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Starbucks China positioning

Personal experience:

It was cool to hold a Starbucks drink in hand, but less so in recent years.

The cool factor is diluted with %Arabica (82 stores), Blue Bottle (5 stores), and Peet’s (over 200 stores).

Blue Bottle can drive me to a shopping mall that wasn’t on my plan. Starbucks has less effect these days.

I rarely buy Luckin coffee, unless it’s a hit product like Moutai coffee. Mostm Luckin items don’t taste like coffee but more like sugar drinks to me.

I have tried other domestic brands like M Stand (350 stores). I think that tastes more on par with Starbucks.

Manner (1000 stores) is not on par with Starbucks, but the minimalist style looks appealing than Luckin for certain customers.

Other international brands like Tim’s (912 stores) is not a bad choice. But the store is less sophisticated than Starbucks (lack of charging).

In terms of drinks, I think Starbucks is less differentiated among premium brands like %arabica, Blue Bottle, Peet’s.

In terms of services, Starbucks is differentiated with charging outlets. And I like the option of ordering without a phone, although I mostly order on phone.

In terms of branding, it’s less “cool” compared with %Arabica and Blue Bottle, unless it’s a Starbucks Reserve coffee.

I think Starbucks’ problem in China is more of a positioning problem. How it can target different segments with a single brand? Different customers want different things and they are just too different in China.

  • too mainstream to be premium / high-end
  • too expensive for routine customers in the real mass market (incl. lower tier cities) in the long run

I am sure in some cities, Starbucks shall still enjoy a “cool” factor for some time, but can fade over the years if other foreign brands enter.

%Arabica Shanghai

 

Blue Bottle Shanghai

Growing capital expenditure for AI firms (MSFT + GOOGL + META => $150bn)

MSFT capex saw 41% increase in CY2023 and 79% increase in the first quarter of 2024. And MSFT expects material sequential increase in capex, which could mean 50-60% increase yoy.

Alphabet capex saw 2% increase in 2023 and 91% increase in the first quarter of 2024. The company expects similar amounts in the following quarters, which points to 50% yoy increase in 2024 capex.

Meta capex saw 12% decline in 2023 and 5% decline in 2024q1, but the company upgrades capex guidance for 2024 to be $35-40bn, which indicates a 33% yoy increase at midpoint.

Adding the 3 above would be $150bn combined capex already, up from ~$100bn in 2023 for those three.

Chinese companies share-based compensation (3)

See previous

Chinese companies share-based compensation (1)

Chinese companies share-based compensation (2)

 

Tencent (HK.700)

2023

FCF: 167 bn rmb (company defined)

SBC: 21 bn rmb, or 12.6% of FCF

Note: FCF significantly improved, while buyback is doubling SBC

 

Meituan (HK.3690)

2023

FCF: 33.6 bn rmb (op. cf minus purchases of pp&E)

SBC: 8.4 bn rmb, or 25% of FCF

Note: FCF significantly improved; buyback starting in 2024

US homebuilders in 2008

What did US homebuilders do in 2008? Residential property market was really bad.

D.R. Horton revenue dropped by 41% yoy in 2008; loss of $2.6bn (more than 2x of 2006 net income) was incurred. Book value was only $2.8bn at 2008 YE.

But D.R. Horton maintained positive cash flows, scaling back expansion and selling inventories.

D.R. Horton started to pay down some debt in 2007 and did so in 2008 as well. It continued to do so until 2011. In 2012, it started to take on more debt.

Similarly for Lennar – revenue dropped 55% yoy in 2008 and incurred loss of $1.1bn. Book value was $2.6bn at 2008 YE.

It maintained positive operating cash flow, reducing supply (deliveries dropped 68% from 2006), pausing expansion and selling inventories.

It didn’t take new debts, but focusing on paying back.

 

 

Is Chipotle a robot company that happens to make chipotle?

Not to say these systems are fantastic; but at least you need to experiment first. Investors love stories.

Robots could do fries Chippy robot (by Miso Robotics)

Robots could peel and cut avocados Autocado (by Vebu)

Robots could prepare the bowl/salad (by Hyphen)

 

Problems?

