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Should Starbucks Corporation Fear This Underdog in Asia?

By Leo Sun - Sep 1, 2015 at 4:03PM

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The Coffee Bean & Tea Leaf plans to challenge Starbucks in China with its reputation for upscale quality and simplicity.

Starbucks (SBUX 0.39%) has big plans for China, where it has opened over 1,700 stores across 90 mainland cities. The coffee giant hopes to double that figure to 3,400 within the next five years. Last quarter, Starbucks' China/Asia-Pacific comparable sales rose 11% annually, outpacing single-digit comps growth across all other regions.

However, Starbucks faces a formidable rival that's also rapidly expanding across Asia -- The Coffee Bean & Tea Leaf, Southern California's oldest and largest privately held specialty coffee and tea retailer. The Coffee Bean & Tea Leaf was founded in 1963 by Herbert and Mona Hyman, who sold the Asian franchise rights to Singaporean brothers Victor and Sunny Sassoon in 1996. Within two years, the Sassoons opened 29 stores in Singapore and Malaysia, nearly as many stores as the Hymans had opened in over three decades of ownership.

Source: Company website.

The Coffee Bean now plans to expand its presence in China beyond its 30 stores in Shanghai. It recently signed a development agreement with South Korean retail conglomerate E-Land to open over 700 new Chinese stores. E-Land operates over 7,000 fashion and retail outlets in China, and its restaurant portfolio -- which The Coffee Bean will soon join -- includes over 20 brands. This strategy will let Coffee Bean expand rapidly by piggybacking on E-Land's massive retail presence. Could this rising star derail Starbucks' plans for growth in China?

Can the underdog compete?
With only about 1,000 stores worldwide, Coffee Bean is a tiny underdog compared with Starbucks, which has over 22,500 locations. But being the underdog has its charms.

Coffee Bean states that all its tea leaves and coffee beans are handpicked and blended, while each beverage is handmade with manual espresso machines and steam wands. Starbucks, by comparison, relies heavily on automated machines to make its beverages. Some coffee enthusiasts also claim that Coffee Bean's drinks have fewer chemicals than Starbucks' drinks. Starbucks recently addressed those concerns by adding real pumpkin puree to its Pumpkin Spice Latte instead of using caramel coloring.

The Coffee Bean & Tea Leaf is also popular with tea drinkers, a prominent demographic in Asian countries. That's why Starbucks added teas to its menu by acquiring Tazo Tea in 1999 and Teavana in 2013. While Starbucks has repeatedly discussed the challenges of converting tea drinkers into coffee drinkers across Asia, the Coffee Bean and Tea Leaf will probably have an easier time, since it promotes both equally.

Can Starbucks maintain its edge?
The Coffee Bean sells its beverages at comparable prices to Starbucks, has similar-looking "urban coffee" stores, and targets the same rising middle class of Asian consumers. But Starbucks has two distinct advantages in Asia -- brand appeal and local expertise.

Source: Coffee Bean and Tea Leaf website.

In China, Starbucks coffee is considered a luxury brand, and customer loyalty runs high. Even after the state-controlled media accused Starbucks of overcharging Chinese customers in comparison with their American counterparts in 2013, Chinese customers defended the brand. A user on microblogging site Weibo stated that Starbucks' prices were "competitive" and the quality made "people feel safe" -- a clear reference to the country's ongoing food-safety crises.

Starbucks also knew the Chinese market was too massive to conquer without local assistance. That's why it partnered with Beijing Mei Da coffee company in the north, Hong Kong-based Maxim's Caterers in the south, and Taiwanese company Uni-President for the Taiwan region. These joint ventures helped tweak Starbucks' menu for local tastes and preferences, which probably contributed to its surging sales.

Coffee Bean's partnership with E-Land, while far-reaching, lacks the localized expertise of Chinese partners. E-Land has a huge presence in China, but it's still a South Korean company that might not fully understand the local tea and coffee tastes in certain regions of China.

There's room for both
The Coffee Bean could start competing against Starbucks in China soon, but it's unlikely it will significantly throttle the coffee giant's overall growth. The Coffee Bean and Starbucks already compete in several countries across Asia, and Starbucks' sales have soared nonetheless. However, Starbucks investors should still keep a close eye on this underdog's growth over the next few years.


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