Company Trend Analysis - Upscale Mega-Store To Boost Starbucks Footprint In China - FEB 2018


BMI View: Luxury and premium goods consumption in China is forecast to grow strongly on the back of rising affluence levels, with this extending to artisanal coffee drinks. Starbucks is looking to capitalize on the rising consumer spending by opening its upscale coffee store , Reserve Roastery, in Shanghai, in order to tap into this growing demand.

Starbucks has opened its largest store in the world in Shanghai, China as of December 2017. Called Reserve Roastery, the mega-store is the second of its kind after the first outlet in Seattle which opened in 2014. The 30,000 square feet store will allow customers to watch beans being roasted and brewed in Bunsen-burner style tubes, feature an 88-feet long coffee bar, and is positioned as "super premium" according to the company. The roastery in Shanghai will have more than 100 beverages available for purchase such as Teavana tea infused with nitrogen and a new steam tea brewing technique.

The Asia-Pacific region, particularly China, is becoming an increasingly important market for Starbucks. Asia-Pacific has been the best performing geographic zone, with operating income growing by 5% y-o-y in Q417 (ending October 1, 2017), compared to a fall of 18% and 24% y-o-y in Americas and EMEA (Europe, Middle-East and Africa) respectively. Furthermore same-store sales grew 8% y-o-y in China compared to just 2% y-o-y globally.

Asia-Pacific Consistently Outperforms In 2017
Operating Income, % y-o-y change
Source: Starbucks Company Filings, BMI

Starbucks' strategic move to open its premium roastery in Shanghai comes on the back of a rising affluence levels in the country, driving the demand for premium and luxury goods. China's upper-income segment (disposable income of USD75,000 and above) is forecast to grow strongly from 1.1mn households in 2017 to 2.7mn in 2021. This upper-income segment will demand more aspirational goods and services that match their lifestyles, with this extending to artisanal and premium coffee offered at Starbuck's Reserve Roastery.

The decision to also open in Shanghai is a result of high and rising GDP per capita in the city, which we forecast to increase from CNY18,584 in 2017 to CNY22,559 in 2021, placing Shanghai among the top three cities in China for the highest GDP per capita. With 3,000 stores already in China, Starbucks plans to increase its store count in China to 5,000 by 2021, particularly in lower-tier cities that also have rising incomes and are aspiring more leisure lifestyles. We highlight provinces like Jiangsu, Fujian and Zhejiang to be possible provinces for the further expansion of Starbucks.

Provinces/ Municipalities With The Highest GDP per Capita
Area 2017f 2021f
f= BMI forecast. Source: BMI
Beijing (Municipality) 17,668 23,166
Tianjin (Municipality) 18,101 22,892
Shanghai (Municipality) 17,452 22,559
Jiangsu (Province) 14,957 19,609
Fujian (Province) 12,011 16,268
Zhejiang (Province) 12,616 16,090
Inner Mongolia (Province) 12,749 15,996
Guangdong (Province) 11,208 14,866
Shandong (Province) 10,931 14,376
Hubei (Province) 9,418 12,777

We forecast demand for coffee in China to grow strongly in China as consumer preferences become more westernized, resulting in strong growth of coffee sales. BMI forecasts coffee sales to grow by an average of 13.3% per annum over 2017 and 2021, with the segment forecast worth CNY108.9bn in 2021, up from CNY67bn in 2017.

Coffee Sales Grow Strongly
Coffee, sales, CBYmn
e/f= BMI estimate/ forecast. Source: BMI/National Statistics

Increasing its chances of success in the country, Starbucks is also employing a retailtainment strategy with its launch of the Reserve Roastery, tapping into consumer's love for experiences by making the new location more about the coffee experience than just drinking coffee. By partnering with Alibaba, Starbucks is also included an augmented reality experience for its Shanghai store, allowing consumers to use their smartphones to learn more about key features in the roastery. The store will also feature Princi Bakery, with freshly baked breads and pastries every day. The Shanghai store opening is one of the five Reserved Roasteries expected to open by 2021, along with openings in Milan and New York in 2018 and in Tokyo and Chicago in 2019. This demonstrates the coffee retailer's high expectation for the market, placing it among the most developed in the US as it expects to see strong growth from a wealthy Chinese population.