Starbucks’ China Defeat

It is hard to say much about the valuation. Starbucks Corp. (NASDAQ: SBUX | SBUX Price Prediction) is selling a 60% piece of its operations in China. It gets $4 billion and long-term license fees. This values the enterprise at $13 billion. The buyer, Boyu Capital, is not in the coffee chain business. (Starbucks calls the deal a “joint venture.”)

The deal gets crazier. Luckin Coffee, which has over 20,000 locations in China, dominates the market for coffee stores. Boyu is supposed to boost the Starbucks store count from 8,000 to 20,000. Where is the management, and what is the strategic plan to get there? It is what Starbucks calls a “shared vision.” Brian Niccol, Starbucks board chair and chief executive officer, said, “Together we will write the next chapter of Starbucks’ storied history in China.”

The deal gets even crazier. Starbucks has a market cap of $92 billion. China is its second-largest market. Presumably, Starbucks is an expert at the coffee shop business, but it is not an expert in China. Starbucks has been defeated in China, 26 years after starting its operations there. Once again, after 26 years of experience, Starbucks is not an expert in the China coffee store business. Over 26 years, it failed to learn anything other than it cannot run coffee shops in China.

In the most recently reported quarter, Starbucks China results were better than its global results or results in its home market. Global comparable store sales were up 1%. U.S. and North American comparable store sales were flat. Chinese comparable store sales were up 2%. China was the star of the quarterly numbers.

What Was the Plan?

Niccol promised to turn his early focus to the United States. So far, that has not worked. He has established uniforms for his baristas. He said he would make Starbucks stores into community locations. And he has fired over 1,000 white-collar workers, reduced the menu, and hopes to decrease the wait time of customers.

All of Niccol’s efforts have gotten him a stock price that is down 18% in the past year. And he posted $0.12 per share in earnings for the most recent quarter. That was down 80% from the same period a year ago. Maybe Starbucks should get McDonald’s to run its U.S. operations.

If this article seems disjointed, it is because the Starbucks China deal is as well.

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