Starbucks doubles down on China growth as global sales stall

Bloomberg

Starbucks sees China surpassing the U.S. as its largest market within a decade as it counts on the country’s affluent consumers to offset stagnant growth in the rest of the world.

On Wednesday, Starbucks is opening its biggest cafe in the world in Shanghai. The 30,000 square-feet store — about half the size of a soccer pitch — is part of upscale moves championed by founder and Chairman Howard Schultz. Customers at the cavernous new outlet on the West Nanjing Road shopping strip can watch beans being roasted, sample high-end brews and use a Starbucks augmented-reality digital app to interact with the store.

The roaster also plans to roll out mobile ordering and delivery of drinks and store goods in China, Chief Executive Officer Kevin Johnson said in Shanghai. The company will team up with a strategic partner to help it with the service, he said.

The Seattle-based company is homing in on its fastest-growing market as it searches for ways to kick-start sluggish global sales after saturating the U.S. with lattes and cappuccinos. Three years after the company opened its first roastery on its home turf, Starbucks is testing the larger, upmarket store concept overseas for the first time in China, where it currently has 3,000 sites.

“It’s obvious to us that the holding power of China for Starbucks is going to be much more significant than the holding power of the U.S.,” Schultz said Tuesday at a briefing to unveil the new cafe. China is on course to be the company’s largest market in less than a decade, he added.

China is becoming crucial for Starbucks. Same-store sales gained 8 percent in the country during the most recent quarter, compared with 2 percent globally. Revenue from the Asia-Pacific region accounted for almost 15 percent of Starbucks’ revenue for the fiscal year ended in October. That’s up from 5.5 percent five years earlier.

The coffee chain would be the latest to jump onto the delivery bandwagon in a country where everything from fresh produce to forklifts can be purchased online and delivered the same day. Starbucks is exploring “a range of options” for delivery, said Johnson, who declined to specify when the service might begin.

“Having mobile ordering where you can either do a mobile order for pickup in the store or a mobile order to be delivered to you is the next frontier for us,” he said. “The innovation that I see in China is going faster and will be more comprehensive than anything we see in other parts of the world.”

Separately, the company could team up with Alibaba Group Holding on projects beyond mobile payment services, Schultz said.

“Jack and I have spoken about a lot of different things,” he said referring to Alibaba Chairman Jack Ma, when asked whether the partnership could extend beyond mobile payment services. “The friendship and the shared values we have and their reach, our brand — there are things that we could do together.”

Customers in China can pay for Starbucks purchases using the mobile payment service from Alibaba-affiliate Alipay, which the roaster began accepting in September.

Starbucks expanded its investment in China in July, when it announced plans to buy out the partners in its East China joint venture. The company agreed to acquire the remaining 50 percent of the business in a $1.3 billion transaction, giving it ownership of about 1,300 cafes in Shanghai and the Jiangsu and Zhejiang provinces. Starbucks, which says it is opening a store every 15 hours in China, plans to have 5,000 cafes on the mainland by 2021.

Starbucks is betting China’s hunger for luxury goods is transferable to coffee. A standard latte at the coffee chain is already pricier than fresh brews at many local cafes in Shanghai. The demand for premium products — from autos to yogurt — is gaining traction as an increasing number of Chinese families cross the income threshold to become affluent.

“Chinese consumers, especially the younger generation, are looking for things more quality-driven, more unique, that speaks to who they are,” said Jack Chuang, a Shanghai-based partner at OC&C Strategy Consultants who has studied the Chinese coffee market. “For coffee, there’s a certain kind of ‘in-the-know’ from consumers who seek out these good boutique shops.”

Starbucks has said it plans other roastery cafes in New York, Tokyo and Italy. The concept is part of a broad push upmarket that includes a line of premium coffee called Reserve and cafes to showcase the new brand. Still, rollout has been slowed by high construction costs and trouble finding suitable real estate.