Italy’s Lavazza Espresso Brand Takes On Starbucks in China

(Bloomberg Businessweek) -- For millenniums the Chinese have turned to tea as their beverage of choice, typically jasmine or green varietals sipped from small porcelain cups. Then in 1999, Starbucks Corp. opened a Beijing beachhead that spawned thousands of other outlets across the country over the next two decades and got locals hooked on U.S.-style coffee concoctions, from nitro cold brew to pumpkin spice latte.

Now one of the biggest names in Italian coffee culture says it wants to serve up the real thing. Lavazza Group has big ambitions for its Chinese foray. By 2025 the Italian family-owned company wants to have 1,000 outlets in China. Lavazza opened a flagship outpost in Shanghai last year and has since added more coffee shops across the country. With design features including wall murals, traditional mocha machines, and white marble trimmings, the Shanghai store evokes an air of Italian dolce vita that the company hopes will resonate with Chinese consumers eager to embrace European luxury and style. “Lavazza has the opportunity to be perceived as a quality European brand, with an espresso heritage appealing to the most sophisticated consumers,” says Jeffrey Young, chief executive officer and founder of Allegra Group Ltd., a strategic advisory firm.

Carving out a slice of the Chinese market won’t be easy for Lavazza, despite its more than a century of experience in coffee culture. It took Starbucks over a dozen years to open 1,000 coffee shops in the country, and now the company is a dominant force with more than 5,000 outlets. Besides, Starbucks has decades of experience perfecting its network around the globe. Lavazza, by contrast, is principally known as a seller of high-quality beans rather than an established retailer, with only a shop in London and one in Milan besides the Chinese stores.

But Lavazza has a potential ace up its sleeve. A year ago the Turin-based company formed a joint venture with Yum China Holdings Inc., a local operator with exclusive rights in mainland China to popular restaurant brands including KFC and Pizza Hut. Lavazza will benefit from access to Yum’s supply chain and logistics infrastructure, as well as its knowledge of the local market. Yum owns 65% of the partnership, and Lavazza holds the rest. The partners are injecting $200 million into the venture to fund growth.

“The Chinese market represents a huge opportunity,” says Lavazza CEO Antonio Baravalle. “Yum China is a world-class player in the food business. We are a 126-year-old Italian company offering know-how, original coffee recipes, a well-known brand, and a mix of fashion and glam that Chinese people appreciate.”

Already, the Lavazza locomotive is picking up speed in China, with more than 20 cafes that have cropped up across Shanghai, Hangzhou, Beijing, and Guangzhou. “Lavazza would have really struggled without a strong partner in China,” says Mark Tanner, managing director of Shanghai-based marketing and branding firm China Skinny. “Starbucks has an unusually large market share, which leaves the other competitors to fight for the scraps.”

Most industry observers expect China to become a predominantly coffee-drinking nation over the next five years, with the market growing at a compound annual rate of more than 10% through 2026, according to Mordor Intelligence market research. Mordor’s forecast shows the U.S. coffee market expanding at about half that rate from 2020 to 2025.

Sales at China’s specialist coffee and tea shops surged to $7.7 billion in 2020, up from $551 million in 2010, according to Euromonitor International. The country is now home to more than 21,000 coffee outlets, a 2020 report from Allegra showed.

Starbucks has been growing steadily in the country since 1999. The Seattle-based company can take credit for largely introducing the Chinese to specialty java drinks, especially consumers in the so-called Tier 1 cities of Beijing, Shanghai, Guangzhou, and Shenzhen.

Starbucks has a goal for more than 6,000 outlets by the end of fiscal 2022. There are over 15,000 Starbucks cafes in the U.S. Despite more competition and slower sales over the past 19 months because of Covid, the company is continuing to invest in China and is bullish on the market long term, CEO Kevin Johnson said in July.

For Lavazza, a company founded in 1895 and owned by the same family for four generations, having an authentic heritage is a unique selling point. “This is the perfect marriage,” Baravalle says of Yum. He sees the Yum partnership going beyond coffee shops, with the venture becoming the distributor in China for Lavazza products including coffee capsules in both the wholesale and retail segments. “It’s a work in progress,” he says.

Another advantage of the Yum alliance is that it might shield Lavazza from a creeping nationalism that’s accelerated a shift in China toward domestic businesses. Foreign giants such as Nike Inc. and Adidas AG have faced pressure, with shoppers boycotting them for taking a stand against the treatment of Muslim Uyghurs in the Xinjiang region.

Baravalle says the China cafes will offer slightly different blends and food items to appeal to local tastes, alongside traditional Italian dishes like lasagna served in a decor featuring images of Italian movies and landmarks.

Still, such flourishes may not be enough to entice local consumers who’ve become accustomed to Starbucks, says Jason Yu, managing director of research firm Kantar Worldpanel Greater China. “Pure ‘Italian origin’ may not be sufficient to win young consumers who have more confidence in local culture and lifestyle,” Yu says. —Flavia Rotondi and Daniela Wei, with Leslie Patton
 
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