Starbucks' 20 Years in China: The Eight Growth Curves It Caught | QDaily Business History

Over 20 years, Starbucks turned its own growth into a China story.

On January 11, 1999, the first Starbucks in China opened on the ground floor of China World Trade Center Phase I in Beijing, surrounded by luxury boutiques and next to the China World Hotel.

There were speeches, dragon and lion dances, and foreign media on hand to cover it — but not a single Starbucks executive. China was still widely seen as a tea-drinking country, and the Beijing operation began as a licensed franchise; Starbucks held no stake in it. That is hard to square with the "most important market" Howard Schultz would later invoke so insistently.

Bringing Starbucks to China was not something Starbucks itself set out to do. The Taiwanese businessman Sun Dawei obtained the franchise from Starbucks and set up Mei Da Coffee Co., Ltd. in Beijing — the company that would go on to run the Starbucks stores in Beijing, Tianjin, Dalian, and other northern Chinese cities. The first cohort of staff trained in Seattle, and everything in the stores, from coffee beans to paper cups, was imported.

Sun Dawei said this was because Starbucks had not yet built a global strategy. In fact, the company already planned to open 500 stores in Asia by 2003 — mostly in Japan — with a target of 10 stores in China within 18 months. When Starbucks entered Japan in 1995, it took a direct stake of nearly 40%; in Thailand, it went in at 100%. By contrast, when it formed a joint venture with Uni-President covering Jiangsu, Zhejiang, and Shanghai around 2000, Starbucks was willing to put up only 5% — far below the government's 50% cap on foreign ownership.

The person fielding reporters' questions at the opening was an executive from Handinc, the backer of Mei Da Coffee — a private equity firm focused on Silicon Valley. He told the Chicago Tribune he hoped Asia's appetite for Western brands would carry over from McDonald's and KFC to Starbucks coffee.

At first there was no sign that it would. Whether in first-tier cities or the second-tier cities that came later, Starbucks stores in those early years never saw anything like the queues outside KFC and Pizza Hut. A tall latte at 19 yuan was not expensive in itself, but housing in Beijing cost only about 2,000 yuan per square meter then, and the average Chinese person spent less than 300 yuan a year eating out.

Chinese consumers, still drinking Nescafé, were not familiar with espresso drinks either. Starbucks staff would helpfully warn customers that the cheapest item — a straight espresso — was tiny, just one mouthful. For a while it was quietly dropped from the menu board.

In fact, even today the average Chinese person drinks fewer than five cups of coffee a year, and 84% of those are instant.

Starbucks opened its first store in almost the only part of Beijing that could have taken it. China World then held a single high-rise office tower, and most of today's familiar landmarks had not even been sketched out. The overpass that went up alongside the Third Ring Road was still called Dabeiyao Bridge.

In the beginning, a Starbucks in a tea-drinking country was treated more as a symbol — a symbol that China and the West shared interests, and could share values. That May, anti-American feeling was running high after the bombing of the Chinese embassy in Belgrade. A New York Times piece opened with a Chinese lawyer who frequented Starbucks, using that detail to write about the ties between the two countries. The Financial Times journalist Richard McGregor, meanwhile, warned in his own book not to assume that a Starbucks or a McDonald's on the street meant China worked the way America did.

The changes that swept China over the next 20 years plainly exceeded everyone's imagination — including how thoroughly the Chinese would embrace Starbucks.

After 2005, China opened up to wholly foreign-owned enterprises, and Starbucks gradually shifted its mainland operations from licensed and joint-venture arrangements to directly managed stores. At the end of 2005, it set up its Greater China Support Center in Shanghai to oversee operations across mainland China, Hong Kong, Macao, and Taiwan. In 2006, Starbucks bought back the stake of its North China partner and began running the region itself. After that, it declared China a priority market for future expansion, and openings sped up.

In 2017, Starbucks paid $1.3 billion to buy out Uni-President's remaining 50% stake in the East China operations, formally taking the whole Chinese market back into its own hands. It was the largest acquisition in the company's history. Soon afterward, Schultz told the New York Times: "When asked how far we can grow in China, I honestly don't know the answer, but I truly believe Starbucks' business in China will one day be bigger than it is in America."

