Starbucks eyes deeper penetration in China, taps into tea-drinking culture

A Starbucks store in Chengdu, China. Photo: Getty Images

Last week's promotion of Belinda Wong from president to CEO of Starbucks China has laid bare the US coffee chain's ambition to penetrate deeper into the world's biggest tea-drinking country.

The appointment hands Wong responsibility to carry out a gargantuan expansion plan to increase the number of Starbucks stores operated in China to 5,000 by 2021 from the current 2,300, as China has seen a double-digit growth in coffee consumption over the past several years, drastically outpacing the global average of 2 percent.

Since 2011 when Wong took the post of president of China operation, the number of Starbucks stores in the country has soared exponentially to today's 2,300 from 400. Because of her admirable performance, industry experts interpret the appointment as a renewed reflection of Starbucks' long-term commitment to China, which has become one of the most important markets for the US coffee chain.

A key market

According to a third-quarter fiscal report released by Starbucks in July, global comparable store sales increased 4 percent year-on-year, which was comprised of a 4 percent increase in the Americas segment, a 3 percent increase in the China/Asia Pacific segment and a 1 percent decline in the EMEA segment. Global operating income grew 9 percent year-on-year to $1.022 billion, with the China/Asia Pacific region contributing $182 million in operating income, representing an increase of 22 percent from the same period of last year, higher than the global average, shows the fiscal report.

The financial report also highlights the Chinese market, whose future growth will depend on store expansion and digitalized development. The Seattle-based company has earlier this year accepted mobile payment in China in a move to bolster its rapidly expanding portfolio of digital innovation in the country.

Encouraged by the robust performance in the Chinese market, the management have reiterated on many occasions the importance of China to Starbucks, to which the company's chairman and CEO Howard Schultz has paid several visits in a decade, and where the ambitious blueprint of increasing stores is being adopted, amid the Chinese leadership's efforts to promote an economic growth model more driven by domestic consumption.

Besides the money-focused store expansion plan, Starbucks is attempting to win the hearts of its Chinese employees with its family-centered policies, offering housing subsidies to full-time baristas and shift supervisors at the company-owned stores to offset half of their monthly housing costs in China and giving employees working for 10 consecutive years or more an unpaid 12-month holiday with guaranteed social security funds.

Wong has hailed these staff welfare policies as the company's continued commitment to support Chinese employees to achieve their personal and professional aspirations.

Betting on middle class

The explosive expansion of the middle class, rising affluence and a greater penetration of Western lifestyle are presenting a huge growth potential for Starbucks in China.

John Culver, group president of Starbucks Global Retail, has predicted that 600 million Chinese people could enter the global middle class over the next decade, and these affluent people are expected to become target consumers of Starbucks coffee.

According to the Global Wealth Report 2015 issued by the Credit Suisse Research Institute, China's middle-class adults, whose number was estimated at 109 million people, owned a combined wealth valued at $7.342 trillion in 2015, accounting for 2.9 percent of the global wealth and 32.2 percent of China's wealth. China ranked the third after the US and Japan in the 2015 list of wealth holdings of middle class by country and region, said the report.

With the rise of per capita income in China and more Chinese people becoming passionate about international travel, their awareness about the coffee culture will also improve, said Schultz, predicting 100-300 million Chinese people in urban areas aged between 20 and 45 are major consumers of coffee drinks.

However, some industry analysts ascribe Starbucks' handsome revenue in China to the large base of regular customers in developed first and second-tier cities. They doubt that a foray into the less-developed, smaller cities and towns will be easy, given a lack of demand there for coffee consumption.

In China, Starbucks has faced a plethora of criticism for its allegedly "biased" pricing strategy, which sets its prices in China's big cities like Beijing much higher than those in New York and London. Hence, it is uncertain if low-income consumers in smaller cities will be willing to spend on high-priced Starbucks coffee, which is widely seen as a symbol of refined taste in the country.

Catering to Chinese tastes

In September, Starbucks started selling its new line of tea drinks, known as Teavana, in its coffee shops in China. It is a new attempt for the company to tap into the traditionally tea-drinking country, which has a highly localized and well-recognized tea culture.

Seeing Teavana as a supplement to its coffee business, Starbucks expects that the tea brand could be built as a premium brand similar to its coffee drinks in China, especially when many Chinese workshop-style tea producers lack standardized production procedures and fancy marketing tools.

However, whether Starbucks is able to create a miracle for its tea business in China remains to be seen.

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