Starbucks China, in a bid to revitalize its China operations has announced a strategic “new retail” partnership with the Chinese technology company Alibaba. The partnership will allow Starbucks to pilot delivery services in September with Alibaba subsidiary, Ele.me, and establish delivery kitchens in Alibaba’s Hema supermarkets.
New Retail is the hottest strategy and trend in Chinese e-commerce and retail operations as it seeks to merge online and offline shopping experiences and brand development. It develops online brand experiences through mobile devices and can involve games, virtual reality and online stores that provide products that can be bought and paid for online and then picked up or enjoyed at retail.
Major Chinese companies involved in e-commerce and technology, such as Alibaba, BaiduJD.com and Tencent are all developing their own “new retail” systems and are pitching to both domestic and international brands their capabilities and synergies.
Starbuck Coffee and has been in China since 1999 and has more than 3,400 stores in the country that cover 140 cities. Starbucks is considered the leading coffee brand in China and in 2016 it was estimated to have a 55% share of the coffee shop market. The company proved that China, as with Japan and South Korea could have a “coffee culture” that co-existed with the local “tea-culture.” Because of Starbuck’s success, many other international brands have entered China including Costa Coffee, Dunkin Doughnuts, McCafe, Segafredo and many others.
While arguably a success, Starbucks’s dominance in China is in question and its China management team has been criticized as being slow to adapt to evolving Chinese consumer trends such as mobile payment systems and home and office delivery.
Starbucks “new retail” partnership with Alibaba will allow the company to develop virtual Starbucks stores across Alibaba’s platforms and take advantage of Alibaba’s delivery, mobile payment, retail and technology network. Kevin Johnson, the chief executive of Starbucks, said at a news briefing in Shanghai that, “This is rocket fuel for our digital flywheel strategy in China.”
Advertising, financial and retail experts all note that without the Alibaba partnership, Starbucks faced a very uncertain forecast for its future operations. Whereas Starbuck’s once dominated the China “coffee shop” market, competition now comes from boutique coffee shops that are springing up across all major Chinese cities as well as both international and domestic coffee shop brands.
Starbucks executives are keenly aware of new competition that has sprung up in 2018 from domestic coffee brand, Luckin Coffee. The company, which started in January with two stores in Beijing and since then has open 800 retail locations in 13 cities. The co-founder of the company, Guo Jinyi has stated that the company’s ambitions is to surpass Starbucks.
Luckin is positioning itself as an alternative to Starbucks that provides many similar drink products that are 20% lower than Starbucks prices. It has also created a loyalty program with a variety of awards, from buy 2 – get 1 free, to but 5 – get 5 free, and has been promoting that its food products at 50% discount. Customers can order and pay online and then decide whether they want pick up their purchases at a store nearby, or have those products delivered to their home or office.
Analysts say its far too early to determine Luckin Coffee will succeed on a long-term basis because of financial, operations and real estate challenges, but the brand is succeeding with Chinese consumers. Many consumers seek “unique” experiences and search for the trendiest boutique coffee shops, while others seek “brands” that they can relate to and have a “relationship” with and that have standardized operations.
What’s clear is that the next 5-years will continue see the China coffee market evolve and Starbucks is betting its money on the “new retail” relationship with Alibaba. As Kevin Johnson, CEO of Starbucks noted, “As people look at the market opportunity in China as it relates to coffee, we expect there will continue to be more competition.”