Starbucks embarks on the road of "espresso" in China

Starbucks has seen explosive growth in Asia "driven by caffeine". Starbucks plans to expand its 500 stores in China to at least 1500 in the next three years, and the report predicts that its business in China will become the second-largest market outside the US by 2014, according to an announcement from the company. Currently, Starbucks has stores in 48 cities in China.

However, the results of the company's expansion strategy have been mixed. Despite a strong rebound in mediocre sales in the US, the company continues to face resistance in Europe-"volatile local tastes" and sluggish economic conditions have put heavy pressure on operating results, according to a recent article in the New York Times. The article also points out that Starbucks is not yet profitable in France. "even in areas where Europe has made money, the company's sales and profit growth lags far behind that of the United States and Asia."

Given this uneven operating record and the continuing uncertainty of global economic development, how can Starbucks succeed in China?

"it turns out that there is a segment of Chinese consumers willing to buy top coffee (premium coffee) (also known as' premium coffee 'and' premium coffee'), as exemplified by the success of Starbucks Coffee in big Chinese cities." Shen Qiaowei, a professor of marketing at Wharton Business School, said. In recent years, the number of coffee shops for high-income white-collar workers in China, both national and local chains, as well as independent stores, has grown dramatically. This is another evidence of people's demand for high-quality top coffee. In addition, this potential demand will grow in the future. "

The assumption that Chinese consumers prefer tea to coffee "may not be accurate for a generation of young people who grew up eating western foods such as McDonalds and KFC and drinking western drinks such as Pepsi in China," Mr Shen said.

At the same time, "Starbucks also needs to be cautious about its expansion plans," Shen said. Tripling the number of stores in China in three or four years means that Starbucks will not only increase its stores in first-and second-tier cities, but also expand to third-tier or smaller cities. In the case of big cities, when the expansion rate exceeds the growth rate of the market "cake", the hidden worry of rapid expansion lies in the cannibalism of the same kind of chain stores. For new markets-third-tier and smaller cities-the worry is whether the price of top coffee will work in areas with lower levels of westernization and economic development. On the other hand, aggressive expansion plans can also repel some competitors and strengthen Starbucks' position in the Chinese market. "

There are great differences between cities.

Lawrence Herbinac (Lawrence Hrebiniak), a management professor at Wharton, is enthusiastic about the expansion plan, but he also offers several warnings. "China seems like an ideal place for Starbucks. As tea drinkers start to choose this new lifestyle of caffeine, coffee sales will grow significantly-annual income growth of 38 per cent and high profit margins of 35 per cent, compared with 22 per cent in the United States. " He also said that when the company raised prices in China last year, "demand has risen, which is a feature of luxury goods." Chinese consumers seem to like to socialize at the fashionable Starbucks, much like the craze in the United States. In addition, the total coffee sales forecast shows that coffee sales are expected to grow by more than 50% by 2015. "

So is there nothing to worry about? "maybe." He says that although the expected growth rate is high-up to 200 per cent in three years-Chinese cities are very different. "small cities with lower incomes may not react as strongly to coffee as consumers in big cities. Lower levels of economic growth may have a greater impact on small markets than on large ones. As senior decision makers, attention must be tilted in the direction of this rapid growth. "

He suggested that a "slower but steady growth strategy" might apply. For example, companies should avoid excessive expansion, such as the pace of opening stores, marketing programs, management controls, and so on. "in the context of rapid expansion, even the best management team will be overwhelmed. Of course, the situation in China looks good, and there is no doubt that expansion and growth strategies should be implemented in this market. " But he also said, "the pace of action is slower, and choosing a less aggressive growth plan to avoid problems caused by overly large and complex reforms may lead to greater success."

On this issue, John Zhang, a marketing professor at Wharton, believes that Starbucks may not be moving fast enough. "the fact is that if the economic growth rate reaches 3%, the United States will have a good year, and if China's economic growth rate is only 8%, then it will be a bad year for it. But given the size of the Chinese market and the expected high growth rate of 7% to 8% over the next decade, investors may wonder why companies don't target faster-growing markets. For example, KFC has opened more than 3000 restaurants in 650 cities in China, and one new restaurant is added every day. By contrast, Starbucks is far from running its growth engine. "

"there is no doubt that this American brand has a strong appeal." "more importantly, for some people, consuming a cup of this bitter and expensive foreign liquid is a sign of being knowledgeable and fashionable," Zhang said. " Indeed, given the popularity of the brand in China, "Starbucks should certainly enjoy the fruits of the expansion of the middle class and the rapid urbanization in the coming years." The risk they face is that they are too slow to open stores, thus missing out on rare and important opportunities. "

Three cups a year

John John Culver, president of Starbucks China and Asia Pacific, announced Starbucks Coffee's expansion plan while attending the Boao Forum in Hainan on April 1 this year. "although we have an ambitious plan to accelerate growth, we will ensure that the overall brand image is enhanced; we will present the best quality espresso, the best products related to local tastes and store design innovation, and at the same time, we will also improve our special relationships with consumers and our communities." Culver talked about.

Starbucks entered the Chinese market in 1999 when it opened its first store at the China International Trade Center (Beijing World Trade Centre) in Beijing. "over the past 13 years, Starbucks Coffee has been successful in maintaining its leading position in the industry because we have kept our promise to ensure that every consumer will enjoy the best coffee every time they visit the store or enjoy the product." Culver said.

Although Starbucks has not disclosed store sales in China, sales in China and the Asia-Pacific region rose 38% to 1.05 billion yuan ($166.9 million) in the fourth quarter, while operating profit rose 26% to 365 million yuan ($57.8 million), according to a report in the Wall Street Journal. The article also points out that although the company recently raised the price of coffee in China-"on a basis that is already more expensive than coffee sold in the United States"-the move did not stop Chinese coffee lovers from flocking to Starbucks stores.

The article also reported that coffee sales in China in 2011 were 6.25 billion yuan ($992 million), up 20% from a year earlier and 92% since 2006, according to market research firm Euromonitor International. Chinese consumers "drink an average of three cups of coffee a year, well below the global average of 240 cups per capita," the report said. "

Under Culver's leadership, Starbucks has continued to expand in the Asia-Pacific region, including Japan, South Korea, Hong Kong, Thailand, Malaysia, Singapore, Indonesia, the Philippines, Australia and New Zealand. The company also plans to move into India and Vietnam later this year.

When talking about the competition Starbucks faces in China, Shen Qiaowei said that McDonald's is also one of them. "however, it may not be the main competitor yet, because McDonald's coffee is much cheaper and attracts different consumer groups." At present, the main competition is similar well-known brand coffee chains from Taiwan and Japan. Many independent local coffee shops have sprung up in big cities. Usually, they all have a very unique style and wonderful atmosphere, attracting the same group of target consumers as Starbucks. Competition from local cafes is intensifying. "

(source: Wharton knowledge online)

(responsible Editor: Leo)