Down 23%, Starbucks hit the rocks in the Chinese market

Produced | Tiger Sniff Commercial Consumer Group

The author | Miao Zhengqing

The title image | Visual China

Starbucks entered a "tough time" in the Chinese market.

On May 3, Starbucks announced its fiscal second quarter of fiscal 2022 (as of April 3, 2022), and net income in China fell by 14%. In the same-store sales segment, Starbucks also performed bleakly: Starbucks same-store sales in the Chinese market fell 23% due to a 20% drop in same-store transaction volume and a 4% decline in average customer unit prices.

As of the end of April 2022, China remained the second largest market for Starbucks. In China, Starbucks stores remained at 5,654, which is equivalent to 16% of Starbucks' global stores. (Tiger sniffing note: Starbucks' largest market is the United States, with a total of about 15,544 stores)

The downturn in the Chinese market has affected Starbucks' "international performance", starbucks international regional same-store sales fell by 8% in the second fiscal quarter, it is worth noting that several key markets outside China have maintained growth momentum, and it is clear that "stall China" has affected Starbucks' overall score.

U.S. stock analyst Liu Bin told Tiger Sniff that in South Korea and other markets, Starbucks's performance showed a growth trend, in addition to the steady increase in store sales, since 2021 Starbucks has changed the store attributes of south Korea and other markets, Starbucks has increased its store control in the Korean market, which has allowed it to gain revenue growth. "For Starbucks, the Chinese market is crucial, but the impact of the epidemic is fatal to Starbucks' business in China." Liu Bin analyzed that Starbucks' core stores in China are mostly distributed in key cities in economically developed areas such as East China, and some cities have experienced a cliff-like decline in sales in recent months.

On the flip side of the coin, this is the first quarterly report after Starbucks' father Schultz returned to the board of directors, and judging by the situation in the Global Market of Starbucks, this financial report "set a revenue record": the financial report showed that Starbucks' consolidated net income increased by 1.45% to $7.6 billion, the second fiscal quarter with the highest consolidated net income in Starbucks history. (Consolidated net income covers Starbucks self-operated stores, licensed Starbucks stores, and others)

Among them, the fastest growing is Starbucks' self-operated stores. Since June 2021, Starbucks' self-operated stores have maintained a revenue growth rate of more than 10%, taking the past six months as an example, the revenue growth rate has reached 14.2%. The North American market is a key engine of Starbucks growth. On the one hand, Starbucks has the largest number of self-operated stores in the North American market, on the other hand, North America (especially in the United States market) has seen a significant recovery in coffee consumption: Starbucks same-store sales in North America and the United States have increased by 12%, while the average unit price and same-store transaction volume have increased by 7% and 5% respectively.

At present, the key question facing Starbucks is how to find a "local growth logic" that is more in line with the new characteristics of the Chinese market in the case of the "two scenes" of the growth trend of the Chinese market and the North American market? And, is the high growth rate in the North American market sustainable?

What is Schultz anxious about?

Although In the Chinese coffee circle, Schultz is an "idol" for many entrepreneurs, after returning to Starbucks, Schultz's most important energy was temporarily focused on the North American market. After the return, Schultz announced the suspension of stock buybacks and quickly launched a "barista listening event" for the North American market - Schultz and other executives (including executives in north America) began to travel to first-line stores to communicate with grassroots baristas.

What keeps Schultz and executives away is that Starbucks is experiencing a "heart-to-heart problem": Starting in 2021, some Employees of Starbucks stores in North America have expressed dissatisfaction with compensation and benefits, and in December 2021, a Starbucks store in Buffalo, New York, officially joined a local "union organization", which was the first store to form a union since Starbucks was founded, which shocked the Starbucks board of directors. A key issue worth noting is that over the past two decades, Starbucks has been implementing new welfare policies in markets such as North America, especially during Schultz's second appearance, Starbucks has solved a number of issues including "salary and gender relations", and Starbucks is also happy to shape its more competitive "labor image" in the coffee circle. But the incident at the Buffalo store in New York almost declared that "the existing Starbucks employment model is facing great challenges."