At one point Starbucks had more stores in China than McDonald's — the only food-and-beverage chains with more outlets were probably KFC and Shaxian Snacks. In a country with no tradition of coffee drinking, it had somehow opened 3,600 stores; for ten years running, China had been a bright spot the CEO felt compelled to raise on earnings calls.

It had reached this scale: 3,600 stores, 150 cities, 50,000 employees. The CEO loved to tell the China story. And Schultz — who had retired, returned, and retired again — chose China as the first stop on his farewell tour.

At the very moment McDonald's and KFC were selling their operating rights to Chinese companies and stepping back from direct management, Starbucks spent $1.3 billion in 2017 to buy back the full operating rights for Jiangsu, Zhejiang, and Shanghai, turning China into a wholly directly managed market.

Over 20 years, Starbucks rode China's changes to explosive growth, and gradually turned itself into a China story.

370 million Chinese moved to cities in the past 20 years — the foundation of any food-and-beverage business

Beijing in 1999 looked nothing like today. The Fourth Ring Road was still under construction; the Third Ring Road had been finished less than five years earlier. The China World CBD — then Beijing's largest commercial district — had just one high-rise office tower. Pan Shiyi's first SOHO project was only just a concept. The Yintai Centre near the CBD would not open until 2008; the CCTV headquarters a street over was four years further off.

Shanghai was the same. Hongqiao Airport, today considered supremely convenient, was still a remote outpost, with barely a building in sight on the road from Xuhui. NASA documented the city's transformation in a series of satellite images.

In 1999, the permanent populations of Beijing, Shanghai, Guangzhou, and Shenzhen together came to 41.37 million. By 2017, those four first-tier cities had added 60% more people.

That was the first tier. Elsewhere the urban shift was even sharper. In 1999, China's urban population stood at 436 million; by 2017 it had reached 817 million. Some 370 million Chinese had moved to cities to live and work over those 20 years.

Bigger, denser cities were the precondition for eating and spending outside the home.

Starbucks moved quickly into second-tier cities, almost always on the busiest commercial strips. But its stores clustered above all in the first tier — especially Shanghai, which now has more than 689, a fifth of all Starbucks stores in China. In Shanghai there is one Starbucks for every 35,000 people; in New York, one for every 24,000.

Also in these 20 years, the Chinese got into the habit of eating out — and spent 12 times more doing it

From 1999 to 2017, total retail sales of consumer goods grew 11.8-fold, while total restaurant and food-service revenue grew 12.4-fold, outpacing retail overall.

People also took up the habit of dining out over these years. According to CEIC data, per-capita spending on eating out among urban Chinese rose from 314.24 yuan in 2001 to 1,315.07 yuan in 2012.

Coffee was not the first to benefit from that enormous growth — KFC, selling fried chicken to kids, was. That is also why Parkson's fast-food chains KFC and Pizza Hut arrived earlier and grew faster in the early years.

But once people were used to eating and shopping out, the "third place" Starbucks had brought with it began to make sense. Chinese consumers had grown comfortable spending time in stores, and Starbucks caught the younger ones among them.

8.2 million post-80s and post-90s graduates entered the workforce — and found options beyond state firms and government offices

By Starbucks' own data, 77% of its frequent customers in China were born after 1980.

Coffee drinking really was not a common habit in China; the product that caught on earlier was instant coffee.

The year Starbucks opened its first Beijing store was also the year China began expanding university enrollment.

World Bank data show that in the mid-1990s, the higher-education enrollment rate for Chinese aged 18 to 22 was just 2.4%. In 1998, the government abolished the graduate job-assignment system. That year the gross enrollment ratio was 9.1%, with 1.08 million students admitted. In the first year of the expansion, Chinese universities took in 520,000 more students — nearly 50% above the year before. By 2003, the number of students enrolled in Chinese universities passed 10 million. After 2009, graduate enrollment also began expanding year by year.

Nearly two decades after the expansion policy took effect, 8.2 million graduates from the class of 1999 onward had entered the workforce by 2018.

