June 20, 2018 / 12:37 PM / 3 months ago

Starbucks blames slower China growth on drop in third-party delivery orders

(Reuters) - Starbucks Corp (SBUX.O) has reported a sudden slowdown in China growth just weeks after trumpeting rapid expansion in the country, citing a drop-off in unapproved third-party delivery services whose bulk orders had been clogging up its cafes.

The U.S. cafe chain said on Tuesday same-store sales would be flat to slightly negative in its second-biggest market in April-June, versus 7 percent growth a year earlier. The announcement was followed by a 9 percent drop in Starbucks’ share price.

China has been a sweet spot for Starbucks for the past few years, as the country embraces cafes and opens up to drinking coffee over tea while growth saturates back home. Last month, the firm said it aimed to triple China revenue and double cafe numbers to 6,000 by 2022.

But on Tuesday, the company said new cafe openings were cannibalizing customer visits at other stores, as also happened in the United States. However, Starbucks particularly noted a decline in third-party firms - with whom it had no formal arrangements - that placed large orders for delivery to their own customers, often resulting in long in-store queues.

“I think it was driven by the government to want to stop having third parties do that because it was creating annoyances,” Chief Executive Kevin Johnson said on a call with analysts on Tuesday. He said the remedy was to seal a delivery partnership with a “large tech company” by the end of the year.

Reuters was unable to confirm any government measures on the matter.

Third-party “daigou” shopping agents in China offer services via delivery platforms such as Ele.me, backed by Alibaba Group Holding Ltd (BABA.N), and Meituan-Dianping, backed by Tencent Holdings Ltd (0700.HK). Restaurants and cafes can also have official accounts on such platforms, though Starbucks does not.

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Mizuho Securities analyst Jeremy Scott in a research note said Starbucks would have been happy for the no-cost custom generated by third-party delivery services, but an official arrangement will likely push up costs.

“While the Street may be willing to forgive a tough May ... the soft comp (comparable store sales) in China is more disheartening given that management is hyper-focused on the market,” said Scott.

Eeasing China comparable store sales had more to do with more competition pricing products below and above Starbucks, as well as from their own stores in certain markets, rather than the third party issue, Benjamin Cavender, senior analyst at China Market Research Group, said.

Starbucks continues to add new stores in some central business district areas in China where it already has too many cafes, Cavender said, adding that such cannibalization forces the company to close older outlets, leading to a loss of customers.

Starbucks also on Tuesday said it planned to close 150 cafes in the United States and open fewer locations in its financial year beginning in October, in response to competition that has seen new coffee chains, convenience stores and fast-food restaurants improve quality and cut prices.

Starbucks’ shares closed down 9 percent on Wednesday, bringing the price closer to negative territory for 2018 - a year in which co-founder Howard Schultz stepped down as executive chairman, and in which the cafe chain found itself at the center of an embarrassing racial-profiling incident.

Several analysts downgraded their view of Starbucks stock and lowered their 12-month price targets after the firm on Tuesday forecast global same-store sales growth of 1 percent for its third financial quarter, below analysts’ 3 percent estimate.

The stock has declined 9 percent so far this year compared with a 3.5 percent rise in the S&P 500 index .SPX. Still, of 31 analysts covering the stock in the United States, 20 rated it "buy" or "strong buy", while the 12-month median price target was a 24 percent premium to its Wednesday close.

Reporting by Sayantani Ghosh in SINGAPORE and Adam Jourdan in SHANGHAI; Additional reporting by Nivedita Balu and Alana Wise; Editing by Steve Orlofsky and Christopher Cushing

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