Starbucks Aims For China To Overtake the US, But Not As Quickly As Some Expect 1

China: a tea drinking nation

China (FXI) is a traditionally tea-drinking nation and no one could have ever thought of the Chinese population drinking coffee instead of tea. But Starbucks has managed to bring about that revolution in China. Early signs show customers have embraced the brand with Starbucks’ (SBUX) stores in China high profitability and returns for the company. China has some of the most innovative Starbucks cafés that have generated the strongest revenues and same stores sales growth in FY16. Starbucks operates ~2500 stores in 118 cities across China and is opening one store per day.

Potential for growth in coffee sales

Coffee consumption in China, the world’s second-largest economy, is far lower than western nations such as the United States and Europe but has potential to grow with a rising middle class that is slowly adopting the coffee culture. Euromonitor expects retail sales volume of fresh coffee to grow 17% annually in China. In 2016, retail sales volume of coffee in China grew 3% to 65,000 tons. Daxue consulting, a research firm expects this number to grow to 300,000 tons per year by 2020.

Demographics in China are favorable for Starbucks’ growth. Economic growth in China, despite the slowdown, is higher than most developed western nations and just behind India. The country also has a growing affluent population with rising disposable income. As China’s middle class emerged, Starbucks took advantage of the opportunity to create a western experience for the young working population.

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Coffee consumption in China is highly concentrated in developed cities like Shanghai, Beijing, and Guangzhou that are home to urban and young Chinese citizens who are more exposed to Western culture. These cities are also home to expat populations working in multinational companies that have set up base in China.

However, international coffee chains like Costa coffee (WTB), UBC, McDonald’s (MCD), and South Korean players like Cafe Bene, Maan Coffee, and Tous Les Jours are mushrooming across the country and are gaining market share. U.K. hospitality giant Whitbread has announced plans to double its own “Costa Coffee” brand store count in China to 700 stores by 2020. The threat to losing its market leader position is forcing Starbucks to differentiate itself and innovate in the Chinese market.

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