Starbucks steps up expansion in China amid economic slowdown

Starbucks CEO Howard Schultz announced an aggressive rollout of new stores in China in the next five years. Illustration:

Starbucks Corporation is poised to open 500 stores every year in China for the next half-decade, with its chief executive officer remaining sanguine about the prospects of the Chinese economy, which recorded 6.9 percent growth in 2015, the slowest in 25 years.

During a tour of Chengdu in January, a western Chinese city famous for its relaxed lifestyle, Starbucks CEO Howard Schultz unveiled the gargantuan expansion plan to increase the total number of its stores in China from today's 2,000 in about 100 cities to 4,500 in 2020, after talking to an auditorium full of Chinese partners and their families.

The development blueprint of the world's largest coffee chain differs from many other foreign food and beverage giants operating in China such as Yum Brands, which blamed their shrinking sales in the country for its cooling economy and market turmoil.

Expecting China to surpass the US as Starbucks' largest market, Schultz said at the Chengdu event that he has faith in the future of the Chinese economy, because of a growing upper middle class fond of Western lifestyle and the Chinese leadership's pledge to promote a growth model more driven by domestic consumption.

"As Starbucks' second-largest and fastest-growing market globally, China represents the most important and exciting opportunity ahead of us," said Schultz, thanking Chinese consumers for recognizing Starbucks as part of their daily ritual since 1999 when he set up the first coffee shop in the Chinese capital of Beijing.

Jack Ma, founder of Alibaba Group, China's largest e-commerce company, was among the audience of Schultz at the Chengdu event. "In my mind, Starbucks is a great and marvelous company…It brought a passion, (a way of) communication, a fashion and a life-changing revolution to China," said the Chinese business mogul.

In China, Starbucks has become a fashionable and social arena where people, especially the young, surf the Internet, handle personal business and have talks with friends while enjoying coffee and cakes.

Growth potential

In October last year, the Seattle-based coffee chain reported an average same-store sales growth of 8 percent globally in its fiscal fourth quarter. Same-store sales in China and the Asia Pacific region slowed to 6 percent, trailing North America's 8 percent.

But data from Euromonitor International, one of the world's leading providers of strategic market research, indicates a massive growth potential in China, which has four times the population of North America.

According to the data, Chinese people consume 4.5 billion cups of coffee every year, lagging far behind the 133.9 billion cups in North America. Euromonitor International predicted that coffee consumption in China will see a double-digit growth annually through 2019 at 18 percent, while the growth in the US is expected just at about 1 percent every year for the next five years.

As retail e-commerce transactions in China soared 48.7 percent year-on-year to 1.61 trillion yuan in the first half of 2015, Starbucks opened its first flagship store in December 2015 in Alibaba's Tmall, the online shopping platform that grossed about 90 billion yuan in turnover during last year's "Double Eleven" shopping fiesta, to sell gift cards and coupons to promote the seamless combination of store experience and online convenience.

Prior to its presence on Tmall, Starbucks had also used digital technologies including app, microblogging and WeChat to promote sales. John Culver, group president for Starbucks China and Asia Pacific, said that the company was evaluating the e-commerce and digital marketing environment in China and keeping a close contact with the important Chinese companies with a goal to create a complete e-commerce ecosystem.

In March 2015, Starbucks and Tingyi Holding Corporation, a Chinese leading food and beverage maker, signed an agreement to manufacture ready-to-drink (RTD) products in China.

Euromonitor International predicted that China's RTD coffee market, which is valued at about $6 billion, is likely to grow by 20 percent over the next three years.

"The move obviously shows that Starbucks does not want to miss the opportunity to grow in China's fast growing RTD coffee market," said Zhu Danpeng, a researcher at the Chinese Institute of Food Business.

Family-focused staff welfare

At the Chengdu event where he interacted with Chinese partners and their families, an innovative communication channel initiated in 2012 out of consideration for respecting China's family-centered tradition, Schultz vowed to offer housing subsidies to full-time baristas and shift supervisors at company-owned stores. The allowance will offset about half of their monthly housing costs in China.

The move is hailed by Belinda Wong, president of Starbucks China, as the company's continued commitment to "support Chinese partners to achieve their personal and professional aspirations".

Starbucks will also carry out Career Coffee Break, a corporate policy allowing employees working for the company for 10 consecutive years or more to have an unpaid 12-month holiday, during which their social security funds will be guaranteed. When they come back, they will do the same jobs they had or have similar positions which give the same pay or benefits. The policy will allow its workers to have more time to stay or travel with their families, said Starbucks.

"Families play an important role in our Chinese partners' career life. So, we would like to take families into consideration when mapping out our partnership investment plan, letting them know what kind of our company really is," said Wong.

In 2015, in collaboration with LinkedIn, the professional social network, Aon Hewitt, the global talent, retirement and health solutions business of Aon plc, presented the Best Employer award to Starbucks China for the strong commitment and superior performance of its staff, business results achieved through effective people practices and long-term business success and sustainability.

Coffee vs tea culture

With the growing number of affluent Chinese considering coffee-drinking as fashionable, a coffee culture has come into vogue in recent years in this tea-drinking country.

Zhu suggested that consumers aged 22-45 tend to choose coffee during social activities, while 45-plus people are more likely to drink tea on the same occasion. "Many tea houses in China have lost their advantage to coffee shops as the former's business is mostly associated with chess and card games," said Zhu.

In an interview with the China Business News, Culver expressed the hope of integrating coffee culture with Chinese tea culture, saying that the two cultures are not competitive but complementary. At present, the major consumers of Starbucks coffee are Chinese people, different from its early days when expatriates and Chinese with overseas experience were the major customer group, Culver recalled in the interview.

"It is cozy here, and I enjoy sitting on the sofa while reading books and drinking coffee (at a Starbucks store)," said a Shanghai-based white-collar worker surnamed Qi, who has a monthly salary of 15,000 yuan. "A cup of coffee here costs me 30 yuan, and up to 100 yuan if I order some desserts and biscuits. I do not think that it is costly if it makes me happy," said the 26-year-old.

Meanwhile, Starbucks has never ceased its bid to diversify its investment portfolio to appeal to Chinese tastes.

There are reports saying that the Seattle-based coffee chain is planning to bring Teavana, a tea retail chain it bought for $620 million in 2012, to China.

Sales of Starbucks' tea division rose 15 percent year-on-year, which was attributed by the company's Chief Operating Officer Kevin Johnson to the popularity of its Teavana shaken iced tea and Teavana tea latte, said a Fortune report. The report quoted Johnson as saying that the tea business contributed to 1 percentage point out of the same-store annual growth of 7 percent in the Americas region.

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