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Starbucks a China Star

Indeed, customer habits in China pose some potential challenges.

At Starbucks' U.S. stores, a big proportion of revenue is from the more profitable takeout business, but customers in China tend to prefer drinking and eating in-store, says Shaun Rein, managing director of Shangai-based China Market Research Group. "They might sit for four or five hours and milk one coffee."

The usage pattern is something Schultz acknowledged on the company's fourth-quarter 2005 earnings call last November: "In the afternoon and evening we have been very surprised, almost stunned, to see how the Chinese customer is using Starbucks stores as an extension of their home and office," he said. "In many ways it's because the Starbucks stores are bigger than where people live. The commuting distances are very long."

Schultz cast this development as favorable to Starbucks, adding: "Because of this, the Chinese people are coming to Starbucks in waves that we did not anticipate" compared with earlier overseas markets such as the U.K. and Japan.

Still, competition is on the rise in China, with U.S. chain The Coffee Bean & Tea Leaf, Hong Kong's Pacific Coffee and the Philippines' Figaro coffee stores all having entered the mainland market.

Rein believes Starbucks could be handicapped by its relatively small selection of food offerings, because many Chinese are still getting used to the taste of coffee, and some of the newer chains, such as The Coffee Bean, offer more options beyond coffee drinks.
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