H&Q Gets A Perk From Starbucks

Target: 60 Starbucks Stores In China

Sale Price: Undisclosed

Seller: H&Q Asia Pacific

Buyer: Starbucks Corp.

Financial Advisor: None

Legal Counsel: Seller: Heller & Ehrman LLP

Seattle-based coffee-monger Starbucks Corp. is working on its China strategy, having recently agreed to acquire 60 Starbucks locations from buyout firm H&Q Asia Pacific. A source with knowledge of the transaction says the sale generated an ROI between 4x and 5x for H&Q, which opened China’s first-ever Starbucks store seven years ago.

The pioneering H&Q has a successful history of building Western brands in the East and then selling them back to their owner. Just a couple months ago, the firm agreed to sell its majority holdings in MTV Japan, which it held since 2001, back to Viacom Inc.’s MTV Networks division for an undisclosed price.

Meanwhile, the Starbucks sale essentially fell into the firm’s lap. “Starbucks had the right [of first refusal] to buy half of our shares when we decided to exit the franchise, and we were already discussing the sale with them when [Starbucks’ CEO] Howard Schultz realized the China could be key to Starbucks’ growth over the next 10 to 20 years. And with the 2008 Olympics coming up, they wanted to accelerate their expansion in the marketplace,” Dr. Ta-lin Hsu, founder and chairman of H&Q, tells Buyouts.

“They approached us for the entire 100%, and as the American saying goes, they made us an offer we couldn’t refuse,” Hsu says.

Indeed, Starbucks says that China will become its most important international market in the years to come, and the country is slated to capture the majority of its planned 20,000-store expansion in non-U.S. markets. Currently the coffee chain has fewer than 4,000 locations outside the U.S.

H&Q opened the first Starbucks store in China on Jan. 11, 1999 after obtaining an exclusive license to do so from the parent company, and eventually grew the franchise to include 61 total locations and approximately 900 employees. Hsu declined to comment on the franchise’s revenues or EBITDA.

For the most part H&Q’s Starbucks locations resemble the industry standard of ambiance. However, the firm did add a few neighborhood touches to give them some hometown flavor, such as selling locally-made classic Chinese foods.

“In the summer, we even began packaging Starbucks-branded moon cakes, which instantly became a best seller,” Hsu says. Moon cakes are hockey puck-shaped pastry’s that are typically stuffed with a red bean paste or lotus seed paste, and are the traditional food eaten on and around the Chinese Moon Festival, which every year falls on the fifteenth day of the eight lunar month—when the moon is at its fullest and brightest. Around that time it’s the custom to give moon cakes as gifts to teachers, parents, neighbors and lovers, Hsu says.

Additional success came as H&Q’s Starbucks stores almost instantly became a part of a local social scene. “This is about lifestyle,” Hsu says. “Starbucks became a third place besides home and the office to meet friends.”

In China, notes Hsu, 80% to 90% of the people stay in the store with their friends, versus the U.S., where 80% buy of the people use the stores as carryout coffee kiosks. “[Starbucks] was surprised when they learned that we have stores that are 400 to 500 square meters (approximately 1,300 to 1650 square feet) in size, but they were happy to learn that they get filled up,” Hsu says. —A.N.