Less than a year after announcing its first major initiative to nurture China’s domestic coffee-growing sector, Starbucks (Nasdaq: SBUX) has come back with announcement of a more substative joint venture to buy coffee beans from the country for use both at home and abroad. (company announcement) This move is clearly as much about public relations as it is about coffee from southwest China’s Yunnan province, which undoubtedly has potential to compete with some of the world’s other top growing regions but is more significant because it carries the “made in China” label. Let’s take a look at the numbers: even with its current aggressive expansion plans, Starbucks, a relative latecomer to China, will have a relatively modest 1,500 stores in the country by 2015, less than a tenth of its current global store count. By comparison, Yum Brands (NYSE: YUM), parent of the KFC and Pizza Hut chains, now derives a full one-third of its global revenue from China and counts the country as its second largest market after the US. (previous post) Anyone who does the math will see that obviously Starbucks sees lots of room for growth in China, especially if it can take a cue from Yum and McDonald’s (NYSE: MCD) and localize its products to better suit China’s tea-drinking culture and develop more products at a middle price range to meet demand from less affluent smaller cities. Having a coffee-buying base in Yunnan could help to lower prices by buying a more local product, and would also be a strong selling point to Chinese eager to see their higher-end products like home-grown coffee compete on the global stage. On the whole, this joint venture looks like a good, cost effective way for Starbucks to tell China it’s committed to the country for the long run, as it seeks to replicate the success of Yum and McDonald’s in this fast growing market.
Bottom line: Starbucks’ new China joint venture underscores its commitment to the country, which could easily become its second largest global market over the next decade.
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