The news: Starbucks is lowering prices in China for some drinks as the country’s relentless price wars force the struggling coffee chain to shift gears.

• The company will lower prices for over a dozen non-coffee drinks by an average of RMB 5 (70 cents), according to a statement posted to its official WeChat account.
• The move will reduce the price gap relative to Starbucks’ more high-end local competitors, allowing it to bolster its appeal to China’s tea drinkers.

Why it matters: Starbucks’ price cuts are a clear indication of the deflationary pressures weighing on China’s economy. Anxieties around the country’s ability to weather a trade war and an ongoing property crisis have crimped consumer spending, forcing companies to slash prices in an effort to spur demand.

• China’s consumer price index (CPI) fell 0.1% YoY in May, the fourth-straight month of deflation, per the National Bureau of Statistics.
• On the industrial side, the problem is considerably worse: Factory deflation entered its 32nd month with the biggest drop in producer prices in nearly two years.
• Conditions are unlikely to improve as trade uncertainty hits China’s manufacturing sector and consumer sentiment. Consumer prices are expected to increase just 0.3% YoY this year, per Bloomberg.

Our take: Starbucks’ pricing actions are necessary to keep it competitive in a challenging market. But it is increasingly struggling to keep up with the likes of Luckin Coffee and Cotti, which are not only considerably cheaper but also better able to meet Chinese consumers’ rapidly shifting tastes.

With conditions in the world’s second-largest economy unlikely to improve this year, Starbucks will have to find a way to become nimbler—and more affordable—to keep within striking distance of its rivals.

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