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Analysis-Starbucks’s China comeback relies on right partner, brewing back the vibe

By Casey Hall

SHANGHAI (Reuters) – As Starbucks tries to revive its faltering business in China, analysts say strategic partnerships and returning to its roots as a place where customers come for a coffee “experience” offer the best bet to beat intense competition and deflationary woes.

The coffee giant is already under pressure globally with declining sales and earnings, but problems in its second-biggest market after the U.S. have been compounded by a weakened economy and consumers unwilling to spend amid a prolonged confidence-shattering property market downturn.

That has seen Starbucks lose its market leader crown in China to local chain Luckin – its domestic revenue surpassed that of its U.S. rival in 2023.

Others such as Cotti and even KFC’s K Coffee have also grown quickly, offering prices less than Starbucks’ 27 yuan ($3.70) Americanos in China as part of a bruising price war that analysts say the U.S. company should resist entering.

Instead, Yaling Jiang, founder of research and strategy consultancy ApertureChina, and others say a strategic partnership provides the strongest chance of Starbucks brewing its way back to success in the world’s second-biggest economy.

“The best case scenario is that they can find a team like Centurium Capital behind Luckin Coffee,” Jiang said.

“When the top decisions are made locally, they may be able to match consumers’ expectations better at China speed.”

Jason Yu, general manager at CTR Market Research, concurred, noting that a good local partner could provide “some advantages in real estate, government relations and land.”

That path is already in Starbucks’ sight. In November it said that it was exploring a strategic partnership in China, possibly following in the footsteps of McDonald’s which sold a majority stake in its China and Hong Kong operations to investors including Citic, a tie-up that has largely been seen as successful.

Reuters reported last week that KKR & Co, Fountainvest Partners and PAG are among buyout firms interested in acquiring a stake in Starbucks’ China business, with Chinese companies, including state-owned conglomerate China Resources Holdings and food delivery giant Meituan also in the mix.

The company declined to comment for this story.

TURNAROUND

For Starbucks CEO Brian Niccol, who took the top job at the coffee chain in August, a successful turnaround in China would no doubt provide strong impetus in revitalising its depressed global business.

The coffee chain’s revenue slumped sharply in the latest quarter, and the company announced 1,100 job cuts as it revamps operations to shore up weak sales which in China alone fell for the fourth straight quarter. Its net revenue in China was around $3 billion in fiscal year 2024, accounting for one-fifth of global revenues.

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