Flush with Nestle cash, Starbucks wants to triple China revenue

[SHANGHAI] Starbucks Corp is laying out an ambitious plan to compete with KFC in the race to become China's fastest-growing foreign food chain by opening 600 new stores annually and more than tripling revenue by 2022.

While Starbucks could add new locations at an even faster pace because of the demand in China, the coffee giant is limiting expansion to maintain store quality, chief executive Officer Kevin Johnson said in an interview in Shanghai on Tuesday. It will have 6,000 stores on the mainland by 2022, compared with a previous target of 5,000 by 2021.

"This is an ideal time for us to accelerate that growth rate," Mr Johnson said ahead of the investor day Starbucks organised for 60 shareholders in Shanghai, the first to be held outside of the US. "China has a long runway of opportunity for Starbucks."

Starbucks is increasingly reliant on explosive momentum in China, where it has no close rivals, to prop up underwhelming sales growth in the US and elsewhere. A US$7.15-billion deal with Nestle earlier this month gives the coffee giant the cash to pursue its goal of accelerating expansion in China, which is set to become Starbucks' largest market within a decade.

The Seattle-based company also expects to more than double its operating profit in China by fiscal year ending 2022. About 15 per cent of Starbucks' revenue came from its China and Asia-Pacific markets - about US$3.2 billion - in fiscal 2017, according to company data compiled by Bloomberg.

It has 3,300 outlets in China, compared with about 12,000 in the US, including licensed stores. Yum China Holdings Inc, which separated from Yum! Brands Inc in 2016, said it had 8,112 stores including KFC and Pizza Hut at the end of March.

The push in the world's second-largest economy comes as its stores in the US face fierce competition from up-and-coming regional coffee houses and steep discounting from fast-food rivals. Consumers also are shopping more at home, shunning brick-and-mortar retail for e-commerce. In China, where cafe culture is less mature but e-commerce more developed, Starbucks cafes have cornered the market on plush but casual meeting spots.

Mr Johnson said that while same-store sales in the US have been weaker than expected, strong performance in new stores stateside means it's still on track "to deliver US growth within the targeted range that we've given of high single-digits."

The Starbucks deal, which gives Nestle the right to market Starbucks products from beans to capsules, will also give the Seattle coffee brand access to a whole new market in China. Switzerland-based Nestle can now sell Starbucks-branded packaged coffee products in Chinese supermarkets, restaurants and catering operations. That's something Starbucks hasn't done previously in the country.

Nestle's relationships with distributors, giving it access to 1.5 million outlets in China, "dramatically accelerates our ability to bring those coffees to market", said Mr Johnson. Introducing these products to China will be "one of the priorities that we focus on early" after the transaction closes, he said.

Besides the flagship Starbucks brand, the accord with Nestle includes the brands Seattle's Best Coffee, Starbucks VIA, Torrefazione Italia and Teavana tea.

Nestle and Starbucks also plan to partner on efforts to make coffee a sustainable agriculture product, through research and development and farmer support, said Mr Johnson. In the market for ready-to-drink coffees, Starbucks remains in competition with Nestle. Besides its bottled Frappucinos and cold brews, the company will add chilled cups in June.

Mr Johnson said the company has a whole pipeline of innovation in ready-to-drink coffee products, which it sells in China in partnership with Tingyi.

The 8.1 billion yuan (S$1.7 billion) ready-to-drink coffee market in China is dominated by Nestle with 71 per cent market share, according to data from Euromonitor International. Starbucks has 3.1 per cent.

The coffee giant will also announce in a few months a new programme for mobile ordering and delivery in China, said Starbucks China CEO Belinda Wong. Currently, 60 per cent of transactions in its China stores are through mobile payment.

BLOOMBERG