This is an English adaptation of a FoodBud historical article originally published on October 30, 2021.
Starbucks reported fiscal 2021 fourth-quarter and full-year results on October 29, 2021. In early U.S. trading, its shares fell 7.31% to $104.928.
For the fourth quarter, ended October 3, Starbucks reported revenue of $8.147 billion, up 31.3% year on year but below market expectations of $8.21 billion. Net income was $1.764 billion, up 349.4%.
Global comparable-store sales rose 17% in the quarter, below analysts’ expected 19%. U.S. comparable-store sales rose 22%, versus expectations of 24.3%.
China comparable-store sales fell 7%, with average ticket down 5% and transaction volume down 2%.
Starbucks’ loyalty program had 24.8 million active members, up 28% year on year. Starbucks China active members reached 17.9 million, up 5% sequentially and 33% year on year. Mobile ordering accounted for 36% of Starbucks China sales.
Starbucks said 80% of its China stores were affected by COVID-19 from mid-August, across 42 cities in 18 provincial-level regions. Even with that pressure, China revenue rose 11% year on year.
Starbucks opened a net 538 new stores in the fourth quarter, up 4% year on year. It ended the period with a record 33,833 stores globally, 51% company-operated and 49% licensed. The U.S. and China together accounted for 62% of the global estate, with 15,450 stores in the U.S. and 5,360 in China across 208 cities.
Chief operating officer and North America president John Culver said cold beverages accounted for 75% of beverage sales in the quarter. Espresso beverage sales rose 34%, and peak hours had returned to pre-pandemic patterns.
CEO Kevin Johnson pointed to measures aimed at improving store and supply-chain efficiency: Mastrena 2 machines that can pull three espresso shots at once, and the Deep Brew AI platform to support staffing, training, and daily inventory management. The message was clear: more store automation and more back-end equipment investment to reduce complexity and improve efficiency.
Johnson said higher prices, higher wages, new product development, store automation, and more efficient cooking equipment would help Starbucks outperform peers and improve operating margin.
Starbucks was considering price increases, though Johnson did not disclose the scale. He said the company was still analyzing pricing, but that prices would continue rising amid global inflation.
For fiscal 2021, Starbucks revenue was $29.06 billion, up 23.6%. Net income was $4.2 billion, up 352.4%. Diluted EPS was $3.54, up 348%. China comparable-store sales rose 17%, with transactions up 19% and average ticket down 2%.
Starbucks expected high-single-digit global comparable-store sales growth in fiscal 2022, about 2,000 net new stores globally, and around 75% of new stores outside the U.S. It expected Starbucks China to reach 6,000 stores in 230 cities in fiscal 2022.
The company also committed to returning $20 billion to shareholders through buybacks and dividends over the following three years.
For fiscal 2022, Starbucks expected GAAP EPS to decline 4%, adjusted EPS to grow at least 10%, operating margin of 17%, and margin to rise to 18%-19% in fiscal 2023. It expected fiscal 2022 net sales of $32.5 billion to $33.0 billion.
Wells Fargo analyst Jon Tower maintained an overweight rating but cut the price target from $135 to $122, arguing Starbucks had substantial pricing power and could ultimately recover costs. He also said the company’s service and traffic differentiation supported its brand strength amid broader industry challenges.
Baird analyst David Tarantino maintained an outperform rating but cut the price target from $144 to $128. He said spending on employee wages and talent investment would pressure margins, and that Starbucks’ fiscal 2022 earnings outlook was below market expectations.
In August 2021, Starbucks China announced a major leadership change: Belinda Wong stepped down as CEO while remaining chair, and former chief operating officer Leo Tsoi became CEO. The appointment took effect on October 1. Tsoi appeared on the earnings call and discussed the China market.
On the call, Barclays analyst Jeffrey Bernstein asked whether Starbucks might rethink its licensed-store strategy and whether Starbucks China’s equity structure could change. He cited QSR, parent of Burger King and Tims coffee, which treated Tims China as an independent company for financing and potential listing.
Johnson said Starbucks remained positive on the U.S. and China over the long term, because those two markets led company growth. He said China still had room for expansion, with continued store openings and high-speed growth. He also mentioned South Korea, where Starbucks sold its equity stake to a long-term local licensing partner.
