The short answer is very big but not many chains will benefit financially!  Of course, there is a more nuanced answer which we share below.  I thought about this question after seeing a recent press report about the new JV between Australia’s Retail Food Group Ltd. and the Chinese steamed buns producer, Goubuli.  The Australian foodservice company is best known for its Gloria Jean’s brand which has been very successful down under beating all other chains including Starbucks.  Can they do the same in China?

A tie-up between a foreign enterprise and a very local firm is generally problematic for many reasons.  Goubuli has been operating for 150 years and manages 30 retail locations in addition to manufacturing and logistics facilities. Can this marriage work? Interestingly enough, the Australian company is not committing any equity to the deal and probably traded some equity for royalty waivers.  Goubuli did make a sizable up-front payment of US$4.9 Million for the country rights which seems very excessive to this scribe!

Here are my concerns about the profitability of the coffee shop market in China.

First, competing directly with an entrenched player like Starbucks is entering a “red ocean” where competitors will probably only see blood. First mover status is critical in China and Starbucks has that.

Second, generally speaking an international coffee shop chain needs to build its brand equity in a Tier 1 city like Beijing or Shanghai. Rising rents and labor costs create serious challenges to operating profitable foodservice businesses in either place. The big chains make most of their money in Tier 2-4 cities with lower operating costs overall.  How many concept owners have that much cash to burn to get to the second level?

Third, being a second tier brand means you get the overflow from Starbucks and second-grade locations in general.  It is a tough road to travel.

What kind of coffee shop concepts can make money in China?  Those that differentiate themselves from Starbucks and Costa.  Upper scale hipster concepts like Intelligentsia and Blue Bottle from the USA, value concepts like Doutor from Japan, and Japanese style coffee shops like Komeda or Hoshino, could all do well.

In short, there is still plenty of blue ocean to navigate in the China coffee shop market that could result in scale and profits!



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