Flush with Nestle cash, Starbucks unveils ambitious China plan

A man walks past an advertisement board of Starbucks in Wuhan, Hubei province, China, on Oct 29, 2013.
A man walks past an advertisement board of Starbucks in Wuhan, Hubei province, China, on Oct 29, 2013.PHOTO: REUTERS

SHANGHAI (BLOOMBERG) - Starbucks unveiled a bold plan to more than triple revenue in China over the next five years, at a time when other American corporates worry that simmering trade tensions may disrupt their businesses in the world's second-largest economy.

Starbucks plans to weather trade tensions by focusing on its Chinese employees and customer base, chief executive officer Kevin Johnson said in an interview in Shanghai on Tuesday (May 15).

The coffee giant laid out plans to compete with KFC in the race to become China's fastest-growing foreign food chain by opening a new store every 15 hours through 2022. It plans to have 6,000 stores on the mainland then, compared with a previous target of 5,000 by 2021.

"China has a long runway of opportunity for Starbucks," Mr Johnson said as the chain kicked off a two-day investor conference in Shanghai, the first to be held outside of the United States.

"We can't control what happens in the geopolitical situation. We are not immune to it, but we take a long-term view," he said.

The vote of confidence comes as 120 US companies and business groups line up to oppose the Trump administration's plan to slap tariffs on US$50 billion (S$67 billion) in Chinese imports.

A hearing on the levies - where companies including Best Buy and General Electric as well as lobby groups such as the National Retail Federation plan to testify - began on Tuesday.

 

Starbucks is increasingly reliant on China, where it has no close rivals, to prop up underwhelming sales growth in the US and elsewhere.

A US$7.2 billion deal with Nestle earlier this month gives the coffee giant the cash to pursue its goal of accelerating expansion in China, which is set to become Starbucks' largest market within a decade.

The Seattle-based company also expects to more than double its operating profit in the country by fiscal year 2022. About 15 per cent of Starbucks' revenue came from its China and Asia Pacific markets - about US$3.2 billion - in fiscal 2017, according to company data compiled by Bloomberg.

It currently has 3,300 outlets in China, compared with about 12,000 in the US, including licensed stores. Yum China Holdings, which separated from Yum! Brands in 2016, said it had 8,112 stores including KFC and Pizza Hut at the end of March.

The push in the China market comes as its stores in the US face fierce competition from up-and-coming regional coffee houses and steep discounting from fast-food rivals. Consumers also are shopping more at home, shunning brick-and-mortar retail for e-commerce. In China, where cafe culture is less mature but e-commerce more developed, Starbucks cafes have cornered the market on plush but casual meeting spots.

Mr Johnson said that while same-store sales in the US have been weaker than expected, strong performance in new stores stateside means it is still on track "to deliver US growth within the targeted range that we've given of high single-digits".

The Starbucks deal, which gives Nestle the right to market Starbucks products from beans to capsules, will also give the Seattle coffee brand access to a whole new market in China.

Switzerland-based Nestle can now sell Starbucks-branded packaged coffee products in Chinese supermarkets, restaurants and catering operations. That is something Starbucks has not done previously in the country.

Nestle's relationships with distributors, giving it access to 1.5 million outlets in China, "dramatically accelerates our ability to bring those coffees to market", said Mr Johnson. Introducing these products to China will be "one of the priorities that we focus on early" after the transaction closes, he said.

Besides the flagship Starbucks brand, the accord with Nestle includes the brands Seattle's Best Coffee, Starbucks VIA, Torrefazione Italia and Teavana tea.

Nestle and Starbucks also plan to partner on efforts to make coffee a sustainable agriculture product, through research and development and farmer support, said Mr Johnson.

In the market for ready-to-drink coffees, Starbucks remains in competition with Nestle. Besides its bottled Frappucinos and cold brews, the company will add chilled cups in June. Mr Johnson said the company has a whole pipeline of innovation in ready-to-drink coffee products.

The 8.1 billion yuan (S$1.7 billion) ready-to-drink coffee market in China is currently dominated by Nestle with 71 per cent market share, according to data from Euromonitor International. Starbucks has 3.1 per cent.

The coffee giant will also announce in a few months a new programme for mobile ordering and delivery in China, said Starbucks China CEO Belinda Wong. Currently, 60 per cent of transactions in its China stores are through mobile payment.

The growth is helping the coffee chain create 10,000 jobs a year in China. There, the company is keen to set itself apart by offering generous employee benefits, including health insurance for the parents of employees in a country where children often care for ageing family members.

"We have built a business here in China over 20 years," Mr Johnson said. "We have built that business in China, for China."