HONG KONG — Starbucks faces a problem in China: coffee and tea consumers who want more for less.
Vivian Yan tried her first Starbucks coffee eight years ago. She was desperate for a caffeine boost at work and the store was nearby. “That didn’t necessarily mean I loved Starbucks,” she said, “nor was it my first choice.”
These days, she thinks a Starbucks cup is a little too expensive and prefers to get her coffee at McDonald’s. But what she really loves are the Chinese chains ChaGee, HeyTea and others that sell coconut milk lattes, cream cheese bubble teas and sweet jasmine tea frappés. “They are delicious and offer more options,” said Yan, 35, who is from China’s eastern Jiangsu province.
Yan’s preference for more diverse flavors poses an acute challenge for Starbucks. The company is losing customers quickly. Brian Niccol, the new CEO, sounded the alarm in October, calling competition “extreme” in the company’s second-largest market after the United States.
When Starbucks opened its first store in China in 1999, tea dominated and coffee culture was virtually non-existent. But the company quickly built a thriving market alongside a growing middle class that was turning to iPhones, Gucci handbags and other international brands to signal its new wealth.
Today, we are more price conscious and attracted to local rivals that are popping up on street corners across the country, offering something a little different. Dozens of Starbucks’ competitors launch new tea and coffee flavors every week at lower prices, creating competition so fierce that Starbucks saw a 14% drop in comparable-store sales in China in the last financial quarter.
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Luckin Coffee, a Chinese brand that started seven years ago, now generates more revenue in the country than Starbucks. It has almost three times as many stores and opens a new one, on average, every hour.
Niccol, who took over as CEO of Starbucks in September, must not only figure out how to help the coffee chain regain its foothold in the United States, where its 17,000 stores generated $26.7 billion in revenue last year, but also find a solution in China, where its 7,600 stores generate around US$3 billion in annual sales.
In China, “we need to figure out how to grow the market now and in the future,” Niccol told Wall Street analysts during an earnings call in October. This growth can come with the help of a strategic partner, he added.
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Starbucks declined to make executives available for this story.
“We have a world-class team and a strong brand in China, and we see significant long-term growth potential in the market,” said Marc Birtel, a company spokesman, in an emailed statement.
Starbucks is not the only foreign company facing challenges in China. Brands that once saw the country as a promising growth market are dealing with slower demand for their products. Consumers remain reluctant to spend money, buffeted by a housing crisis and a weak job market that have hurt China’s economy.
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In early December, General Motors announced it would face a more than $5 billion hit to its profits as it restructures its troubled operations in China, which have been posting losses as its car sales have fallen sharply. Estée Lauder shares plunged 21% in a single day after the cosmetics company cut its dividend and withdrew its 2025 forecast due to uncertainty over China’s economy.
In almost every category, local businesses are willing to price their cars, coffee and clothes at deep discounts to crush the competition.
Starbucks, offering more milk teas and flavors that cater to local tastes, but they are often more expensive than competitors and sometimes miss the mark.
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Many young consumers in China are also shunning foreign brands in favor of Chinese companies amid a wave of nationalism known as guochao, or Chinese fashion. The country’s leaders have a history of heightening patriotism with propaganda during times of tension with other countries. If President-elect Donald Trump follows through on his promise to impose tariffs on all products entering the United States from China, the government in Beijing could turn against American brands.
In a nod to this, Starbucks, which offers more U.S.-centric drinks like the Pumpkin Spice Latte in its China stores, recently said its business faces risks from “rising tensions between the U.S. and China and increased anti-Americanism, potential tariff increases, reprisals, restrictive regulations or boycotts, and growing political sensitivities in China.”
Patriotic sentiment is an increasingly important factor for foreign brands, according to Jin Lu, a public relations expert who has worked with many multinational brands in China, including PepsiCo and McKinsey.
“This momentum of Chinese nationalism has grown very, very strong,” Lu said. “People tend to think, ‘OK, this country is stronger and has the second-largest economy. Do we really need this foreign investment?’”
At a Starbucks in Hong Kong in December, Liu Ning, 47, who was visiting the city from Zhengzhou in northern China, reluctantly ordered a matcha latte. He was tired from all the shopping and needed a place to sit.
“Starbucks coffee tastes terrible and has an industrial feel,” Liu said. The restaurant was almost empty except for a few tables occupied by students and a few workers on their laptops.
But just around the corner, dozens of people stood outside ChaGee, a Starbucks competitor, waiting for Lapsang Souchong tea lattes and snowy Da Hong Pao frappés. They posed in front of the sign and took photos of their red and blue takeaway cups, posting on social media about the quality and price, which was often cheaper than Starbucks drinks.
China now has more coffee shops than the United States, according to World Coffee Portal, a market research firm. The market grew 25% from 2018 to 2023, according to Bain & Co. estimates.
“Chinese consumers are very spoiled in some ways because it’s a very competitive market and all the suppliers are trying to make them happy with new releases,” said Nancy Zheng, a partner at Bain in Shanghai.
Luckin, for example, launches around 60 new products each year, offering a new drink every week. Its new coconut latte generates nearly $140 million in annual sales, according to Zheng.
With its spacious stores and couches, Starbucks is still often the place where professionals meet to discuss business, students go to study or tired shoppers find respite. This, in a way, positions the company in a different category from its competitors, which tend to have smaller stores focused on fulfilling orders placed on smartphone applications.
Starbucks “is still a strong brand,” said Fred Hu, founder of investment firm Primavera Capital and non-executive chairman of Yum China, the exclusive licensee of the KFC, Pizza Hut and Taco Bell brands in the country. “There is no reason why they cannot be successful in the future.”
“But,” he adds, “they need to make changes.” These changes could include finding a local partner or spinning off the business in China, as Yum did in 2016. Depending on the direction Niccol takes, Primavera Capital could be a future candidate for a partnership.
Regardless of what Niccol ends up doing, experts say time may be running out.
This year, Howard Schultz, former CEO of Starbucks, insisted that the coffee chain would not get into a price war in China. “As customers become more informed about coffee, they will want to upgrade to cheaper or discounted products,” he said in a talk at Fudan University in Shanghai. “As long as we continue to gain the market’s respect, they will choose to upgrade to Starbucks.”
At the same time, the company has tried some of the tactics used by its local competitors. He increased promotions and provided coupons throughout much of the summer. The coffee giant has also started following domestic competitors like Luckin and Cotti in smaller cities. During this year’s Lunar New Year holiday, Starbucks released a pork-flavored latte. It cost over $9 and was widely viewed as a disaster.
“They are the first coffee brand in China, so it will definitely be challenging to defend their position because all the new products are taking their customers,” Zheng said.
Starbucks, she added, “lost a lot of customers to Chinese brands.”