According to the financial report, the total number of Starbucks employees in North America in 2021 has exceeded 220,000, and the epidemic is the key to the crisis of Starbucks: analysts who study the Chain Catering Industry in North America told Tiger Sniff that after the epidemic, there was a labor shortage in the North American catering circle, and some chain restaurants had to raise salaries to recruit people, which led to the subversive challenge of the existing "compensation and benefit system" of some large brands. The person also pointed out a key variable, in the North American market, the younger generation has begun to move towards positions such as baristas, and they are affected by emerging traffic content such as Tik Tok, more consumer enthusiasm, more social sharing expression, more environmental protection and personal sustainable development in their daily lives, "The traditional dining world is experiencing changes in the North American market that has not changed in 50 years." ”

Before Schultz's official return, Starbucks had already given him several temporary emergencies, including pleading with the legend to go to front-line stores in 2021 to communicate with young baristas, but this effort did not seem to be enough, and starbucks encountered more labor pressure in North America after entering 2022. After Schultz's official return, a clear signal is that Starbucks is about to make a micro-turn from "pleasing the world of capital" to "pleasing employees": after terminating the stock buyback program, Schultz announced a new strategy that included improving the compensation and benefits of store employees, and public information showed that the initial plan already involved up to $200 million in related investments.

"There will also be a staff development model that will change." A Chinese entrepreneur who is deeply involved in the North American beverage industry told Tiger Sniff that Schultz was once an advocate of Starbucks's "crash training", and one of his ideas was that through one afternoon of training, a new person could take up a job (a fully automatic coffee machine based on Starbucks). But in the North American market, the demand for boutique hand punches began to rise significantly after the epidemic, and the younger generation of baristas was not satisfied with just "manipulating automatic machines".

According to the person, Starbucks has increased its staff skills training in some stores in North America. "After the return of Schultz, it seems that he is also rethinking the growth path of baristas." This may deeply affect the long-term development of Starbucks, a common law in the North American market and the Chinese market is that more skilled baristas mean higher salaries - and "salary" is the root cause of Starbucks's current troubles in North America.

At the other end of the pressure is the high cost of raw materials and logistics, and the most optimistic coffee analysts after entering April have begun to feel anxious about the development of the global coffee market in 2022. "From coffee beans, paper, metal materials, almost every link is increasing in price." Coffee analyst Zhao Chengcheng believes that these price increases are actually just appearances, and the younger generation of consumers are more concerned about the green environmental protection of ingredients, which means that there is a phased pressure on the cost of materials. "You need to change the existing production methods, supply system, if it is just a small coffee shop, it is relatively easy to turn around, for the chain coffee giants, this involves some decades or even decades of deep rewriting of the existing system."

The price increase on the consumer side has become one of the choices. A coffee analyst, who did not want to be named, believes that the "bright" of Starbucks' global revenue in the second fiscal quarter is inseparable from the multiple price increases since 2021. "From the book, the unit price of customers has indeed risen, but whether it is a healthy and rational rise needs to be continuously observed." The person believes that the healthy and rational customer unit price rise is based on the rise in consumer consumption power and the increase in product SKU richness; on the contrary, under the retaliatory consumption boom, the unit price of customers looks "beautiful" through price increases.

But from the perspective of the global market, starbucks price increases have become imperative. A key figure in the earnings report is the consolidated operating margin, Starbucks fell to 12.4% year-on-year, and the core reason for the decline is the pressure on the supply chain side and the pressure on employee costs - if Starbucks maintains the existing price system, various uncertainties may further eat into its profits in 2022. "From this perspective, Starbucks made a clever choice to get used to the new price system quickly when a wave of retaliatory consumption emerges." The above-mentioned person said that in South Korea and other markets, from the current sales status, Starbucks's price increase has been a "smooth transition", and Starbucks has not seen a significant decline in market share in the local area after the price increase.

