Battered Starbucks Enters Price War

Starbucks Corp. (NASDAQ: SBUX) has counted on China to be its major growth market. That has not worked out. The United States and China are 61% of the company’s revenue. It has 7,758 locations in China, and its comparable-store sales there were flat in the most recently reported quarter.

Starbucks is taking a beating from local competitor Luckin Coffee. It has over 21,000 stores, mostly in China.

Starbucks is trying to jump-start sales with sharp discounts on the tea it sells in China. The average cut is $0.70, according to Bloomberg. This includes over 10 tea-based products, which almost certainly means thinner margins on these beverages.

Starbucks and its new overpaid CEO Brian Niccol need help. The stock has drooped slightly more than the S&P 500 in the past year. Niccol received $96 million to fix the broken coffee company. He improved the fortunes of Taco Bell and Chipotle earlier. He remains upbeat. “My optimism has turned into confidence that our ‘Back to Starbucks’ plan is the right strategy to turn the business around and to unlock opportunities ahead,” he commented when Starbucks posted its latest earnings.

In the U.S., Niccol says he will make Starbucks into a local coffee house. He has fired 1,100 people and created uniforms for baristas. He is challenged by McDonald’s and Dunkin Donuts, each of which has a large footprint in the U.S.

It is too early to tell whether his U.S. formula can work in China. Discounts may be the best way to pick up market share. However, he does not lead the industry in China, so creative solutions like discounts may be his best gamble.

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