MondayFounder

Beijing, the vibrant capital of China, sets the stage for a complex and shifting consumer landscape, presenting a formidable challenge for international brands seeking to regain pre-Covid levels of consumer spending. Morgan Stanley, a renowned financial institution, delved into this phenomenon in a recent report, shedding light on the factors hindering China’s recovery and the rising tide of competition faced by brands such as Starbucks.

Chinese consumers, while gradually recovering from the pandemic’s aftermath, exhibit a newfound caution in their spending habits. Moreover, a myriad of alternative choices now vies for their attention, making it even more challenging for international brands to regain their former prominence.

Morgan Stanley’s analysts outlined three key factors impacting Chinese consumers this year. Firstly, unlike the United States and other parts of the world, China has not distributed stimulus checks to its citizens, leaving them with reduced purchasing power. This absence of financial aid has dampened the resurgence of consumer spending.

Secondly, pandemic-related restrictions and regulatory changes have dealt a severe blow to the service sector, resulting in the loss of an estimated 30 million jobs that would have existed prior to the Covid outbreak. The analysts anticipate that roughly 20 million of these jobs may gradually return later this year and into the next. However, the remaining 10 million positions may take longer to recover, as they were adversely affected by Beijing’s crackdown on education, internet technology, and property sectors.

Lastly, the housing market continues to struggle due to government efforts to curtail speculation. This persistent softness in the real estate sector stands in contrast to the recovery experienced during the first half of 2021 when property sales drove economic growth. The Morgan Stanley analysts highlight this shift as a significant factor affecting consumer spending patterns.

Covid-19 and its subsequent containment measures, spanning from 2020 to 2022, exerted a considerable drag on China’s economy. Although the restrictions abruptly ended in December, growth has only shown modest signs of recovery. Morgan Stanley analysts project a modest 9% rebound in Chinese consumer spending this year, followed by a 4.8% increase next year. However, this forecast falls 0.5 percentage points lower than pre-pandemic expectations.

For Starbucks, the journey to regaining market strength proves arduous. Morgan Stanley analysts predict that same-store sales in China will grow by approximately 7% this year. Despite this improvement, these figures still pale in comparison to the prosperous years preceding the pandemic, representing a decrease of roughly low-teens compared to 2019 levels.

Compounding the challenges faced by international brands is the intensifying competition from local players. Among the analysts’ U.S. “restaurants” stock picks, the U.S.-based coffee giant, Starbucks, is deemed the “least favored” to leverage China’s recovery. The report highlights the staggering 16% year-on-year increase in coffee stores across China, primarily comprised of local brands. This influx of competition has eroded market share for multinational corporations like Starbucks, even though they continue to expand their store networks at a commendable pace.

Luckin Coffee, a China-based company, has emerged as a dominant player, boasting an impressive portfolio of over 9,000 stores. Similarly, Tim Hortons, having entered the Chinese market in 2019, has grown its presence to over 600 locations. The popularity of Cotti Coffee has reached such heights that its website explicitly warns against impersonators. These emerging and rapidly expanding concepts pose a significant threat to Starbucks’ market share.

Starbucks, recognizing the evolving landscape, remains committed to its growth trajectory in China, having recently celebrated the opening of its 6,000th store in mainland China in September 2022.