Starbucks did great last quarter, not only in the U.S. but in all corners of the world.
Just don’t look at the Seattle-based coffee giant’s second-largest market, that is. China, which the company has long argued will one day take over the top spot, has struggled with continued COVID shutdowns and renewed surges of the coronavirus.
Same-store sales in the last three months of 2022 declined 29% there, including a 42% decline in December. The 29% decline was four times worse than the company expected. And the company is uncertain about when it will fully recover in the country.
“We are expecting the second half of fiscal 2023 in China to be stronger than the first half,” Interim CEO Howard Schultz told investors on Thursday. “But uncertainties remain and the better part of valor is to remain cautious around precisely when our recovery in China will take full flight.”
Yet company executives remain optimistic that its stores will recover and that the market will return to the level of growth Starbucks is accustomed to there. “When it does, the return to pre-COVID routines and the adoption of new post-COVID routines will become self-evident in China,” Schultz added. “And customers will flock to Starbucks.”
Investors are at least somewhat skeptical. Starbucks’ stock fell more than 4% on Friday due largely to the weakness in China.
China is an important market for Starbucks, given its size. The coffee giant operates its locations there and is on an aggressive growth track, with plans for 9,000 restaurants by the end of 2025, or about 1,000 new locations per year. Schultz has predicted that it will one day overtake the U.S. as the company’s largest market.
But questions have persisted about Starbucks’ performance there for most of the past two years as sales have faltered amid continued restrictions and the country’s difficult emergence last year from its “zero-COVID” policy. China maintained restrictions long after other countries reopened. But after China lifted its zero-COVID policy it was hit with a severe surge in infections. That led to Starbucks' particularly weak December. At one point, 1,800 of Starbucks' 6,100 China stores were closed.
Remove China, and revenue in each of Starbucks' business segments increased in the double digits in the company's fiscal first quarter ended Jan. 1. Revenue in international markets alone rose 25% in the quarter, not including China or the impact of foreign currency translation. China's problems hurt earnings per share by 6 cents.
Not helping matters for Starbucks has been the resurgence of Luckin Coffee, the fast-growing Chinese coffee chain that has come back from bankruptcy. That company has yet to report fourth-quarter earnings but its same-store sales rose more than 19% in the third quarter and revenues increased nearly 66%.
What’s more, Starbucks executives expect China to drain income at a higher rate in the coming months. Rachel Ruggeri, the company’s CFO, says COVID headwinds will continue in the current quarter, impacting the company’s operating income at an even higher rate than the last period.
Ruggeri also said that “we do not have clear line of sight into the timing of recovery” and as such, China’s contribution to the company’s profits will be lower than expected.
Still, executives insist things are getting better. As restrictions have lifted and more people there return to normal activities, same-store sales have improved, down 15% in January. The Chinese New Year also proved to be strong for the chain.
And Starbucks executives argue that it will improve much more once the market reopens for good. Belinda Wong, chairwoman of Starbucks China, said that the brand remains the top choice for coffee-away-from-home among Chinese consumers. She also said that customer connection scores in the country remain high.
“There’s no other competitor that can match the competitive advantages we have, the quality of our coffee, our brand strength, our connection, our unique third place and our omnichannel capabilities, our national footprint and the digital ecosystem and supply chain excellence that we have built,” Wong said.
Schultz, however, said that company executives plan to make a trip to China to check on the status of the market. He also said they have been “directly involved” with the Chinese team to help them through this period.
“They’ve been under a lot of pressure,” he said.
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