Starbucks Caffeinates Its China Growth Plan

In time for the Beijing Olympics, the Seattle coffee phenom is buying out its chief local partner and looking to seriously ramp up mainland operations

by Dexter Roberts

A Tall Espresso Con Panna costs $1.63, while a small coffee of the day is $1.50. And a Mocha Frappuccino Grande sets you back a substantial $3.63 at the crowded Starbucks stores of Beijing, Shanghai, and Tianjin. Wait a second—isn't the mainland better known for leaves steeped in water, as demonstrated by the phrase "all the tea in China?"

There's no shortage of tea in the country that invented it, but the fact is that java beans are a new sensation for the relatively well-off urban Chinese, who now earn on average $1,312 per year, up 9.6% this year. (Rural Chinese won't likely be drinking Seattle's finest anytime soon, however; rural incomes, still less than a third of their urban counterparts, this year grew 6.2% to $407.)

Still, the change in salaries is good news for Starbucks (SBUX). The caffeine-injection chain announced on Oct. 24 that it is buying out its China partner Beijing Mei Da Coffee, which itself was owned by private equity firm H&Q Asia Pacific and other shareholders, to take control of 60 retail shops in Beijing and the nearby port city of Tianjin. Another company, Beijing Sanyuan, continues to hold a minority share. The financial terms of the deal have not been disclosed.

Duck on the Menu

"We are very excited about the significant increase of equity ownership in these markets, which we believe demonstrates our commitment to China, and which we believe will permit us to achieve greater operational efficiencies, accelerate our expansion in China, and contribute to the leisure environment within Beijing and Tianjin," said Jinlong Wang, president of Starbucks Greater China, in a press release.

Of course, they haven't exactly been sitting still up to now. In the seven years since H&Q Asia—the former controlling shareholder of Beijing Mei Da Coffee—opened the first Starbucks shop in Beijing in 1999, the Seattle phenomenon has grown to 190 stores in 19 cities in mainland China. The chain on the mainland offers the usual menu of joe, plus chocolate muffins, and a duck's breast sandwich that costs $1.50. There are 430 shops for all of Greater China.

Why go it alone (largely) now? Well, in reality the China market has become a bit easier to navigate in the last few years, particularly since Beijing entered the World Trade Organization in 2001 and began opening its markets, including the retail market.

I'll Take it From Here

So more and more companies are now moving to take control of their China joint ventures, says an Aug. 30 survey by the Washington (D.C.)-based U.S.-China Business Council. And 75% of new investment is going to wholly foreign-owned enterprises, rather than to ventures with Chinese partners. All told, 81% of the Council's members reported their China operations as being profitable.

"Buying out one's partner is becoming more common certainly," says Kent D. Kedl, general manager of Shanghai-based consultancy Technomic Asia. "Starbucks at the corporate level probably feels they know better how China works now and so they can go it on their own. It's a pretty natural thing to do. And with the food and retail market pretty much open, more and more companies are deciding to do this."

Coffee Break

Will the rapid growth in coffee consumption continue? Well, Starbucks management sure hopes so. "This transaction allows Starbucks to be more integrated into the communities by building on the strong human connections that Beijing Mei Da Coffee helped us establish in this market with our local partners [employees] and customers. We are now poised to expand rapidly in this important region two years before the 2008 Beijing Olympics," said Starbuck's Wang.

"It's not just a drink in China. It's a destination. It's a place to be seen and a place to show how modern one is," adds Technomic Asia's Kedl. And with China's economy growing in double digits, there are likely to be lots more young urban and modern Chinese ready to sip java in a sleek new Starbucks.

Roberts is BusinessWeek's Beijing bureau chief.