Last week, Starbucks, the renowned coffee chain, experienced a noteworthy shift in its leadership as founder and three-time CEO, Howard Schultz, announced his departure from the board of directors. This transition coincides with the appointment of CEO Laxman Narasimhan earlier this year. Effective October 1, former Alibaba executive Wei Zhang will step into Schultz’s role, signifying the renewed emphasis of Starbucks on the China market.
China, which stands as the second-largest market of Starbucks, may witness alterations in the company’s strategic approach. Schultz, recognized for spearheading Starbucks’ unique positioning in the Chinese market, also played a pivotal role in garnering substantial government support for the company’s expansion plans in China, as noted by Bernstein analyst Danilo Gargiulo.
In recent years, Starbucks’ international presence has witnessed robust growth. The company recently celebrated the inauguration of its 20,000th location outside North America, with plans to add an additional 9,000 stores in China over the next two years.
The departure of Schultz, who historically advocated against franchising, prompts speculation about potential shifts in Starbucks’ business model. Gargiulo contemplates whether Schultz’s exit could pave the way for the implementation of a franchising strategy in China, given the evolving competitive landscape and potential for improved profitability.
Starbucks’ initial foray into China dates back to the opening of its inaugural store in Beijing in 1999, followed by its debut in Shanghai in 2000. From the early 2000s until 2017, Starbucks pursued an expansion strategy in partnership with joint venture allies, capitalizing on the untapped potential of the Chinese market. However, in 2017, the company opted for a complete in-house operation, acquiring the remaining 50% stake of its East China business for $1.3 billion. Since then, Starbucks has bolstered its presence with directly owned and operated stores.
Georgetown professor Arthur Dong highlighted Starbucks’ adeptness in securing prime locations and establishing key partnerships, often with influential figures within the Chinese political and business landscape. Despite these successes, the current business environment in China presents new challenges, notably heightened regulatory scrutiny and geopolitical tensions.
Investors remain vigilant about Starbucks’ China business amidst broader economic uncertainties. Cowen analyst Andrew Charles expressed caution, citing potential headwinds from the evolving China narrative.
As Starbucks strives to reach its ambitious goal of 9,000 stores in China, the prospect of a franchising model emerges as a viable option. This shift, according to Dong, could attract local investors and mitigate financial risks for Starbucks in a potentially volatile market.
The concept of franchising, while not a departure from established industry practices, aligns with Starbucks’ existing blend of company-operated and licensed stores. Starbucks’ international footprint currently consists of 51% company-operated and 49% licensed locations.
In navigating this transition, Starbucks is poised to make strategic determinations regarding ownership of key locations in first-tier cities, while expanding franchise or licensed stores in second- and third-tier cities. This nuanced approach reflects Starbucks’ commitment to sustained growth and adaptability in the dynamic Chinese market.
While Starbucks differs from peers in its revenue sources, with a primary focus on coffee and food sales rather than real estate, the uncertain economic climate in China prompts a cautious outlook. Georgetown’s Dong emphasized the need for Beijing to implement substantial measures to rejuvenate the economy and restore consumer confidence.
In light of these challenges, Starbucks’ shift in strategy will likely be closely monitored by investors, with an eye towards potential long-term impacts on the company’s foothold in the Chinese market.
Source: Yahoo Finance
