Starbucks has come to its senses

(The author of this article is Bohu Finance, published by Titanium Media with authorization)

By Bohu Finance (bohuFN), Author: All too well

In 2017, when brands like KFC and McDonald's were selling or spinning off their China businesses, Starbucks took the opposite approach by acquiring full ownership of its Chinese business from its joint venture partner, achieving full direct operations in mainland China.

The founder of Starbucks made this statement: 'No other Western consumer brand in China can achieve what we have.' Indeed, the 'third place' concept became the holy grail for coffee practitioners at the time, and Starbucks positioned itself as the brand synonymous with the category.

Eight years later, Starbucks has had a change of heart and chosen a different path.

On April 2 this year, Starbucks officially announced the completion of the joint venture transaction with Boyu Capital.

Under the agreement, a fund managed by Boyu Capital will hold 60% of the equity in Starbucks' retail business in China, while Starbucks Global retains 40%. Approximately 8,000 directly operated stores in mainland China will gradually transition to a franchising model, managed and operated by the newly established joint venture. The reporting line for Belinda Liu, CEO of Starbucks China, will now be to the board of the new joint venture.

The shared long-term goal of both parties is to eventually expand the number of stores to 20,000.

To be honest, the sale of Starbucks China was somewhat expected. What's more intriguing is how Starbucks China will proceed next. How will Starbucks change?

From 2018 until now, it's fair to say that China's coffee market has experienced significant transformation. Consider this set of data: In 2018, the average annual coffee consumption per person in China was only six cups; by 2025, per capita annual coffee consumption among coffee drinkers is projected to reach 25 cups.

The Chinese have become bigger coffee drinkers, essentially thanks to a mutual attraction between consumers and brands like Luckin Coffee and Cotti. Amidst a backdrop of consumer downgrading, people need caffeine but, more importantly, they need affordable caffeine. Meanwhile, Luckin Coffee and similar players are maximizing efficiency through grab-and-go services, digitalization, and franchising. While flooding the market with cheap caffeine, they’ve also turned the gold standard of ten thousand stores into a basic entry requirement.

By early 2026, Luckin Coffee’s store count has surpassed 30,000, while Cotti exceeds 18,000 locations. Luckin Coffee, Cotti, and Nowwa Coffee have successively entered the ‘ten thousand store club.’ With around 8,000 outlets, Starbucks China ranks only fourth in the market.

With the industry being so competitive, even Starbucks China is struggling.

By the end of fiscal year 2025, Starbucks had 8,011 stores in China, nearing half the number in the US market, but its revenue was only one-eighth that of the US. The contrast with global markets is stark. Stores in China account for about one-fifth of Starbucks' total store count globally, yet they contribute only 9% of total revenue and 7% of the group's operating profit.

In terms of per-store valuation, the total value of its 8,000 stores is approximately $4 billion, with an average per-store valuation of just $50,000—less than a quarter of Starbucks' global average.

Proactively seeking change is always better than passively taking hits.

After completing the transaction, thousands of Starbucks China stores transitioned from direct operation to franchising, increasing the proportion of franchised stores in Starbucks' international markets from 55% to 90%. Shifting from an asset-heavy to an asset-light model means larger profit margins.

Turning to its partner Boyu Capital, this firm prefers large-scale, high-growth sectors or those benefiting from localization advantages in China. Its portfolio includes property management companies like Vanke Cloud and Jinke Services, as well as mid-to-high-end residential communities and some office buildings in both higher-tier and lower-tier cities. It has also invested in notable consumer brands such as Haitian and Mixue Ice City, and recently made several investments in the AI sector.

This indicates that Boyu Capital is an investment company with deep insights into the Chinese market. Industry insiders suggest that Boyu Capital will bring more opportunities to Starbucks China in store expansion, digital transformation, and product development.

In fact, before officially announcing the introduction of external capital, Starbucks had already made significant efforts. In June of last year, Starbucks launched a promotional campaign featuring discounts across three flagship categories: Frappuccino, Iced Shaken Espresso, and Tea Lattes, with dozens of products seeing price reductions. Simultaneously, changes were implemented in product development and supply chain optimization.

After completing the equity handover, Starbucks China has unveiled a new direction for development. First, it aims to create 'a thousand stores with a thousand faces,' tapping into local markets; second, it plans to accelerate its expansion into lower-tier markets. Over the next three years, the number of county-level administrative regions covered by Starbucks China will increase from over 1,000 to more than 1,500.

Is this an advantage and opportunity for Starbucks?

Here’s the conclusion first: we believe that 'a thousand stores with a thousand faces' and expanding into lower-tier markets are more suitable strategies for Starbucks at this stage.

The essence of 'a thousand stores with a thousand faces' is achieving differentiated supply through more refined operations. Simply put, it means making each Starbucks store closer to the needs of its local community through diversified store formats.

This is similar to Starbucks’ strategy in the U.S., where it returned to the concept of 'community coffee shops,' also known as returning to its roots. In 2024, after the CEO of Starbucks resumed office, the key requirement for middle management in core areas was to 'increase user repurchase rates by improving store experience and adjusting products, rather than relying on low prices to boost consumption frequency.'

Let me give you a simple example. The differentiated supply we are familiar with often involves menu updates. For instance, Starbucks China recently introduced Spring Harmony coffee beans tailored for first-time or infrequent coffee drinkers in the Chinese market. In reality, the operation of 'a thousand stores with a thousand faces' is even more flexible. Besides common methods like espresso and hand-pour, Starbucks China will roll out 'Daily Fresh Brew' coffee in over 1,000 office building business districts. Store types are also more diverse, ranging from the smallest Starbucks at 10 square meters to mobile coffee carts at concerts, modular convenient stores in office buildings, and over 800 Reserve and themed stores. Starbucks will expand flexibly with various store formats to meet demands more precisely.

At the same time, Starbucks partners will build a 'one store, one community' model, allowing them to customize music playlists, organize events suited to the store, and add self-created specialty drinks to the digital menu. With passion and creativity, they will make every store a place with the strongest sense of belonging in the community.

These changes will also be reflected in the pace of store expansion. Over the next three years, Starbucks China plans to expand to over 1,500 county-level administrative regions. Store models will gradually shift from traditional large stores of about 200 square meters to smaller yet beautiful stores of 80 to 120 square meters.

In fact, after years of intense price wars in the coffee market, major brands have gradually established their own brand positioning.

Blindly cutting prices not only fails to attract the core users of competitors but also undermines brand value and corporate profits, leading to losses outweighing gains. Therefore, in the second half of the coffee industry's lifecycle, brands no longer need 'miraculous breakthroughs' through aggressive subsidies but should focus on more refined operations. They must dynamically adjust operational strategies based on user repurchase rates and the popularity of new products, shifting from 'acquiring users' to 'retaining users.'

However, this transition will not be easy for Starbucks China. Striking a balance between brand identity and market realities will become a long-term challenge that both Starbucks and Boyu must address together.

In 2017, McDonald's, which had been developing in China for 26 years, fell into a multi-year stagnation. The number of stores opened by Wallace in one year was twice the total number of stores McDonald's had opened over 26 years.

Just six years after CITIC and Carlyle took over, China quickly became McDonald's second-largest global market. The secret can be summarized in five words:

Better understanding of the Chinese people.

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