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Commentary by Adam Clark

Starbucks Corp.'s growth plans depend heavily on swift Chinese expansion over the next three years despite economic headwinds. Even if the coffee-chain giant is correct about the potential growth of the caffeinated beverage in traditionally tea-drinking China, rival companies such as local chains Luckin Coffee Inc. and Manner Coffee, or Japanese brand % Arabica could complicate matters.

Starbucks said Wednesday that it intends to have 9,000 stores in China by 2025, up from 6,000 at the end of this year, enabling a doubling of its sales in the country. There are grounds for optimism -- Starbucks says the average Chinese consumer drinks 10-12 cups of coffee a year. That compares with 329 cups annually for the average American consumer of coffee, according to a Deloitte report. However, the premium positioning of Starbucks leaves it vulnerable if Chinese middle-class consumers feel squeezed amid the country's property crisis. Analysts at Wedbush say there is limited near-term visibility on Chinese growth, despite Starbucks' estimate that annual same-store sales growth through to 2025 should be 4%-6%.

Starbucks also faces growing competitors. Luckin Coffee is the chief rival to Starbucks, with more than 7,100 stores. It also seems to have weathered recent Covid restrictions better, reporting same-store sales growth of 41% in the second quarter of the year from the prior year, compared with a 44% fall for Starbucks in its comparable quarter. However, Luckin is still trying to recover trust, having delisted from Nasdaq in 2020 after admitting it had fabricated sales. Manner Coffee -- backed by TikTok owner Bytedance Ltd. -- is expanding from its Shanghai base and has been reported by Bloomberg to be considering an initial public offering in Hong Kong. Deloitte reports that among 'cost-effective' coffee chains, Manner is the only one to have a higher average rating and popularity on social platforms than Starbucks. The local franchise owner of Japanese brand % Arabica has also been reported to be seeking funds to continue its expansion in top-tier Chinese cities where it challenges Starbucks at the premium end of the market.

Market Insights are commentary that is independent of the news coverage by reporters at The Wall Street Journal.

Write to Adam Clark at adam.clark@dowjones.com

(END) Dow Jones Newswires

September 15, 2022 08:10 ET (12:10 GMT)

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