How does Starbucks solve China's troubles?

The epidemic in 2022 is making the coffee circle rethink the methodology of the Chinese market: in the past, people firmly believed that Shanghai would win the world.

After 20 years of rapid development, Shanghai has become the largest coffee consumer city in China, and Shanghai is the most powerful place for coffee consumption in the whole of Asia. This has made Shanghai a place where coffee must be contested, and a "place where heavy soldiers gather" for coffee brands. Taking Starbucks as an example, Shanghai is one of starbucks's most important cities in the Chinese market, where there are not only a large number of Starbucks stores, but also a consumer group with a higher average unit price.

The impact of the epidemic on Starbucks is not only the decline in store traffic. Since 2020, Starbucks has slowed down its expansion in the Chinese market, and originally planned to complete the target of "6,000 stores" in 2022. The slowdown in store opening and the "optimization" of some underperforming stores have left Starbucks with a "gap" of more than 300 stores from its target. In the second quarter, Starbucks opened 97 new stores, and at this rate, it is doubtful whether Starbucks can complete 6,000 stores in 2022.

The deeper impact is that the ongoing epidemic and staying at home for a long time may adjust the consumption habits of some users. Recently, the sales of coffee liquid, coffee capsules and boutique instant coffee on some e-commerce platforms have increased significantly, while the sales of coffee machines and other equipment have been growing since 2021. One possible scenario is that after the return to normalcy in cities such as Shanghai, consumers will rise a wave of retaliatory consumption fever, but at the same time, "home coffee" may also enter a wave of boom, which means competing with the "passenger flow" of offline stores.

A clear answer in front of Starbucks is that outside of stores, Starbucks needs to accelerate "networking." This is not only takeaway coffee, but also retail coffee products (Starbucks currently sold this business to Nestlé) and more importantly, Starbucks needs to build a coffee mind in the "virtual world".

"For example, when people buy coffee takeaways, will they instinctively choose Starbucks? And when buying home coffee products, will you give priority to buying Starbucks products? This is what Starbucks needs to solve quickly after this epidemic. Zhao Chengcheng told Tiger Sniff that in the "Internet world", the new local coffee forces and heavy troops gathered are mostly new categories - since 2016, these brands have avoided international big names to create some new categories, or make some niche categories bigger. In the process of their rise, they make full use of new traffic (short videos, live broadcasts) and complete delivery based on e-commerce channels, and younger coffee consumers have quickly become the key audience for these new categories.

Judging from the current situation of Starbucks, it has not withdrawn from the table, but with a senior supply chain and real-world brand power, Starbucks has quickly "grown" in the "online" coffee world: the financial report shows that in the second fiscal quarter, Starbucks accounted for 43% of sales through digital channels, which set a new record. After re-signing with the takeaway platform in January this year, Starbucks simultaneously laid out the US group and Hungry, which was regarded as a key opportunity for Starbucks to "exert force" on takeaway.

Starbucks also needs to think about the deep impact of the epidemic on local workers. Since 2021, the coffee and tea circles are facing the pressure of high labor costs, and optimizing efficiency through digitalization and smart devices is becoming a common choice for brands, which will also be the top priority for Starbucks' development in the Chinese market in 2022. Some people told Tiger Sniff in February this year that some new coffee machines and equipment are being trialed in some stores, and these devices can help stores further optimize the personnel structure and improve human efficiency.

At present, with Beijing and other places tightening control due to epidemic factors, Starbucks sales in China's core cities are facing further "decline". It is reported that Starbucks is cautiously optimistic about whether the Chinese market can "pick up" in the third quarter. If the Chinese market does not return to a high growth rate in 2022, can North America support Starbucks' annual growth trend? The longer-term question is, after the epidemic gradually recovers, what key and new strategies should Starbucks try in the Chinese market? After all, China's coffee market is already a common "new continent" in the eyes of the coffee crowd.