Zhang Xinyuan, a Shanghai white-collar worker, is happy that a new Starbucks outlet has opened near her flat in the city’s Pudong district. “A cup of Starbucks espresso drink in the morning is an essential part of my daily life and the new outlet, within only five minutes’ walk from home, will save me a lot of time,” said the 35-year-old. “Starbucks has reasons to smile in this market since it has so many loyal customers like me.” Zhang and many young middle-class Chinese like her are fuelling a boom in popularity in coffee drinking in the traditional home of tea, with the likes of Starbucks and UK-based Costa Coffee among the beneficiaries. But analysts note that the big players will need to look over their shoulders as new entrants join the market, intensifying already cutthroat competition, although there is still plenty of room to expand into smaller cities. “The overall coffee market is still underdeveloped in tier-three to tier-five cities in China,” said Jason Yu, the general manager of market research firm Kantar Worldpanel Greater China. “But the established players are facing competition from new entrants … and popular milk tea shops catering to younger consumers.” Milk tea shops refers to numerous chains that sell various tea-based drinks that often have either milk mixed in or come with cheese as a topping. Their popularity has surged in the past two years in China, Hong Kong and elsewhere in Asia. According to a 2017 report by market intelligence consultancy Mintel, China’s coffee shop market is set to grow at a compound annual rate of 5.7 per cent in the next five years, reaching 79.4 billion yuan (US$11.6 billion) by 2022, up from 60.2 billion yuan last year, with booming markets in first- and second-tier cities the main drivers for coffee shop chains. Starbucks has been in China since 1999 and now has 3,400 stores in the country. Chief executive Kevin Johnson has repeatedly said that China would become the firm’s biggest market within a decade. Starbucks reported that same-store sales in mainland China fell 2 per cent in the April-June period from the previous quarter, which followed growth of 4 per cent and 6 per cent in the preceding two quarters. It said at the time a government crackdown on third-party delivery services was one reason for the slowing quarterly sales. The crackdown came as the government moved to suspend drivers who broke traffic laws or were involved in accidents, as part of a road safety campaign. Starbucks to launch virtual stores, coffee delivery service to combat sales slump in China To help it weather the rising competition, Starbucks formed a partnership in August with e-commerce giant Alibaba Group, which owns the South China Morning Post , to deliver coffee and open virtual stores in a market where digitalisation has redrawn the commercial landscape. It will begin the service in Beijing and Shanghai from September, using the 3 million registered riders of Ele.me, Alibaba’s food delivery platform. Initially, 150 Starbucks stores will offer delivery services and the number will be expanded to more than 2,000 across 30 cities by the end of 2018. Costa Coffee is eyeing 1,200 stores in China by 2022, a big increase from more than 400 at the end of 2017. It has joined hands with Alibaba’s cloud unit Aliyun to open two themed coffee houses in the eastern city of Hangzhou, the location of Alibaba’s headquarters. The shops offer among other things tailor-made services and products for software engineers, for example, free coffee for those who solve particular problems in their work, as well as a speciality drink known as Apsara Coffee, named after Apsara, Alibaba’s cloud platform. Meanwhile, fast-growing home-grown brand Luckin Coffee has 660 outlets in 13 Chinese cities, and last month raised US$200 million in a funding round from investors including Singapore’s sovereign fund GIC. The chain is basing its model on preparing coffee at small outlets for takeaway or delivery of orders placed through an app. As part of its brand-building efforts, it gives away lai see, or the traditional Chinese red envelopes containing cash, to those who invite friends to register on its mobile app. Analysts also said that besides technological innovation, to stay in the game coffee chains must ensure that their drinks look good and appeal visually to the young in an era of instant photographs shared on social media. “In fact, these marketing campaigns and innovative eye-catching offerings are aimed at making the coffee brands look more attractive, a trend that is worth exploring by coffee houses today,” said Summer Chen, a senior analyst at Mintel. She added that seasonal bonus offerings and new innovative products can help companies draw young consumers’ attention.