What has happened?
Last December, Starbucks (SBUX) entered into a strategic alliance with WeChat parent Tencent (OTCPK:TCEHY)(OTCPK:TCTZF) to enable WeChat Pay in its China stores. This is despite Alipay being the dominant payment platform in the country. Alipay is a unit of Alibaba’s Ant Financial and is the mobile payment arm of Alibaba (BABA). According to Belinda Wong, CEO of Starbucks China, WeChat Pay accounted for 29% of all transactions in the first-quarter and it “elevated the Starbucks experience for both customers and partners through its convenience and fast transaction speed”.
In a sign that Starbucks is now open to working with Alibaba, the two companies announced yesterday that the 242 Starbucks stores in Malaysia will soon accept Alipay as a form of payment. The volume is not expected to be significant in the near-term as the local population does not use Alipay. The beneficiaries are actually tourists from China, whose usage of mobile payment modes is already an indispensable part of their daily life.
The market share of electronic payment services by transaction volume in Q1, 2017: (Source: Chinese SEO Shifu)
What is the significance of the deal?
Nevertheless, I believe Alibaba has been working behind the scene to make Alipay a more prevalent fixture in countries outside of China. For instance, Alibaba announced yesterday the designation of local start-up CCPay to facilitate the increase in the number of Alipay acceptance points in Singapore. The beauty of the deal with CCPay is that the companies do not need to specifically register for an Alipay account as CCPay would handle all the transactions performed via Alipay.
Eventually, the goal is for the payment platform to be made available not just to those with a China banking account but also Singapore bank customers as well. The aggressiveness of Alibaba should make the management of credit card companies like Visa (V) and Mastercard (MA) sit up. While the adoption of Apple Pay (AAPL) would still provide these credit card companies a slice of the pie, Alipay does not rely on them as intermediaries. Thus, the rise of Alipay would naturally deprive the other payment providers of those transactions that would go through Alipay. To ensure that Alipay will be the leading mobile payment platform in the region, Jack Ma has declared that Alibaba places Pakistan, the Philippines, Thailand, Vietnam and Cambodia on his group’s special attention list. With the other mobile payment platforms still missing in action in South East Asia and the Indian Subcontinent, Alipay will enjoy a clear early mover advantage.
The low-profile tie-up with Starbucks in Malaysia is a good prelude to test out the system and work out the kinks while the volume is small, before the full implementation of Alipay as a full-fledged payment mode in Malaysia. This could be the model to be adopted for other markets. In case you are wondering why the two companies have chosen Malaysia, of all countries in the world, to collaborate for the first time, look at which country Alibaba’s founder, Jack Ma, had praised effusively regarding the speed at which it implemented digital projects – Malaysia. Jack Ma has made several trips in the past two years to Malaysia meeting with top business and government leaders. In November last year, Malaysian Prime Minister Datuk Seri Najib Tun Razak appointed him as the country’s digital economy adviser, beating Indonesia to it.
“Honestly, we were shocked by Malaysia’s speed… We thought it was almost impossible to make that happen in three months. It was a huge project, but they made it on time. They set up a great, strong team to follow up on the project. They opened up a customs office, inspection offices and made available the land that was required.”
– Jack Ma on Malaysia becoming the first e-WTP (World Trade Platform) hub in the region
Detractors of the potential of Starbucks outside the U.S. typically point to the much lower GDP per capita of China as well as its virtually non-existent coffee culture. However, this argument fails to recognize the fact that the Starbucks stores in China are concentrated in areas where the affordability of the residents is much higher than the “average” Chinese. It is important to note that due to the large population which is spread across the huge country, the reliance of national averages can result in significant distortions from the actual situation of a particular locale.
Starbucks stores have been experiencing phenomenal growth in China and the company recently reached an agreement to buy out its local partner to maximize the full benefit of operating in the country. The spectacular growth enjoyed by Starbucks in the years of operating in the country coupled with its doubling-down action demonstrated the management’s recognition of a sizeable population who can appreciate its beverages and also afford them. For those that really could not afford Starbucks offerings or prefer not to pay for the premium coffee, they could still be Starbucks customers thanks to the “gifting” culture. In China, e-wallets do not stop at providing just payment services. They facilitate the culture of gifting. Companies can pay for credits to be gifted electronically to employees, suppliers, or customers. Friends can also send e-gifts of specific beverages which are already pre-paid. Hence, basing the potential of Starbucks on the number of people who can afford its beverages is ignoring the fact that those who can afford could buy cups not only for themselves but they could also pay for others to enjoy the drinks. Hence, worries about Starbucks facing a growth plateau even in China seem rather unfounded.
Besides collaborating on the e-wallet service, Alibaba could tap on Starbucks highly accessible outlets to serve as collection points for online orders. Starbucks would benefit from the incidental customer who might decide to take out a drink while he or she leaves with the goods. The company is slated to rely more heavily on international sales growth due to the stagnating US market. Thus, it should be open to fresh ideas on increasing sales. Alibaba’s consumer unit Taobao would save on the last mile delivery costs if its customers opt to pick up their online orders at a Starbuck store of their choice. The customers would benefit from having the option to pick up the items they had purchased during the day where they are working (many Starbucks outlets are located near offices and at the ground floors of office buildings) or engaged in other outdoor activities. Customers could also collect their orders while they pick up their cup of morning coffee at Starbucks. This is a triple-win scenario. Readers with ideas of your own, please feel free to voice them out in the comments field.
Note from author: Thank you for reading. My articles revolve around a subject or angle that I feel might have been overlooked. If you would like more of such articles and wish to be informed as soon as they are published, please click on the “Follow” button below the title near the top of this page and check the “Get email alerts.” If you have additional insights on the topic or contrasting views, please kindly share them in the comments section for further discussion.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BABA, SBUX over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.