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Starbucks is late to coffee delivery in China

Krystal Hu
Reporter

It’s 10 a.m. and Lusong Liu, a 25-year-old who works for a real estate company in the Southern Chinese City of Shenzhen, sends a link to his colleagues in the messaging app WeChat. He writes, “Anyone want to order coffee?”

“It’s a routine for us,” said Liu, a Starbucks fan since college who is used to ordering coffee online and having it delivered. “We’re just too lazy to go out and it’s very cheap to get it delivered.” For a mere $1, he can enjoy a Starbucks frappuccino without even leaving the building.

Alibaba’s ele.me platform will deliver Starbucks coffee in China.

China may be a tea drinking nation, but coffee businesses are booming there. And more people in the country want their coffee to be delivered to their doorstep.

It has been the fastest growing market for Starbucks (SBUX). With more than 3,300 stores and 45,000 employees in China, Starbucks dominates more than half of the country’s coffee market. But on delivery, it’s playing catch-up. On Thursday, the Seattle-based coffee chain finally made a major move in China by partnering with Alibaba (BABA) to deliver coffee to customers. Prior to the deal, customers like Liu were receiving their Starbucks coffee from third-party providers that have no relationships with the coffee chain.

Local startups have been able to dominate the coffee-delivery space for a while. Shanghai-based Coffee Box started delivering coffee from Starbucks to customers since 2014. Without any formal deals with Starbucks, it just dispatches couriers to buy coffee from Starbucks in cities’ main business districts, and charges $0.30 for delivery. Coffee Box has built a fanbase on its digital platform and raised $25 million in new funding this March. Having learned about consumers’ tastes and habits, it now only delivers its own branded coffee and drinks.

Another local competitor that has pressured Starbucks to move faster is Luckin Coffee, which has opened 800 stores in six months and is now valued at $1 billion. Luckin, which promotes its app for ordering coffee, claims the average delivery time for each order is 18 minutes, and promises to refund customers if it takes more than 30 minutes to deliver an order.

“It’s been five years and we’ve finally woken up Starbucks,” Hongfan Zuo, a product manager at Coffee Box, told Yahoo Finance. “Now the giant is on the way, we have to sustain competitive differentiation in the battle.”

Jeffrey Towson, an investment professor at Peking University, believes the timing of Starbucks’s partnership with Alibaba shows the coffee chain giant finally recognizing that it’s fallen behind rivals in China. During last week’s earnings call, Starbucks noted underperformance in China and CEO Kevin Johnson acknowledged “the need to move faster and enable delivery”.

“They were behind the curve,” said Towson. “They’ve got a real competitor. [Luckin] moves really fast and they’re attacking digital, which is Starbucks’s weak points.”

Now that Starbucks will use Alibaba’s ele.me platform to deliver coffee, Luckin will have to rely on price to compete — a cup of Luckin coffee is two-thirds the price of a cup of Starbucks’s coffee. In China, Starbucks charges the same prices as in New York.

“The biggest gun that Luckin has is that they’ve dropped the price point,” said Towson. ”They’re coming for a mass market. If that works, it could open up a huge market.”

A deliveryman leaves a Luckin Coffee store with a takeout box for online sales in Beijing, China July 17, 2018. REUTERS/Jason Lee

The ongoing urbanization and growing middle class in China could present big opportunities for both homegrown and foreign coffee brands. Last year, the country’s retail coffee market reached $4.72 billion, a 15% jump from 2016, according to Euromonitor International. Instant coffee once dominated 90% of China’s coffee consumption, but more and more people are willing to pay for brewed coffee. On average, people in China now drink up to five cups of coffee in a year, leaving much room for growth. 

Starbucks doesn’t break down revenue from China specifically, but it has ambitious plans to double the number of stores in the country by the end of 2022, which means opening a new location every 15 hours. Towson doesn’t think the company will lower prices to compete, but he thinks teaming up with Alibaba could give it a major advantage.

“With Alibaba, there’s this huge online ecosystem that they’re getting integrated into,” he said. “They’re basically going from the digital laggard to the front lines of digital China.”

Do you think Starbucks should deliver coffee in the U.S.? Write to Krystal Hu via krystalh@yahoofinance.com or follow her on Twitter.

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