China is Starbucks' 2nd biggest market, but sales are slumping. Here's why.

Core Insights - Starbucks is facing significant challenges in China, with comparable store sales down 14% in the most recent quarter, highlighting the volatility in its sales performance over the past five years [1][3][11] - The company has over 7,300 stores in China, making it its second-largest market after the US, with a target of reaching 9,000 stores by 2025 [1][12] Sales Performance - Comparable store sales have been negative for the last two quarters, with both the transaction count and average ticket size down 7% year-over-year [3][12] - The average ticket size has been declining steadily over the past two years, indicating a shift in consumer spending behavior [3][12] Competition Landscape - The coffee shop sector in China is experiencing intense competition, with Luckin Coffee being Starbucks' biggest rival, boasting over 20,000 stores compared to Starbucks' 7,300 [5][6] - Other competitors include Cotti Coffee, McDonald's McCafe, and KFC's KCoffee, contributing to a challenging market environment for Starbucks [6] Consumer Preferences - Many Chinese consumers prioritize product over experience when visiting coffee shops, which contrasts with Starbucks' consumer-centric approach [7] - Luckin Coffee's rapid product innovation and focus on local flavors have made it more appealing to Chinese consumers, particularly with popular offerings like sweet and milky beverages [7][8] Strategic Positioning - Starbucks aims to maintain its premium positioning in China, targeting middle-class consumers, particularly white-collar professionals, with prices ranging from 30 to 40 yuan ($4.20 to $5.60) for a 16-ounce drink [9] - Despite this strategy, Starbucks has increased its use of discounting to compete with local rivals, which has led to lower average check sizes [9] Economic Context - China's economic growth has slowed to 4.7% year-over-year in the second quarter of 2024, contributing to cautious consumer spending [11] - The current economic climate presents challenges for all players in the market, including Luckin Coffee, which has also reported a decline in same-store sales [11] Future Outlook - Starbucks remains optimistic about its long-term strategy in China, focusing on locally relevant products and expanding into smaller cities [12] - The company added over 800 new stores in the year leading up to June 30, indicating a commitment to growth despite current challenges [12]