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Food & Beverage

Starbucks raises bet on China despite coronavirus blow

Chain commits $130m to build largest overseas roaster near Shanghai

Starbucks has projected that the COVID-19 outbreak will reduce its expected revenue from China in the quarter ending March 31 by $400 million to $430 million.   © Reuters

SHANGHAI -- Shrugging off worries about the long-term impact of the new coronavirus outbreak, Starbucks Coffee has committed to invest $130 million into building its largest overseas coffee roaster near Shanghai.

Starbucks' emphasis on China as its top focus market alongside the U.S. means that the shutdown of most of its Chinese store network during the worst of the outbreak is set to take a big bite out of its profits.

The Seattle-based company warned investors on March 5 that the disruption in China alone would reduce its earnings per share by 15 to 18 cents and expected revenues by $400 million to $430 million in the quarter ending March 31. The company earned 74 cents a share the previous quarter.

Nevertheless, the company said Friday that it still aims to operate 6,000 stores in China by 2022, up from around 4,200 now, though it had warned the week before that some openings planned for this year would be pushed back to 2021.

"Starbucks has always taken a long-term view in China, and our commitment to the market has never been stronger," said Belinda Wong, chairman and chief executive of the company's China business.

The new roaster in the city of Kunshan will be Starbucks' first in Asia. Stores in the region now depend on the company's roasters in the U.S. Starbucks aims to open the new roaster by 2022 within a complex that will also include a warehouse and an automated distribution center.

While Starbucks' roaster in Amsterdam serves the company's wider European markets, its plans for Asian markets outside of mainland China are unclear. Asked about supplying other markets from Kunshan, the company said simply that the output is "for China."

With foreign investment plunging under the impact of both the COVID-19 pandemic and China's already slowing economic momentum, Beijing was quick to hold up Starbucks' Friday announcement as a sign of confidence in the country's future.

Just as the government was releasing data showing that foreign direct investment had fallen 25.6% in February from a year before, the State Council announced that Premier Li Keqiang had congratulated Starbucks on its commitment.

"The Chinese market has huge potential, and the fundamentals of the economy have not changed in the long run," Li said in his letter to the company, state outlets reported. "China will continue to be a hot spot for foreign investment."

After opening its first Chinese store in 1999, Starbucks added stores aggressively in big cities including Beijing and Shanghai as it won over local tea drinkers into trying its brew. But around 80% of the stores were forced to close by early February as COVID-19 spread, with the remainder cutting back service hours.

Sales in February of stores open for at least a year were down 78%, Starbucks said in a filing with the U.S. Securities and Exchange Commission. For the quarter as a whole, it now expects to report a 50% drop.

As of March 5, more than 90% of the company's China outlets were again operating. Some though are open only for delivery while the others are restricting seating and usually still closing early. The company said orders via mobile phone accounted for about 80% of sales during the last week of February.

Starbucks' increased focus on mobile-based sales has brought the company into more direct competition with local upstart Luckin Coffee, whose outlet network recently overtook that of its U.S. rival.

As of Dec. 31, Luckin counted 4,507 shops. It announced in January that it would begin rolling out vending machines and unmanned "smart coffee machines" in high-traffic spots like office buildings.

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