Beijing deal percolating at Starbucks?
By Lu Haoting (China Business Weekly)
Updated: 2004-08-03 14:11

Starbucks Coffee International, speeding up its expansion in Asia by raising the stakes in its local licensees, is widely believed to be percolating similar plans in Beijing.

Some media reported last week that Starbucks Coffee International, the overseas subsidiary of Seattle-based Starbucks Corp, is negotiating with Beijing Meida Coffee Co Ltd, Starbucks' licensee in North China, to purchase a stake in the Chinese firm.

Caroline Wong, communications manager of Starbucks Coffee Asia Pacific Ltd, declined to comment on the report.

The company, "at this time, has no announcement to make with regards to buying into the Beijing market," she added.

Said Amy Wang, Meida's brand development supervisor, "We haven't received such information from Starbucks Coffee International."

A Hong Kong-based firm, in which H & Q Asia Pacific is a major investor, holds 90 percent of Meida. Beijing Sanyuan Group, one of China's top three dairy producers, holds the remaining 10 percent.

H & Q Asia Pacific is one of the largest venture capital firms in Asia-Pacific.

Analysts suggest Starbucks will have to acquire stakes in its local partners if it wants to strengthen its brand and management control and enhance its expansion in China.

"Licensing is an effective tool when Starbucks first steps into a brand new market, because that involves relatively small investment and presents low risks," said Pei Liang, secretary-general of China Chain Store & Franchise Association.

"But Starbucks, the brand's owner, only receives royalty fees from the licensee. Starbucks is unable to regulate the cash flow in its business. It also is unable to reap substantial profits."

Starbucks will not "overlook the growing profit from coffee consumption in China," Pei said.

Experts believe the penetration of coffee in China, currently confined to a few developed coastal regions and consumed by 0.1-0.5 percent of the population, will increase significantly over the next several years.

That is driven by the influx of expatriates into China and China's Western-lifestyle-oriented youth.

"Many international players are queuing up to take advantage of the expected boom," Pei said.

"By holding stakes, Starbucks could have a louder voice in management control, and, in turn, react more swiftly to changing market conditions."

Starbucks last July paid US$21 million and raised its share, to 50 percent from 5 percent, in its licensee in Shanghai -- Shanghai Uni-President Starbucks Coffee Ltd.

Taiwan-based Uni-President Group used to own 95 percent of the licensee.

Some analysts suggested that reflects the eastern metropolis is a more successful market, compared with the capital, for Starbucks.

"It is true that Western-style food culture is more mature and better established in Shanghai, given the city's history," Pei said.

"But nobody could afford to ignore Beijing, given the large number of expatriates working and living here, and the young generation that cranes for fashion. That contributes to a stable consumer base."

Starbucks arrived in China in 1999, when Meida opened the first Starbucks coffee shop in Beijing. It now has around 100 stores in China.

Starbucks was recently approved to open its first coffee shop in the new terminal at Beijing Capital International Airport.

The outlet is scheduled to open in September.

"We plan to open another three stores in the second terminal," Wang said.

The huge passenger flow at the airport is expected to greatly boost Starbucks' business in Beijing, analysts said.

Starbucks in June acquired its licensed operations in Singapore from its local partner, Bonvests Holdings Ltd.

The coffee giant last month announced it will raise, to 49.9 percent, its share in its Malaysian licensee, Berjaya Coffee Co Sdn Bhd.