Starbucks' new JV aims to operate 20,000 stores in China

Starbucks Coffee Co announced on Tuesday that it has entered an agreement to form a joint venture (JV) with Boyu Capital, a leading alternative investment firm, to operate Starbucks retail outlets in China.

The move follows a similar localization strategy adopted by other global food companies such as McDonald's and KFC, analysts said. In China's highly competitive coffee market, where local rivals such as Luckin and Cotti offer significantly lower prices, the injection of Chinese capital will enable the US-based coffee chain to pursue a more proactive localization strategy - including cutting prices and expanding into lower-tier cities - to capture cost-conscious consumers and gain a solid foothold in one of its largest overseas markets, analysts noted.

Under the agreement, Boyu and Starbucks will operate a JV, with Boyu holding an interest of up to 60 percent in Starbucks retail operations in China.

Starbucks will retain a 40 percent interest in the JV and continue to own and license the Starbucks brand and intellectual property to the new entity. Boyu will acquire its interest based on a cash-free, debt-free enterprise value of approximately $4 billion.

This partnership marks "a significant milestone" in Starbucks' ongoing transformation and underscores its commitment to accelerating long-term growth in China, the company told the Global Times on Tuesday.

Under this JV, the two companies will elevate the customer experience, "accelerate innovation in beverages and digital platforms, and expand into new cities and regions."

Starbucks expects the total value of its China retail business to exceed $13 billion, composed of three sources: proceeds from the sale of a controlling interest in the JV to Boyu; the value of Starbucks' retained interest in the JV and the net present value of ongoing licensing economics payable to Starbucks over the next decade or longer.

The business' headquarters will remain in Shanghai and will own and operate the 8,000 Starbucks coffeehouses across the market, with a shared vision to grow to as many as 20,000 locations over time, said Starbucks.

The transaction reflects the US company's push to accelerate localization in the Chinese market and compete with local rivals such as Luckin, Cotti and KTC's K Coffee, with strategies tailored to the Chinese market, Liu Dingding, a veteran industry analyst, told the Global Times on Tuesday.

In 2024, Starbucks' market share in China stood at 14 percent, down from 34 percent in 2019, Reuters reported, citing data from Euromonitor International.

Chinese coffee chain Luckin, which opened in 2017, has surpassed the number of stores Starbucks had in China in 2019. In 2023, Luckin's revenue in China exceeded that of Starbucks for the first time, Fortune magazine reported.

Starbucks entered China in 1999 and more than one-fifth of Starbucks' global stores are now located in the Chinese market, according to media reports.

"Forming a joint venture with a Chinese fund is a very common strategy for global firms with regard to their localization strategy. Holders of Chinese capital can achieve capital gains through the sustained growth of those global companies' operations in China," a private equity fund manager surnamed Zhu based in Shenzhen, South China's Guangdong Province told the Global Times on Tuesday.

According to Zhu, Hong Kong-based Boyu Capital has extensive experience in the consumer and high-end retail industries. One of its recent standout investments in the tea and coffee drink sector is its stake in Mixue Ice Cream &Tea, which helped the Chinese fast-food chain to expand to more than 30,000 stores, accelerate its overseas growth and ultimately go public.

In 2017, McDonald's sold 80 percent of its Chinese mainland and Hong Kong operations to investors including Citic for $2.1 billion, a tie-up that has largely been seen as successful, Reuters reported. KFC's and Pizza Hut's operations in China were spun off by their owner Yum! Brands in 2016, according to a BBC report.

Liu predicted that following the establishment of the JV, Starbucks will accelerate the opening of more coffee houses across China, in particular in smaller cities.

"It can't be ruled out that the US company will launch an affiliated brand with a pricing strategy similar to that of Luckin or Cotti, while leveraging its brand appeal to recapture market share from local rivals," Liu said.

He added that as China's coffee culture prevails, a healthy dose of competition will prompt all market players to innovate and improve the quality of their services, which will be beneficial for the industry's long-term development.