How Starbucks Can Profit From Alibaba Alliance

In China, Starbucks Inc. (SBUX) is attempting to regain ground through a new delivery partnership with global e-commerce behemoth Alibaba Holdings (BABA). 

Starbucks is planning for China, the coffee chain's second-largest market after the U.S., to eventually become its biggest as its middle class balloons and incorporates beverage delivery into their everyday lives. Yet in its latest quarter, despite beating expectations on both top and bottom line numbers, the Seattle-based firm disappointed investors with lower-than-expected same-store sales in the world's most populous country. (See also: Starbucks: Losses to Speed Up on Craft Coffee Buzz.)

'New Retail' to Revitalize Traffic in Key Market

In attempts to turnaround a 2% decline in its key growth market, Starbucks announced on Thursday a "new retail" alliance with Chinese tech giant Alibaba in which the two companies will pilot delivery services next month with an Alibaba subsidiary,, and establish up to 600 "delivery kitchens" in Alibaba's Hema supermarkets. The food delivery service will serve 150 stores in Shanghai and Beijing and will broaden to 2,000 stories in 30 cities before the end of the calendar year. Starbucks will also integrate across Alibaba's platforms to offer virtual Starbucks stores and personalized experiences for Chinese customers, according to the firms. 

"This means that a customer that uses Alipay or Taobao or Tmall or Hema has an integrated Starbucks virtual store similar to the mobile app embedded right into that experience," stated Starbucks Chief Executive Officer Kevin Johnson. "That opens up 500 million or more active users of those apps that will have access to Starbucks."

Taking on Luckin

At a news briefing in Shanghai, Johnson called the deal "rocket fuel for our digital flywheel strategy in China." The alliance could also help fend off competition from Chinese startup Luckin Coffee, which quickly grew from two stores in January, to 800 branches in 13 cities currently, as noted by The New York Times. The mass-market alternative to Starbucks charges customers 20% less for a latte and offers heavy discounts, promotions, and 30-minute delivery. 

New retail, by which offline and online shopping experiences are blended, offers customers the ability to visit physical store locations but place orders online and research products through their smart devices. Starbucks, which plans to double its 3,400 stores in more than 140 cities across the Asian country by 2020, is using the deal as part of its new retail push, positioned to boost traffic as it expands from traditional brick-and-mortar retail. Johnson indicated that the combination of Starbucks' retail expertise and Alibaba's technology capabilities "will be an accelerator for our business, no doubt." (See also: Starbucks Vs. Dunkin': Business Models Compared.)

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.