Starbucks eyes China growth

29 April 2011

BEIJING: Starbucks, the coffee house chain, has reached a "galvanising moment" in China, as changing consumer habits and urbanisation fuel surging demand for its products.

Speaking on a call with analysts, Howard Schultz, Starbucks' chief executive, expressed considerable optimism about the opportunities afforded by the world's most populous country.

"Asia, and now China in particular, hold tremendous promise for Starbucks," he said.

"On an operating basis, China is performing ahead of plan and quickly becoming a more meaningful contributor to Starbucks' overall profit picture."

The US multinational recently held a leadership conference in Shanghai, drawing together all of its 800-plus store managers, to share best practice and determine future strategy.

Schultz suggested this could be a "galvanising moment" for the company, which has ambitious objectives concerning China.

"I'm extremely proud of the deep, enduring, authentic emotional connection we have built in China, and it bodes well for our disciplined growth plans ahead," he said.

One component of the organisation's formula is entering smaller metropolitan hubs, as shown by the opening of its first branch in Weizhou two months ago.

"Starbucks now operates in 35 cities in China, many of them second- and third-tier cities, but with 1m-plus populations," said Schultz.

As a result of a wider demographic shift towards urban centres, the Government has predicted more than 500 cities will contain 1m residents in five years time.

"I remain convinced ... of how ideally positioned Starbucks is to profitably grow its store presence across dozens, if not hundreds, of cities throughout China in the quarters and years ahead," said Schultz.

To exploit such a trend, Starbucks intends to triple the scale of its network to approximately 1,500 outlets by 2015.

Equally importantly, existing sites are also flourishing, as comparable sales climbed 20% in the last quarter.

Completed transactions enjoyed a double-digit lift in Q1, buoyed by "accelerating coffee adoption", while operating margins in China actually outstrip those of the US.

"While the bulk of transactions take place in the traditionally slower middle to late afternoon day part, we are now beginning to see the morning ritual develop," Schultz added.

"We saw this happen in Japan in the mid-'90s, and we believe that we will continue to see an increasing number of customers in the morning business as coffee consumption patterns evolve."

Elsewhere, Starbucks' expansion into the grocery sector have extended to China, as it rolled out the Via instant brand in April, logging sales 20% in front of initial forecasts.

Under the auspice of a project in Yunnan, Starbucks is also working with the authorities to grow high-quality Arabica beans to drive the "speciality" coffee category in a socially-responsible manner.

"We believe strongly that our vertical integration strategy will demonstrate to the Chinese consumer and the Chinese government that we are committed to investing in China in an appropriate and respectful way for the long term," Schultz said.

Schultz concluded the successes already secured in China constitute a forerunner of the country's emergence as the firm's second-largest market, behind the US.

"These are very early days for Starbucks in China as we build trust while moving quickly but conscientiously with local relevance, and above all, with respect to the Chinese consumer and the Chinese culture," he said

"These results represent remarkable achievements for a market that is still very much in its early stages of development and are a testimony to the size of the China prize for Starbucks."

Data sourced from Seeking Alpha; additional content by Warc staff