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Bathed in the warm tropical sunlight of Bali, dancers sway to the sensual chimes of the gamelan at the January opening of a special Starbucks Dewata Coffee Sanctuary on the resort island. In attendance are dignitaries and VIPs draped in their finest batik shirts, including Starbucks CEO Kevin Johnson. The outlet is the largest in Southeast Asia, at 20,000 square feet, and one of only 185 Starbucks Reserve bars around the world, out of 29,000 stores worldwide. “Welcome to the Starbucks Reserve Dewata, it’s a pleasure to be here,” declares Johnson to the crowd, inviting them to explore the new store, which includes a small, but working, coffee plantation on the premises.
Johnson flew 8,000 miles from the Starbucks headquarters in Seattle to attend the ceremony in good part because Asia has huge strategic importance for the company, where it has about 8,600 outlets. The most critical market in the region is China—home to 40% of all Starbucks in Asia. “China is the second largest and fastest growing market for Starbucks [after the U.S. market],” says Johnson, 58, in an exclusive interview with Forbes Asia during his visit.
The Chinese coffee market is expected to generate revenues of $4.3 billion annually by 2022, up from $2.4 billion today, according to the U.K. research firm Mintel. By that date, Starbucks aims to have more than 6,000 stores in China from 3,521 today—almost doubling in size in just three years. The addition of new cafes in China is paying off, having nearly doubled Starbucks’ total revenues from there to $652 million in 2018 from a year ago.
While the U.S. is already saturated, China is a wide-open opportunity: annual coffee consumption per capita is just 0.5 cup, against 300 cups in the U.S. “So, you look at that math, that means it’s over 1,200 times the opportunity size as the U.S. in terms of consumption,” said Johnson in an analyst conference call in April last year. To show its commitment to China, the largest Starbucks in the world by size, at 30,000 square feet, opened in Shanghai in 2017.
Yet the company is facing competitors in the region on many fronts, from dozens of new hip coffee bars opening across Asia to larger regional competitors such as Hong Kong’s Pacific Coffee and Singapore’s Coffee Bean & Tea Leaf. One of the strongest upstarts is China’s homegrown Luckin Coffee, based in Xiamen. Starting with its first store in Beijing just last year, the company has grown to more than 2,000 outlets. This challenge is perhaps the biggest test yet for Johnson, who took over as CEO in 2017 from Starbucks’ legendary founder Howard Schultz.
Luckin has vowed to overtake Starbucks this year with more stores in China, 4,500 by year’s end, against Starbucks’ planned 4,200 stores by year-end. Johnson reportedly fired back earlier this year that Luckin is “unlikely” to top Starbucks in 2019. Yet Luckin claims to open a new store in China every four hours, while Starbucks opens one every 15 hours. Starbucks is now in a race to secure the best locations in China, says John Quelch, dean of University of Miami Business School. “The more stores you have, the more efficient your national brand advertising and brand building efforts become,” he says.
Starbucks, which entered China two decades ago, is playing for keeps. “We are committed to the long-term,” says Johnson. In May last year, Starbucks sold its global consumer business to Swiss multinational Nestle for $7 billion. The deal creates a partnership where Nestle will handle the retail sales of all Starbucks-branded products worldwide.
This global agreement has a large China component, as the Swiss giant already has distribution to 1.5 million outlets in China. Nestle can now roll out Starbucks products quickly across China. Another step in consolidating its position came in 2017, when Starbucks bought out its joint venture partner in eastern China, Taiwan’s Uni-President group, for $1.3 billion, giving Starbucks full control over the critical Shanghai market. Starbucks has about 600 stores in Shanghai, the largest number of outlets in any single city in the world. As part of the deal, Starbucks gave Uni-President full control to run Starbucks in Taiwan. With the acquisition of the eastern China business, Starbucks now fully controls about 85% of its stores in China (the rest are licensed to partners).
Another element of the strategy is digital. “We have put together our China digital partnership with Alibaba, and we can begin to do things like Starbucks deliveries across China,” says Johnson. In August last year, Starbucks inked a deal with Alibaba to use Ele.me,
China’s leading online food delivery site, to sell Starbucks beverages. Called Starbucks Delivers, it will link Ele.me delivery services with 2,000 Starbucks across 30 Chinese cities. Starbucks will also be available in Alibaba’s retail grocery chain Hema. Starbucks is also planning to open with Alibaba its first virtual store worldwide in China, making it available through the Starbucks app or Alibaba’s apps such as Taobao or Alipay. Inside this virtual store, customers will be able to order drinks, buy merchandise or send gifts, whether inside or outside a physical Starbucks store.
Johnson doesn’t seem worried about China and the Asia market. “The addressable market for coffee is so big and growing,” he says. “We’ve always had competitors since we opened the first Starbucks store. We have large competitors, startup competitors—our strategy is to continue to invest in the experience we create.”