By Evie Liu
Starbucks stock jumped 1.8% on Thursday after a report that the coffee retailer is considering selling a stake in its Chinese operations to a local partner to help it better grow in the market.
This doesn't come as a surprise.
Bloomberg reported the deal under consideration, citing people with knowledge of the matter.
As Starbucks struggles with slumping sales in China, management has been exploring ways to rejuvenate growth and has noted on several occasions that they are considering a strategic partnership to help the company better compete in China.
"We are fully committed to our business and partners, and to growing in China," said a Starbucks spokesperson in response to Barron's request for comment.
While it's unclear what a partnership looks like or entails, it's probably dilutive to profit margins, BTIG analyst Peter Saleh wrote in an October note.
China is Starbucks' largest market outside of the U.S., with over 7,500 stores generating roughly $3 billion of revenue in fiscal 2024 -- about 9% of the total sales. The company has invested heavily to strengthen its presence in China, but that has proven challenging in recent years.
Although Starbucks has been growing its store count in the country, a generally weaker consumer environment and fierce competition from local rivals such as Luckin Coffee are increasingly hurting its business.
In fiscal 2024, same-store sales for Starbucks' Chinese stores fell 8% from a year earlier, with the fourth quarter ending in September seeing a 14% slump -- thanks to declines in both the number and average size of orders.
If Starbucks were to sell some of its stake in China, it wouldn't be the first. It isn't uncommon for western chains to tie up with operators or investors in overseas markets when they struggle to compete with local rivals or cater to local tastes.
In 2016, KFC parent Yum! Brands sold a stake in its Chinese operations to private equity firm Primavera Capital, which eventually led to a spinoff of the business as a separate listing on the New York Stock Exchange under the name Yum! China.
The following year, McDonald's sold a majority stake in its China and Hong Kong operators to a group of investors. But the company has bought back some those stakes in 2023.
Still, rebooting China might not be Starbucks' top priority right now. The company is facing bigger challenges in its domestic business in North America, which accounted for 75% of its total revenue in fiscal 2024.
The coffee chain is struggling to maintain growth at home as consumers complain about long lines, high prices for drinks, and a less cozy store environment. In the latest quarter, same-store sales in North America declined 6% from a year ago.
Since Brian Niccol became the new CEO of Starbucks in September, the company has been focused on turning around its U.S. business under its "Back to Starbucks" plan. Niccol has spent much of his time visiting stores and meeting with partners in U.S. markets.
He hasn't made a market visit to China yet. On the latest earnings call, Niccol said he needs to spend time in China to better understand the company's operations there.
"All indications show me the competitive environment is extreme, the macro environment is tough, and we need to figure out how we grow in the market now and into the future," he told analysts.
Write to Evie Liu at evie.liu@barrons.com
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November 21, 2024 16:52 ET (21:52 GMT)
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