CONSUMER: Starbucks, Tingyi Heat Up Bottled Beverage Market
Bottom line: Starbucks’ new tie-up with mass-market food maker Tingyi looks like a smart partnership that could help the pair quickly develop China’s largely untapped market for premium bottled beverages.
Following its phenomenal success in China’s retail dining market, US coffee giant Starbucks (Nasdaq: SBUX) is taking aim at bottled beverages in a new tie-up with one of the nation’s leading food product makers. The pairing is a big odd on the surface, bringing together the premium-minded Starbucks with Tingyi (HKEx: 322), a Taiwanese company whose main Master Kong brand is synonymous with tasty but decidedly low-end instant noodles.
But then again, nobody ever dreamed that Starbucks could overcome the huge odds against it by not only convincing tea-minded Chinese to drink coffee, but also getting them pay handsomely for the privilege. Accordingly, I would give the company a fairly strong chance for working similar magic in the highly competitive bottled beverage space, which would provide a huge new source of revenue from its China business.
The whole concept of premium bottled drinks is still alien to most Chinese, in a market still dominated by names like Coca Cola (NYSE: KO), Pepsi (NYSE: PEP) and a host of local players including Tingyi and juice maker Huiyuan (HKEx: 1886). All of those companies sell their products in a very narrow price band in the 3-8 yuan range, or about $0.50 to $1.30. Presumably these new Starbucks coffee products would sell for much more than that, probably above the psychologically important 10 yuan level.
All that said, let’s step back and review the latest deal that will give Starbucks access to Tingyi’s vast manufacturing, marketing and sales networks throughout China. (company announcement; English article) According to Starbucks’ announcement, it will provide its own expertise on making coffee products to Tingyi, which will manufacture the actual coffee-based drinks and distribute them through a vast national network that reaches into virtually ever corner of China. Starbucks already produces its own bottled coffee products in China, though their distribution is highly limited.
One newspaper headline pokes fun at the new tie-up, asking “Would You Want To Purchase a Made-In-China Frappuccino?” in a reference to the lowbrow image of anything produced domestically. (Chinese article) Obviously we’ll have to wait and see what the answer is to that question, though I’ll give my own assessment shortly.
I should also add that this new tie-up appears just slightly unusual, since Tingyi announced another partnership 3 years ago with Pepsi, which technically is a competitor to Starbucks in the bottled beverage space. (previous post) This new partnership looks more aimed at the higher end of the market than the mainstream audience targeted by Pepsi, though that earlier partnership could still produce some conflicts for this new Tingyi-Starbucks tie-up.
All that said, quickly discuss the chances for success for this new tie-up. Investors were generally impressed, with Tingyi and Starbucks shares both rising 2 percent in Hong Kong and New York, respectively.
I would tend to also be enthusiastic, though it’s important to note that bottled drinks and restaurant beverages usually target 2 different markets. But in the case of China, the lines are somewhat blurred in this instance since Starbucks has become a lifestyle brand rather than just a restaurant operator. Thus status-conscious Chinese consumers are often just as eager to be seen walking down the street holding a Starbucks cup as they are to drink what’s actually inside the cup.
Starbucks’ successful creation of such a premium image has allowed it to open 1,500 stores in 90 Chinese cities, many of which are often packed despite their high prices. That premium image hasn’t really translated yet to Starbucks’ bottled drinks in China yet, though the company hasn’t really made a major marketing push in that direction. When it makes such a move under this Tingyi partnership, it could easily transfer the high-end image associated with its coffee shop brand to its bottled beverages, providing another big growth opportunity.
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