Starbucks Corporation (SBUX) is preparing to storm China – a growing market for coffee by launching a joint venture in the south of the country that will give it control over the production and processing of coffee. The coffee giant signed a Memorandum of Understanding (MOU) with Ai Ni Group, a farming company in Yunnan province, to form a joint venture by the end of this year.
Starbucks revealed that the venture would purchase and export Arabica Yunnan coffee beans and operate dry mills. Starbucks would have operating control. This would give a strong foothold to the company in its "second home market" outside the U.S.
The management revealed that the joint venture is a step towards the company’s goal of owning farms and roasting coffee in China.
The Seattle-based company also plans to open a farmer support center in Yunnan. It already has support centers in Costa Rica and Rwanda that help coffee growers there improve their quality, so they can sell the beans at higher prices to specialty roasters like Starbucks.
Last month, Starbucks took full control of a majority of its stores in mainland China based on a contractual agreement with its long time joint-venture partner in South China, including Hong Kong and Macau, Maxim’s Caterers Ltd.
The agreement allows Starbucks to assume 100 percent equity in the important Chinese provinces of Guangdong, Hainan, Sichuan, Shaanxi and Hubei, and the municipality of Chongqing.
Last November, Starbucks signed a deal with the provincial government in China to set up the company's first-ever farm in the world. The agreement is in tune with the company's strategy of securing supplies in the midst of sky-high coffee prices and of catering to a rapidly growing market of coffee drinkers in China.
Starbucks had entered the region in 1998 with the opening of its first store in Taipei, Taiwan. The first Starbucks store in mainland China was opened in Beijing in January 1999 through a licensing agreement with Mei Da Coffee Co. Ltd.
Since then the retail giant has been periodically pumping energy and gaining gradual prominence across China. It has been working to improve its ‘brand image’ in China and attract China’s affluent consumer class. The firm has about 400 stores in mainland China and 800 in the greater China region. By 2015, it aims to more than triple its locations to 1,500 stores in 90 cities.
Starbucks has been focusing on foreign markets for additional growth. The company’s policy is unlike its rival Green Mountain Coffee Roasters (GMCR) which relies almost entirely on the U.S. market.
Currently, we maintain a Neutral rating on the stock on a long-term basis. However, Starbucks holds a Zacks #4 Rank, which translates into a short-term Sell rating.
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