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Starbucks shifts gear in China with big acquisition

A Starbucks logo hangs inside its outlet inside the Forbidden City in Beijing. Photo: Reuters

Unlike fast food chain McDonald's which sold the franchise right of its restaurants in the Chinese mainland and Hong Kong to three strategic investors earlier this year, coffee chain Starbucks is doubling down on the company-operated business in the country which it bets as one of the top sales drivers in the following years.

In a deal inked recently, Starbucks will acquire the remaining 50 percent stake in its East China business from its joint venture partners Uni-President Enterprises and President Chain Store for $1.3 billion, its biggest-ever transaction that will enable the Seattle-based company to obtain 100 percent ownership of about 1,300 cafes in Shanghai and Jiangsu and Zhejiang provinces.

The $1.3 billion acquisition signifies the attainment of Starbucks' long-term goal to put all outlets under its umbrella in China, where the US coffee chain currently has 2,800 locations and plans to operate 5,000 cafes by 2021.

Starbucks' effort to regain the full control of its business in China goes back to 2005 when the Chinese government allowed foreign-funded companies doing business in the country to operate independently, before which Starbucks had to work with local partners to operate its outlets under a joint venture structure, of which it owned a very small share.

The strategy, which is considered as the best way to protect Starbucks from potential political and business risks in a new commercial environment, resembles what it did in Japan where it initially started business with some local joint venture partners and then brought the business back in house after spending time on learning the local market and consumers.

Industry insiders said that getting the sole ownership of business would help Starbucks unlock the potential to earn more money, unclog the process of decision making and maintain its brand's value and reputation in China, where the growing middle class and urbanization will give a huge potential customer base to tap.

And these benefits could boil down to the goal of opening 5,000 Starbucks stores by 2021 in China, an ambitious blueprint that Chief Executive Officer Kevin Johnson said can be materialized under a full company-operated structure.

Zhu Danpeng, a senior researcher at the China Brand Research Institute, said that the $1.3 billion buyout of locations in the East China region is a demonstration of Starbucks' strong confidence in the Chinese market and will give a boost to the implementation of its gargantuan expansion plan in the country.

Cafes in Shanghai and Jiangsu and Zhejiang provinces account for nearly half of its total stores in China, with Shanghai alone having almost 600 Starbucks stores, the largest number in any city globally. By December, Shanghai will be the first city outside of the US to open the ultra-premium Starbucks Reserve Roastery.

"As a place where the most Starbucks stores are located, the East China region will serve as an experimental field for Starbucks to strengthen deployment across the country," Zhu said.

Additional revenue

At a performance analysis conference held after Starbucks announced the $1.3 billion cash deal, Johnson said that he felt very sanguine about Starbucks' prospects in China, saying that buying the rest of the East China joint venture will help increase the revenue from China by $1 billion in the first year after gaining the full ownership there, according to a report published on jiemian.com, a business news website in China.

Analysts attributed Johnson's confidence to Starbucks' latest third-quarter fiscal report, which puts spotlight on the Chinese market as slowing growth in America forced the company to cut its profit forecast for the fiscal year. According to the financial report, the first under Johnson's leadership which was posted hours after Starbucks announced the $1.3 billion acquisition of the East China outlets, same-store sales from China were up a robust 7 percent in the third quarter, compared with the 5 percent growth in the US and 4 percent growth globally.

The encouraging financial result in China has connection with the country's economy.

During a visit to the Chinese western city of Chengdu last year, Howard Schultz, Starbucks' former Chief Executive Officer, unveiled the expansion plan to open 500 stores every year in China for the next half-decade, which is based on his faith on the Chinese economy which is seeing a transformation to be driven by domestic consumption and innovation. Schultz also estimated in an interview during the Chengdu tour that the number of the middle class in China would expand to 600 million members in the next 10 years, a potential coffee consumer group in the country.

"With the rise of the middle class and the growth in coffee consumption in China, we see a huge business opportunity in China. It (assuming full ownership of the Chinese market) is the beginning of yet another exciting new chapter for Starbucks in China," Belinda Wong, Chief Executive Officer of Starbucks China, said.

Digital innovation

Wong also emphasized that full ownership will give Starbucks the opportunity to fully leverage its robust business infrastructure to deliver digital innovation to the Chinese customers.

Starbucks has forged a partnership with China's technology giant Tencent in terms of digital services. In December 2016, the Chinese users of WeChat, a popular messaging app developed by Tencent, were able to pay for Starbucks products via WeChat Pay, a mobile payment system that allows customers to complete payments by scanning quick response code.

Currently, 40 percent of Starbucks' sales in China comes from customers who pay via WeChat Pay, according to Wong, who also said that Starbucks' mobile-ordering app has also been a key to reaping benefits in China.

The head of Starbucks' China operations revealed that the company is studying the possibility of offering more convenient digital services in China such as delivery service. But the coffee chain should take into consideration a possible slowdown in in-store traffic as a large number of mobile orders may lead to congestion and delays in serving orders at physical outlets.
 


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