A Starbucks Corp. store in Shanghai, China.
Qilai Shen/Bloomberg
Starbucks has agreed to sell an up to 60% slice in its China business to Chinese investment firm Boyu Capital in a deal that values the operation at $4 billion.
The Seattle-based company announced on Monday that it has formed a joint venture in China with Boyu. The investment firm will own up to 60% in the new entity, while Starbucks retains a 40% interest and keeps the right to license the brand. The total value of its China retail business exceeds $13 billion, which includes licensing fees payable to the company over the next decade, according to the Starbucks announcement.
“Boyu’s deep local knowledge and expertise will help accelerate our growth in China, especially as we expand into smaller cities and new regions,” the coffee giant’s Chairman and CEO, Brian Niccol, said in the statement.
Starbucks plans to increase its number of stores in China to as many as 20,000 over time, according to the statement. The company, which currently operates 8,000 stores in the world’s second-largest economy, had long been searching for a partner as it seeks a turnaround.
In recent years, it has been losing ground to rivals such as Luckin Coffee, as consumers increasingly turn to cheaper offerings. Luckin sells a cup of Americano for $3 — which is almost one-third cheaper than similar offerings from Starbucks in China. Before settling on Boyu, the American company has reportedly received interest from investment firms including Carlyle Group, EQT and HongShan.
The U.S. coffee giant might resort to steep price cuts as it works with its new partner to resuscitate growth in one of its most important markets, analysts say.
Starbucks’ next step in China might be discounting its average retail price of coffee drinks to a level closer to that of local competitors, says Mark Tanner, Shanghai-based managing director of market research firm China Skinny. “Most consumers struggle to understand the premium that Starbucks charges relative to competitors,” he says in a WeChat message.
Starbucks and Boyu didn’t respond to requests for comment. The coffee giant had already cut the price of some of its tea-based beverages by almost 20% to as cheap as 29 yuan ($4.1) in June. Its China business showed modest improvement in the quarter that ended in September. Total revenues increased 6% year-on-year to $831.6 million. Same store sales rose 2% year-on-year, compared with a 14% decline the same period a year ago.
Yet the company needs to do more, says Zhang Yi, founder of Guangzhou-based consultancy iiMedia Research. Starbucks has also been slow to cater to the changing palate of the younger generation, he says.
Luckin Coffee, on the other hand, is quick to capture the attention of young shoppers by launching locally themed products. One of its limited-edition coffee drinks featuring the hit video game Black Myth: Wukong on packaging has proved to be a huge success. The Chinese company’s system even crashed at one point as it was overwhelmed with orders.
“Starbucks’s U.S. headquarters didn’t capture the opportunities here,” Zhang says. “I think it must also do these brand collaborations going forward.”