Starbucks Corp (NASDAQ:SBUX) is evaluating options for its Chinese operations, including the potential sale of a stake in the business.

The coffee chain has consulted advisers on strategies to expand in China and has gauged interest from potential investors, including local private equity firms, Bloomberg cites familiar sources. Possible buyers include Chinese conglomerates or regional companies with relevant industry expertise.

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Starbucks is seeking strategic partnerships in China as it grapples with declining sales in the region. Once its fastest-growing market, China now faces economic headwinds, including a property slump, employment uncertainties, and slower consumer spending, SCMP reports.

The company faces mounting pressure from activist investor Elliott Investment Management, which has urged a review of its Chinese business. Other Western brands have made similar moves, such as McDonald’s Corp (NYSE:MCD) and Yum! Brands Inc (NYSE:YUM), which sold stakes in their Chinese operations to private equity investors to drive growth and adapt to local market demands.

China, Starbucks’ second-largest market, generated approximately $3 billion in revenue last year, with the store count increasing by 12%. Despite this growth, Starbucks is contending with stiff competition from local rivals like Luckin Coffee Inc, which has rapidly gained market share with more affordable offerings.

Starbucks saw its same-store sales in China shrink by 14% in the fiscal fourth quarter ending September, surpassing its global sales decline of 9%.

Rising competition from cost-effective rivals such as Luckin Coffee and Cotti Coffee has further strained its position, as these companies attract budget-conscious consumers with significantly lower-priced offerings.

Brian Niccol, who became CEO in August 2024, acknowledged the challenges, citing an “extreme” competitive environment and macroeconomic pressures.

Starbucks’ signature 27-yuan ($3.70) Americano is losing traction against Luckin Coffee’s brews, priced at 11.9 yuan, and Cotti Coffee’s offerings, which initially cost 9.9 yuan before a modest price hike to reduce cash burn.

Cotti Coffee, founded by two former Luckin executives in 2022, has rapidly expanded to 10,000 locations across 28 markets, creating intense competition in China’s coffee industry.

Meanwhile, Starbucks operated 7,596 stores in China as of September, accounting for 19% of its global footprint.

Starbucks is also contending with the growing popularity of fruit-infused teas and juices, which is increasing competition for consumer spending.

Price Action: SBUX stock is up 1.57% at $99.80 at last check on Thursday.

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