BREAKINGVIEWS-A Starbucks China sale will be bittersweet

By Ka Sing Chan

HONG KONG, Sept 16 (Reuters Breakingviews) - Starbucks SBUX.O may find coffee is better for two in China. CEO Brian Niccol has received bids valuing his firm's operations in the People's Republic at $5 billion - which values the enterprise at just half the almost 20 times EBITDA the $94 billion parent trades on. The discount shows how much the coffee giant has struggled in the world's second-largest economy against fierce competition, shifting tastes and geopolitics.

The company is selling a controlling stake in its China operations, Reuters reported last week, citing sources. Among the potential buyers are global investment firms Carlyle CG.O and EQT, as well as China-focused peers like HongShan Capital Group and Boyu Capital, which plan to submit binding bids as early as next month. So far, though, most of the offers that have come in valued the China enterprise at no higher than 10 times the $500 million in EBITDA the unit is expected to generate this year, Reuters reported.

That will be a disappointment for the company's executives who have spent the past decade talking up the growth opportunities in China. In 2017, the company even bought back a 50% stake in its eastern China venture, which housed roughly half of Starbucks' 3,000 stores in the country at the time. It marked a bold departure from the company's preferred strategy of relying on licensed partners, which requires less upfront investment and lower rental and staff costs.

But the bet soured as domestic rivals from Luckin Coffee LC0Ay.D to Mixue 2097.HK muscle in by offering a wider variety of drinks at far cheaper prices. Starbucks' China market share has shrunk from 34% in 2019 to 14% in 2024, per market data provider Euromonitor. Over the same period revenue climbed only 4.7% to $3 billion, despite an 84% increase in the number of stores in the country to about 7,500.

Against this backdrop, bidders' reported valuation multiple may not be so bad. Luckin Coffee, for instance, trades on roughly the same - albeit on the over-the-counter market after an accounting scandal forced it to delist from the Nasdaq in 2020. The challenger boasts three times as many stores as Starbucks has in China and reported a blistering 47% year-on-year jump in second-quarter revenue to $1.7 billion.

To catch up, Niccol has maintained his goal of hitting 20,000 stores in China. A partner with local expertise can help fund that expansion, as well as revamp the American brand's strategy at a time when nimbler domestic groups, buoyed by a wave of nationalism, have gained popularity among the country's fickle consumers.

The situation is similar to 2017, when McDonald's inked a 20-year franchise deal for its China unit with a consortium led by CITIC 0267.HK and Carlyle CG.O. Others like Yum! Brands YUM.N have either spun off their China business or partnered locally.

For Starbucks, the partial retreat may be better late than never. Other consumer giants in the country, like Walmart WMT.N and Ikea, will take note. An asset-light model is a more flexible strategy in the face of fickle consumers and volatile geopolitics.

CONTEXT NEWS

Global investment firms Carlyle and EQT, alongside regional players HongShan Capital and Boyu Capital, are preparing final offers for a controlling stake in Starbucks' China operations, Reuters reported on September 12, citing five people with knowledge of the matter. Starbucks has asked them to submit binding bids by early October.

Most of the submitted bids value the business at no higher than $5 billion, Reuters reported on September 5, citing two people who have knowledge of the deal discussions.