Domestic brands' rapid expansion poses 'nightmare'
Famed U.S. companies like Apple and Starbucks are declining in the Chinese market because of pressure in the current macroeconomic context and intensified competition with local rivals.
Starbucks will be the next U.S. brand to warn of China trouble after Apple, U.S. media outlet CNBC said in a recent report, citing Goldman Sachs.
Analysts said that given the slowdown in the domestic economy and consumption sentiment toward U.S. brands due to the trade tension, Starbucks will find it hard to compete with local cost-effective rivals and it's possible it will lose more consumers, just like Apple did.
Apple lowered its revenue expectations on January 2 (U.S. time) for the first time in 16 years due to poor iPhone sales in China.
Starbucks said its China comparable-store sales were up 1 percent in the fourth quarter of 2018, improving from -2 percent in the third quarter. But the figure was lower than its growth of at least 6 percent since the third quarter of 2016, media reports said.
In recent days, the two U.S. companies have been eager to offer strategies such as price cuts and discounts to win Chinese consumers.
Several Chinese electronics retailers including JD.com Inc, Alibaba's Tmall and suning.com, have cut iPhone prices by as much as 1,200 yuan ($178).
"Starbucks recently provided many discounts such as 'buy one, get one free' with an invoice valid within three days," a 20-something white-collar worker in Beijing surnamed Shen told the Global Times on Monday.
Another consumer named Han Han in Beijing said that "although I have long been a fan of Starbucks, the ongoing China-U.S. trade friction has somewhat affected my choices and some local emerging brands like Luckin have become more favored. I like its low price and good-tasting snacks."
As Luckin aims to overtake Starbucks, its rapid expansion will be a "nightmare" for Starbucks' growth in the Chinese market, Han said.
Luckin plans to open 2,500 more stores this year, taking the number of its coffee outlets to more than 4,500 nationwide, according to information released by the company in early January. Achieving that goal would take it past Starbucks, which has more than 3,600 stores in the Chinese mainland market.
Luckin had sold 89.68 million cups of coffee by the end of last year and opened 2,073 stores in 22 domestic cities.
Apple and Starbucks are gradually declining in the Chinese market because of pressure in the macroeconomic environment as well as competition from local cost-effective rivals, Liu Dingding, a Beijing-based industry analyst, told the Global Times on Monday.
Goldman Sachs has downgraded Starbucks to neutral from buy and lowered its price target on Starbucks to $68 from $75, the CNBC report said.
"It is very possible that Luckin will overtake Starbucks in the domestic market in terms of the number of physical stores in 2019," Liu said.
Zhang Yi, CEO of Guangdong-based iiMedia Research Institute, agreed, saying that Starbucks has begun feeling the pressure from intensified competition in the domestic coffee market, and the large discounts and delivery service offered by Luckin have indeed attracted some of its consumers.
But the brand value of Starbucks, plus its long history, cannot be easily overtaken by firms like Luckin, which is just at the early stage, Liu said, noting that domestic brands should enhance their quality if they hope to achieve sustainable growth in the future.
