Starbucks in China: Balancing Price Avoidance Amid Discounting Pull

In Shanghai, Starbucks encounters intense competition for its beverages from rapidly expanding, budget-friendly competitors, which have eroded its market dominance. Despite expressing a desire to steer clear of such conflicts, the coffee giant finds itself increasingly entangled in a price battle it sought to evade.

Starbucks faces significant pressure, especially from investors, as weaker sales in its primary markets, the United States and China, have garnered attention. Despite being edged out by Luckin Coffee in China's sales rankings in 2023, Starbucks remains committed to avoiding a price-driven competition. Belinda Wong, CEO of Starbucks China, emphasized this stance in January, prioritizing sustainable, high-quality growth over price wars. Similar sentiments were echoed by founder Howard Schultz during a visit to Shanghai in March. However, reports indicate an uptick in discount offerings through various channels, suggesting potential deviations from this strategy.

Effectively, Starbucks has facilitated discounted purchases for Chinese consumers, offering significant reductions like 30% off or buy-one-get-one-free deals on popular coffee selections without officially lowering their base prices. This approach risks escalating discounting practices, potentially leading to a full-blown price war. While Reuters couldn't precisely measure the extent of Starbucks' increased coupon usage, the company chose not to disclose its coupon policy. Such discounting strategies were previously uncommon for the American coffee chain.

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However, in 2024, such coupons have become readily accessible. Walker Shen, a 38-year-old office worker from Shanghai, frequently utilizes discount coupons to purchase his daily coffee. He has observed a surge in push notifications from Starbucks in recent months, offering him 30% off coupons.

According to Shen, fewer individuals are now opting for Starbucks, noting that "most people aren't that particular about quality," implying a decreased willingness to pay a premium for Starbucks products.

The onset of a pricing battle within China's coffee industry coincides with a persistent deflationary atmosphere, compounded by subdued consumer confidence amidst economic recovery struggles and stagnant wages.

According to Jason Yu, the Greater China managing director of market research firm Kantar Worldpanel, Starbucks finds itself compelled to engage in price competition to some extent in a market where battles over low costs have become commonplace, representing "the new normal."

"Enhancing promotional offers and ramping up the intensity of their promotions, particularly through active social media engagement, are crucial measures to safeguard their market standing and prevent further erosion of market share," he emphasized.

Starbucks reported an 11% decline in same-store sales in China, its second-largest market, in the second quarter results released in early May, leading to a reduction in its annual sales forecast.

As of 2022, the coffee chain held a 13.6% market share in China's cafe and bar market, based on the latest available data.

According to Daxue Consulting, a market research firm, China's roast coffee market was valued at $11.7 billion in 2023 and is forecasted to reach $13.25 billion by 2025. Compared to other players in the market, Starbucks maintains a more selective approach to distributing discount coupons, as noted by independent food and beverage analyst Zhu Danpeng.

"Starbucks implements promotions, but they are typically limited in scope, either in terms of duration or specific product offerings," he explained.

Last year, Starbucks China CEO Wong mentioned "Deep Brew," the company's AI-driven data analytics engine, which enables targeted discount offers to be tailored to "the right customers at the right time" in China. However, the company declined to comment on the current utilization of Deep Brew as part of its strategy.

Coffee for beans

While Luckin's large latte is priced at 29 yuan ($4.00), which is close to Starbucks' latte price of 33 yuan, Luckin frequently offers lattes for just 9.9 yuan with widely-available coupons. Other competitors offer even lower prices; for example, Cotti, founded by former Luckin Chairman Charles Lu, provides Americanos for 8.8 yuan with a coupon, and KFC's KCoffee allows members to purchase 5 yuan coffees for 30 days with a 10-yuan membership fee.

Benefiting from its substantial discounts and rapid store expansion, Luckin's revenue soared to 24.86 billion yuan ($3.45 billion) in 2023, surpassing Starbucks' comparable annual sales of $3.16 billion in China. With 18,590 stores, more than double the 9,000 Starbucks plans to open in China by 2025, Luckin maintains a competitive edge.

Despite price remaining a significant factor in consumer choices, Jason Yu of Kantar emphasizes that Starbucks shouldn't solely engage in a price war. He suggests that Starbucks should persist in offering a premium in-store experience that its competitors cannot replicate.

"Starbucks must compete on price, but it should not solely rely on price competition," he emphasized.

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"They must take the lead in innovation, drive the conversation about coffee culture, and establish emotional connections with consumers, or they risk losing ground to local competitors."

Source: Brecorder