Starbucks faces intensifying competition in China amid price war fears

Starbucks is facing severe competition in China as low-cost rivals lose their market share, putting the coffee giant into a pricing conflict it wants to avoid. Starbucks is facing rising investor pressure as sales in its two main regions, the United States and China, fall.

In 2023, Luckin Coffee surpassed Starbucks in yearly sales in China for the first time, posing a substantial challenge to the Seattle-based corporation. Despite this, Starbucks management argues that a pricing war is unnecessary. "We are not interested in entering the price war," stated Starbucks China CEO Belinda Wong in January. Founder Howard Schultz echoed these remarks during a March visit to Shanghai, emphasizing the importance of profitable, long-term growth.

However, industry analysts and Chinese customers note an increase in discount coupons provided by Starbucks via mini-programs, Douyin livestreams, and third-party delivery services. These discounts, which are commonly 30 per cent off or two-for-one vouchers, indicate that Starbucks is becoming more reliant on promotions to entice customers rather than formally decreasing pricing.

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While the scope of Starbucks' increased discounting is unknown, these tactics were unusual for the corporation until recently. They have become commonplace by 2024. Walker Shen, a 38-year-old Shanghai office worker, saw more frequent push alerts from Starbucks offering 30 per cent off promotions. "I think fewer people are drinking Starbucks now," Shen said, adding that many customers are unwilling to pay a premium for the company's quality.

The price battle in China's coffee industry comes with a deflationary economy and low consumer attitude, providing further obstacles to Starbucks. According to Jason Yu, Greater China managing director at Kantar Worldpanel, Starbucks has little choice but to compete on price in a market where low-cost battles have become "the new normal." He noted that preserving market share requires strengthening promotional offers and growing social media activity.

Starbucks' second-quarter data in early May revealed an 11 per cent loss in same-store sales in China, prompting a fall in the company's annual sales projection. According to Daxue Consulting, the company's market share in China's cafe and bar sector was 13.6 per cent in 2022. China's roast coffee industry was valued at $11.7 billion in 2023, with estimates of $13.25 billion by 2025.

Despite the competition, Starbucks' discounting approach remains selective, according to Zhu Danpeng, an independent food and beverage analyst. Promotions are limited to specific periods or items. Starbucks China CEO Wong emphasised the importance of "Deep Brew," the company's AI data analytics engine, in efficiently targeting discounts, but declined to comment on the company's present strategy.

Competitors such as Luckin Coffee, which routinely provides lattes at considerably lower prices, and Cotti, a chain founded by former Luckin Chairman Charles Lu, exacerbate the pricing pressure. Luckin's quick expansion, with over 18,590 locations compared to Starbucks' targeted 9,000 by 2025, poses yet another challenge to Starbucks.

According to Kantar's Yu, Starbucks should continue to differentiate itself through its premium in-store experience. "Starbucks needs to compete on price but not only compete on price," according to him. "They need to lead in innovation, lead in the coffee conversation, and create emotional value for consumers, or they will lose out more to local competition."

(With inputs from Reuters)