SHANGHAI/BEIJING (Reuters) -Starbucks' ( SBUX ) decision on Monday to sell up to 60% of its China business to local private equity firm Boyu Capital could help the hard-pressed brand regain ground in one of the world's fastest-growing coffee markets.

By pulling in Boyu, the U.S. coffee chain is adding local capital and operational expertise into its China arm, where it plans to triple its footprint to 20,000 stores, industry analysts say.

However, Starbucks still faces mounting pressure from low-cost local rivals, including Luckin Coffee, as well as shifting consumer tastes.

Boyu, already an investor in China's budget bubble tea leader Mixue Group ( MXUGF ), is familiar with the low end of the coffee-price spectrum. The company operates Lucky Cup, a rapidly expanding coffee chain with a goal of opening 10,000 stores by the end of 2025. Prices start at just RMB 6 ($0.84), undercutting competitors such as Luckin. 

BOYU BETS ACROSS THE SPECTRUM

By backing both Mixue ( MXUGF ) and Starbucks, Boyu is positioning itself to capture both cost-conscious consumers and those seeking a premium experience.

Starbucks' ( SBUX ) market share in China tumbled to 14% last year from 34% in 2019, according to Euromonitor International data.

Boyu's "hands-on experience in these markets matches Starbucks' ( SBUX ) strategy," said food and beverage analyst Zhu Danpeng. "Boyu's involvement will make that push more resolute."

Real estate risks also loom large. In smaller cities, rapid mall development can leave Starbucks stores stranded in underperforming locations, though Bernstein analysts wrote in an investor note that Boyu's deep connections could help it secure "some of the most premier real estate assets in China." Starbucks CEO Brian Niccol said Boyu would be especially helpful in assisting the roaster's entry into small cities.

The company did not immediately respond to a request for comment.

Niccol is pushing a U.S. recovery focused on overhauling store operations. His predecessor, Laxman Narasimhan, bet heavily on China, increasing the store count by more than a quarter to nearly 7,600 stores in the two years he led the company. 

Analysts say the China deal will allow Starbucks to focus more fully on the United States.

Shares have lost 20% over the last year, compared with a 19% rise in the S&P 500. They were down more than 3% on the Nasdaq on Tuesday afternoon. 

Jessica Gleeson, a former Starbucks China executive, said the deal could be a turning point. 

"The injection of capital and China expertise from Boyu is exactly the catalyst Starbucks China needs to shift from defense back to offense," she said. 

STARBUCKS IN TOUGH POSITION

Yet challenges remain. Ben Cavender, managing director at Shanghai-based China Market Research Group, said Starbucks' ( SBUX ) brand is caught in a "really awkward position" in China.

Budget-conscious consumers are flocking to Luckin or Yum China's ( YUMC ) KCOFFEE, while younger and more sophisticated drinkers are gravitating to boutique cafés offering better ambiance and quality at similar prices. 

"Starbucks is competing with an offer which by definition is a bit more unique and funky and interesting to the consumer," Cavender said. 

Starbucks China division generated around $3.1 billion in net sales last year, according to quarterly filings, compared to nearly $3 billion in 2024. Luckin reported slightly more than $3.6 billion in sales for the fiscal year ending in February.

Starbucks did not disclose the licensing terms in the deal. Yum China ( YUMC ), which launched KCOFFEE in 2022, pays licensing fees to Yum equal to 3% of net system sales, according to filings.