Starbucks has announced it will sell a majority stake in its China operations to a Hong Kong-based private equity firm for $4 billion after years of losing market share to domestic competitors.
Starbucks announced the sale on Monday, which will see Boyu Capital acquire a 60% stake in its China retail business through a joint venture.
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Boyu Capital has offices in Shanghai, Beijing and Singapore, and co-founders include Alvin Jiang, the grandson of former Chinese president Jiang Zemin, according to Reuters.
The US coffee giant will retain a 40% interest in its China operations, while retaining ownership of its brand and intellectual property, the company said.
The deal marks a “new chapter” in Starbucks’ 26-year history in China, the company said in a statement.
Jason Yu, managing director of Shanghai-based CTR Market Research, said the deal would also give Starbucks much-needed capital and logistics support as it expands into China.
Starbucks has 8,000 stores across China and aims to open up to 20,000 stores through the joint venture, the company said in a statement.
“Starbucks used to be the pioneer of coffee in China and was probably the first coffee chain in many cities. But that is no longer the case as local competition has already outpaced Starbucks’ expansion,” Yu told Al Jazeera.
Top competitors include homegrown Luckin Coffee, which has more than 26,000 stores worldwide, primarily in China.
While Starbucks has historically focused on first- and second-tier cities like Shanghai, Beijing, and Shenzhen, Luckin is expanding into much smaller cities.
Luckin has also built a reputation for offering customers much cheaper drinks than Starbucks through its loyalty program and in-app discounts.
Yu said a small Americano coffee costs 30 yuan ($4.21) at Starbucks, while the average retail price for the same drink at Luckin is about 10 yuan ($1.40).
Olivia Plotnick, founder of Shanghai-based social marketing company Y Social, told Al Jazeera that Starbucks has not been able to keep up with competitive pricing and consumer preferences.
“Starbucks has lost the very competitive edge it once had, as domestic players such as Luckin and later Kotti Coffee undercut it in price, footprint and flavor driven by technology, broader beverage competition from the rise of milk tea brands, and delivery platform wars,” Plotnick said. Plotnick used the term “delivery platform wars” to describe the fierce competition among delivery apps that drives down the prices of products like coffee.
The joint venture between Starbucks and Boyu Capital will not only provide Starbucks with more investment capital, but also help manage logistics, infrastructure and commercial facilities as it opens more stores in regional cities, Yu said.
The company is following a familiar strategy used by other international brands in China, he said.
In 2016, KFC and Pizza Hut owner Yum Brands sold a stake in its China operations to China-based Primavera Capital and an affiliate of e-commerce giant Alibaba Group, according to Reuters. The China business was later spun off and became an independent entity.
McDonald’s sold a majority stake in its China, Hong Kong and Macau operations to Chinese government-backed conglomerate CITIC and private equity group Carlyle Capital in 2017, but later bought back some of the business, according to CNBC.
According to CNBC, after the deal with CITIC, McDonald’s aims to double the number of restaurants in China to 5,500 by the end of 2023, and to open 10,000 restaurants by 2028.
