What is brewing for Starbucks in China?
In the Interview, the specialist said China’s coffee industry has experienced a number of changes over the past decade. Previously a “high-end” drink, coffee is now seen by Chinese consumers as an “everyday” beverage. A number of boutique coffee shops have opened, whilst at the same time, delivery and pick-up services in the industry have grown, according to the specialist.
As such, the specialist believes China’s coffee industry market could grow by 2-3 times over the next 3-5 years. Emerging brands such as Manner Coffee, OPS Cafe, Rumours and %Arabica are increasing footfall in tier 1-2 cities such as Beijing and Shanghai, while established names like Starbucks, Tim Hortons and Luckin Coffee are expanding in tier 3-4 cities.
We heard that Chinese coffee drinkers are not loyal to any particular brand. As such, the specialist recommended Starbucks should focus on product R&D and service quality improvements, as well as traffic acquisition, to attract new consumers. Such recommendations require stable products and supply chain, according to the specialist, with Strabucks and Luckin Coffee holding bigger advantages over other competitors in this regard.
The specialist told us Starbucks plans to reach 9,000 more stores in China over the next 3-5 years, penetrating over 300 cities. This would require it to build another 3,000 stores by 2025-2026, they added. We heard its store quantity might be lower than Luckin Coffee but its overall volume is bigger on account of the size of its stores. Future stores are likely to be more expensive to run due to higher rent costs, with Strabucks no longer receiving favourable rent policies from landlords, the specialist added.
Although Starbucks’ store productivity and footfall has decreased, the specialist said it still managed to increase average revenue per customer spend by 10-18%. They told us this was by selling peripheral products like specialty foods and other merchandise. The specialist told us an average store’s gross margin is 60-70%, with a profit margin of 40-45% and labour costs of 20-25%.
Overall, the specialist said Starbucks’ store profits can still support business development and expansion plans as it looks to increase its footfall in tier 3 and 4 cities.
Click here to access all the human insights in the Third Bridge Forum Interview, “Starbucks & China’s Coffee Retail Market Development Status Quo & Outlook”.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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