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Starbucks accelerates expansion in China amid monopoly allegations

Photo: AP

Starbucks Corporation reaffirmed its grandiose expansion plan for China, irrespective of a local rival's provocative question about its alleged monopoly in the Chinese market, which the American coffee chain sees as its second-largest revenue stream after the United States.

Last week, Starbucks for the first time organized its first-ever China Investor Conference, at which it charted the blueprint to annually open 600 new stores in the next half-decade in China, where it currently operates nearly 3,300 stores and employs 45,000 employees. By September 2022, the number of Starbucks stores in China is expected to hit the 6,000 mark, said the company.

The new expansion plan for the Chinese market is more aggressive than the one that Starbucks revealed two years ago when it decided to set up 500 new locations every year in the country through 2020.

China has become a sought-after market for Starbucks, which believes that the rise of the affluent middle class would contribute to its robust growth in the country, as Starbucks' former chief executive officer Howard Schultz has estimated that the company could reduce by half the time that it spent in the United States to increase the number of stores from 3,000 to 10,000.

The importance of the Chinese market is reflected in the opening of an upscale Reserve Roastery in downtown Shanghai in late-2017, the first non-American location of such kind which boasts stylist designs such as a fancy ceiling decorated with handmade tiles made from American walnut and a large copper-made cask where freshly-roasted coffee beans are stored. The special designs are used by Starbucks to fulfill its commitment to provide Chinese consumers with an immersive experience when drinking coffee in what it calls the world's largest Reserve Roastery in the world.

Starbucks has said that it will operate some 10,000 stores in China by 2026, from which point 800 new locations will be established each year.

At the China Investor Conference, the Seattle-based coffee chain also shed light on the reason why it formed a global coffee alliance with Switzerland's Nestlé, stressing that the alliance will bring more options to Chinese consumers who prefer to drink coffee at home.

Earlier this month, Nestlé paid $7.2 billion to obtain the permanent right to sell Starbucks-branded packaged coffee and tea products.

Analysts said that the business Starbucks sold to Nestlé only accounted for 8 percent of its operating revenue and would substantially enhance its international image.

Consumers are very likely to buy Starbucks' packaged products after they are served with quality coffee at its physical stores, wrote Michael Boyd, an independent investor, in an article published on Seeking Alpha, an American website focusing on investment.

Nestlé is a well-known instant coffee brand among Chinese consumers.

Questions about monopoly

Starbucks' rapid expansion in China has brought an existential threat to the local coffee chain operators.

The announcement of Starbucks' new expansion plan just came after it became a target of criticism by its Chinese rivals, among which Luckin Coffee has publicly accused the US coffee giant for monopolizing China's coffee market.

In an open letter published on May 15, Luckin Coffee, China's new coffee brand created by Qian Zhiya, former chief operation officer of Chinese ride-hailing firm UCAR, said that it will sue Starbucks for the violation of the country’s Anti-monopoly Law, which has punished some big Western firms for unfair competition in the Chinese market.

Luckin Coffee complained in the open letter that it was rejected by the commercial property owners which had signed agreements containing exclusivity clauses beforehand with Starbucks. Luckin Coffee also slammed Starbucks' peremptory business practice of asking suppliers to choose which camp they wanted to be in.

If a Chinese court accepts the lawsuit, it will be the first time for Starbucks to be sued in China.

In response, Starbucks said in a statement that it "has no intention to be involved in a marketing hype initiated by other brands", adding that it welcomes orderly competition which can promote the development of both sides. It also said that a consistent innovation in quality and services can produce real value for Chinese consumers.

Some industry insiders, however, said that the open letter might be a tool that Luckin Coffee uses to enhance exposure of its brand in the context of Starbucks' popularity in China.

Since its establishment in November 2017, Luckin Coffee has raised a great sum of money from several funding rounds, which has enabled the Chinese coffee chain to open more than 500 stores across China as of now, with its advertisements being seen everywhere from official buildings to social media platforms. The development path of Luckin Coffee is commonly adopted by nascent brands in China especially in the era of the Internet because the money-burning strategy can easily help them be known by consumers.

Growing competition

In competition with the domestic rivals which are moving toward chain-store operation, Starbucks is figuring out ways to fight back.

Previously, Starbucks China's Chief Executive Officer Belinda Wong announced plans to offer delivery service in China, which is part of the company's digitalization efforts.

The American coffee chain has connected its stores with Alipay, a mobile payment service operated by e-commerce giant Alibaba Group's financial unit Ant Financial. It was reported that 30 percent of Starbucks' orders in China came from consumers who pay through smartphones.

Starbucks has also provided a service which enables consumers to place an order on the app and then take what they order at a store.

During an interview with Caixin, a leading business magazine in China, Starbucks Chief Executive Officer Kevin Johnson hailed the uniqueness of Starbucks in China where coffee and tea shops have sprung up, saying that the ongoing innovation and consumer-oriented services will keep the brand alive in the market.

In 2017, the value of China's coffee market amounted to 25.2 billion yuan, 55 percent of which was grasped by Starbucks, according to statistics released by market research company Euromonitor.

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