Has Starbucks cracked the code in China?

Starbucks Reserve Roastery in Shanghai is already a "crowning achievement" for the company

Starbucks' interactive coffee store Shanghai Reserve Roastery is the company’s highest grossing store, with daily sales double the amount the average US store makes in one week.

The interactive coffee experience, which opened its doors in December, became the company’s highest grossing store within its first eight weeks of operation as Chinese consumers happily queued for more than two hours to get inside.

The store, which is powered by Alibaba technology, enables consumers to place and pay for orders digitally via an app, as well as engage with augmented reality experiences, view menus, order special blends and book customised experiences. It also houses Starbuck’s Teavana tea brand and Princi bakery, an artisan café concept offering baked goods, sandwiches and desserts.

Starbucks president and chief executive officer Kevin Johnson, said the store “is among the crowning achievements in the company's history”.

“Customers' response to our Shanghai Roastery has been extraordinary and the Roastery is already performing well above expectation,” Johnson said on the company’s earnings call with investors earlier this year.

“Customers, in some cases, are lined up for hours to enter the Roastery and be taken on an immersive multi-sensory coffee, food and tea journey.

“On its very first day of operation, the Shanghai Roastery became the highest grossing Starbucks store in the world, averaging more than double the number of transactions of our highly successful Seattle Roastery, and with an average ticket of $29.”

Starbucks estimates the store, which is 30,000 square feet, will serve more than a million customers a year. This is despite the fact that Shanghai already has more than 600 Starbucks stores – not to mention thousands of rivals.

The store’s popularity is the latest in a string of successes for the Starbucks brand in China, which continues to be Starbucks fastest growing market. The coffee brand has more than 3,100 stores across 136 cities in China, with a new store opening every 15 hours. In Q1 Starbucks China added a further 6% growth in the market driven by increased transactions and 30% growth in revenues.

Starbucks predicts its China business will contribute a quarter of its entire sales growth by 2019 and the market is credited with helping Starbucks move beyond its longstanding dependence on the US business.

“Starbucks has cracked the code in China, and no Western consumer brand is better positioned than Starbucks in China. You have to experience our business in China for yourself to fully appreciate it, but we are much more than simply a coffee retail,” said Johnson.

“We have best-in-class unit economics, decades of whitespace to grow in both physical and digital retail, the most trusted brick and mortar brand in the market, and a world-class management team. And we are in the nascent stages of building a business that will continue to deliver an increased portion of our revenue and operating income growth. The deep respect we have for our customers and partners in China, and that our customers and partners in China have for the Starbucks brand and each other have resulted in rapid sustained customer and market growth.”

“I have no doubt that one day Starbucks will have more stores in China than we have in the US,” Johnson said.

Starbucks currently dominates China’s specialist coffee market, with a 55% share of the estimated $3.81bn market. However, with forecasts the coffee shop market could grow to $12bn by 2022, rivals such as Costa Coffee, McCafe and Pacific Coffee are clamouring to grow their share.

Last October, Costa coffee owner Whitbread bought out its joint venture partner Yueda to take full ownership of its South China Costa operations. While Costa currently operates 252 stores in China, including 93 in Shanghai, it has “ambitious growth plans for China”.

The attraction to the China market is obvious, according to Starbuck’s executive chairman Howard Schultz.

“We just opened a store that is doing twice the amount per day that an average Starbucks is doing each week. That's the growth opportunity and that's the strength of the company in China.

“There is no other Western brand, consumer brand that is accomplished with 3,100 plus stores, a store opening every day and numbers the likes of which we have never seen in our history,” said Schultz.

While rivals, including new arrivals Peets Coffee, will need rapid growth to catch Starbucks, the lessons for these brands are easy to follow.

Starbucks’ has been an early adopter of tech and social media platforms, including its WeChat-connected Starbucks Rewards loyalty program, which has more than 6 million active members, and its current integration with Alibaba, which enables consumers to order coffee via Taobao.

The company has also embraced digital payments, through WeChat pay and Alipay, which now contribute more than 60% of transactions, while e-commerce and social gifting have trebled in one year to account for $20m in Q1.

Starbucks also has plans to grow the Princi café concept beyond the Roastery stores, with plans to launch standalone bakeries, which will house coffee bars and sell Starbucks drinks products.

However, while Starbucks remains upbeat, some analysts predict the growth might not live up to the hype. Wall Street firm Wedbush Securities predicted Starbucks sales growth will perform below expectations, with China producing only 20% growth, according to a CNBC report.

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