Starbucks Heads for Smaller China Cities as Coffee Shops Triple

Starbucks Corp. (SBUX) is planning a bigger push into smaller cities in China as the world’s largest coffee- shop operator triples stores in the country that will become its second-biggest market by 2014.

The company will have 1,500 stores in more than 70 Chinese cities by 2015 and expansion through smaller cities is “most definitely” a viable way to grow, John Culver, head for China and Asia Pacific, said yesterday in an interview at the Boao Forum for Asia in the southern province of Hainan.

The added stores would build on Starbucks’ push outside the U.S. and help it tap growing demand from coffee drinkers in the world’s most-populous nation. China’s coffee shop market is forecast to surge 55 percent to 4.5 billion yuan ($714 million) in 2015 from 2.9 billion yuan last year, data from Euromonitor International show.

“We see tremendous opportunity to continue to grow in cities that we are currently in -- those tier one, tier two cities,” Culver said. “And also, thoughtfully to expand to tier two, tier three, tier four cities.”

Higher Margins

Business in Chin’s smaller cities has “been tremendously successful” so far, he said. A deeper push into Asian countries like China would help the company’s profits. Operating margin for the company’s China/Asia Pacific business was 34.6 percent in the quarter ended Jan. 1, topping the 21.8 percent for its Americas segment, according to the company’s January earnings statement. China offers the “highest financial return” among all markets, Culver said.

Photographer: Nelson Ching/Bloomberg

Servers help customers at a Starbucks Corp. store in Beijing. Close

Servers help customers at a Starbucks Corp. store in Beijing.

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Photographer: Nelson Ching/Bloomberg

Servers help customers at a Starbucks Corp. store in Beijing.

Revenue for the China/Asia-Pacific segment totaled $166.9 million in the first quarter, compared with $2.6 billion in the America’s segment.

Starbucks dominated China’s coffee shop market with a 66.3 percent share in 2010, according to Euromonitor. Whitbread Plc (WTB), owner of the Costa Coffee chain, and McDonald’s Corp. trailed with 8.9 percent and 8 percent shares in 2010 respectively, according to London-based researcher Euromonitor.

‘Investment Dollars’

The company is increasing “investment dollars” to build infrastructure in China, Culver said without providing a specific number.

Starbucks said last year it had signed an agreement to form a joint-venture company with Chinese coffee operator Ai Ni Group to purchase and export high-quality arabica Yunnan coffee

Other global competitors are also expanding. Luigi Lavazza SpA, an Italian coffee company, said in November it plans to open more than 200 coffee shops in first-and second-tier cities in China over the next three years.

Photographer: Nelson Ching/Bloomberg

John Culver, chief executive officer of Starbucks Coffee International. Close

John Culver, chief executive officer of Starbucks Coffee International.

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Photographer: Nelson Ching/Bloomberg

John Culver, chief executive officer of Starbucks Coffee International.

China will become the Seattle-based coffee chain’s second largest market outside the U.S. by 2014, Culver said. The company has about 500 outlets in China and operates in 48 cities at the moment. “Over the 13 years we’ve been in China, we have been able to introduce the coffee house culture in China and it’s no different when we move into those cities where we don’t currently have stores,” he said.

Starbucks owns all its stores in China, except in Jiangsu, Zhejiang and Shanghai where it has a joint venture with Taiwan’s Uni-President Enterprises Corp. (1216)

As coffee prices have risen, the company has its supply of coffee “bought out through the remainder of 2012 and into the first six months of 2013,” Culver said.

Starbucks said in March it plans to introduce a new single- serve brewer called the Verismo in the U.S. later this year. The machine will make espresso-based beverages and brewed coffee. It began selling Via instant coffee in China, Hong Kong, Macau and Taiwan in April 2011.

Shares of Starbucks advanced 0.29 percent to $55.89 on the Nasdaq Stock Market on March 30. The stock has risen 21 percent this year.

To contact Bloomberg News staff for this story: Michael Wei in Shanghai at mwei13@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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