Starbucks Struggles in the US but Adjusts Prices in Korea [Business & Issues]

US Sales Decline for 2 Consecutive Quarters
Stock Also Slumps Amid Low-Cost Brand Offensive
Korean Starbucks Raises Grande and Venti Prices

[Image source=Getty Images Yonhap News]

Starbucks experienced two consecutive quarters of sales decline in its largest markets, the United States and China. This is attributed to consumers with thinner wallets due to inflation seeking more affordable coffee brands rather than Starbucks. Starbucks' stock price has also continued to decline, dropping nearly 20% since the beginning of the year. Combined with adverse factors such as boycotts in the Middle East and Southeast Asia, it is expected that sales growth will face difficulties for some time.

Contrary to the atmosphere in the U.S. market, the Korean market, which recorded its highest-ever sales, saw price increases on some items for the first time in 30 months. Attention is focused on how domestic consumers will respond to the strategy of Starbucks Korea, which operates under a license separate from Starbucks headquarters.

U.S. Same-Store Orders Down 6%... Stock Price Decline Continues

According to CNBC, on the 1st (local time) at the Nasdaq market in the U.S., Starbucks' stock price fell 3.64% to $75.11 compared to the previous session. This represents a 19.81% drop from $93.67 at the beginning of the year. Starbucks' Q2 earnings (fiscal Q3) announced on the 30th of last month showed sales of $9.11 billion (approximately 12.4898 trillion KRW), down 0.6% year-over-year, and earnings per share fell 7.6% to $0.93, weakening investor sentiment.

In particular, sales slumps at Starbucks stores in North America, its largest market, continue, leading to a negative outlook for future performance. In Q2 this year, Starbucks' same-store sales (stores operating for more than one year) in the U.S. decreased by 2% year-over-year. This followed a 3% decline in Q1, showing consecutive quarters of weak sales. As of the end of last year, the number of Starbucks stores worldwide was 16,446 in the U.S., 6,975 in China, 1,901 in Japan, and 1,893 in Korea, with North American market sales accounting for more than 70% of total sales.

The sales decline in China, the second-largest market, is even steeper. Starbucks' same-store sales in China dropped 14% year-over-year. Similar to the North American market, this follows an 11% decrease last quarter, marking two consecutive quarters of decline.

Promotion Effects Weakened Amid Low-Cost Brand Offensive... Inflation Impact Deepens

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The main reasons for Starbucks' sales slump are analyzed as a decrease in overall coffee demand due to inflation and competition with low-cost brands. Although Starbucks is expanding various promotional events to recover sales, intensified price competition is making customer attraction increasingly difficult.

RJ Hotovy, an analysis expert at PlaceIQ, an AI-powered data analytics company, told CNN, "Most of Starbucks' North American sales come overwhelmingly from drive-thru (DT) sales rather than in-store sales, but competition with Dutch Bros, a low-cost drive-thru coffee brand rising in the U.S., is fierce," adding, "The inflation impact has kept dining prices high, leading more customers to brew coffee at home, which also affects Starbucks' sales decline."

In the Chinese market, Luckin Coffee's low-price offensive, emerging as a major competitor to Starbucks, threatens Starbucks' sales. According to Bloomberg, Luckin Coffee had 18,590 stores in China as of the end of last year, securing an overwhelming first place. The gap in store numbers with Starbucks (6,975 stores), ranked second, exceeded 10,000. For a 16-ounce (473ml) coffee, Luckin Coffee's caf? latte price is 11.02 yuan (about 2,091 KRW), only about one-third of Starbucks' 33 yuan (about 6,262 KRW) price.

Starbucks CEO Laxman Narasimhan stated during the conference call after the earnings announcement on the 30th of last month, "The business in China is in a vulnerable state," and "We are in the early stages of seeking strategic partners to accelerate growth in China." This suggests that Starbucks plans to shift its China business, which is facing difficulties in price competition, from direct operation to a licensing agreement with local companies.

Other various adverse factors surrounding Starbucks are also expected to negatively impact sales. The U.S. economic magazine Fortune pointed out, "In Middle Eastern and Southeast Asian Islamic countries, Starbucks is viewed as a pro-Israel company, leading to ongoing boycotts, and in the U.S., unions have been formed at 470 stores demanding wage increases and improved working conditions, making labor-management conflicts an urgent issue."

In Korea, Prices Rise Instead... Sales Near 3 Trillion KRW Last Year

[Image source=Yonhap News]

Contrary to the atmosphere in the U.S. and China markets, where sales are declining, sales continue to grow in Korea, where prices for some items were increased. From the 2nd, Starbucks Korea raised the prices of Caf? Americano Grande (473ml) and Venti (591ml) sizes by 300 KRW and 600 KRW, respectively, to 5,300 KRW and 6,100 KRW. However, the price of the most popular Tall (355ml) size was maintained at 4,500 KRW, and the Short (237ml) size was lowered by 300 KRW to 3,700 KRW.

The reason only the prices of large-sized drinks such as Grande and Venti were raised in this price increase, the first in 30 months, is that their sales proportions have significantly increased. As of last year, Starbucks Korea's sales proportions were about 51% for Tall size, 32% for Grande, 15% for Venti, and only about 1% for Short size. The sales volume of large-sized drinks has risen to nearly half.

The driving force behind Starbucks Korea's ability to implement a price increase policy contrary to other regions like the U.S. and China is its sales growth. Starbucks Korea recorded sales of 2.9295 trillion KRW last year, a 12.9% increase from the previous year, achieving an all-time high. However, the operating profit margin fell to 4.8%, about half compared to 8.5% in 2020 and 10.0% in 2021, making the price increase inevitable.

Meanwhile, unlike the U.S. and China markets, which consist of company-operated stores, Starbucks Korea operates under a sole license by SCK Company, a subsidiary of E-Mart. When Starbucks first entered Korea in 1999, Starbucks headquarters and E-Mart invested 50-50 to establish Starbucks Korea. After the joint venture contract ended in September 2021, E-Mart purchased some shares (17.5%) and became the parent company holding 67.5% of the shares. The remaining 32.5% is held by the Singapore Investment Corporation as a financial investor (FI).