Full of beans | Article – HSBC VisionGo

Why has internet giant Tencent invested in Canadian coffee chain Tim Hortons China business?

The Milky Way is home to as many as 400 billion stars. And yet it is still growing, with new stars emerging faster than the speed of sound. Tencent’s universe of investments is smaller, with stakes in more than 800 companies. But its galaxy is also growing at a rapid pace and 160 of the biggest stars are supernovas, said to be worth $1 billion or more.

“In the past, our investment sectors were mostly focused on video games and content, as well as the [new] frontiers of science and technology,” Martin Lau, president of the Shenzhen-based titan, told a gathering of 500 investees in Beijing in January. “However, in the future, we will pay more attention to smart retail and payment platforms with the development of Tencent’s WeChat mini-app ecosystem.”

The strategy – which aims to support a pivot to the “industrial internet”, or providing services to other businesses – doesn’t seem to have been damaged by the coronavirus outbreak. Just last week an investment in the coffee house chain Tim Hortons was added to its Rmb231 billion ($32.5 billion) portfolio.

According to Lu Yongchen, CEO of the Canadian brand’s China operations, the fresh funds from Tencent – in the hundreds of millions of yuan – will go towards digitising Tim Hortons business in China, as well as a build-out in new stores. Opening its first outlet there last February, the inventor of “double-double” – a type of coffee with a double serving of both sugar and cream – now has 50 stores, mostly in Shanghai. It says it wants 1,500 outlets across the country within a decade (see WiC444).

“We don’t actually lack money. We care more about the synergy that the investor can bring,” Lu told Xiaoshidai, a zimeiti.

He also says that 020 is central to Tim Hortons strategy in China and that a lot of new digital infrastructure in loyalty programmes and order placement will be built into its WeChat mini-app (a Tencent platform). The coffee chain says it has already accumulated a million members, which contribute about 80% of its sales.

Qianzhan, a Beijing-based consultancy, forecasts that China’s coffee market will reach Rmb330 billion in sales by 2024, up 43% from 2019, as the number of coffee-drinkers grows at double-digit rates. It is noteworthy that sales of ground coffee made up just 18% of the market in 2018, with the rest dominated by ready-to-drink products. But the rising appeal of affordable luxury to millions of consumers means that there is still room for premium coffee chains and artisan cafés to grow. Starbucks, for instance, has plans to extend its physical presence to 6,000 stores in China by 2022, as well as ploughing Rmb900 million into a new roasting facility in Jiangsu’s Kunshan.

Back in 2018 Tencent signed a partnership with the now notorious Luckin Coffee in a bid to counter the alliance between Starbucks and Alibaba’s delivery arm Ele.me. Luckin has trumpeted a ‘digital-first’ from day one, focusing on orders by app and quick-fire delivery. The plan in the partnership was to ride on China’s emerging coffee culture as a bridgehead into another major application of ‘smart retail’, where Tencent is doing battle with Alibaba. But with the Luckin brand laid low by a major accounting scandal (see WiC490) – and news this week that Nasdaq wants to delist it – Tencent has changed horses to the Canadian chain.

Tencent did the deal with Cartesian Capital, a private equity firm that owns the Tim Hortons franchise in China. It previously led a similar expansion effort for Burger King, which is also owned by Tim Hortons parent company Restaurant Brands International.

Meanwhile the South China Morning Post says Tencent is scouring the market for more deals amid the fallout from the Covid-19 pandemic. The Shenzhen giant unveiled a standalone website for its investment arm in April. Founded in 2008, the unit has a core team of 11 people, led by Jeffrey Li Zhaohui, a key player in Tencent’s acquisition of Finnish mobile gaming group Supercell, which cemented its position as an online video game giant around the world.

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