As high-level trade relations between U.S. and China remain uncertain, American coffee leader Starbucks Corporation (SBUX) is moving aggressively to expand its digital and delivery capabilities in China alongside Alibaba Group Holding Ltd (BABA) .
Announced earlier this month, the Chinese Internet giant and the U.S. coffee retailer will "transform Starbucks China into a digital operation," Alibaba CEO Daniel Zhang said in the company's earnings this morning.
The partnership underscores how many U.S. companies view China as a significant market for future growth, despite high-level politics and trade war headlines in recent months.
In China, Starbucks controls 58.6% of the overall coffee market in China, accounting for $1.3 billion, in revenues for the coffee purveyor in the second quarter.
"As demonstrated by our partnership with Starbucks, we are working constructively with American brands to better serve Chinese consumers," said Joseph Tsai, co-founder and executive vice chairman of Alibaba, on a call on Thursday.
The cross-platform collaboration will include "digital stores in Alibaba consumer Apps, coffee delivery for online orders, and the loyalty program collaboration," the company said.
Starbucks' growth story in the country so traditionally tea-crazy that Chairman Mao elected to use it as toothpaste has been a remarkable one for Starbucks. In only 20 years, the Seattle-based chain has now opened 3,400 stores, with plans for up to 6,000, making it ideal for the scale that Alibaba is seeking to prove its platform at.
"The strategic partnership with Starbucks is proof of our New Retail model at scale and showcases how Alibaba can help our brand partners more deeply and innovatively engage with their customers in China," an Alibaba press release this morning explained.
Jefferies Financial Group Inc (JEF) equity analyst Andy Barish also saw the opportunity as a boon for the coffee company.
"Delivery is now a 'lifestyle' for Chinese consumers, so the absence of a [third party delivery] offering had a detrimental impact on sales," he wrote in a research note on August 2. "BABA sets SBUX up to capture this opportunity, and extend its quality-assured, premium retail experience beyond its four walls."
Good Synergies with Alibaba
As reported by Real Money's contributor Chris Versace, the transition to the "new retail" model is a hallmark of a "digital lifestyle" promoted by Alibaba.
He suggested that Alibaba has room to grow even to $250 per share based on this lifestyle.
On the other hand, while the program seems to be a "dream team" partnership on paper, the complexities of a Chinese-American partnership in today's climate is certainly precarious given ongoing trade tensions.
A collaboration with an upmarket foreign brand like Starbucks poses challenges should the Chinese economy continue to deteriorate and "look terrible", as US economic advisor Larry Kudlow puts it, and Chinese consumers no longer wish to purchase expensive frappuccinos.
It could also pose risk if the Chinese government decides to introduce measure to punish U.S. companies operating in China.
The partnership, which should help Starbucks hold off Chinese rivals, offers Alibaba a testing ground for its ele.me delivery project and will certainly be one to watch as both expand aggressively into digital delivery space.