Problems at Starbucks – Chinese Consumer Spending Recovery Slows Down

Chinese consumer spending is expected to face a prolonged recovery and may not return to pre-Covid levels in the near future, presenting challenges for international brands like Starbucks, according to a report by Morgan Stanley. Despite an anticipated 9% rebound in Chinese consumer spending this year, the forecast for next year suggests only a 4.8% increase, 0.5 percentage points lower than pre-pandemic levels. The cautious spending habits of consumers, lack of government stimulus checks, job losses in the service sector, and a soft housing market are all contributing factors to the slow recovery.

In addition to these challenges, international brands like Starbucks are facing increasing competition from local players in the Chinese market. According to the report, China experienced a 16% year-on-year growth in the number of coffee stores, mostly consisting of local brands. This rise in competition, coupled with the market share loss for multinational corporations, including Starbucks, has created a tougher environment for international brands. Notably, brands such as Luckin Coffee with over 9,000 stores, Tim Hortons with more than 600 locations, and the popular Cotti Coffee have gained momentum in the Chinese coffee market.

Despite Starbucks opening its 6,000th store in mainland China in September 2022, the brand faces significant challenges in capitalizing on China’s recovery compared to other U.S. “restaurants” stock picks, as noted by Morgan Stanley analysts. While Starbucks is expected to see approximately 7% growth in same-store sales in China this year, it still lags behind the levels achieved prior to the pandemic. As Chinese consumer spending continues to face obstacles and local competition strengthens, international brands will need to devise effective strategies to navigate and thrive in the demanding Chinese market landscape.