In July 2021, Singapore’s GIC announced it would buy a 32.5% stake in Starbucks Coffee Korea. Reuters reported Starbucks Coffee Korea was valued at $2.35 billion, or about S$3.1 billion.
Starbucks said in Seattle that it would sell its 50% stake in Starbucks Coffee Korea. The business had been a joint venture between Starbucks and E-Mart, South Korea’s largest retailer, with each side holding 50%. After the deal, Starbucks sold its full stake, while E-Mart bought an additional 17.5%, lifting its holding to 67.5%.
Starbucks originally entered mainland China through local partners and licensed operations.
The first mainland China Starbucks opened in 1999 at Beijing’s China World Mall. It was operated under license by Beijing Mei Da Starbucks Coffee Co. Starbucks then used similar structures in East and South China. In East China, it formed Shanghai Uni-President Starbucks as a joint venture with Uni-President. In South China, the business was operated by Maxim’s Caterers.
Starting in 2005, Starbucks began buying back joint-venture stakes and converting licensed stores to company-operated stores. In 2005, Starbucks increased its stake in Shanghai Uni-President Starbucks to 50%. It later raised its stake in Maxim’s Starbucks to 51%. In 2006, Starbucks acquired 90% of Beijing Mei Da Starbucks, bringing more than 60 stores in Beijing and Tianjin back under direct operation.
In 2017, Starbucks acquired the remaining 50% of Shanghai Uni-President Starbucks for $1.3 billion, the largest acquisition in Starbucks history at the time. The deal gave Starbucks 100% ownership of about 1,300 stores across 25 cities in Shanghai, Jiangsu, and Zhejiang.
By 2017, Starbucks had fully taken control of its mainland China stores. Its Starbucks operations in Hong Kong and Macau remained licensed to Maxim’s Group.
Four years later, the question was whether Starbucks should again change Starbucks China’s equity structure.
In China’s coffee market, Starbucks helped educate consumers, and Luckin Coffee also played a major role. International brands had an early advantage, using strong brands to define the market and command premium pricing. But the broader Chinese consumer market has seen a structural rise of local brands taking share from international brands.
According to Starbucks’ fiscal 2021 report, Starbucks China generated full-year revenue of $3.65 billion, or RMB 23.38 billion.
Luckin Coffee reported first-half 2021 revenue of RMB 3.18 billion, up 106%. That implies first-half 2020 revenue of RMB 1.54 billion, and full-year 2020 revenue was RMB 4.033 billion. Combining Luckin’s second half of 2020 with first half of 2021 gives revenue of RMB 5.67 billion.
According to data in Nayuki’s prospectus, China’s freshly made coffee market was RMB 50.7 billion in 2020. Other company research cited annual compound growth of 20%-25%, implying a 2021 market size of about RMB 61.0 billion.
Based on the revenue figures above, Starbucks and Luckin had estimated shares of about 38% and 9.2%, respectively. The gap remained large, but Luckin was accelerating.
By store count, Starbucks China had 5,135 stores at the end of the first half of 2021, while Luckin had 5,259.
On pricing, Luckin and Manner targeted the middle price band with small-store formats, making coffee a more everyday retail product. Manner was positioned more toward specialty coffee within the market Luckin covered, with a narrower mass-market fit.
Shanghai is the high ground of China’s coffee market. Starbucks had 916 stores in Shanghai, the highest count of any global city, according to GeoHey data.
Luckin and Manner’s Shanghai expansion largely followed Starbucks locations, using lower prices and small stores to compete. Starbucks has small-store formats, but its product pricing has remained high. Without the premium of a larger third-place environment, its small-store model has less advantage against Luckin and Manner.
Starbucks’ fourth-quarter China same-store sales fell 7%, while average ticket fell 5% as pricing and discounts came under pressure. The average-ticket decline was not limited to the fourth quarter; it had continued for several quarters.
That decline suggested that Luckin, Manner, and similar competitors were meaningfully affecting Starbucks.
If that trend continued and Starbucks’ China growth story weakened in the following years, FoodBud argued that if the business fell into losses, North American headquarters could consider selling equity in the China business, with South Korea serving as a precedent.
Note: forward guidance, price targets, shareholder-return plans, valuation figures, and IPO-related references above are historical figures from 2021.