Starbucks is facing increasing growth pressure.
On July 31st, the company released its performance for the third quarter of fiscal year 2024 (ending on June 30th, 2024). According to the financial report, Starbucks' revenue for the current period was $9.114 billion, a year-on-year decrease of 0.06%, and a year-on-year increase of 1% calculated at a fixed exchange rate. Net profit decreased by 7.6% year-on-year to $1.05 billion.
Behind it is the unevenness of major markets.
In the current period, Starbucks' revenue in North America was 6.135 billion US dollars, a year-on-year increase of 0.9%. This growth comes from store expansion. Starbucks added 526 new stores this quarter, bringing the total number of stores to 39477. Among them, stores in the United States and China accounted for 61% of the company's global stores, with 16730 and 7306 stores respectively.
The performance of the second largest market, the Chinese market, is not optimistic.
As the store scale continues to expand, Starbucks' revenue in China for the current period was 733.8 million US dollars, a year-on-year decrease of 11% and a month on month increase of 5%.
Over the past year, unprecedented store expansion and large-scale price wars at the expense of same store sales and profitability have also caused significant disruptions to the business environment, "said Laxman Narasimhan, Starbucks' global CEO, during the earnings call.
Price war intensifies
Objectively speaking, the price war in the Chinese coffee market has indeed become more intense.
On July 23rd, Kudi Coffee announced its official plan to open 8000 convenience stores in the second half of the year. At the same time, the company also set a goal of expanding to 50000 convenience stores over the next three years. At the end of February, Kudi stated that the store expansion had reached a scale of 7000 stores and would enter a period of stable expansion.
Synchronized with expansion is the price war. On May 24th, Kudi Coffee announced another three-year promotion, the "9.9 yuan promotion for the entire session".
It should be noted that at a price of 9.9 yuan, Kudi may have completed its capital circulation. The company's Chief Strategy Officer, Li Yingbo, stated that Kudi has basically completed the construction of its supply chain and achieved initial cost advantages. But according to 21st Century Business Herald reporters, Kudi has not yet made a profit.
This pattern has already had an impact on Luckin. The company's Q2 2024 results show that profits continue to shrink. In the current period, Luckin Coffee's revenue was 8.403 billion yuan, a year-on-year increase of 35.5%; Net profit was 871 million yuan, a year-on-year decrease of 13%. Last quarter, Luckin was in a loss making state.
Behind it lies the impact of price wars. This impact includes both Luckin's participation in price wars and the erosion of profits from low-priced products, as well as consumers switching to other companies. In May 2023, Kudi Coffee launched the "9.9 Every Day" promotion, and since then, a coffee price war has been raging. Less than a month later, Luckin Coffee announced the launch of a store anniversary promotion, launching 9.9 yuan per week coffee items. In June, it announced the launch of a regular 9.9 yuan per week discount, which will last for at least two years.
At present, unlike Kudi's 9.9 yuan discount, Luckin Coffee is offering special prices on some products, with fluctuating discounts. In the current period, Luckin Coffee's self operated same store sales decreased by 20.9% year-on-year, while the growth rate in the same period of 2023 was 20.8%.
In terms of store count, as of the end of the second quarter, Luckin Coffee had a total of 19961 stores, a year-on-year increase of 84%. Among them, there were 19924 domestic companies, with a net increase of 1371 companies; There are 37 foreign companies, with a net increase of 5. In the current period, there were 13019 directly operated stores of Luckin Coffee in China, with a net increase of 820 stores; Joined 6905 companies, with a net increase of 514 companies.
Returning to Starbucks, under the influence of the price war, same store sales have continued to decline.
In the current period, Starbucks China's same store sales decreased by 14% year-on-year, with a 7% decrease in same store transaction volume and a 7% decrease in average order value. The good news is that the brand's localized holiday food and breakfast time member consumption frequency have increased.
As mentioned earlier, Starbucks' stores in China are still in an expansion period. At the end of June, Starbucks China had 7306 stores, an increase of 213 from the previous quarter and a 13% increase from the previous year. Starbucks CFO Rachel Ruggeri stated that the new store has brought significant growth to the business.
The sinking market appears relatively easy. Taking Ruggeri as an example, Starbucks has covered about 900 out of nearly 3000 counties and cities in China. Our investment return rate in the first year was as high as 70%, and the average cash profit margin exceeded 30%, "he said.
This viewpoint may also mean that Starbucks is struggling in the high-end market.
Continue to expand
It should also be noted that Starbucks is also launching new strategies.
On June 20th, the brand announced changes to its membership system, with the highlight being the integration with Hilton in the membership ecosystem. Specifically, members of both parties can join each other's membership system through their respective apps and other channels. In addition, at the membership level, Starbucks has added "Diamond Star". For regular members, Starbucks has added the redemption of 3 stars and 5 stars in addition to the original "9 stars for a designated medium drink" and "1 star for the corresponding drink".
Under this change, in the current period, Starbucks Star Enjoy Club's 90 day active members increased by 1 million to 22 million compared to the previous quarter, with a total membership of over 132 million. However, various strategies have never been able to completely salvage Starbucks' declining sales trend.
In addition, Starbucks still verbally emphasizes not participating in price wars.
We will continue to focus on the high-end coffee market, seeking high-quality, profitable, and sustainable growth. Based on the present, we will steadily grow and not sacrifice operating profit margins for sales. Secondly, we will explore huge blue ocean opportunities through rhythmic store expansion planning, and ensure first-class returns and profitability of our stores. Thirdly, we will continue to invest in our partners, "said Liu Wenjuan, Co CEO of Starbucks China.
She also added that Starbucks China has adopted targeted and precise pricing strategies to create sales growth.
Looking back, Starbucks' continued expansion seems to be a firm strategy. Its plan is to have 9000 stores in China by 2025.
However, the expansion method may change.
Eslite stated that Starbucks sees higher growth and profit opportunities in China, and the company is building a new generation of Starbucks based on high-end brands to conduct more digital, innovative, and localized businesses.
To achieve this goal, he revealed that Starbucks is in the early stages of exploring strategic partnerships in China to further enhance its competitive position, accelerate growth and innovation, and achieve long-term victory in China.
We have always attached great importance to entrepreneurial spirit and have studied various methods to achieve this goal, including joint ventures, strategic partnerships in technology, real estate, and supply chain. However, to be frank, we are in a very early stage, so I do not want to comment specifically on any of the options. We will update you on the latest developments as we explore the progress of strategic partnerships.
In fact, Starbucks has had significant collaborations with companies such as Uni President Group and Maxim's Group. However, with Starbucks gradually acquiring shares in its joint ventures in China, all of its stores in mainland China have switched to a direct sales model. In the ready to drink field, Starbucks currently has production and sales cooperation with Kangshifu. It remains to be seen what kind of strategic partners are mentioned by Eslite.
And what can be confirmed is that under the cold market, Starbucks is brewing a bigger transformation in China.