China Might Soon Become Starbucks' Largest Market

Starbucks is having a hell of a run right now. Despite recent economic issues like inflation and the recession scare that leave consumers wary of excess spending, sales are booming at America's go-to coffee chain: Restaurant Business reports that in the United States, in Q4 2022, Starbucks saw eight of its 10 best sales days in the company's history. This is in part due to customers ordering more specialty and customized beverages (which are more expensive), as well as tacking more food onto their orders. In China, Starbucks' performance hasn't been so rosy—and yet the Chinese market is the one that might, in the long run, outpace every other.

COVID has hammered away at Starbucks' business in the Chinese market for the past three years. Same-store sales plummeted 42% in December 2022 due to COVID resurgences, and the coffee chain isn't quite sure when its business is going to recover there, as continuing issues are expected through the current quarter and beyond.

In a February 2 call with investors, Starbucks interim CEO Howard Schultz demonstrated cautious optimism about the company's recovery in the Chinese market. It's just not clear exactly when that recovery might happen.

"We are expecting the second half of fiscal 2023 in China to be stronger than the first half," said Schultz on the call. "But uncertainties remain and the better part of valor is to remain cautious around precisely when our recovery in China will take full flight."

To be clear, the Chinese market is absolutely enormous for Starbucks. Current growth plans are very aggressive, too: There are currently 6,100 Starbucks locations in China, and the company plans on expanding its footprint to 9,000 Chinese locations by the end of 2025, or around 1,000 new stores per year.

Schultz has long predicted that the Chinese market will someday become Starbucks' biggest. He's been making such statements since as far back as 2016, yet there's a good chance it won't happen for a while. According to ScrapeHero, an online data collection company, there are nearly 16,000 Starbucks stores in the United States in 2023, nearly triple the number of locations currently in China and nearly double the total amount that Starbucks hopes to operate in China by 2025.

Right now, COVID is a major disruptor to Starbucks' success in China specifically. The nation's zero COVID policy was lifted in December 2022, after which cases spiked dramatically and led to "dramatic decline in consumer activity," as Schultz put it.

What also doesn't help is that one of Starbucks' major competitors in China, Luckin Coffee, has clawed its way back from bankruptcy after being caught in a dramatic sales inflation scheme in 2020. Luckin's sales have been steadily rising, and while its fourth-quarter earnings aren't out yet, third-quarter sales (prior to COVID spikes) showed its revenue was up by 66%.

On the other hand, because consumers in China have been under tighter COVID restrictions than those in other nations for the past three years, the industry is hoping that they are therefore proportionally more excited to turn to the comfort of, say, a cup of Starbucks coffee.

"Our customers in China are creating a full return to familiar pre-COVID routines and lifestyles," Schultz said. "And huge consumer demand in China is waiting to be unleashed."