A coffee war on the streets of
Shanghai has reached boiling point and is threatening to spill over into neighbouring cities, as the world's biggest franchises fight to secure as-yet unclaimed turf.
Leading the fray is Starbucks, which has staked its claim on nearly all the choice locations in Shanghai, opening 26 outlets this year compared to just five in 2005. The US chain has already opened 13 new outlets this year, bringing its total number of stores in the city to 64. Over the past few months, Starbucks has doubled its presence from three stores to six along a two-mile stretch of Central Huaihai Road, Shanghai's premier commercial district.
"I believe we have this area saturated," says Xie Guohui, vice-president of Starbucks in Shanghai, which is a joint venture with Taiwanese and local partners including
Shanghai Tobacco, the city's tobacco monopoly with diversified interests in food processing and distribution. "Newcomers will find it difficult to get a foothold in that area," he adds.
But brutal business tactics don't seem to have deterred challengers. Last month large British coffee chain Costa threw down the gauntlet by announcing it planned to open 300 outlets in China. It will open its first stores in
Shanghai and eastern China as early as next year.
Costa is part of British leisure group Whitbread. At a press conference in Shanghai, Whitbread's chief executive Alan Parker said his company has formed a joint venture with Shanghai's Yueda Group. "There is an established coffee culture and increasing interest in drinking coffee out of the home (in
Shanghai and other major cities)," Parker said.
The crowd at one Starbucks in an office building on Central Huaihai Road gives credence to Parker's enthusiasm. Declining to provide exact figures, Starbucks' Xie said a busy cafe sells hundreds of cups of coffee on an average day not small change considering a "short" cappuccino at Starbucks costs 23 yuan (US$2.90).
Low material and labour costs in the drinks service industry, especially for coffee and tea, mean the sector offers extremely attractive profit margins.
Understandably, the lucrative business has attracted a raft of competitors queuing up to serve China's growing number of coffee converts. As well as Starbucks, at least three other foreign coffee chains are already fighting for a share of the
Shanghai market.
The most prominent challenger to Starbucks' early lead is widely considered to be Italian brand illy, whose distinctive red and white sign can be seen hanging in cafes across the city. Although most well-known for supplying beans and machines, illy also operates a string of coffee kiosks at office buildings, including one at the Jinmao Tower, the tallest building in Shanghai.
Another purveyor of Italian coffee, Lavazza, is marketing itself as a refined up-market Italian alternative to the US giant. It is said to be particularly picky in the choice of location for its cafes. So far it has opened only one outlet in the city and is planning a second one.
Then there is Pacific Coffee, which already competes head-to-head with Starbucks in Hong Kong. It opened its first shop in
Shanghai right in the middle of Starbucks' territory and is quietly scouting for locations for new outlets. In Xintiandi, the trendy entertainment district, a big Coffee Bean & Tea Leaf is fiercely competing for business with a large Starbucks outlet nearby.
Aficionados, of course, say they can easily taste the difference between the US brew and other superior varieties. But these subtleties are lost on most customers, for whom it is convenience that counts. "Nobody is going to walk a mile to buy a cup of so-and-so's coffee," says Xie.
Indeed, Starbucks and other chains have attained a similar standard across the globe; how well they compete in any specific market is often decided by the location of their outlets.
Despite its growing popularity, coffee is still a luxury item in Shanghai, and even more so in the mainland's less affluent cities. Xie and others point out that foreign coffee chains are fighting for a customer base that is actually quite small.
