Starbucks partners Alibaba in China to offer delivery services

Starbucks launches a partnership with Alibaba's Chinese food delivery platform Ele.me, in a move to shore up sales in its second-largest market and to battle aggressive competition from local coffee start-ups. VIDEO: REUTERS
Starbucks' president and CEO Kevin Johnson during a press conference in China, where Starbucks coffees will be delivered to Chinese consumers with the help of e-commerce giant Alibaba.
Starbucks' president and CEO Kevin Johnson during a press conference in China, where Starbucks coffees will be delivered to Chinese consumers with the help of e-commerce giant Alibaba.PHOTO: AFP

SHANGHAI - For years, Starbucks was the undisputed king of coffee in China.

It single-handedly created a market of coffee drinkers in a nation of tea lovers, cashing in on a wave of affluent Chinese who looked to Starbucks as an aspirational brand. The country quickly became the coffee chain's second-largest market after the United States.

But Starbucks' dominance in China is increasingly under attack, as growth begins to slow and competitors aggressively target coffee drinkers. Starbucks executives have come under scrutiny for being slow to adapt to technological shifts and retail trends in the country, namely delivery.

On Thursday (July 2), in a bid to revitalise its China operation, the company announced what it called a strategic "new retail" partnership with the Chinese tech giant Alibaba.

The partnership will allow Starbucks to pilot delivery services next month with an Alibaba subsidiary, Ele.me, and establish what it called delivery kitchens in Alibaba's Hema supermarkets.

Starbucks will also integrate across Alibaba's platforms to create a virtual Starbucks store so Chinese customers can have more personalised experiences, the two companies said.

"This is rocket fuel for our digital flywheel strategy in China," Kevin Johnson, chief executive of Starbucks, said Thursday at a news briefing in Shanghai.

China is one of Starbucks' most important markets, especially as the company's domestic one cools. It has raised prices to offset decreasing foot traffic into U.S. stores. And last week, Starbucks lowered its growth projections for the year.

But the company has also recently seen sales in China drop. Same-store sales in the most recent quarter fell by 2 per cent after increases in the previous two quarters.

For Starbucks, analysts say the "new retail" is partly an attempt to fend off competition from Luckin Coffee, a Chinese startup. The company, which was started in Beijing in January with two stores, has since opened more than 800 branches in 13 cities around the country. Its co-founder, Guo Jinyi, has been vocal about the company's ambitions to surpass Starbucks.

Starbucks has long been criticised as slow to adapt to digital trends in China; it came to mobile payments later than other brands and is starting delivery only now.

"At Starbucks, we feel that we need to earn our right to do delivery right," said Belinda Wong, chief executive of Starbucks' China operation.

Perhaps no phenomenon has created as much buzz for transforming the consumer experience in China than "new retail". From Alibaba to JD.com, e-commerce companies are encouraging consumers to merge their offline and online shopping experiences by visiting brick-and-mortar stores but placing their orders online and finding out more information about their products through their smartphones.

Jeffrey Towson, a private-equity investor and a professor of investment at Peking University who has been vocal about Starbucks' failure to be nimble in adopting digital strategies, said Thursday's announcement could help Starbucks move beyond its traditional reliance on brick-and-mortar transactions.

He added, "This is really bad news for Luckin Coffee." Luckin is positioning itself as a mass-market alternative to Starbucks so it can win over customers willing to pay US$3.50 (S$4.79) for a latte - 20 per cent below what Starbucks charges. It offers customers discounts if they order more and is giving them half off food orders for the next five months. Customers can also choose whether they want to pick up their coffees at a store or have them delivered in 30 minutes.

It is still too soon to say whether Luckin will succeed in a country rife with startups that burn through cash and go bankrupt overnight. And it can be hard to compete in the long run against the scale of a brand like Starbucks.

Guo, Luckin's co-founder, pointed out that Starbucks is not dominant in other countries like Canada, where there is Tim Hortons, and Britain, which is dominated by Costa Coffee.

"Each place has its own local brand, and these local brands are now the leaders," Guo said. "I believe that in China, anything can happen in a place that is so conducive for innovation and entrepreneurship."

In May, Luckin sued Starbucks, arguing that the U.S. chain had signed exclusive contracts with commercial property owners that barred other coffee shops from entering the space if a Starbucks was already there.

It is not going to be easy to oust Starbucks, which has 3,400 stores in more than 140 cities in China and plans to nearly double that by 2022.

Ben Cavender, senior analystof China Market Research, a consultancy based in Shanghai, estimates that Starbucks has a 70 per cent share of the market, blazing past coffee chains like McDonald's McCafe and Costa Coffee. But the company must prove it can stay on the cutting edge.

 
 

"The challenge is that consumers are much pickier about the experience they get now; they have other good options that have standardised quality and potentially a more interesting environment," Cavender said. "So Starbucks has to do a better job. It's not a clear win anymore."

Johnson said that Starbucks began discussing partnering with Alibaba about a year ago.

When asked about the competition posed by Luckin, Johnson said, "I think certainly as people look at the market opportunity in China as it relates to coffee, we expect there will continue to be more competition."

What Starbucks has going for it is a large following, especially in big cities like Beijing and Shanghai. On Tuesday, as the summer sun bore down on the trendy Sanlitun neighborhood of Beijing, customers lined up for coffees. Wang Qi, 25, who works in media, said she preferred Starbucks to Luckin because of the environment.

"You can sit down and have a proper cup of coffee," Wang said.

Zhao Ting, who is also 25 and works in media, said, "Everyone trusts this brand." But not everyone has remained loyal. Wang Shanshan, a 35-year-old who drinks coffee once or twice a week, said she had switched to Luckin because she thought its coffee tasted better than Starbucks'. Plus, there are the discounts.

"They are giving one free if you buy two, five free if you buy five," Wang said. "I think it's pretty good."