A "Nightmare" for Starbucks

No brand in Europe or America provides customers with affordable alternatives. Is it possible that they are overconfident in selling "class," "trendy," and "sophisticated" coffee in every cup?

Surrounded by Challenges

The Q2 2024 financial statements of several American corporations operating in China disclose significant difficulties. The most prevalent concern is diminishing revenue and profits, with Starbucks—the "giant" of the US beverage sector, which operates 7,306 outlets in China—reporting a 14% revenue reduction.

Former CEO Howard Schultz's ambitious plan to open one shop every nine hours in China has entirely crumbled. Laxman Narasimhan, who was named CEO in September 2022, suggested establishing eight stores every day throughout the world, saving $4 billion in expenditures, and boosting pay, but his efforts were mainly unsuccessful.

Starbucks is grappling with internal conflicts as the Workers United , representing baristas at over 470 stores in the U.S., demands higher wages and additional staffing.

Customer traffic at Starbucks counters in the U.S. dropped 7% in Q1 2024, marking the largest quarterly decline since at least 2010. Starbucks' stock has fallen about 20% over the past 12 months.

In China, its most significant market, Starbucks has fallen well behind Luckin Coffee in terms of stores count and sales. Luckin Coffee now operates 13,300 outlets, nearly all of which are in China. This amount is double that of Starbucks, which has 6,800 stores.

Starbucks' CEO, Laxman Narasimhan, is overhauling the company's top leadership, modifying its business approach to "democratize" certain areas, and providing a 50% discount on drinks. "Everything is ready," Starbucks announced in an email to customers. This is an unusual "concession" following the brand's decades of dominance.

Losing from the Starting Point

Starbucks is failing mostly as a result of its failure in China. Being at the top for too long, as seen with many well-known firms in other areas, frequently leads to problems.

Luckin Coffee, which was founded in 2017, is like a baby compared to Starbucks. This Chinese company is rapidly expanding, with up to 16 new locations opening on any one day.

In contrast to Starbucks, Luckin Coffee employs a cheaper pricing strategy, selling coffee for just $2 per cup compared to Starbucks’ $10. Even with a 50% discount, Starbucks' coffee remains expensive from the perspective of current Chinese consumers. According to market research company Technomic, the average price for a cup of brewed coffee at the beginning of this year was $3.65, a 49% increase compared to 2020.

Luckin Coffee's quick growth is fueled by its hybrid business strategy, which operates both directly and through franchises. As a consequence, the moniker "Luckin Coffee" spread like wildfire without costing the genuine owner a dime. Meanwhile, Starbucks continues to struggle with whether or not to franchise its brand.

Luckin Coffee's business concept relies upon app-based ordering, with consumers picking up orders in-store or having them delivered. This has helped the corporation to reduce labor and operating expenditures because its outlets are smaller. As a result, Luckin Coffee's operational costs are significantly lower than its competitors.

That said, focusing on a single market right at home is undoubtedly easier than managing a multinational company like Starbucks, which has to juggle the complex tastes, preferences, and consumption trends of various countries and regions.

Typically, not just in coffee, no brand from Europe or America offers the world affordable solutions. However, their overconfidence in selling what they call "class," "trendy," and "sophisticated" is unlikely to succeed in every market globally.