New Cafes Won't Solve Starbucks China Problem

All-day dining won’t solve Starbucks’ big problem in China: Growing foreign and domestic competition.

Starbucks is introducing a new store concept in China in Shanghai: All-day dining, featuring fresh Italian food, according to a Bloomberg report.

“The Starbucks Reserve Bakery Cafe is, along with the already-opened Reserve Roastery, part of the company's Siren Retail strategy,” says equity analyst John Zolidis.

“The goal of Siren Retail is to elevate the Starbucks brand by creating differentiated coffee-based experiences.  The Reserve Bakery combines the company's existing beverage offering with an expanded menu including cocktails and a much broader food assortment based on the Italian Princi Bakery's specialties.  (Starbucks recently acquired Princi and has been introducing the brand in select stores worldwide.)“

While it’s too early to determine whether the new store concept will appeal to Chinese consumers, it’s very unlikely to help the American franchise giant fend-off the growing competition in the Chinese coffee market.

“In China, and in Shanghai in particular, the market has become increasingly competitive with a combination of Western brands like Starbucks and Costa Coffee feuding with local trendy cafes, as well as Beijing-based Luckin coffee, which is currently undergoing one of the fastest retail expansions in history,” says Zolidis.  “Starbucks hopes that its stores can win against these competitors with a combination of product innovation, solid service, attractive atmosphere, a compelling digital loyalty program and delivery.    The company is also relying on its brand, which has been in China for more than 20 years, to create a halo around its offering and to support its pricing.”

On the upper end, there’s competition from Coca-Cola owned Costa Coffee, with 400 stores, and a plan to open another 800 by 2022.

On the low end, there’s competition from Chinese start-ups like Luckin Coffee.

Founded in Beijing in October 2017, the company’s stores are spreading like a wildfire—one store every 15 hours, according to Statista.com.

Already, the company has 2000 stores in operation, and is expected to reach 4500 by the end of 2019.

That’s well ahead of Starbucks which is expected to have 4,121 stores by then.

Meanwhile, Luckin has been capturing the marketing buzz from Starbucks by placing stores in landmarks like the Forbidden City —where Starbucks was famously evicted a decade ago.

And there’s Luckin’s business model, which focuses on smaller stores, technology, and speedy delivery, which are popular among the younger generations.

Worse, Luckin has driven the coffee market into a situation Starbucks doesn’t want to be: price competition. Luckin Coffee products sell 20% below those of Starbucks.

Wall Street analysts know too well what that means for Starbucks: Pressure on market shares, sales growth and profit margins, especially as the Chinese economy slows down.

“Regardless, in the near-term, Starbucks' results (including slightly negative transactions at existing stores) appear to show that growth in supply is outstripping demand,” adds Zolidis.  “Whether the current competitive dynamic will lead to a shake-out among retailers or, on the other hand, serves to spur accelerated growth in Chinese coffee consumption is still difficult to determine.”

My recent book The Ten Golden Rules Of Leadership is published  by AMACOM, and can be found here. 

I’m Professor and Chair of the Department of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional jour...