BEIJING - In
Starbucks' headquarters in Seattle, a group of
company executives meet regularly, but not to
discuss new items on the menu or what marketing
campaign should be adopted. Instead, their topic
of conversation is China.
They are part of
the "China Club", established by more than 300
senior company officials at the US coffee company.
Learning to speak Mandarin recently became a new
part of their routine.
Starbucks chairman
Howard Schultz is one of the club members.
"In our Seattle office there has been such
great enthusiasm and excitement for Starbucks in
China. If I am not traveling, I always try to be
at the meetings," Schultz said.
Although
China accounted for less than 10% of Starbucks'
US$6.4 billion global sales in 2005, Schultz says
the country will
soon become the firm's
largest market outside of North America.
"We look at this market in terms of how
quickly Starbucks has been accepted in just a few
years. The market response has exceeded our
expectations," Schultz said.
Since the
first Starbucks outlet on the Chinese mainland
opened in Beijing in 1999,
Starbucks has become one of the most popular
brands among Chinese white-collar workers aged
between 25 and 40, surveys have shown.
Starbucks in Beijing has maintained an
annual sales growth of more than 30% in recent
years. In Shanghai, the chain
started to make a profit the second year after the
first store opened in the city. Its net profit
reached 32 million yuan ($4 million) in less than
two years.
But to Schultz this is only
"the good start" of Starbucks' long-term expansion
plans in China. A more challenging task is to grow
even faster in what is potentially the company's
largest overseas market.
Analysts believe
finding the best ownership structure is vital if
Starbucks is to realize that aim. To lower risks
in overseas markets, Starbucks uses different
types of ownership structures. It either
authorizes a local developer to use the Starbucks
brand or sets up a joint venture with partners.
Beijing Meida Coffee Co Ltd is Starbucks'
authorized developer in northern China. It is 90%
owned by a Hong Kong-based firm, of which H&Q
Asia Pacific, one of the largest venture-capital
companies in the Asia-Pacific region, is a major
shareholder. Beijing Sanyuan Group, a leading
Chinese dairy, holds the remaining shares.
Shanghai Uni-President Starbucks Coffee
Ltd is responsible for operations in Shanghai and
eastern China's Jiangsu and Zhejiang provinces. The
joint venture used to be 95% owned by Taiwan-based
Uni-President Group, while Starbucks held a 5%
stake. Starbucks raised its share to 50% in 2003
by reportedly paying $21.3 million to
Uni-President.
Hong Kong catering
conglomerate Maxim's Caterers Ltd is Starbucks'
joint venture partner in Hong Kong, Macau and southern China.
Starbucks last year increased its stake in the
joint venture, Coffee Concepts (Southern China)
Ltd, to 51% from 5%.
The three individual
companies can seek independent development within
their own regions but cannot help Starbucks'
national expansion plans, analysts said. The
coffee company has to acquire controlling stakes
in its joint ventures if it wants to strengthen
management control and "reap substantial profits
as the market grows", said Pei Liang, secretary
general of the China Chain Store and Franchise
Association.
"Licensing or holding a
minority stake is an effective tool when first
stepping into a new market because it involves a
small investment," Pei said. "But Starbucks, the
brand's owner, only receives royalty fees from the
licensee. It is unable to regulate cash flow in
the business."
Better pace To
help Starbucks grow more efficiently, Schultz
strengthened the management team in China by
appointing a number of new executives in April.
Based in Shanghai, they directly report to US
headquarters and are expected to consolidate
Starbucks' operations in China, including in
management, logistics and marketing.
The
team, which Schultz calls "real professionals",
includes Wang Jinlong, who headed Starbucks'
overseas expansion in the late 1990s; Eden Woon,
the former chief executive officer of the Hong
Kong General Chamber of Commerce; and Shantel
Wong, once chief marketing officer for McDonald's
China.
"With 400 stores in China,
including 180 on the mainland, Starbucks' business
in China is large enough already to have a direct
relationship with the Seattle support center and
the senior team there," Schultz said. "We also
believe the opportunities in China represent the
largest opportunities we can have outside of North
America. It deserves to be a separate business
unit unto itself."
One mission of the
strengthened Chinese team is to speed up the pace
of opening wholly owned Starbucks stores in cities
where its three partners do not operate, while the
US company negotiates with its partners about
raising stakes.
Since last year, Starbucks
has opened nine wholly owned stores in Qingdao, in
eastern China's Shandong province, and
Dalian and Shenyang in northeastern China's Liaoning province.
"Expansion will continue," Schultz said.
"The Starbucks growth model has been
successful with many different types of ownership
structures. From time to time we revise those
ownership structures because of strategic
opportunities. China is no different from many
other markets around the world," he said. "In
1999, we didn't have the infrastructure that we
have today in China. Now we are more prepared and
more capable of doing things. That might mean,
over time, some changes in equity."
The
removal of restrictions on foreign investment in
the retail industry at the end of 2004, due to
China's World Trade Organization membership, also
opens the door for Starbucks to be directly
involved in the development of the China market,
Schultz said.
"But we must look at how
everybody can win. A great partnership is a
win-win situation for everybody, and that is what
we have been doing with Beijing Meida," Schultz
said. "And let us not forget to give credit to
Meida for helping Starbucks enter China back in
1999. Hsu Ta-lin, chairman of H&Q Asia
Pacific, was instrumental in that effort."
Hsu told China Daily last year that
Starbucks plans to buy a 50% stake in Beijing
Meida. A contract signed by Starbucks and H&Q
Asia Pacific in 1999, when the first green-mermaid
logo appeared in Beijing, says Starbucks can buy
half of the company after five years in operation.
The price of that deal has been at the center of
negotiations.
With 11,500 stores around
the world, the 35-year-old Starbucks still opens
five new ones daily. Schultz said in February that
the coffee retailer would maintain annual earnings
growth of at least 20% over the next three to five
years.
"We believe over the long term that
the market opportunities for Starbucks worldwide
mean at least 30,000 stores, with 15,000 in North
America and 15,000 outside North America," Schultz
said.
He believes that besides the
ever-expanding menu of coffee and tea beverages,
an array of new products and services will help to
make his ambitions become reality. The coffee
retailer has dished out such items as compact
discs, board games and wireless Internet access.
It recently joined forces with a major
Hollywood talent agency to find movies that could
be promoted in its coffee stores. The first movie
to get the Starbucks treatment is Akeelah and
the Bee, which debuted last month, about a Los
Angeles girl who becomes a spelling champion.
Starbucks will introduce a book written by "a
world-renowned author" in the autumn, Schultz
said. The book will be sold at Starbucks outlets.
