Starbucks in China
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Starbucks in China
Introduction
Company Background
Starbucks is an American corporation that serves the global coffee market. It was founded in Seattle, Washington in 1971. It is the largest coffeehouse in the largest coffeehouse around the globe, with more than 20,891 stores in 64 countries. United States is the largest with 13,279 stores followed by Canada with 1,324, and Japan with 989. However, this has recently changed, where China is expected to overtake Japan and Canada to become the second largest market for Starbucks (Horovitz, 2013). It started its expansion in 1984 when the owners purchased Peet. At this time, the sale for coffee was dropping although specialty one was increasing. By 1986, it has opened six more stores in Seattle. The owners later sold it to Howard Schultz who started expanding it to new markets such as Vancouver, British Columbia, Canada and Chicago. Today, it has expanded overseas to become the largest.
The company offers a wide variety of coffee products and other hot and cold beverages, as well as pastries and sandwiches amongst other snacks. It also started offering tea in 1999 after acquiring Tazo brand. It offers specialty coffee to its customers amongst other variations, with high quality standards. To ensure high-quality products, it starts with selecting the best coffee beans from the suppliers and helps farmers in producing quality coffee. This has been crucial for its business.
Target Market Background
The target market for this paper is China, which has recently overtaken Canada as the second largest Starbucks market. Chinese market presents a big opportunity for many overseas businesses because of its dense population (Tian & Dong, 2011). With a population of 1.3 billion people, it offers many companies an access to a big market that cannot be found in other countries. However, it is important to note that the country poses its own challenges and advantages as well. One of the issues to face in Chinese is that majority do not have brand royalty, which is an advantage to new businesses because the consumers will purchase it (Boone, 2012).
In contrast to the advantage posed by lack of brand royalty, Starbucks faced a rather complex challenge. China has a long culture of drinking tea that dates back to thousands of years. The people in this market associate to tea in a cultural way, which meant that entering this market would require considering this culture. This required understanding the customer and their buying behavior. Starbucks conducted extensive research concerning the buying behavior of the Chinese before entering. In the market research, it realized that majority of the Chinese viewed tea as a drink that brings people together for socializing. In addition, it realized that the market was growing due to the developments (DeVault, 2014). An increased number of middle class was emerging, one that could favor western coffee experience as an activity that bring friends together. It provided a market with new consumers due to rising income levels, who are eager to try new products and brands. This provided the company with an opportunity to exploit.
Another finding about the Chinese market is that 86% favored their domestic brands while only 53% cited trust in the foreign brands (nzcta.co.nz, 2014). This meant that Starbucks had to come up with a strategy that would gain their trust. This meant that foreign companies had to customize their products to meet the market demands of China. Some of the strategies that can be important to gaining the trust of consumers are at the point of sale considering the influence of salespeople on customer purchasing behavior (nzcta.co.nz, 2014). Therefore, entering this market for the first time requires having a good marketing mix to win the trust of its local consumers.
Marketing Mix
In order to in the trust of the Chinese consumers, Starbucks required a strong marketing mix that would address all their demands. It is important to note that the company was facing a challenging issue due to the long established culture of drinking tea as aforementioned. In addition, the research indicated that it required several strategies to tackle different challenges. The first one was preference for domestic goods, meaning Starbucks had to tailor its products to their preference. The second was point of sale, meaning that the place or location of the store had to be visible in order to attract the consumers (Tian & Dong, 2011). The other issue was the growing middle class due to the increasing income levels. This meant that Starbucks needed to price its products according the current income levels of the people. Additionally, it required considering the price of tea, which is the mainstream hot beverage before setting theirs. In addition, the changing views and culture of Chinese required addressing promotional activities in a way that did not insult their culture of drinking tea. Therefore, having a strong marketing mix was the main key to entering this market.
Product
Starbucks realized that being a global brand doe not necessarily mean having a global product. Rather than brining the products it serves from other markets, it tailored the products to Chinese tastes by offering a highly localized variety of beverages. It conducted an extensive research concerning the tastes of the consumers to come up with a unique blend of western and eastern product. Additionally, it allows every store the flexibility of choosing from a variety of beverages that fits the area. To tailor it to the local tastes, Starbucks used local ingredients that included green tea in its products. This strategy was aimed at turning the potential obstacles posed by the tea-drinking culture into favor. This worked well and brought many consumers to its stores.
For sustainability purposes, Starbucks entered into partnership with local people to ensure its local products including coffee is promoted. One example is the coffee planting in the Yunnan province where Starbucks is helping the farmers. Yunnan coffee is known as one of the best in Asia, but for a long time has not been known to the world. Starbucks not only seeks to promote coffee in China, but also bring the Chinese grown coffee to the world. Starbucks will help in growing, operating a processing facility and increasing crop yield. In addition to this strategy, it has also established greener ways of packaging its products. One of the strategies used here is recycling the cups used to reduce pollution.
Promotion
When Starbucks entered the Chinese market, it realized that starting with heavy advertisements concerning coffee would be unwelcome considering its culture of drinking tea. This would be regarded as a threat to the Chinese culture. Instead, the company started by establishing its presence in high traffic and visibility areas, where stores would be easily noted. With time passing, Starbucks rolled out some advertisements in the local television shows, it created a 25-episode soap opera program that was shown in segments of two minutes. It also recognized that Chinese trust their celebrities. It used endorsements from some of the famous Chinese celebrities. One of them was the basketball player, Yao Ming (nzcta.co.nz, 2014).
