in August last year after six years as CEO of Chipotle, told investors the plan is working: “It’s clear that our recovery is gaining momentum,” he said.