Uber spent $2B fighting with Chinese DidiChuxing. Adidas has been fighting Chinese Li-Ning and Anta for decades. And Apple is now struggling against multiple rising Chinese competitors,(Xiaomi, Huawei, Oppo, etc.). One thing you can always count on in China: A successful international company will inspire serious domestic competitors.

So why doesn’t Starbucks have a serious competitor in China? I’ve been asking people this for months and I still can’t get a good answer. It’s weird.

Starbucks has been in China since 1999 and currently has about 2,500 outlets. They have likely had the majority of the China retail coffee market for years. And they have announced plans to open 500 new outlets per year. That will get them to 5,000 China stores by 2020.

Also, they have said these stores are among their most profitable (from earnings call “our newest class of Starbucks stores in China is delivering the highest AUVs, ROI and profitability of any store class in our history in the market.”)

So Starbucks in China has big market share, rapid growth and apparently attractive economics. Although they are breaking the #1 rule of doing business in China as a foreigner: If you are doing really well, keep it quiet.

Starbucks does have some smaller competitors in China. There is Costa Coffee from the UK. Costa is planning to have 900 China stores by 2020. There is CaffeeBebe from South Korea and Coffee Bean from Los Angeles. Both are fairly small in China. There is UBC Coffee (originally from Taiwan) but this is really more of a restaurant. And there is Pacific Coffee of Hong Kong, which has been majority acquired by China Resources.

You could also consider convenience stores like Family Mart and 7-11 as competitors. Certainly lots of coffee is sold there and they both have huge operational footprints. Also, there is McDonalds which has its McCafes. But these are a stretch as direct competitors I think.

Overall, I just can’t point to any serious Chinese competitor for Starbucks. I don’t see a China Mobile, Alibaba, Suning or Wanda-type really big company fighting them for their customers and locations.

I’ve been asking around about this and here are the answers I have gotten so far:

Explanation 1: Starbucks was the first mover and the market was slow to emerge.

Nestle entered China in 1990. Starbucks entered in 1999. But even as late as 2007 or so, it was not totally clear that Chinese consumers were going to drink coffee. I can remember being told over and over “You are waiguo. You don’t understand China. We like tea, not coffee”.

It took a long time for coffee to catch on in China. And even today coffee drinking is still somewhat rare. In 2013, the average Chinese consumed about 4 cups annually. That compares to 441 annually in the USA and over 1,000 cups in Norway (which I also don’t understand.). Drinking coffee has been slow to develop in China thus far.

It also took a long time for Chinese consumers to rise enough in disposable income to afford Starbucks-type retail coffee. Even today, the prices in China (about 30 rmb for a latte) are much more expensive than in the US on a purchasing power basis.

So Starbucks getting to the market first and having the long-term commitment to build in a slow-to-emerge market was important. They lost money in China for years and years. Most companies were not prepared for such a long haul. This was not a rapid consumer success story, like we have seen with Pepsi, Tingyi, Apple and others.

The net result of this “pain now for gain later” strategy was they ended up with the best locations and the best brand.

Explanation 2: Starbucks’ brand and scale give them an advantage in getting real estate.

Winning in retail coffee hinges on getting the right locations. While customers are somewhat brand loyal, they generally won’t walk five extra blocks to go to Starbucks if a Costa is across the street. Getting high profile and high traffic locations is critical.

Starbucks is now significantly larger than their competitors in most Chinese cities, which means they have more outlets, more local customers and greater brand recognition. I think these local scale advantages do give them an advantage in getting the best locations. They are probably offered the best locations (perhaps at a special price?) and can definitely outspend their smaller competitors on real estate because they have more cash, more customers and more brand power. They can open in the nice shopping mall rather than on the side street. They can be at the entrance of the mall rather than on the third floor. It’s just much harder for a smaller, less famous company to acquire and afford these higher profile, higher traffic and higher price locations.

In theory, having the higher traffic and higher profile locations results in greater increases in sales and brand awareness – which then further increases their local scale advantage. So it could be a virtuous cycle (in theory).

This explanation is that while the China coffee market looks big and fragmented, it is actually pretty consolidated when you map it out by the best locations city by city. Competing with Starbucks for these best spots is a lot harder than it appears.

Explanation 3: Senior Chinese business people have a blindspot for coffee.

Even if all the above are true, I still don’t see why coffee outlets could not be opened by a serious China competitor. There are over 160 Chinese cities with over 1M people. And this will increase to 220 cities by 2025. So even today, there is just a lot room for a new entrant, say in Chongqing or some other region.

What is really stopping a major company like China Resources from opening 500 stores? Why can’t Wanda take over all the coffee outlets in their +100 Wanda Plazas? They are doing exactly that in hotels and cinemas at the moment. Why aren’t the big boys of China entering this market?

Is it possible that the senior business people of China all grew up drinking tea and never really started drinking coffee? Maybe people like Wang Jianlin just don’t like coffee?

This explanation would be consistent with the fact that the instant coffee market of China (probably +80% of the total coffee market) is +70% dominated by Nestle, another foreign company. Actually, come to think of it, the energy drink market is also +80% dominated by RedBull. Maybe China’ big business leaders just have a blind spot for caffeine?

Final Explanation: It could still be somewhat a fad.

This is the explanation that worries me. There is a possibility that retail coffee in China is, to some degree, a fad. Drinking expensive coffee with friends in a nice setting is still relatively new for most of China. This has only been going on for 5 years or so for most people. It is also sort of a status thing and Chinese consumers are notoriously fickle about what is cool. Is this somewhat a fad? Could the China retail coffee market shrink by 20%? What if millennials lose interest? Could it ultimately be limited to just a small niche of the population? I think it is definitely possible. Maybe big companies are staying out because they don’t really believe in it long-term?

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The truth is I don’t know why Starbucks doesn’t have a serious competitor in China. Service businesses are an important sector in China. And it is an area where local companies have struggled. Still, it seems very strange to me. Note: I am writing this in a Starbucks. All ideas are appreciated.

Thanks. Jeff

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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