  • cleaning
  • items prepared may not be as good as humans for now
  • lack of customer relationship (I still like it when your local coffee shop people can remember your name)
  • if broke down, hard to replace? unless you have a spare machine nearby… but in every city?
  • less job growth for society
  • etc.

How to win young voters?

Mortgage rate 7% is too high.

If you didn’t purchase a home in 2020-21, you seem to have missed the boat.

Sure unemployment rate is low, but young people don’t have that feeling that job market is great. The confidence of easily getting another job, or getting a good raise is not high.

Sure crypto price may ease some pressure if you assume that’s young people’s assets, but that’s too speculative to put a lot of money, and may not be good for the hardworking people with low risk-appetite.

Student debt relief seems to be a limited approach.

Pro-Palestinian protests and the subsequent arrests could be troubling.

It’s either lowering rates soon or legalizing marijuana soon, to win young voters.

But marijuana is a risky approach and might have negative impact on other voters. Must be cautiously executed.

Single biggest investment decision in the last 3 years

To me, that’s “not buying a home in Shenzhen”.

How much did I gain? almost as much as $1mn.

Well, if I bought a 10-20mn rmb home in 2021, with 30-50% down payment, which was the plan, I would have invested 3-10mn rmb.

Over the past 3 years, I could have lost 3-6mn rmb or 60-100% of the equity value, assuming home prices dropped by 30%. In fact, I have seen examples of home price dropped by 66% in 2024 compared with 2021.

This doesn’t include the interest expenses, brokerage fees, and opportunity costs which can be at 2.5% deposit rate times 3 years for rmb.

What surprised me in 2021?

The low rental yield surprised me at first – easily 1%.

The place I got in 2021 shall cost 10mn rmb to purchase, but renting costs 11k rmb / month, which was 1.3% rental yield.

Then I realized housing price in SZ is comparable to some of the most expensive cities in the world. (ASP in certain part of SZ can be easily 150k+ rmb per sqm, which is equivalent to $2.1k  / sqft)

$2k / sqft is insane.

Even someone assumes (subtract) the savings on insurance, tax, etc., (say 2-3% a year) – the price is high ($1k / sqft).

The simplified math works like this – take a $1mn home as an example, assuming a 2.5% discount rate, and assuming the cost of owning is 2.5% per year, the savings on cost of owning is $1mn.

Therefore, you could cut the China’s listing price by half and compare. But still expensive. This also assumes that you don’t pay property tax in China – which is true is most cities and especially for your first home or smaller homes.

Note that if US raises interest rate, that value of this “saving” can be immediately cut – e.g. cut by 50% if discount rate increases to 5%. See below.

Home price to income level is also concerning. I am sure there are many rich business owners in SZ, but wages are not that high. High-paying jobs are not common, and SZ was not as resilient as other cities in earning wages.

Big companies like Tencent, Vanke shall face pressure in the coming years. [Gaming was called spiritual opium in 2021, and Vanke is a residential real estate developer] Cross-border e-commerce was hot, but competition quickly rose (especially from TEMU), plus global consumption dropped as Ukraine war broke out and Fed increased interest rate.

SZ also have strict requirement to purchase homes. You need to have 3 years of social insurance payment to purchase a “residential property”. You could purchase an “apartment”, which doesn’t need social insurance requirement but that can drop even more in prices due to oversupply.

[“residential property” and “apartment” are two different types of property that are treated differently in property rights, in taxes, in education resources, in electricity costs, etc.; rental price could be the similar, but “residential property” are more expensive to purchase]

Microplastic (detection & replacement), sounds like a future business

This article is pretty good at summarizing the importance of microplastic to health (downside), including in cardiovascular disease etc..

Global companies are trying to address this issue for a long time. The most recent development is Starbucks’ announcement of redesigned single-use cups with 10-20% less plastic.

EU’s objective: aims to reduce microplastic releases by 30% by 2030.

See a previous article for fast-fashion and microplastic.