Starbucks Corp. has ambitious plans to expand in China, but an unlikely challenger, homegrown chain 85 Degrees Café (85C), is fast on its heels.

The coffee giant announced Friday that it has entered an agreement with southern China's Yunnan provincial government to set up farming and processing facilities as well as the province's first Starbucks store by 2011.

This comes in line with Starbucks' hopes of conquering a rapidly growing middle class with its aggressive expansion plans.  There are now more than 400 Starbucks stores on the mainland and 800 in greater China, and CEO Howard Schultz says there will be "thousands" of Starbucks on Chinese soil in the coming years.

The chain launched a special blend made with beans sourced from Yunnan in early 2009.

Costa Coffee, Starbucks' main contender in China, has an estimated 200 shops on the mainland.  The chain has kept mum about its plans in light of the Starbucks announcement, providing an opportunity for Taiwan-based Gourmet Master Co. Ltd to flex its growing muscle in the scramble toward a growing base of coffee consumers in second and third-tier Chinese cities.

Wu Cheng-Hsueh, head of Gourmet Master, which operates 85C, Taiwan's largest coffee chain, told the China Daily on Monday that it too has big plans.

There are now almost 150 85C cafes on the mainland and 320 in Taiwan, and Wu says the company plans to open 1,000 additional stores by 2015.

85C undercuts Starbucks by more than 50 percent, selling a regular coffee for costs RMB 8 ($1.20). A Starbucks coffee of a comparable size ranges from RMB 15 ($2.26) and up.  Wu said that the company "will continue its strategy" of offering cheaper products than its competitors, even as earning power in China continues to grow.

However, as coffee retailers bank on growing levels of affluence in the country, is cheap really the way to go?

Victor Wang, a Shanghai resident working in the city's bustling Jing'an business district, says there is both an 85C and a Starbucks located roughly the same distance from his office, but that he only buys coffee from 85C for takeaway because it's "too crowded."  He says that he would prefer to meet friends for coffee at Starbucks.

It is actually part of 85C's strategy to be present on high-traffic street corners, with threadbare cafe seating areas that lack much in terms of ambiance. By contrast, Starbucks boasts leather armchairs and are generally located on quieter pedestrian streets or inside of shopping malls or plazas.

85C is also known more for its offering of Taiwan-style baked goods than for its coffee. The chain sells sweet breads peppered with meat, taro flavored buns and sponge cakes coated in pork floss. Starbucks has tried to compete in this aspect with the offering of localized snacks, but remains a place the Chinese go on special occasions when they crave Western desserts like tiramisu and chocolate cake.

 

 

 

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