The post-80s generation graduated just as career options were changing.

The 1992 sitcom Stories from the Editorial Office (《编辑部的故事》) captured the typical Chinese office of its day — no private space, and none wanted; a newspaper and a cup of endlessly re-steeped green tea were all the setup an office needed.

When Starbucks entered China, it brought the "third place" with it: a space that was neither home nor office. Customers were not only there to drink coffee; they came to wait for someone, chat, work, do business.

The earliest Starbucks customers in China were foreigners working in the country, then employees of foreign-invested companies, and then the broader white-collar class.

A 2002 Economic Observer article quoted one such "gold-collar" professional: "My life is completely contained within the CBD — I work in China World Tower A, shop in the China World basement, work out at Nirvana Fitness, go out in Sanlitun, and socialize at the Starbucks in Modern Plaza."

The number of foreign-invested companies in China grew fast through the 1990s, peaking around 2005. But around then the Hong Kong and Taiwan firms that had led the first wave gradually faded, and European and American firms filled in behind them — a handover that made the foreign-enterprise headcount swing, even as the share of private firms in the overall business population rose without a break.

By the end of 2017, according to the State Administration for Industry and Commerce, sole proprietorships and private enterprises together made up 94% of all business entities in China.

The "white-collar" class took shape through this process.

"White-collar" — so called because office work usually meant sitting at a desk in a white shirt. When Starbucks first entered China, the term itself was still new. To be white-collar meant a respectable job, a decent salary, and a certain way of life. "Young white-collar" is still a target group brands invoke today, though both its reach and its meaning have shifted a good deal from twenty years ago.

Now brands are more likely to talk about "young people" than "white-collar workers," because spending power does not map neatly onto earning power. College students and even younger consumers have their own strong appetite and capacity to spend.

Shopping malls went from nonexistent to everywhere to opening in third-tier cities — and Starbucks followed them into 150 Chinese cities

As first- and second-tier cities filled up, Starbucks' strategy in China in recent years has been to push into the suburbs of major cities and into third- and fourth-tier cities.

The rise of commercial real estate did a great deal of that work for it.

The early 2000s marked the start of Wang Jianlin's pivot to commercial real estate. He reasoned then that once urbanization was complete, demand for housing would fall — a structural feature of the industry, he said: "A residential district, once fully built out, is empty — a few thousand people left, nothing else." He also felt residential projects had unreliable cash flow — money came in while apartments sold, then stopped while new land was bought and a fresh development was designed. After a three-day internal meeting, Wanda decided to move into commercial real estate: building Wanda Plazas. It would lease out most of the retail space for steady cash flow.

In 2003, the first Wanda Plaza opened in Changchun. Walmart, Suning, McDonald's, and KFC — crowd-drawing anchor tenants — were all on Wanda's recruitment list. And Wanda was not only meeting retailers' needs; it was meeting the hopes of second- and third-tier-city governments to rebuild their downtowns, or build new ones from scratch.

These commercial real estate projects drew in retailers, which drew in customers — people came to see films, eat, and shop, and of course to have coffee.

From 2010 on, the number of new Wanda Plazas opening each year reached double digits. That same year, Starbucks began partnering with Wanda to enter second- and third-tier cities through its properties — cities including Fuzhou, Jinan, Zhenjiang, Taizhou, Langfang, Tangshan, Nanchang, Huai'an, Quanzhou, Changchun, Yingkou, Tai'an, and Yinchuan, among others.

Starbucks gradually turned itself into a China story — and in 2018 ran headlong into China's growth problems

Over 20 years, Starbucks went in China from cautious experiment to all-in bet.

In 2006, the North China operations became wholly owned. Starbucks then declared China a priority market for future expansion, and openings began to speed up.

Around 2007, after a burst of rapid expansion into too many unrelated areas, Starbucks' results suffered, and the 2008 global financial crisis brought Schultz back as CEO. He took a series of steps to reassert the quality of Starbucks coffee: shutting all 7,000-plus U.S. stores at once to retrain baristas, closing unprofitable locations and cutting staff, and dropping certain product lines and business units.