Another strategy that Starbucks has used to gain market share in the Chinese market is adapting to the local demands and taste. The company did not seek to push new products to its new market as most companies do. Rather, it sought to blend in the local products with the western ones. This has achieved success where many foreign companies have failed.
Price
Starbucks is well known for its premium branded coffee. It charges highly not only for its high-quality coffee, but also for the experience. Although it says, its coffee is not expensive but classified as a premium brand. Normally, a cup of coffee would cost 50 cents in regular coffee shops. However, Starbucks sells its coffee at $1.75 in the United States market, which customers are willing to buy. Recently, Starbucks has faced criticism over its highly priced coffee compared to other countries. In a new article, it was cited that the price of coffee is a third higher than United States, which it said contributed to the higher profit margin. Starbucks was able to achieve this price because of the faith in foreign brands by the locals. Considering it is under scrutiny, it should price its products using value creation strategy (Rein, 2012).
Place
Upon entering the Chinese market, Starbucks knew it needed to establish stores in high-visibility areas. In addition, it sought high-traffic place, where it stood to gain more customers. This was very effective in helping the company to establish its presence. In addition, from the market research conducted, it was clear that its products were mostly favored by the younger generation. To this regard, Starbucks opened stores in urban areas where majority of the people are young. In addition, its stores are well designed to allow the people to enjoy the services (Spear, 2009). It offered comfortable environments that included air conditioners, which were rare in many restaurants. Such environment was favored by executives who met to discuss issues.
Competitor $ SWOT Analysis
Competitor Analysis
Starbucks has faced stiff competition from the local shops. However, the main competitor for Starbucks is Nestle. Nestle is currently planning expansion in China because of the expected growth of consumers. It is seeking to battle with Starbucks on premium coffee. The rising middle class provides a lucrative market for any company with a strong global brand. Currently, Nestle has been experiencing growth as well and is looking forward to opening a Nescafe coffee Center in this market (Young, 2013). This center aims at providing farmers with training on better growing techniques while at the same time promoting it to more consumers (Ferrell & Hartline, 2014).
Nestle has gone ahead to sign a memorandum of understanding with the local government in the Yunnan province, where coffee is grown in china. It has agreed to invest in a Nestle Center that shall set up a farming institute, as well as a consumer experience center (O’Brien, 2013). This poses a great threat to Starbucks that is seeking to increase its dominance in the same area in order to promote the local products. Whoever controls this area has a good chance of winning consumers considering Chinese prefer their domestic products to foreign ones (Nestle.com, 2013). In addition, Nestle has been in China longer than Starbucks especially in this coffee growing region. Therefore, most of the farmers associate with it more than they do with Starbucks.
On the other hand, Starbucks has gained its competitive advantage in China by offering consumers products tailored to their local tastes. Instead of providing coffee only, it included Chinese ingredients in its product range, which has attracted more consumers. Currently, it has surpassed Nestle in terms of stores.
SWOT Analysis
| SWOT Analysis for Starbucks | ||
| Positive | Negative | |
| Internal | Strengths Strong financial record Number one brand in the world Largest coffee house chain store globally Starbucks experience | Weaknesses High prices of coffee beans Pricing of its products Negative image |
| External | Opportunities Extended supply range Fast growing market in china Increased product range Expansion of retail store | Threats Rising prices in coffee beans as well as dairy products Increasing competition Supply disruption |
The first strength of Starbucks is the financial status and the rising profitability. In addition, it has been able to outdo its closest competitor with a return on investment on 224.54%. It is the number one brand in the world, which gives it a competitive edge over other competitors. Its brand is associated with high-quality coffee and customer service. The Starbucks experience is yet another strength, which allows the company to offer products at premium prices. Additionally, it is offering a wide range of products, tailored to local taste. This has increased its customer base (Kluyver, 2010).
Starbucks has a few weaknesses in China especially after the recent criticism over its prices. Currently, price of coffee beans determines its profitability. Coffee bean prices are in the category of commodities, meaning it cannot be controlled by Starbucks. The other weakness is the high prices for its products that have come under attack fro the Chinese media. It needs to tailor its prices according to the market income levels. Finally, this attack has left a negative image about the brand, which will be hard to eliminate (Ungson & Wong, 2008).
In this market, Starbucks has a big opportunity to grow due to the growing market. In addition, the country’s development means an increase in the middle class, providing more opportunity for growth. Additionally, it has a chance to increase its market share by offering more variety in its products. It also has a chance to expand supplier network considering the market is still new and vibrant. Finally, it has a chance to expand by increasing coffeehouses in the market because it is still young.
Threats for Starbucks come from the rising coffee prices, which it has no control over. This has the ability to reduce its profitability within a short time. The other one is competition for the new growing market from Nestle and other small businesses. Finally, it faces disruptions in its supply chain due to political, economic and weather conditions that could affect coffee production.
Conclusion
It
is clear that Starbucks used the right strategies to enter the Chinese market. The
major strategy that increased its trust was tailoring the products to local
taste and demands. This made it clear it was not a threat to the Chinese
culture of drinking tea. The company went ahead to open stores in high
visibility and traffic areas. Instead of using heavy advertisement, it used
word of mouth to customers who came in. this prevented the company from
threatening the tea culture. In addition, it has collaborated with local
consumers and suppliers, as well as farmers to offer the best products (Pride,
Hughes & Kapoor, 2013). The only failure has come from high pricing.
I recommend that Starbucks should lower its price according to the market
income levels. It needs to create more value if it has to charge higher than it
does on other markets.
References
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Nestle.com. (2013). Nestle to Build Nescafe Coffee Centre in China. Retrieved from http://www.nestle.com/Media/NewsAndFeatures/puer-coffee-institute
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