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Starbucks to Open China Coffee Farm, Securing Global Supply


By Laurie Burkitt
The Wall Street Journal

NOVEMBER 12, 2010

KUNMING, China—Starbucks Corp. is developing its own coffee farm in China to secure supply amid a booming population of coffee drinkers and a global battle for quality coffee beans.

The Seattle-based coffee chain said Friday it plans to hire coffee growers in China's southwest Yunnan province who will plant Arabica seeds in the first quarter of next year and harvest yields by 2014. A processing facility and a coffee development research center are also in the pipeline, said Starbucks Chief Executive Howard Schultz.

"Our investment in this coffee growing region demonstrates our ongoing commitment to build China into our second home market outside of the U.S.," Mr. Schultz said.

The push comes as China's demand for coffee is skyrocketing, as is the global price of coffee beans. Coffee sales for the industry climbed 9% last year to 4.6 billion yuan, or roughly $700 million, according to research company Euromonitor International. Starbucks currently operates 400 stores on the mainland and aims to open a thousand more in the coming years. China is poised to become Starbucks' second largest market behind the U.S., overtaking Canada, Japan and the U.K,.

Starbucks' revenue this year jumped to $10.7 billion, up 9.5% from 2009. International store sales increased 6%. The company declined to provide specific information on its China growth.

Mr. Schultz said he hopes the quality and quantity of the Yunnan-grown coffee will be high enough to sell as a single-origin offering in China, as well as in shops around the world.

China's Yunnan provincial government also plans to invest 3 billion yuan to increase coffee production to 200,000 tons from 38,000 tons over the next decade.

Global coffee bean prices jumped 50% this year, reaching a 13-year high in June, due to bad weather and failing crops in Columbia and Central America. To absorb the higher costs, Starbucks in September raised the prices of some hard-to-make and larger-sized drinks, though in the U.S. only. Prices in China, which average $5 for a java chip frappuccino, didn't change.

Starbucks is in its second year of recovery after a successful sweep of cost reform, having cut $600 million from its operating structure. U.S. consumers are starting to regain their desires for an afternoon latte, but with many still clenching tight to their wallets, Starbucks is looking for new ways to grow. Some analysts say its recent decision to discontinue a distribution contract with Kraft Foods Inc. signals it will likely launch new products, like a single serve machine, similar to Nestle SA's Nespresso.

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