Prices are falling, county towns are expanding, and Starbucks is no longer "high above".
Recently, Starbucks disclosed its performance report for the first quarter of the 2024 fiscal year (October 1 to December 31, 2023). During the reporting period, Starbucks achieved a total revenue of 9.425 billion US dollars, an increase of approximately 8.2% year-on-year; Net profit was 1.024 billion US dollars, a year-on-year increase of nearly 20%.
At the subsequent telephone performance conference, the company pointed out that the revenue growth was mainly due to the recovery of the Chinese market. As Starbucks' second market, the development of the China region has become a focus of attention for executives and many investors.
Low key price reduction for new products
"Our high priced product sales have declined, and consumers are now more cautious," said Belinda Wong, Chairman of Starbucks China.
At the beginning of last year, the Chinese coffee market launched a "price war", which is now becoming increasingly fierce. From the "1 yuan promotion" launched by Kudi Coffee to the normalization of the "9.9 yuan promotion" by Luckin Coffee, many coffee brands have started low-priced promotions, gradually reducing consumer acceptance of high priced freshly ground coffee.
Although Starbucks clearly stated during the phone performance meeting that it has no intention of participating in the coffee price war, the financial report still shows that it is inevitable to be affected.
In the first quarter of 2024 (i.e. the fourth quarter of 2023), Starbucks China saw a 9% decrease in average unit price per customer. Compared with the data from the previous two quarters, in the second, third, and fourth quarters of 2023, Starbucks China saw a year-on-year decrease of 1%, 3%, and 9% in average unit price per customer, respectively. This means that Starbucks is no longer going up high.
Recently, Starbucks launched a limited new Dragon Year product to welcome the Chinese New Year. Some consumers found that the original price of the Starbucks Dragon Year new product (Zhongbei), which was 39 yuan/cup, was only discounted for 19.9 yuan on the Meituan platform, almost 50% off; In addition, on delivery platforms such as Ele.me, you can often order 2 cups of coffee at a 70% or even 50% discount, with a discounted price of around 25 yuan per cup.
Starbucks, which is positioned as a high-end brand, cannot directly shout "9 yuan for the entire venue" like Luckin, but in order to retain consumers in such a fierce competitive environment, it also needs to quietly "lower prices". From the results, the event improved performance. In the first quarter of 2024 (i.e. the fourth quarter of 2023), Starbucks China's revenue was 735 million US dollars, a year-on-year increase of 18%, and same store sales increased by 10%.
Expand the lower tier market
We are increasing the proportion of opening new stores in lower tier markets and new county towns, where the new store economy is clearly strong. Accelerating the sinking is seen as an important strategy for the Chinese market by Starbucks CEO Laxman Narasimhan.
After more than 20 years of entering China, the coffee industry in China has been constantly changing, and Starbucks is no longer dominating. In 2023, the company's biggest competitor, Luckin, is accelerating its expansion pace, surpassing Starbucks in both store numbers and quarterly revenue.
Starbucks urgently needs to seek new growth, and unlike before, Starbucks no longer focuses on consumers in first and second tier cities, but is eager to open its stores to county towns. According to Jihai Data, from October 1, 2022 to September 30, 2023, Starbucks opened new stores in 27 cities, of which 74% were in fifth tier cities.
"In recent years, Starbucks' new store performance and profitability in county towns have been better than those in first tier cities." Wang Jingying said that although there are short-term obstacles, the long-term opportunities in China are obvious. "As of December 31, 2023, we have only conducted business in 857 out of nearly 3000 cities in China, and there are still many opportunities.".
Despite the accelerated sinking of the plan, Starbucks also stated that "its determination to expand its high-end market position has not wavered." Starbucks opened 169 new stores in the fourth quarter of 2023, including 28 county-level stores.
It is worth mentioning that competition in lower tier cities is also fierce, and not only Starbucks is eyeing this market.
In October 2023, Starbucks opened its first county-level store in Jiangxi Province (Jinxian Wuyue Plaza store), and within 500 meters of this store, the figures of Luckin and Coodie can be seen. Luckin has relaxed franchise restrictions since 2023, with a focus on expanding its stores in third - and fourth tier cities.
According to data from Narrow Door Meal Eye, as of the end of January, the total number of "Lucky Coffee" coffee brand stores under the umbrella of Mixuebingcheng exceeded 2800, of which over 60% were distributed in third, fourth, and fifth tier cities, with product prices ranging from 5 yuan to 10 yuan.
In addition to competitive factors, the taste and consumption habits of consumers in county towns are also different from those in first tier cities.
A report points out that most consumers in county towns are not accustomed to the bitterness of coffee and prefer sweetness. They also have a relatively weak demand for the refreshing and refreshing function of coffee. Therefore, when choosing beverages, milk tea should be prioritized over coffee. According to the Ele.me delivery platform, the monthly sales of three milk tea brands, Guming, Chabaidao, and Bawang Chaji, near Jinxian Wuyue Square in Nanchang, Jiangxi, are over 1000. The monthly sales of Starbucks, Luckin, and Kudi coffee brands are all less than 300.
County consumers are more sensitive to product prices and have lower demand for the "third space" (open space for business and office negotiations) shaped by Starbucks stores. Therefore, facing the vast market but diverse consumer habits in Chinese county towns, Starbucks may need to make corresponding adjustments in its products and marketing strategies.
During the conference call, Starbucks announced its performance guidelines for the 2024 fiscal year. Global annual revenue is expected to grow by 7% -10%; Global same store sales are expected to grow by 4% -6%, both lower than market forecasts. In the Chinese market, it is expected to have 9000 stores by 2025. As of the end of 2023, Starbucks had nearly 7000 stores in China.