Where Starbucks goes, the rest soon follow. Costa, the fast-growing UK coffee shop chain, is turning its sights on China.

Whitbread, the UK hospitality company and owner of the Costa brand, has unveiled a joint venture with Chinese partner Yueda Group to launch Costa coffee shops in Shanghai and eastern China.

The first Costa outlet is scheduled to open in early 2007 and the aim is to open over 300 stores throughout China in the next few years. That is a pretty aggressive expansion in anyone's book, as Costa currently has 500 stores, mostly in the UK.

This is Whitbread's first venture in China and while I suspect it could be difficult to export Whitbread's other brands -- such as its Beefeater chain of traditional pub restaurants -- coffee seems a safe bet.

Alan Parker, Whitbread's CEO, says:

China is a very attractive market making this a major deal for Costa. There is an established coffee culture and increasing interest in drinking coffee out of the home so there is consumer demand for the product."

Today, coffee drinking is mostly confined to a few developed coastal regions of China and consumed by less than 0.5% of the population.

While visitors to China are quick to spot the growing number of western-style coffee shops -- most famously, a Starbucks in Beijing's forbidden city -- coffee, if it is known at all, exists in one form for most Chinese: a jar of Nescafe. Nestle currently enjoys an estimated 85 to 90% share of China's instant coffee market.

While Nestle introduced coffee to China, Starbucks gets the credit for bringing "real" coffee to China's masses. As a new coffee culture emerges in China and more tea drinkers switch to beans, domestic and international players are queueing up to take advantage of the expected boom.

Starbucks has been in China since 1999 and has over 200 stores. But it has has to fight hard to protect its image and brand identity. In particular, Starbucks has been in a long-running dispute with Chinese coffee shops over the use of the Starbucks trademark.

Starbucks has registered all its major trademarks in China, including its Chinese name, xingbake. In 2003, it was dismayed to discover that a rival coffee shop had started operating in Qingdao using a Chinese name that includes the word xingbake.

In addition, the company used the English name "Qingdao Star Sbuck Coffee" on its napkins, menus and business cards, and its beans were packaged in bags identical to those used by Starbucks. For good measure, the Chinese company's logo had an uncanny resemblance to Starbucks'.

A Qingdao court recently ruled in Starbucks' favour and ordered the Chinese company to stop using Starbucks' trademarks and the confusing logo. However, the defendant has appealed and Starbucks' victory is currently only partial -- the shop has removed all references to Starbucks' English trademarks but continues to use the "xingbake" and "Star Sbuck" names.

The court decision has important ramifications for multinationals operating in China, according to Harris & Moure, an international law firm that operates the ChinaLawBlog.

Steve Dickson, an H&M lawyer living in Qingdao, says that the defendant was operating a business openly infringing on Starbucks' trademarks.

Dickson visited the store concerned, a traditional Chinese-style coffee shop located in a "somewhat seedy hotel". He says no-one would confuse it with the real thing yet the sloppy service, shabby decor and mixed-up marketing are nevertheless damaging to Starbucks' image and brand.

The good news we can take from the Starbucks case in Qingdao is that China's legal system has developed to the point where intellectual property rights can be successfully defended through legal action."

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