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Coffee at the doorstep: Starbucks aims to enhance foothold with e-commerce partnership

A cup of Starbucks coffee sits on a table in a cafe in central Hong Kong. Photo: Reuters

Chinese consumers will soon enjoy Starbucks coffee at home or offices by simply pressing a button on their smartphones rather than visiting a physical store.

Recently, Starbucks announced a new retail partnership with China's e-commerce giant Alibaba Group to deliver its coffee, in a milestone move aimed at breaking away from its tradition of building up-scale physical stores which are intended to provide coffee lovers an immersive experience and cozy environment in what it calls the "Third Place".

According to a statement released on Starbucks' website, Alibaba-owned food delivery app, which has 3 million registered delivery people, will exclusively run the delivery service, which will be piloted in 150 Starbucks stores located in key trade zones in Beijing and Shanghai in September, and then expanded to more than 2,000 outlets across 30 Chinese cities by the end of this year.

A 30-minute deadline will be set for the delivery, and a specially designed cup lid and hot and cold food delivery box will be used in order to keep the coffee temperature basically unchanged till it reaches the consumers.

As a part of the new retail partnership which will help enhance its digital presence in China, Starbucks will establish the "Starbucks Delivery Kitchens" in Alibaba's supermarket chain Hema and use the supermarket's distinct delivery system to fulfill its orders. The first "Starbucks Delivery Kitchens" will be opened in selected Hema supermarkets in Shanghai and Hangzhou in September at the earliest.

"Our transformational partnership will reshape modern retail, and represents a significant milestone in our efforts to exceed the expectations of Chinese consumers. Starbucks China is one to watch, and I have full confidence in the team that will bring new innovation behind the Starbucks Experience to life," said Kevin Johnson, president and chief executive officer of Starbucks.

Heightened digitalization efforts

With the increasing number of Internet users and fast development of digital technologies in China, Starbucks is embracing digitalization to offer more convenient, seamless services to Chinese customers.

Since 2017 when Starbucks acquired the remaining 50 percent stake in its East China business from its joint venture partners Uni-President Enterprises and President Chain Store, the Seattle-based company has begun to apply digital innovation to its business.

In September last year, Starbucks connected Alipay, a mobile payment system owned by Alibaba, with its stores, in the wave of cash-free payment in China, where digital wallet is gradually displacing paper money. The US coffee giant has also established a partnership with Chinese Internet titan Tencent's WeChat Pay, an archrival of Alipay.

In this summer, Starbucks launched a mini program on Alipay, which will make ordering, online payment and delivery in a one-stop process. This mini program features a social networking function, through which users can send Starbucks coupons to their friends as gifts.

Currently, Starbucks is collaborating across businesses within Alibaba's online marketplaces Tmall and Taobao, with plans to open virtual stores on the online platforms where consumers can buy Starbucks products.

A makeshift strategy?

Starbucks' new retail partnership with Alibaba comes as domestic Internet-based coffee chains are taking the fast track to success in China through selling cheaper quality coffee, offering delivery services and giving subsidies to consumers.

Among these domestic competitors, Luckin Coffee, a new coffee brand created by Qian Zhiya, former chief operating officer of Chinese ride-hailing firm UCAR, who is good at capitalizing on the Internet to boost business, is the biggest threat to Starbucks.

Since its establishment in November 2017, Luckin Coffee has raised a great sum of money from several funding rounds and opened 809 stores across 13 Chinese cities so far.

Last week, Luckin Coffee announced an ambitious plan to open 2,000 outlets across the country by the end of this year. At the same time, it also announced to offer healthy snacks such as sandwich and muffin at prices much lower than those provided by Starbucks and other foreign coffee chains. In order to grasp more market share, the healthy snacks will be sold at a 50 percent discount for the 2,000 stores nationwide by the end of 2018, said the company.

Luckin Coffee, which largely relies on what it calls "take-out kitchens" to expand business, also adopts a similar low-price strategy to sales of its coffee. For example, a large cup of latte sold at the Chinese coffee chain is about 20 percent cheaper than what it costs at Starbucks.

In May, the young coffee brand challenged Starbucks by publically accusing the US coffee giant for monopolizing China's coffee market.

Luckin Coffee has entered the unicorn club with an estimated value of $1 billion after a $200 million funding round in July.

The strong competition from domestic rivals has created pressure on Starbucks, which said in the latest financial report that its same-store sales in China dropped 2 percent in the third quarter.

Focus on opening new stores

However, Belinda Wong, chief executive officer of Starbucks China, played down the China same-store sales drop, saying that 70 percent of the company's growth in the Chinese market was contributed by the new stores.

This year, Starbucks has renewed its expansion plan for the Chinese market, vowing to annually open 600 new stores in the next five years in the country, where it currently operates nearly 3,400 stores. Two years ago, the store expansion rate just stood at 500 new locations every year through 2020.

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.

Meanwhile, Starbucks has begun seeing China as the new location of its lavish Reserve Roastery outside of the United States, in a sign of the great importance it attaches to the Chinese market.

In late-2017, Starbucks' second Reserve Roastery was opened in Shanghai. It was described as the world's largest Starbucks store, which boasts a ceiling decorated with 10,000 handmade tiles made from American walnut, a two-story copper-made cask where freshly-roasted coffee beans are stored and which is adorned with 1,000 traditional Chinese stamps and chops.

It also features augmented reality technology which allows customers to learn more about how coffee beans are roasted and three coffee bars including a tea bar made from three-dimensional printed materials and a bar where customers can be served with authentic Italian delicacies.

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