The 1971 founded company Starbucks has undergone an impressive expansion throughout the last years and as a result now is the leading coffee house retailer in the world. Due to several joint ventures, partners, and an enormous amount of directly operated stores, it is present in more than 34 countries and serves around 33 millions of customers per week.
1 Moreover, the company significantly increased its global publicity within subscribing to strategic alliances with various hotels, air carriers, schools, and stadiums. Nevertheless, Starbucks possesses an immense core business in the United States, which is based on its corporate roots in Seattle, as well as the huge market potential for coffee in this country. Consequently, the first 24 years Starbucks only operated in America, where it opened 677 stores, before expanding abroad for the first time in 1995. The strong relation to their home country becomes obvious, when considering the amount of coffeehouses: 7,302 out 10,241 stores are located in the United States and only 16% of revenue is generated in the international market.
2 However, these figures do not have to indicate that Starbucks is not a global company. Due to its standardized products throughout the entire world, its consistent shop design, and almost identical pricing strategy, Starbucks cannot only be considered as a global brand, but also as a global company. Additionally, the business has recently launched a roasting facility in the Netherlands to supply the European market with beans from coffee-growing regions of Central America, Africa, and Indonesia. This development again underlines the position as a global company. Elements of the marketing environment affecting the Starbucks business in China
China offers an immense market potential for Starbucks, since it constitutes one-fifth of the world population. But looking at the Chinese market in a more depth analysis, it reveals many difficulties for the American coffee company. One of the major problems is the low Chinese GDP, which in a population breakdown analysis proves that only 2% of the whole population – the so-called “Nouveau Riche” and “Yuppies” – are potential customers for Starbucks.
3 Consequently, they have a very low purchasing power and are very price sensitive shoppers, which in fact do not match with Starbucks’ upper level pricing strategy. Even though at first Western brands were perceived as prestige, Chinese nowadays tend to be very patriotic and often try to avoid these brands; only the two upper-class groups of the Chinese society are ready for foreign goods.
4 This is also a result of the improving Chinese economy and the therewith conjunct increasing national pride. In addition to that, China has a very strong link to its 5,000 year-old traditional culture and combines this with a close relation to its tea drinking customs. Concurrently, their consumption towards coffee is very low (0.1%), whereas tea is their most favorite beverage, which can be derived from a survey about the Chinese beverage market.
5 Not only this affects the Starbucks business in China, but also past mistakes regarding their treatment of the important Chinese culture. Hereby, particularly the issues in the Forbidden City – one of the Chinese icons – have led to a huge controversy throughout the society. Another significant problem demonstrates the enormous amount of product and brand piracy in China, which highly affects customer loyalty towards Starbucks, since the quality of the faked products is by far worse.
Recent problems and future challenges for Starbucks in China It would be naïve of Starbucks to assume that all problems in China are suddenly over, just by closing their dispute with Xingbake, a recently appeared Chinese imitator. Especially when considering the different copycats existing in the Chinese market, it is apparent that they will have to face future challenges in this context. However, a first message to combat these disputes has been sent.
In addition to that, new challenges regarding their controversies in the Forbidden City might appear, if Starbucks does not try to adapt to the Chinese culture by introducing a larger tea selection in their shops in order to restore customer loyalty and to gain more customers. This would also be very consistent with Starbucks’ guiding principles that state: “Embrace diversity as an essential component in the way we do business”.
6 Moreover, the American coffee company will have to face the Chinese’ increasing national pride to avoid Western brands, which makes it even harder for Starbucks to establish a strong and positive image in the long-term. Furthermore, their target customers and therewith their probable locations are limited to the major cities and the coastal urban areas. But within these areas, Starbucks has a good potential, since a growing number of young, trendy people are willing to spend more money on luxury goods, as the Starbucks products are in China.
In this context, tourists also capture an increasingly important position, since they are more and more traveling to China and hence are possible Starbucks clients as well. Additionally, the middle class starts to earn more money and thus also represents a potential future consumer. As a result of the growing amount of prospective customers and so copycats, it could be a challenge for the global company that the market suddenly is oversaturated, since coffee still remains anything but the Chinese’ favorite beverage. Consequently, it is Starbucks’ main challenge to not only effectively establish them, but also to integrate the coffee culture in China. Within this process Starbucks should also bear in mind that their image still is damaged and that they need to improve it in order to be successful in the long-term.
Recommendations for the future Starbucks expansion strategy in China Within deciding whether to open directly operated stores or not in the Chinese market, first of all a general expansion strategy should be clarified. Since China is one of the largest markets in the world, it provides enormous growth potential, particularly as the economy currently starts to improve. Even though Starbucks had to face some major issues in the past period and China is not known to be the coffee drinking nation, a further expansion for a global company such as Starbucks is unavoidable.
Consequently, in our opinion it is the best alternative for Starbucks to directly operate a couple of flagship stores in prestigious locations, in order to create further brand awareness, retain control over the Starbucks image, as well as to avoid crucial future mistakes. Nevertheless, Starbucks should continue its international strategy of licensing more coffee shops than directly operating them.
7 Hence, the majority of newly opened stores should further on be licensed to their local partners, since they are aware of the local customs, culture and regional knowledge. However, Starbucks should hereby increase its monitoring to avoid further crucial mistakes in the already touchy Chinese market. Though, the company’s expansion in this market should be gradually, in order to evade an oversaturation of the Chinese market and to sensitize the consumers with Starbucks and coffee in general.
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- Starbucks Corporation. (2005). Fiscal 2005 Annual Report. United States.
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- Starbucks Company Fact Sheet (2005). Starbucks Guiding Principles.
- Starbucks Corporation (2005). Store Data.