Gourmet Master to Challenge Starbucks on China's Street Corners

Gourmet Master Co., operator of Taiwan’s largest coffee-shop chain, plans to increase its China outlets more than sixfold to 1,000 to challenge Starbucks Corp. in the fastest-growing major economy.

The company will use proceeds of a planned initial public offering in Taipei to open stores in cities such as Shenzhen, Chengdu and Wuhan, aiming to reach its expansion target by 2015, Chairman Wu Cheng-Hsueh said in a phone interview yesterday.

Gourmet Master, whose 85C outlets sell coffee for about half the cost of Starbucks, will seek to gain market share by targeting “high foot traffic” street corner locations and continuing to offer cheaper prices than competitors, Wu said. Starbucks has said it plans to open “thousands” of coffee shops in China as rising incomes spur demand.

“Gourmet Master has a strong image of a quality Taiwanese brand and this coupled with its competitive pricing will help attract Chinese consumers,” Horatio Lin, an analyst at Grand Cathay Investment Services Corp., said today. “The growing incomes of Chinese consumers will help cultivate a coffee culture and attract more chain operators.”

Coffee chain operators are expanding in China to get a bigger share of the market where per-capita consumption of the brew is 22 grams per person, compared with an estimated 3.3 kilograms in Japan, according to data from roaster Key Coffee Inc. China Resources Enterprise Ltd., owner of Hong Kong’s second-biggest coffee chain, last month said it plans to open as many as 1,000 Pacific Coffee shops in China.

Rising Incomes

China, the world’s most populous nation, has had average monthly retail sales growth of 18.3 percent this year. The country’s middle-income and affluent consumers will probably almost triple in 10 years with the bulk of the increase coming from smaller cities, Boston Consulting Group Inc. said Nov. 8.

Wu said he will “continue the strategy” of offering coffee and pastries at cheaper prices than his competitors, even as the world’s fastest-growing economy boosts the wages of Chinese consumers. About 60 percent of Gourmet Master’s China stores are on street corners.

Gourmet Master’s 85C outlets offer a 16-ounce serving of latte at NT$65 ($2.15) compared with NT$110 at Starbucks. Gourmet Master sells American coffee for NT$50 for a 16-ounce serving compared with Starbucks’ NT$95 Caffe Americano.

24-Hour Service

“A balance between quality and price attracts average people to 85C stores,” said Cheng Kong-fah, associate professor of the Department of Business Administration at National Chung Cheng University. The chain can also “differentiate” itself from competitors with its freshly baked goods and 24-hour service, he said.

Wu also faces a challenge from convenience-store chains, Linda Huang, a Taipei-based analyst at Macquarie Capital Securities Ltd., said in a note to clients in September. President Chain Store Corp. sells latte for NT$50 at the more than 4,700 7-Eleven stores it operates in Taiwan.

Gourmet Master has 325 stores in Taiwan, of which 41 are wholly owned, compared with 231 directly owned outlets for closely held President Starbucks Coffee Corp., a joint venture established in 1998 between the world’s biggest coffee-shop chain and Uni-President Enterprises Corp. and President Chain Store Corp. President Starbucks aims to have 235 stores in Taiwan by the end of the year, it said in an e-mailed response to questions.

Overseas Growth

Wu, 43, aims to raise the number of his China stores to 170 by the end of this year from 150 now. The native of southern Taiwan’s Yunlin county, who left school at 14, opened the first 85C store in 2004 and expanded to Australia in 2006, where he now has four outlets. He opened his first branch in mainland China in Shanghai in 2007.

Starbucks Chief Executive Officer Howard Schultz said in April the Seattle-based company expects to eventually have “thousands of stores” in mainland China, where it now has about 380.

Gourmet Master may raise as much as NT$2.57 billion ($85 million) publicly selling shares equal to a stake of about 11 percent and aims to start trading on Taiwan’s stock exchange by the end of the month.

Wu directly owns about 16 percent of Gourmet Master, spokeswoman Michelle Hsieh said. About 37 percent is held by investment companies on behalf of Wu and Gourmet Master employees and at least 10.8 percent is held by overseas investors, she said.

Gourmet Master had sales of NT$6.37 billion in the first nine months of the year and net income of NT$634 million, according to a statement from underwriter Yuanta Securities Co. Its overseas revenue surpassed domestic sales in October last year, the securities firm said.

Profit more than doubled to NT$758 million in 2009 from the previous year on increased sales from China.

To contact the reporter on this story: Adela Lin in Taipei at alin95@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

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