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BUSINESS & TECH

Starbucks Picks Shanghai for First Upscale Cafe Outside U.S.

By Wang Luyao and Coco Feng
The two-story Starbucks Reserve Roastery in Shanghai covers 2,700 square meters, making it the single largest Starbucks in the world. Photo: Starbucks
The two-story Starbucks Reserve Roastery in Shanghai covers 2,700 square meters, making it the single largest Starbucks in the world. Photo: Starbucks

U.S. coffeehouse chain Starbucks Corp. will open a Starbucks Reserve Roastery in Shanghai, the first of the new concept cafes outside its home turf, reflecting the company’s confidence in its fastest growing market.

The multimillion-dollar project is the company’s biggest move in the China market since it secured sole ownership of its 3,000 stores in the country by buying out its joint venture in July.

Starbucks China will stick with the company-operated model without any franchises for the next decade, company CEO Kevin Johnson told Caixin during an interview on Monday.

The upcoming Shanghai Reserve Roastery, which after opening Wednesday will offer customers a glimpse into coffee-making from the roasting and packaging of the beans to the brewing of the drink, will be the world’s second after the first Reserve Roastery location in Seattle opened in 2014.

The 2,700 square-meter (2,970 square yards) cafe — the company’s largest store in the world — will not only serve coffee, but also tea and wine. It is adorned with more than 1,000 traditional Chinese seals that narrate the story of Starbucks. Customers will also be able to explore the store through augmented reality powered by Alibaba Group’s scene-recognition technology.

The company is doing everything possible to expand its impact in its fastest-growing market, in which a store opens every 15 hours. It plans to make charitable donations of around $20 million over the next five years to aid poverty alleviation efforts in China.

Although China, with its more than 3,000 Starbucks outlets, still lags behind the U.S., which has 10,000 Starbucks stores, Executive Chairman Howard Schultz said that the business in China will grow faster than the U.S. in the future.

Starbucks CEO Johnson spoke to Caixin about the present and future of the coffeehouse chain in China. The following are edited excerpts from the interview.

Caixin: What does the new Reserve Roastery mean to Starbucks as it continues to expand in China?

Johnson: If you look at the opportunity ahead, the Roastery really is an inflection point for us to accelerate our growth, and we see so much opportunity for us to continue to build beautiful stores, hire and take care of great partners, as well as create something that is a warm welcoming environment for all of our customers.

Will Starbucks continue to open more stores in China?

We have over 5 million customer occasions a week in China in our stores; globally we have 95 million customer visits a week. We continue to see very strong growth in the number of those customer visits. So by building more stores, it allows us to continue to expand our reach to reach more and more customers. It’s just so important for us to continue to expand the presence into more cities. We see a significant growth opportunity ahead for Starbucks in China.

Coffees are more costly in Beijing and Shanghai than in the U.S., considering the average income. How did you make decisions on pricing?

If you look at what we’ve done in terms of the offerings that we have, we think that it is an affordable luxury for customers of all kinds of economic backgrounds. Many of our customers in big cities become regular customers that come in one or two times a day, but we also provide an occasion where customers can come and visit us as a treat or a celebration of some special event. We want to make sure that we have a great presence for all customers.

We’re very careful about pricing. Part of the reason we charge what we charge is because we want to make sure that we pay us a very good wage to our employees. We provide them health care. We charge a price that’s a fair price for the customers, but also the kind of price that allows us to take care of our people.

Will Starbucks bring in franchisees?

Right now the reason that we like having company-operated stores in China is because we believe we can expand at the right pace for our China business. For now, with the store growth count that we have and with the opportunity ahead, we’re going to continue to stay focused with the business model that we have here in China, which is a company-operated model. We will always consider a range of business models, but right now our strategy in China is a company-operated business model, and that’s going to be our model if I look at the next decade. I think we’ve got a 10-year opportunity to really drive significant growth in China and it’s our strategy and our intent to do that as a company operated model.

Starbucks just announced the charitable donation of $20 million in China. How do you keep the balance between philanthropy and financial stability?

They are related. When we invest in social impact, that’s a way to demonstrate that we care about the communities we operate in, and we care about doing the right thing to create opportunities and sustainability around the world. Oftentimes customers want to do business with a company that has positive social impact beyond just doing commerce.

Certainly there’s a balance there. We have to make sure that we’re thoughtful about the investments we make, our cost base and the prices we charge. We’ve, over the last 18 years in China and 47 years since Starbucks was founded, found a very good way to manage a very delicate balance.

Contact reporter Coco Feng (renkefeng@caixin.com)

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