Starbucks’ (SBUX) stock rose by 1.8% on Thursday, following reports that the coffee giant is exploring the sale of a stake in its Chinese operations.
This potential move, aimed at fostering growth in the world’s largest coffee market outside the US, comes as Starbucks grapples with declining sales and fierce competition from local rivals.
Stake sale could boost growth but may impact margins
According to Bloomberg, Starbucks is considering a strategic partnership in China by selling a stake to a local investor.
While the specifics of the deal remain unclear, such partnerships are common among Western companies operating in China.
Analysts warn that the move could dilute profit margins but provide much-needed support in a challenging market.
Peter Saleh, an analyst at BTIG, noted in an October report that while a stake sale may improve Starbucks’ competitive position, it is unlikely to be a high-margin strategy.
However, the potential partnership could help Starbucks better cater to Chinese consumers’ preferences and navigate the intense competition in the region.
China: A critical but struggling market for Starbucks
China accounts for approximately 9% of Starbucks’ total revenue, generating $3 billion in fiscal 2024 from its 7,500 stores.
Despite significant investments to strengthen its presence, the company faces challenges stemming from a weaker consumer environment and stiff competition from local brands like Luckin Coffee, which has rapidly gained market share.
Same-store sales in China dropped 8% year-over-year in fiscal 2024, with a sharper decline of 14% in the fourth quarter ending September.
This slump reflects a decrease in both the number and size of orders, exacerbated by changing consumer behaviour and economic headwinds.
Starbucks’ struggles in China are not unique. Other Western brands, including Yum! Brands and McDonald’s, have faced similar challenges and turned to local partnerships or stake sales to regain momentum.
Yum! China, which emerged after Yum! Brands sold a stake in its Chinese operations in 2016, is now a publicly traded company on the New York Stock Exchange.
Strategic parallels and potential outcomes
If Starbucks proceeds with the stake sale, it could follow the path of other global brands that have successfully leveraged local partnerships in China.
However, these arrangements come with trade-offs, often involving reduced control over operations and profit-sharing agreements.
Starbucks CEO Brian Niccol, who took over in September 2024, has acknowledged the complexity of the Chinese market.
On the company’s latest earnings call, he noted the “extreme” competitive environment and the need for a long-term strategy to grow in the region.
Niccol plans to visit China to gain a deeper understanding of the challenges and opportunities.
Domestic challenges overshadow China’s issues
While the situation in China is significant, Starbucks faces even larger hurdles in its North American market, which accounts for 75% of its total revenue.
In fiscal 2024, same-store sales in North America fell by 6%, driven by complaints about long wait times, rising prices, and a perceived decline in the in-store experience.
Under its “Back to Starbucks” initiative, the company is focusing on revitalizing its US business.
This plan includes streamlining operations, addressing customer feedback, and improving employee engagement.
Niccol has prioritized these efforts, spending much of his time visiting US stores and engaging with partners.
The dual challenges in China and North America highlight the balancing act Starbucks must perform to maintain global growth.
While the proposed stake sale in China could provide a boost, it may not address the broader issues impacting the company’s performance in its home market.
What does this mean for SBUX stock?
The potential stake sale in China has created optimism among investors, as reflected in the recent uptick in Starbucks stock.
However, analysts caution that the long-term impact will depend on how effectively the company executes the partnership and adapts to the evolving Chinese market.
Additionally, Starbucks’ focus on its domestic operations may limit its ability to fully address the challenges in China.
The company’s ability to juggle both priorities will be critical to sustaining investor confidence and delivering consistent financial performance.
For now, the market is watching closely as Starbucks navigates this pivotal moment in its global strategy.
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