It was in the aftermath that the China market became the thing Schultz stressed most at Starbucks. Even as global same-store sales growth slowed, Chinese stores held growth at 6% to 7% and above. The stock recovered, and earnings kept growing.

China became the market Starbucks executives most enjoyed discussing. In the most recent annual filing, China was mentioned 103 times; on the earnings call that followed, China came up 42 times, the United States only 15.

Starbucks kept doubling down, adopting approaches better suited to China: starting in September 2018, Starbucks delivery went live on Ele.me, after earlier tying in to WeChat and Alipay — in other markets, Starbucks has held firmly to its own digital payment systems.

Since the full switch to direct management in 2018, Starbucks China has gone from opening roughly one new store a day to one every 15 hours. Even that was not enough: under Starbucks' plan, the mainland store count was to reach 6,000 by the end of fiscal 2022, covering 230 cities, including 100 new to the chain.

By contrast, Starbucks planned to close 150 stores in the United States that same year.

At the same time, Starbucks began to face headwinds. Global same-store sales growth had been slowing for two years, and the company's main lever for keeping it up was simply to keep opening stores. Starbucks had opened 2,000 new stores in the United States over those two years, but transaction counts and foot traffic were falling. Same-store sales growth in China also saw its first decline in nine years in 2018.

Hundreds of companies — including Apple, with a market cap above $700 billion — had been through similar slumps tied to the China market.

In early January, Apple's leadership published an open letter revising its revenue guidance for the coming quarter. Tim Cook blamed the rare downward revision on weakness in emerging markets, chiefly China.

"Lower-than-anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline." Apple had foreseen some decline — it simply came faster than expected, with China pinned on the trade war.

A company turns its business into a China story and pours its greatest resources into that market.

While China kept growing, Starbucks caught these curves — opening 3,600 stores in a country with no coffee habit, across 150 cities, over 20 years.

Against the backdrop of McDonald's and KFC handing their operating rights to Chinese companies and stepping back from direct management, Starbucks chose to double down, and Schultz began visiting China more often. Starbucks also struck a partnership with Alibaba, using Ele.me to sell and deliver coffee. Even now, at a moment of peak uncertainty — while other American companies are still hesitating — Starbucks has launched a $5 billion accelerated buyback program.

On his post-retirement farewell tour, Schultz chose China as his first stop. In an open letter to Starbucks' China "partners," Schultz wrote: "I am also mindful that I am visiting at a time of tension in trade relations between China and the United States, our two largest markets. Every company will inevitably be affected to some degree by macro-political factors, but I believe Starbucks China will continue to grow strongly."

Starbucks' past 20 years have been a China story. And now, even with China's growth in turbulence, it looks as though the story will be carried on by Schultz's successors.

Some of the foundations that once supported Starbucks' growth in China are beginning to give way.

The number of people working for foreign-invested companies peaked back in 2013 and has fallen every year since; in recent years a wave of foreign firms has pulled out of China altogether, with no small number closing their China operations and leaving the market.

The demographic shift will be even more wrenching. Because of a sustained fall in the birth rate, China's population aged 10 to 19 today is 36% smaller than the same age group in 2005 — meaning that over the next ten years, more than a third fewer young people will enter the workforce than a decade ago. They are exactly the consumers Starbucks depends on most.

As first- and second-tier cities have filled up, pushing into the suburbs of major cities and into third- and fourth-tier cities has been Starbucks' strategy in China in recent years.

But the commercial real estate boom that ran for more than a decade is winding down, and Wanda has already begun turning toward overseas investment. Jiangyin — a county-level city among China's top 100 by economic strength — never managed to build a new downtown around its Wanda Plaza. Even in first- and second-tier cities, where Wanda's footprint has grown ever denser, the model is running into trouble.

Over 20 years, Starbucks tied its growth to China's development and reaped extraordinary returns. As the curves it once relied on start to flatten, that has become a problem.

Charts by Xiuxia Feng

Data compiled by Fangyi Gong

Cover image from VisualHunt.com and Yunlu Tang