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Starbucks: Is It Time to Let China Cool Off?

Starbucks (SBUX) may need to slow its growth in China, its most important non-U.S. market. In a Tuesday note, Bernstein analysts wrote that while the Barron’s Next 50 company has grown to nearly 60% market share—well ahead of the number-two, McDonald’s (MCD) McCafe—in specialty coffee, competition in key markets may point toward signs of a glut in some cities. Management has said the battle for delivery business has complicated the Chinese market, but there may be more to the story, according to Bernstein—and not only that some competitors appear to offer “better delivery at lower prices.” “Cannibalization appears to be playing a role, suggesting that the pace of growth may need to slow until incomes in [third- and fourth-tier] cities catch up with the densely penetrated [first- and second-tier] cities” such as Shanghai and Beijing, Bernstein wrote.