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China’s coffee war has become the hottest showdown in global retail. What started out as an unlikely contest between Starbucks and a handful of local start-ups has now turned into a bitter feud. Facing homegrown rivals and eroding brand power, Starbucks has agreed to sell a majority stake in its China business to Boyu Capital, creating a $4bn joint venture. That marks a shift from dominance to survival.
Local rivals such as Luckin and Cotti are expanding rapidly in China, slashing prices and catering to local tastes. Meanwhile, chains known for other drinks are moving into the same space and fighting for the same customers. Tea and bubble tea giants including Mixue and Guming are now a significant presence both in physical stores and delivery apps. That means Starbucks no longer competes only with local coffee peers.
Of those peers, Luckin Coffee alone has more than 26,000 outlets across China, more than three times Starbucks’ reach. A long list of smaller rivals add to the competition, pouring even cheaper lattes into an increasingly cost-sensitive consumer market. That means Starbucks’ premium pricing strategy is no longer viable.
The tie-up with Boyu is therefore a timely move for the US group. Taking a smaller share of the proceeds should be worthwhile if it allows Starbucks to survive a price war it can no longer win alone. It will help shift Starbucks towards an asset light and brand-driven model, and reduce its exposure to China’s volatile retail sector.
But it is a good deal for Boyu too. The company has a strong record of using its political and retail networks to turn around underperforming global brands in China. Faster expansion in lower-tier cities and better real estate terms could help Starbucks finally regain momentum in a market where its growth has slowed.
Despite strong physical store growth, shares of coffee and tea retailers in China have been declining this year, reflecting weak consumer demand and growing price competition. Shares of Guming are down a quarter from its July peak. Mixue shares trade at a discount of about a third to global peers on a forward earnings basis.
That market weakness helps explain Starbucks’ latest move. The deal is a reflection of a broader trend: foreign companies can no longer rely on brand prestige alone in sectors in which Chinese rivals undercut prices and understand consumers better.
