Amid local rivals' challenges, will Starbucks sustain its quondam glory in China?

Facing the breakneck expansion of local coffee brands and a decrease in its same-store sales growth in China, Starbucks is banking on accelerated implementation of its digitalization strategy to right the ship in the country, which the US coffee chain wants to become its largest market in a decade.

Among these local competitors, Luckin Coffee is seen as the biggest challenger of Starbucks by virtue of its crazy store expansion and flexible sales channels. The Beijing-based coffee startup has remained attractive to venture capitalists since its establishment a year ago. Now, its valuation is twice that of four months ago, amounting to $2 billion, after the completion of its latest fundraising round, with the names of investors undisclosed. The last fundraising round happened in July, when Luckin Coffee secured $200 million and its valuation stood at $1 billion. It is indeed a miracle for most unicorns to see their valuation hit the $2 billion mark within such a short time.

Luckin Coffee's inflated early-stage valuation comes on the heels of its grandiose store expansion plan, which aims to open about 2,000 locations by the end of 2018 in China, where it currently runs nearly 1,400 stores in more than 20 cities. Comparatively, Starbucks operates over 3,400 stores in China, an achievement that it took 19 years to make, and plans to establish 600 new stores annually in the next half-decade in the country.

In the past, the high speed of store expansion assured Starbucks of a stable revenue in China, where coffee drinking has gradually become fashionable and a symbol of wealth among Chinese. But with the diversity of coffee brands and China's economic slowdown in the recent years, the outlook of Starbucks' rapid store expansion might not be as good as expected. The latest fiscal figure about its same-store sales in China proves that it has become less popular among Chinese consumers. In the fourth quarter, its same-store sales in China merely grew by 1 percent, compared with 8 percent in the same period of last year. It looks better than last quarter when its same-store sales unexpectedly decreased 2 percent, the first drop in nine years.

Kevin Johnson, chief executive officer of Starbucks, has said that the company will put emphasis on the American and Chinese market as well as its cooperation with Nestlé in the coming year.

The less-than-expected same-store sales growth could be seen as a result of the rise of domestic Internet-driven coffee brands like Luckin Coffee, which have grabbed the market share rapidly through high technologies, delivery services, subsidies and store expansion. Take Luckin Coffee for instance, the Chinese coffee startup has established a partnership with technology giant Tencent to create a new lifestyle of smart retail through exploring robotic delivery of orders as well as facial recognition-powered payment on WeChat Pay.

Starbucks has realized the importance of digitalization in enhancing its presence in China, where most consumers are used to pay everything online. In November, the Seattle-based coffee giant rolled out a new policy in China allowing customers to get more bonus stars if they pay via its self-branded app, a move that reflects the company's intent to raise the popularity of its own mobile payment system in the country. Starbucks also accepts WeChat Pay and Alipay payments.

The payment-for-bonus policy came three months after Starbucks announced the new retail cooperation with Alibaba-owned food delivery app Ele.me to deliver its coffee and the establishment of "Starbucks Delivery Kitchens" in Alibaba's supermarket chain Hema for better fulfilment of its orders. However, domestic media reports said that the delivery services failed to boost Starbucks' sales in China due to the high delivery charges.

And starting November 6, Starbucks slightly increased the prices of parts of its products sold in China stores after what it calls a careful assessment on rents, logistics, store facilities, manpower and product development. It is uncertain whether the price hike would affect Starbucks' sales in China, as its coffee prices are higher than that of its Chinese counterparts. The last price hike of Starbucks in China happened two years ago.

On Luckin Coffee's part, whether the domestic brand could pose a long-term challenge to Starbucks remains uncertain. The biggest problem is about its money-burning and subsidy-enabled operation mode, which allows it to adopt a favorable pricing strategy and supports its store expansion ambition. Industry experts have called this operation mode "unsustainable", saying that it could not guarantee stable profitability, which in turn would dash the belief of investors. The downfall of many bike-sharing firms in China could be a precedent. Luckin Coffee has said that it had made preparations for long-term losses and had not set a timetable for profitability. Therefore, it is too early to judge that Starbucks is losing to domestic competitors.