McDonald's seeks caffeine high in China | Article – HSBC VisionGo

Fast food giant joins the coffee battle with Rmb2.5 billion investment to expand its Chinese McCafe network to 4,000 outlets and take on Starbucks

Lifestyle  ·    ·  2 mins read

The first McCafe was launched in Melbourne in 1993. A decade later McCafe had become the largest coffee shop brand across Australia and New Zealand. McCafe is now seeking to replicate that success in China.

Last month the McDonald’s controlled chain announced that over the next three years it will invest Rmb2.5 billion ($381 million) to expand its foothold in the Chinese coffee market. The chain is predicted to have over 4,000 stores by 2023, a rollout assisted by its parent company’s large network of existing stores in China.

Zhang Jiayin, the CEO of McDonald’s China, is confident about McCafe’s expansion plans. “I haven’t singled out anyone as competition,” he said. “Even if the market is competitive, we can continue to drive progress in our industry.”

“Remember when McCafe had free refills? If they bring back this tradition they’ll definitely be competitive,” wrote one weibo user. “In the future we can take a Starbucks cup to drink McDonald’s coffee,” joked another.

In fact, on November 16, Starbucks also announced its own vision for China’s specialty coffee industry, with the groundbreaking ceremony of the China Coffee Innovation Park, a 80,000-square metre space that will feature a smart supply chain, an experience centre and roasting plants. Starbucks plans to invest up to $150 million in the project that is set to be operational by the summer of 2022.

Starbucks has also been rapidly growing its number of stores. Its latest financial report revealed that in the fiscal fourth quarter, it had opened 480 new cafes across the globe, and 259 were in China. Starbucks currently has 4,706 cafes in the country, and it expects to add another 581 by the end of 2020.

Starbucks is rapidly adapting to China’s fast-growing delivery industry as well (see WiC346). Since 2018, customers have been able to place orders for coffee on Alibaba’s food delivery app Ele.me. In July, the two firms expanded their partnership, with a Starbucks delivery service now offered through Taobao and the mobile map app Amap. Delivered orders made up 9% of Starbucks’ Chinese sales last quarter, with analysts predicting further growth.

The Chinese coffee market is evolving fast. In May Tencent invested in the China business of Canadian coffee chain Tim Hortons, with a plan to accelerate store openings to 1,500 locations (see WiC496). Beverage giant Nongfu Spring has also expanded into home-brewed drip coffee in a move that will see it competing on a quality basis with the likes of Starbucks and its delivery products (see WiC487). Oil giant Sinopec has even launched a coffee brand of its own that it now sells through its massive network of petrol stations (see WiC467).

The Chinese are better known for drinking tea, but their coffee consumption is on the rise.

Data from the International Coffee Organisation in London indicates that sales of the beverage this year will reach Rmb300 billion. By 2025 the market size could grow to Rmb1 trillion, it believes.

That bold forecast makes sense: the average Chinese only drank 7.2 cups of coffee last year – suggesting there’s room for a lot more latte and cappuccino to be ordered from the growing numbers of baristas. The annual growth rate of China’s coffee market is 15%, significantly higher than that of the 2% global average.

“Chinese people are increasingly receptive to a variety of drinks. Coffee is one of them, especially as food and beverage companies increase their brand recognition,” opined a contributor on ThePaper.cn, a portal.

But how, you might wonder, could the disgraced Luckin Coffee still be expanding? Mired in a scandal in 2019 that its sales had been inflated (see WiC 482), Luckin was suspended from trading on Nasdaq in June and it has filed to delist. But the bad news seems not to have slowed the brand’s growth: this year it added 2,000 new outlets taking its nationwide tally to around 7,000.

In fact, Luckin has been even more concentrated on growing its business in the past year, Sina Finance noted. Analysts are watching with interest: with Luckin’s access to new capital constrained, one view is that management is making a last-ditch effort to tee up a more attractive takeover offer.

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