Starbucks has a China problem: coffee and tea drinkers who want more for less.
Vivian Yan tried her first Starbucks coffee eight years ago. She was desperate for a jolt of caffeine at work, and the store was nearby. “It didn’t necessarily mean I love Starbucks,” she said, “nor was it my first choice.”
These days, she thinks a cup of Starbucks is a little too expensive and prefers to get her coffee from McDonald’s. But what she really loves is ChaGee, HeyTea and other Chinese chains that sell coconut milk lattes, boba milk teas with cheese cream and sugary jasmine tea frappés. “They are delicious and offer more choices,” said Ms. Yan, 35, who is from China’s eastern province of Jiangsu.
Ms. Yan’s preference for more diverse flavors poses an acute challenge for Starbucks. It is losing customers at a rapid pace. Brian Niccol, the new chief executive, sounded the alarm in October, calling the competition “extreme” in the company’s second-biggest market behind the United States.
When Starbucks opened its first shop in China in 1999, tea dominated and coffee culture was practically nonexistent. But the company quickly built a thriving market alongside a swelling middle class that was turning to iPhones, Gucci handbags and other international brands to signal its newfound wealth.
Today, consumers are less interested in foreign brands, more cost conscious and enticed by local rivals that are popping up on corners all around the country offering something a little different. Dozens of competitors to Starbucks spin out new flavors of tea and coffee every week, at lower prices, creating competition so ferocious that Starbucks saw a 14 percent plunge in same-store sales in China in its most recent financial quarter.
Luckin Coffee, a Chinese brand that started seven years ago, now generates more revenue in the country than Starbucks. It has nearly three times as many stores, and opens a new one, on average, every hour.
Mr. Niccol, who took over as Starbucks’s chief executive in September, has to not only figure out how to help the coffee chain regain its footing 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 bring in around $3 billion in annual sales.
In China, “we need to figure out how we grow in the market now and into the future,” Mr. Niccol told Wall Street analysts on an earnings call in October. That growth could come with the help of a strategic partner, he added.
Starbucks declined to make any executives available for this article.
“We have a world-class team and a strong brand in China, and we see significant long-term growth potential in the market,” Marc Birtel, a spokesman for the company, said in an emailed statement.
Starbucks is hardly the only foreign company grappling with China. Brands that once looked at the country as a booming growth market are wrestling with slower demand for their products. Consumers remain stubbornly unwilling to spend money, shaken by a real estate crisis and weak labor market that have been a drag on China’s economy.
In early December, General Motors said it would take a more than $5 billion hit to its profits as it restructured its ailing China operations, which have been losing money as its car sales here have dropped sharply. Estée Lauder’s stock tumbled 21 percent in one day after the beauty company cut its dividend and pulled its 2025 forecast because of uncertainty over China’s economy.
In almost all categories, homegrown companies are willing to price their cars, coffee and clothing at steep discounts to crush the competition.
Starbucks has diversified its menus in China, offering more milk teas and flavors that cater to local tastes, but they are typically more costly than their competitors and have occasionally missed the mark.
Many young consumers in China are also eschewing foreign brands in favor of Chinese companies amid a wave of nationalism known as guochao, or Chinese fad. The country’s leaders have a history of dialing up the patriotism with propaganda during moments of tension with other countries. If President-elect Donald J. Trump follows through on his promise to impose tariffs on all products going into the United States from China, the government in Beijing could turn on American brands.
In a nod to this, Starbucks, which offers more American-centric drinks like Pumpkin Spice Latte in its stores in China, recently said its business faced risks from “escalating U.S.-China tension and increased anti-Americanism, potential tariff increases, retaliations, restrictive regulations or boycotts, and increasing political sensitivities in China.”
The sense of patriotism 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 China nationalism has grown very, very strong,” Mr. Lu said. “People tend to think: ‘OK, this country is stronger and 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 from the northern Chinese city of Zhengzhou, begrudgingly ordered a matcha latte. He was tired from shopping and needed a place to sit.
“The coffee at Starbucks tastes terrible and has an industrial feel,” Mr. Liu said. The restaurant was mostly empty except for a few tables occupied by students and some 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 Da Hong Pao snowy frappés. They posed in front of the sign and took photos of their red and blue takeaway cups, posting to their social media accounts about the quality and price, which was generally cheaper than drinks from Starbucks.
China now has more coffee shops than the United States, according to the World Coffee Portal, a market research firm. The market grew 25 percent from 2018 to 2023, according to Bain & Company estimates.
“Chinese consumers are very spoiled in some ways because it is a very competitive market and all the suppliers are trying to make consumers happy with new launches,” said Nancy Zheng, a partner at Bain in Shanghai.
Luckin, for instance, goes through about 60 new products each year, offering a new drink every week. Its new coconut latte sells nearly $140 million worth annually, Ms. Zheng said.
With its spacious stores and couches, Starbucks is often still the place where professionals meet to talk deals, students go to study or tired shoppers find respite. This, in some ways, positions Starbucks in a different category from its competitors, which tend to have smaller storefronts that focus on churning out orders made on smartphone apps.
Starbucks is “still a strong brand,” said Fred Hu, founder of the investment firm Primavera Capital and an nonexecutive chairman of Yum China, the exclusive licensee of KFC, Pizza Hut and Taco Bell brands in the country. “There is no reason they cannot succeed going forward.”
“But,” he added, “they do need to make changes.” Those could include finding a local partner or spinning off the China business, as Yum did in 2016. Depending on the direction Mr. Niccol takes, Primavera Capital could be a future suitor for a partnership.
Whatever Mr. Niccol ends up doing, time may be running out, experts said.
This year, Howard Schultz, Starbucks’s former chief executive, insisted that the coffee chain would not enter a price war in China. “As customers become more knowledgeable about coffee, they will want to upgrade from lower-end or discounted products,” he said in a talk at Fudan University in Shanghai. “As long as we continue to earn the market’s respect, they will choose to upgrade to Starbucks.”
At the same time, the company has been trying some of the tactics used by its local competitors. It ramped up promotions and provided coupons throughout much of the summer. The coffee giant also began to follow domestic competitors like Luckin and Cotti into smaller cities. During the Lunar New Year holiday this year, Starbucks released a pork flavor latte. It cost more than $9 and was widely seen as a disaster.
“They are the first coffee brand in China, so definitely it’s going to be challenging to defend their position because all the new products are taking their customers,” Ms. Zheng said.
Starbucks, she added, has “lost a lot customers to Chinese brands.”
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