Starbucks is said to consider selling stake in Chinese business

By Dong Cao, Vinicy Chan and Crystal Tse

Starbucks Corp. is exploring options for its Chinese operations including the possibility of selling a stake in the business, according to people with knowledge of the matter.

The coffee chain has been speaking to advisers about ways to grow its operations in China including the potential introduction of a local partner, the people said, asking not to be identified because the information is private. It has informally gauged interest from prospective investors, including domestic private equity firms, the people said.

A stake sale could also attract interest from Chinese conglomerates or other local companies with experience in the industry, some of the people said. Starbucks is still evaluating its options and hasn’t made a decision about whether to proceed, the people said.

Starbucks has faced pressure from activist Elliott Investment Management, which wants it to commit to reviewing its Chinese business, Bloomberg News has reported. In previous years, McDonald’s Corp. and Yum! Brands Inc. have carved out their Chinese operations and sold stakes to private equity firms to tap more growth and better cater to local tastes.

China is the second-biggest market globally for Starbucks and generated about $3 billion of net revenue in the most recent financial year, when the company increased its store count in the country by 12 per cent. But local upstarts such as Luckin Coffee Inc. are increasingly challenging their position.

New Starbucks Chief Executive Officer Brian Niccol told analysts last month that he’s working to better understand the company’s Chinese operations, noting that the competitive environment seems “extreme” and the macro environment is “tough.” Starbucks needs to figure out how to expand in the market and is continuing to explore strategic partnerships that could help it over the long term, Niccol said at the time, without providing further details.

“We are fully committed to our business and partners, and to growing in China,” a spokesperson for Starbucks said in response to Bloomberg News queries this week. “We are working to find the best path to growth, which includes exploring strategic partnerships.”

Niccol, the former CEO of Chipotle Mexican Grill Inc., took the reins at Starbucks in September after his predecessor Laxman Narasimhan failed to revive its flagging fortunes and was abruptly ousted. Niccol has vowed to redouble efforts to improve Starbucks’s physical locations and speed up service times. Shares of Starbucks have gained about 2 per cent this year, giving the company a market value of about $111 billion.

Starbucks had 7,596 outlets in China as of late September, accounting for about 19 per cent of the global total. Same-store sales fell 14 per cent in China last quarter.

Other Western chains have also sought local tie-ups in China after struggling to catch up with more nimble rivals. In 2016, KFC operator Yum sold a stake in its Chinese operations to Primavera Capital, a private equity firm led by former Goldman Sachs Group Inc. rainmaker Fred Hu, and tech billionaire Jack Ma’s Ant Financial Services Group. That set the stage for it to spin the business off in a separate listing, which came after pressure from activist investor Corvex Management.

The following year, McDonald’s sold a controlling stake in its China and Hong Kong operators for $1.7 billion to a group of investors including state-backed conglomerate Citic Ltd., domestic buyout firm Citic Capital Holdings Ltd. and Carlyle Group Inc.