What’s Starbucks’ plan for sustained success in China? Delivery dominance
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What’s Starbucks’ plan for sustained success in China? Delivery dominance

China is the market that global coffeehouse kingpin Starbucks has pinned its future growth hopes on. The country is massive – the world’s most populous – and its coffee culture is just beginning. For western experts, that presents the possibility of incredible growth over the coming decades. That growth is just around the corner, and its scope cannot be understated. Per-capita coffee consumption is set to rise, and Starbucks is on course to add 600 stores a year, hitting 6,000 across 230 Chinese cities by the end of fiscal 2022.

Starbucks’ share price has increased by 20% over the past three monthsStarbucks graph

Source: Yahoo Finance

Starbucks was an early mover into China, seeing the potential in the country’s tea-drinkers long before its competitors. As a result, Starbucks is largely responsible for creating the country’s coffeehouse culture, and is still its biggest player. Euromonitor suggests that the company has an impressive 58.6% share of the Chinese market. However, now, there are serious rivals appearing.

Luckin Coffee launched in January this year, and it already has 1,500 stores across 21 cities in China. A strong promotional strategy, more affordable prices and a focus on delivery are key differentials that are letting it grab market share. As Starbucks growth has started to slow, the bigger company is looking to innovate services similar to younger upstarts in order to maintain its dominant position on the market.

There’s certainly more than enough business to go around: China’s GDP will increase from $11 trillion in 2014 to $15 trillion in 2021. That will create million of new middle-class consumers who will flock to new luxuries, like a morning latte on the commute to work. While Starbucks might be facing serious competitors for the first time in China, it’s still the market leader – and it took that position by understanding China and coffee better than anyone else. There’s no reason to believe that’s changed.

Looking to erode Luckin’s only real advantage, Starbucks has partnered with local giant Alibaba to offer a peerless delivery service. So far, the service is running in Shanghai, Beijing, and 11 other cities in China. By the end of 2019, it will be in operation over 2,000 of the company’s stores. Alibaba’s seamless digital expertise will lend Starbucks a massive benefit in the country, as convenience-oriented millennials, and home-order customers, increasingly see it as the ‘go-to’ option. It might be the major expansion point that lets it accomplish its next big goals: a tripling of revenue and a doubling of operating income in China over the next five years.

Disclosure

Dominion holds Starbucks in its Global Trends Managed Fund.


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