Is things getting tougher for Starbucks in China?Our thoughts on Trump’s tariff talks | Wilnesh News
Former President Trump has pledged to impose tougher tariffs on China if re-elected, which could make it more difficult for U.S. companies such as Starbucks to do business in the world’s second-largest economy as they already face challenges from low-cost domestic Fierce competition from competitors. “When you’re being taken advantage of by other countries, I completely believe in them (tariffs) economically,” the 2024 Republican presidential candidate told CNBC on Monday. Campaign rhetoric aside, the U.S. has been increasingly aggressive in its response to tariffs during the Trump administration. Many of the tariffs imposed by China remain in place under President Joe Biden, the presumptive Democratic nominee. No matter who wins the election, any reaccelerating trade war between Washington and Beijing could stoke the flames of nationalism among Chinese buyers to boycott American brands, hurting U.S. consumer goods companies in China. During Trump’s trade war, Chinese consumers refused to buy some American goods and services in protest. In 2018, shortly after Trump’s first round of taxes, then-Starbucks CEO Kevin Johnson argued that his company’s coffee was different. Starbucks, he said, is “built in China for China.” He added at the time that the company “operates in China as a consumer- and culture-related entity, and we are playing the long game.” SBUX 1Y mountain Starbucks shares rose 1% on Monday, perhaps as investors shrugged off worries about China’s trade war. To be sure, the stock has been volatile since the start of the year amid concerns about the company’s performance in China. China’s economic pressure and aggressive local competitors pose challenges. The situation could raise doubts about Starbucks’ appeal to a broad swath of Chinese consumers—already a concern for investors. “I’m worried they’re too expensive for China,” Jim Cramer said recently of Starbucks. He added that China is a “country without growth” given its shrinking population, which is a negative sign for companies like Starbucks that rely on China’s growing consumption. Although China still has a population of about 1.43 million, it lost its status as the world’s most populous country to India last year. Those pressures in China and the United States — Starbucks’ second- and first-largest markets, respectively — have been weighing on the stock. Historically, Starbucks’ price-to-earnings ratio ranges from 22 to 30 times forward earnings estimates. Starbucks currently trades at a price-to-earnings ratio of 22 times, which is at the lower end of that range. Jeff Marks, the club’s director of portfolio analysis, believes Starbucks is “reflecting on a lot of issues right now and not foreseeing where things might get better.” He added that to regain a premium P/E ratio, the company “needs to show it can make China is back on track and re-accelerating competition with the United States.” China’s lagging economic recovery from the coronavirus pandemic has exacerbated Starbucks’ challenges. Economic improvement there will depend in part on whether the Chinese government passes fiscal spending measures that could help boost consumer confidence. Last week, Beijing announced an ambitious economic growth target of about 5% in 2024. The Chinese government admits that achieving this goal “will not be easy” as deflation, a real estate crisis and rising debt stifle economic growth. China’s economic weakness is making consumers there more price-sensitive, leading to the rise of rivals such as Chinese coffee chain chains Luckin Coffee and Coty, which are more promotional than Starbucks and offer deep discounts. The average price of Luckin Coffee’s beverages in China is about US$1.38 per cup, while Starbucks’ average price is US$4.18 per cup. Instead, Starbucks offers more premium beverages targeted at middle- and upper-income consumers. Despite facing various headwinds, Starbucks still sees huge potential in China’s high-end market and is committed to differentiation through product innovation, new food offerings, and premium in-store and digital experiences. Starbucks’ recovery in China was weaker than expected in the first quarter of fiscal 2024, due to lower sales and a heightened promotional environment in China due to what management described as “more cautious” consumers. Two reasons cited by Starbucks were declining sales of higher-priced items in China and investments in targeted promotions to personalize offers and reward customers. Peter Saleh, a restaurant analyst at financial services firm BTIG, said he wouldn’t be surprised if Starbucks does more promotions in the short term because Chinese consumers “seem to be more cautious about reopening after the pandemic.” be inhibited”. “You have to get those deals to increase sales,” he told CNBC. “The goal is to get those customers back to your store. Over time, you can move them to full-price items. .” During Starbucks’ recent earnings call, management said they may be operating in an “environment of heightened promotions,” but they are “not interested in a price war with domestic coffee competitors in China.” Instead, their focus is on “achieving high-quality and profitable sustainable growth” by becoming a leader in China’s high-end market. As China’s coffee market matures, Starbucks believes the industry will experience more defined tiered competitive dynamics, which will expand opportunities as a premium brand. Saleh believes that at some point, Chinese consumers will come back, and when they do, Starbucks’ appeal will still be there. “There are some things you get at Starbucks that you can’t get anywhere else,” he said. “It’s more about innovation in the brand and the experience, and that’s why people choose to go to Starbucks. They’ve always operated in the upper end of the market and have always been successful there.” Getting there, however, may take more time. BTIG estimates that China’s economic recovery will take at least six to eight months before investors start to see changes in deal numbers. But Saleh said it may take longer because Chinese consumers are not off to a strong start in 2024. As of its latest quarterly report, Starbucks has nearly 7,000 stores in China. The company expects to achieve its goal of opening 9,000 stores in China by 2025. The company maintains “full confidence” in business opportunities in China and continues to see “huge potential in China’s high-end market.” Only time will tell whether another four years of the Trump administration or Biden can level the playing field with China without harming the interests of American companies in China. (Jim Cramer’s Charitable Trust is buying SBUX. See here for a full list of stocks.) As a subscriber to Jim Cramer’s CNBC Investing Club, you will Receive trade alerts before Jim Cramer trades. Jim waits 45 minutes after sending a trade alert before buying or selling stocks in his charitable trust portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing a trade alert before executing the trade. The investment club information above is subject to our Terms and Conditions and Privacy Policy and our Disclaimer. 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Former President Trump promised to impose tougher tariffs on China if re-elected, which could make it more difficult for American companies to do business in the world’s second-largest economy, such as Starbucks These companies already face stiff competition from low-cost domestic rivals.
