Why investors think Starbucks’ China business may be overvalued
Starbucks’ investors were excited for a brief moment after CNBC reported that the coffee giant received offers valuing its China operations at up to $10 billion, sending its Nasdaq-listed shares over 3% higher briefly before paring back gains. Starbucks China has attracted offers for a potential stake sale, valuing the coffee chain at between $5 billion and $10 billion, according to sources, and the bidding is likely to settle toward the higher end of that range. Following the report, Starbucks shares jumped over 3% at open to an intra-day high of $97.89, levels not seen in over three months, before drifting lower to close with a 0.33% gain. SBUX 5D mountain Starbucks Corp Analysts appeared to take the hefty valuation with a grain of salt, saying the outsized offer may not align with the company’s underlying fundamentals, with most keeping their target price for the stock unchanged. “This may be overvaluing the business and not placing enough weight on how competitive China’s coffee market is, or how much Starbucks is currently struggling to create a clear identity in the market,” Ben Cavender, managing director of China Market Research Group, told CNBC on Thursday. Similarly, analysts at Citi Bank suggested that the $10 billion valuation would be a steep price unless the buyer sees a clear path to stronger sales and better profitability for Starbucks’ China business. “We expect $10B would need to reflect the buyer’s view that there is room to quickly recoup sales lost during COVID” or improve its profitability, analysts at Citi Bank said in a note Thursday, noting that Starbucks’ same-store sales in China were still down about 33% from pre-pandemic levels. The investment bank has set its 12-month target price for Starbucks at $95. The stock closed at $95.03 Wednesday. Starbucks China has been grappling with intensifying competition from local rivals, such as lower-priced Luckin Coffee and premium boutique coffee chains, with its market share falling to 14% in 2024 from 34% in 2019, according to data from market research provider Euromonitor International. Luckin Coffee , which has 24,032 stores in China and 65 stores outside China as of March, had a market value of $11.26 billion in its over-the-counter shares, as of Wednesday close. In comparison, Starbucks had 7,758 stores across China as of March, according to its latest earnings report. “The market in China evolves so quickly that it makes it difficult for a brand with such a large footprint like Starbucks to adapt quickly enough,” Cavender said. Starbucks’ same-store sales in China were flat in the first quarter of this year after falling for four consecutive quarters . To lure back mainland customers, Starbucks in June launched sugar-free options and opted for its first-ever price cut in China, lowering the prices of more than 20 iced and tea-based drinks by an average of 5 yuan (70 cents), to target what it called “China’s fast-growing non-coffee market.” “$10 billion seems on the higher end of the valuation while the actual price private equity settled may be lower,” said Jason Yu, general manager at CTR Market Research, citing the “competitive challenges Starbucks is facing.” “As consumers today are tightening their belt but still willing to pay premium on emotional value a coffee can bring, Starbucks is caught in the middle,” Yu added, referring to the promotion deals launched by Starbucks on its app to narrow the price gap with competitors while seeking to retain its traditional premium brand positioning. “Ultimately Starbucks either will win the efficiency games, matching its price and operation model with its Chinese counterpart or closing those less profitable outlets and focus on real brand experiences,” Yu said, noting that “it is very difficult to stay in the middle.” Starbucks kicked off the formal sale process of its China operation late last year, a person familiar with the matter told CNBC, inviting preliminary proposals from potential suitors. It has not, however, decided whether to sell a controlling or a minority stake in its China business, CNBC learned. The move to sell a partial stake in Starbucks’ China business is part of CEO Brian Niccol’s turnaround playbook, CNBC Investing Club’s Jim Cramer said. Niccol was CEO of Taco Bell back in 2016 when the chain’s parent Yum Brands spun off Yum China, and turned it into a separate, publicly traded company later that year. The spin-off allowed the parent company to focus on its core business and return capital to shareholders through dividends and share repurchases . “If you don’t own it, you should buy it,” said Jim Cramer, referring to Starbucks’ stock.
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