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The recent tie-up between Starbucks and Chinese e-commerce giant Alibaba to offer coffee delivery has caused quite a buzz in the industry.
For one thing, it’s the first time the US-based coffee chain has gone into the online food delivery business. For another, it highlights how Alibaba is accelerating efforts to form relationships with offline merchants and service providers.
The new delivery service, utilizing Alibaba’s one-stop shopping space Hema Fresh Market and its on-demand food delivery platform Ele.me, which has 3 million delivery riders, will connect to Starbuck’s existing outlet network.
It’s not yet clear how smooth the system will work, nor how Starbucks staffers will divide their time serving customers from different sales channels.
Trial operation on the new service, which will dispatch coffee orders from existing Starbucks outlets, will begin with 150 stores in Beijing and Shanghai next month, expanding eventually to more than 2,000 Starbucks outlets in 30 mainland cities by the end of this year.
Hema Fresh Market sites will also be altered to add coffee stalls that can make coffee to Starbucks’ specifications and serve as dispatch centers.
The new partnership may be part of Starbucks’ plans to buck up trade. In the second quarter, same-store sales at Starbucks China fell 2 percent. The Seattle-based company has announced plans to add 600 new outlet a year in the next five years, taking its domestic presence up to 230 cities.
Established coffee chains are facing competition from the many small coffee shops springing up everywhere in China. Such enterprises require relatively small startup capital.
Starbucks has denied that its Alibaba partnership was prompted by local competition, insisting that negotiation for the venture began a year ago, with many factors to iron out to ensure that consumers receive the same brew whether they are ordering in-house or online for takeaways.
In 2017, consumption of ready-made coffee drinks away from home in first- and second-tier cities dropped 8.5 percent, while growth in the packaged beverage sector was booming, according to research firm Kantar Worldpanel.
The trend was partly due to the ease of purchasing pre-packaged beverages in convenience stores and vending machines.
Packaged coffee drinks accounted for 32 percent of sales in the 12 months ended June 30, while sales of tea drinks rose 15 percent.
Chinese consumers spend about US$160 per capita annually on away-from-home snacks and non-alcoholic drinks, an earlier Kantar report said. Leisure afternoon teatime has become popular among urban residents as a way to hang out with friends.
Starbucks’ expansion plans come at a time when the market of coffee shops in first- and second-tier cities is becoming saturated. Growth potential rests in smaller cities. Tmall and Taobao data show that the highest growth in coffee-related spending occurred in third- and fourth-tier cities.
Adding a delivery service would allow Starbucks a stronger foothold in the highly competitive market.
“The new retail strategies offer established coffee chains and other merchants new opportunities,” said Alex Shutter, an Oliver Wyman partner based in Shanghai.
Thanks to the prevalence of smart devices and digital payment systems, consumers are already getting used to ordering products and services through online channels. They also expect prompt delivery of quality goods and services.
Starbucks and Alibaba will channel coffee delivery orders to the closest store with the capacity to make the drinks and complete delivery. Data collected on consumer pattern, both offline and online, will need to be shared and integrated, industry watchers said.
Shanghai resident Sharon Leng, who buys one Starbucks drink every day, said she isn’t sure the delivery service makes sense.
“It’s almost impossible to maintain the current service level given that extra work will be needed for the delivery service, and loyal Starbucks customers aren’t likely to increase spending just because of the delivery service.”
In cities like Shanghai, Starbucks outlets are so prolific that they can easily cater to commuters’ needs for a caffeine fix.
Starbucks calls the new “virtual stores” a new dimension for customers. That may be so, but it will have to contend with the fact that many online consumers care as much about price as brand.
Then, too, Starbucks is not alone in the coffee delivery realm. Local start-up chain Luckin is already vowing to offer deep discounts for delivery of its coffee and snacks. It is also encouraging users to share coupons through social media channels to bring in new customers.
Alibaba said it hopes the new delivery service will fill an online coffee order within 30 minutes and is implementing measures to ensure that it’s hot on arrival.
Hema Market itself is still a trial project in Alibaba’s new retail strategy. The tie-up with Starbucks is just another channel to test the new marketing strategy in a fast-changing environment of often fickle consumers.
“It’s always important to meet consumers’ expectations and create a consistent experience, both through physical and digital channels, and to stick to the core business when entering new areas or adding new services,” Oliver & Wyman’s Shutter noted.
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