Starbucks won’t benefit from China’s post-Covid recovery

BEIJING – Chinese consumer spending will not soon return to pre-Covid levels, a problem for international brands such as Starbucks, Morgan Stanley said in a report on Sunday.

Not only are people more cautious, but they have more options now.

Morgan Stanley analysts said on the spending side, three factors are weighing on China’s consumer this year.

First, China has not given out stimulus checks to consumers as the US and other parts of the world did in the wake of Covid.

Second, pandemic restrictions and regulatory changes have eliminated 30 million service sector jobs that existed before Covid, analysts estimate.

Around 20 million of these jobs are likely to come back by the end of this year and next year, the report said. But analysts expect the remaining 10 million will take longer to recover because they were hit by Beijing’s crackdown on education, internet technology and property.

Third, the housing market has continued to be soft in the face of government efforts to limit speculation.

Earlier, recently during the first half of 2021, there was a recovery in property sales, analysts at Morgan Stanley pointed out.

Kovid-19 and the measures to control it from 2020 to 2022 dragged down the Chinese economy. Since the abrupt end of those restrictions in December, there has been a modest recovery in growth.

After an expected 9% return in spending from Chinese consumers this year, Morgan Stanley analysts forecast growth of 4.8% next year – 0.5 percentage points lower than before the pandemic.

For Starbucks, analysts expect the industry metric of same-store sales in China to rise about 7% this year. It is still “largely low-teens” compared to 2019 levels, the report said.

Also increasing local competition making things difficult for international brands.

In fact, the US-based coffee giant is “least favored for China’s recovery” among Morgan Stanley analysts’ US “restaurant” stock picks.

In April, China saw a 16% year-on-year increase in the number of coffee stores – mostly local brands, a Morgan Stanley report said. “As a result, multinationals like SBUX are losing market share (though still adding stores at a strong pace).”

“The brand faces more competition from relatively nascent but rapidly growing concepts such as Luckin’s, Coty’s and Tim Hortons.”

According to the companies, China-based Luckin Coffee now has more than 9,000 stores, while Tim Hortons has more than 600 locations after entering the country in 2019. New brand Cotti Coffee is so popular that its website warns people trying to impersonate the brand.

Starbucks will open its 6,000th store in mainland China in September 2022.