Caixin
Oct 13, 2017 01:50 PM
BUSINESS & TECH

Costa Coffee Heats Up China Pot With Local Partner Buyout

Whitbread PLC, owner of the Costa coffee chain, said its buyout of its South China partner won’t affect its North China operations, which are conducted through a separate 50-50 joint venture with BHG. Above, a Costa barista makes a cup of coffee at a shop near Manchester, England, on May 5. Photo: Visual China
Whitbread PLC, owner of the Costa coffee chain, said its buyout of its South China partner won’t affect its North China operations, which are conducted through a separate 50-50 joint venture with BHG. Above, a Costa barista makes a cup of coffee at a shop near Manchester, England, on May 5. Photo: Visual China

The owner of the Costa coffee chain has bought out its South China partner, months after larger rival Starbucks Corp. made a similar move as the two companies seek to gain more control over their respective brands and operations in the fast-growing market.

Whitbread PLC said it paid 310 million yuan ($47.0 million) to buy out the 49% of its joint venture owned by local partner Yueda. Following the buyout, Whitbread will own 100% of the company that operates 252 stores in its South China region, which includes 93 stores in Shanghai.

The move represents a “significant and exciting step” in Whitbread’s ambitious growth plan for China, CEO Alison Brittain said.

“The coffee shop market in China is highly attractive, with a compelling opportunity for Costa to grow its presence over the longer term,” Brittain said. “This acquisition gives us full strategic and funding flexibility to unlock Costa’s potential in China, providing a strong platform to facilitate future growth, enhance the customer experience and make Costa the coffee shop of choice in this fast-growing market.”

Whitbread added the buyout won’t affect its North China operations, which are conducted through a separate 50-50 joint venture with BHG. That venture operates 156 stores, bringing Costa’s total for China to just over 400 stores.

Whitbread has previously said it aims to significantly boost its global Costa sales to about 2.5 billion pounds sterling ($3.31 billion) annually by 2020, representing about a 40% increase over sales of 1.8 billion pounds for its latest fiscal year ended March 2. In its latest annual report, the company, which has about 3,500 Costa stores worldwide, said it saw “tremendous long-term opportunity” for the chain in China.

“We believe that our current operations represent a platform to unlock the potential in China and to establish a No. 2 position in the market,” Whitbread said. “We recognize that we have more work to do to get the proposition right in China and to reinvigorate the brand. However, we are given confidence by the fact that, outside a tail of underperforming stores, site performance is credible.”

Costa is well behind China’s market leader Starbucks, which now has about 2,800 stores in China with plans to boost that to 5,000 by 2021. Starbucks has taken similar steps to take control of its local operations, buying out its South China joint venture partner in 2011, and more recently buying out its East China partner in July for $1.3 billion.

Costa, Starbucks and other international coffee chains are all trying to take advantage of China’s growing taste for coffee, especially among its newly minted younger white collar workers. Such professionals often see the drink as much as a lifestyle choice as a beverage and are willing to pay large sums of up to 30 to 40 yuan for a cup, compared with the older, more budget-conscious generation that still prefers tea.

Contact reporter Yang Ge (geyang@caixin.com)

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