Starbucks Coffee Company (SBUX) finally has taken full control of 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 China provinces of Guangdong, Hainan, Sichuan, Shaanxi and Hubei, and the municipality of Chongqing.
Also as part of the agreement, Maxim’s has acquired Starbucks remaining equity stake in the Hong Kong and Macau markets, assuming 100 percent equity in them. Maxim’s Caterers saw a 10-year extension in its Hong Kong operating term until 2037 and gained a 30 percent stake in a joint venture with Starbucks in Chengdu, the capital of the Sichuan Province in southwestern China.
The relation between Starbucks and Maxim’s Caterers Ltd dates back to 2000, when Hong Kong’s Maxim’s Group had introduced Starbucks Coffee. Coffee Concepts Limited, a joint venture between Maxim’s Caterers Ltd and Starbucks Coffee International, Inc. operates Starbucks stores in Hong Kong and Macau.
By May 2008, Starbucks had managed to open its 100th store at Hollywood Road, Central. Starbucks now has more than 110 stores across Hong Kong’s commercial, shopping & entertainment and residential areas. Starbucks coffee shops in Southern China and South West China are also operated by joint venture companies established by Hong Kong Maxim’s Group and Starbucks Coffee International Inc.
Starbucks had entered the Greater China market 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 ‘brandimage’ 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 also adapted many products to suit Chinese tastes, such as Chai Tea Lattes, Green Tea Black Sesame Frappuccinos, Black Bean Muffins and Black Sesame Cookies. In April this year, it offered its instant-coffee packets to Chinese coffee lovers and expanded beyond coffee stores to sell consumer packaged goods in the region.
Further, it is setting up a research-and-development center in Shanghai. The research center will focus on manufacturing tea products for China, where sipping at a warm cup of tea is much more endured than coffee consumption. However, in November last year it set up a coffee farm and processing facilities in China’s southern Yunnan province to introduce the strong taste of coffee.
Currently, we maintain a Neutral rating on the stock on long term basis. Further, Starbucks holds a Zacks #3 Rank, which translates into a short-term Hold rating.
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