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    China Business
     Jun 15, 2006
Starbucks soars in China

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.

(Asia Pulse/XIC)


A victory for Starbucks in trademark war (Jan 20, '06)

Why the Chinese love Seattle (Apr 19, '06)

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