Casey Hall and Sophie Yu
SHANGHAI (Reuters) – As Starbucks (NASDAQ:) faces stiff competition for its beer in China from fast-growing, low-cost rivals that have grabbed its market share, the coffee chain is increasingly embroiled in a price war, it says. wants to avoid.
The stakes are high for Starbucks, which has recently come under increasing pressure from investors due to declining sales in its two largest markets, the United States and China.
While the Seattle-based company ceased operations in the world’s second-largest economy, where its competitor Lukin Coffee (OTC:) has propelled it to No. 1 in annual sales for the first time in 2023, management is convinced it doesn’t need to engage in a race to the bottom on prices.
“We are not interested in a price war,” Starbucks China CEO Belinda Wong said in January. “We are focused on delivering high quality, yet profitable and sustainable growth.” Those sentiments were echoed by founder Howard Schultz during a visit to Shanghai in March.
However, analysts, Reuters checks and social media posts from Chinese consumers point to an increase in the number of discount coupons being offered by Starbucks through its own mini-programs, as well as through coffee maker livestreams on Douyin and popular third-party delivery platforms. to order coffee.
Essentially, Starbucks has made it relatively easy for Chinese consumers to buy their most frequently ordered coffees with 30% off or two-for-one coupons without lowering their listed prices, sliding down the slippery slope of increasing discounts toward a potential price war.
While Reuters was unable to quantify how much use of Starbucks discount coupons has increased, and the firm declined to comment on its coupon policies, such discounting practices were once rare at American coffee makers. However, in 2024 they became readily available.
Walker Shen, 38, is an office worker from Shanghai who often uses discount coupons to buy his daily coffee. In recent months, he’s noticed an increase in push notifications from Starbucks offering him 30% off coupons.
“I think fewer people are drinking Starbucks now,” Shen said, adding that “most people are not as picky when it comes to quality,” meaning fewer consumers are willing to pay more for Starbucks.
The price war in China’s coffee sector comes amid a persistent deflationary environment, exacerbated by weak consumer sentiment as the economy struggles to recover and wages stagnate.
Unfortunately for Starbucks, says Jason Yu, managing director of research firm Kantar Worldpanel in China, it doesn’t really have any choice but to compete to some extent on price in a market where competing for low cost has become “the new norm.”
“Strengthening and increasing the intensity of promotional offers, as well as high activity on social networks are important steps to maintain our position and prevent further erosion of market share,” he added.
In second-quarter results released in early May, Starbucks said same-store sales in China – its second-largest market – fell 11%, prompting the company to lower its full-year sales forecast.
The coffee chain held 13.6% of China’s cafe and bar market in 2022, according to the latest data available. Market research firm Daxue Consulting valued China’s roasted coffee market at $11.7 billion in 2023 and forecasts it will grow to $13.25 billion by 2025.
Starbucks remains more astute in its approach to distributing discount coupons than others, says independent food and beverage analyst Zhu Danpeng.
“Starbucks will run promotions, but they will be small, limited in time or for specific products,” he said.
Starbucks China CEO Wong said last year that “Deep Brew”, a data analytics engine using artificial intelligence, would offer discounts to “the right customers at the right time” in China, although the company declined to comment on the use of Deep Brew. as part of its current strategy.
COFFEE BEANS
Luckin’s list price of a large latte of 29 yuan ($4) is not far from the price of a latte at Starbucks (33 yuan), but in fact Luckin often sells lattes for 9.9 yuan with a widely available coupon.
Other competitors’ offerings are even cheaper: the Cotti chain, founded by former Luckin chairman Charles Lu, offers an Americano for 8.8 yuan with a coupon, and KFC’s KCoffee allows members to buy coffee for 5 yuan for 30 days with a 10 yuan membership fee.
Thanks to deep discounts and faster store expansion (18,590 stores are already more than double the 9,000 Starbucks says it will open in China by 2025), Luckin’s revenue reached 24.86 billion yuan ($3.45 billion) ) in 2023, surpassing Starbucks’ comparable annual sales of $3.16. billion in China.
While price will be an important factor in consumer decisions for the foreseeable future, Starbucks won’t beat its rivals in a race to the bottom, Kantar’s Yu says, adding that the US firm should continue its strategy of offering a premium in-store experience that its can’t match. competitors.
“Starbucks needs to compete on price, but not just on price,” he said. “They need to lead in innovation, lead the coffee conversation and create emotional value for consumers or they will lose out further to local competition.”
($1 = 7.2444 yuan)