Will Starbucks cut prices if it has acquired the ownership of 1300 stores in East China?

Event: Starbucks acquires ownership of 1300 stores in East China

Starbucks Coffee announced that it has reached a formal acquisition agreement with its long-term joint venture partners Uni-President Enterprise Co., Ltd. (hereinafter referred to as "Unified Enterprise") and Unified Superstore Co., Ltd. (hereinafter referred to as "Unified Super"). Starbucks will buy the remaining 50% of Starbucks East China Market Joint Venture (Shanghai Unified Starbucks Coffee Co., Ltd.) for about $1.3 billion in cash. Starbucks detailed the financial impact of the deal during its third-quarter 2017 earnings call at 14:00 (Western time) on July 27. The deal is still subject to regulatory approval and is expected to be completed in early 2018.

It is understood that through the acquisition, Starbucks will take 100 per cent ownership of about 1300 stores in eastern China, including Jiangsu, Zhejiang and Shanghai. At the same time, Uni-President and Uni-President will acquire the remaining 50 per cent of Taiwan's Uni-President Starbucks (hereinafter referred to as "Taiwan Starbucks") for about $175 million, thus owning 100 per cent of Starbucks' operating rights in the Taiwan market. Starbucks was founded in 1997 and currently has about 410 stores in the Taiwan market.

Analysis: why does Chinese mainland directly operate in Starbucks?

Why should Starbucks achieve all direct operations in Chinese mainland? Kevin Johnson, president and CEO of Starbucks Coffee, said that fully and directly managing the entire Chinese mainland market would help "achieve the goal of increasing the number of stores from the current 2800 to 5000 by 2021". He said it was a key step in advancing Starbucks' strategy of "diversifying the Chinese market to achieve Starbucks' long-term profitable development in the Asian market."

On the one hand, it has always been a "routine" for Starbucks to choose local partners when expanding overseas, adopt a franchise model, and then take back control when the market is mature. In 1999, Starbucks opened its first Starbucks in China, with three long-term partners, Beijing Sanyuan Group and Meida, Unification and Hong Kong Meixin Group, which are joined by some funds. After China allowed wholly foreign-owned enterprises to open stores in 2005, Starbucks bought back shares in Meida, Sanyuan and Meixin in 2006, 2007 and 2011, taking over stores in central, northern and southern China. The situation is similar in the Japanese market, where Starbucks bought a stake in its Japanese partner for $913.5 million in 2014.

On the other hand, Uni-President has been plagued by profit pressure for several years. The annual report of Uni-President in recent years shows that after reaching a peak of 23.329 billion yuan in 2013, Uni-President's revenue has declined in the past three years. According to its 2016 annual report, Uni-President achieved revenue of 20.986 billion yuan last year, down 5.1% from the same period last year, while net profit was 607 million yuan, down 27.2% from the same period last year. In May last year, Uni-President announced that it would sell its 47.83% stake in Jinmai Lang Beverage for 1.291 billion yuan. After the completion of the transaction, Uni-President no longer holds any interest in Jinmai Lang Beverage Group. In November of the same year, Uni-President Group signed an equity transfer contract with Guangdong Jianlibao Group to sell its 100% stake in Foshan Sanshui Jianlibao Trading to Jianlibao Group for 950 million yuan.

Attention: the key to whether Starbucks will cut its price is its own decision.

Chen Yuefeng, CEO of Lingbeast Media, who has been engaged in retail reporting and research for many years, said in an interview with a reporter from Beijing Youth Daily that Starbucks has a full direct operation in Chinese mainland, but in fact, it planned to do so a few years ago. Because of the gradual maturity of the Chinese market and the judgment of future market growth, Starbucks hopes to recover the development and income rights of this market. Although Uni-President is not willing to sell, but due to the profit pressure of Unification, the sale of shares is not surprising, of course, the price is not bad. Starbucks is obviously optimistic about the long-term development of the Chinese market. It is estimated that next, Starbucks stores in the Chinese market will expand faster.

Chen Yuefeng believes that the management level of Starbucks stores will not improve much. Starbucks management is relatively simple, not complex, and the degree of standardization is not low. If we say that purely from the adaptation of local taste, as well as the development of derivative products, unity should have more advantages. However, after so many years of crawling in the Chinese market, Starbucks itself knows enough about the market, so its management should not change much in the short term.

After the full direct operation of Starbucks stores, there should be no impact on consumers. In response to the issue of Starbucks' sales price in the mainland, Chen Yuefeng said that if the price can be reduced, it is best. In fact, compared with the price of its products in the United States, China should have room for downward adjustment. The key depends on how Starbucks makes its decision.