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Starbucks in the Chinese Market

Barriers and Obstacles to Growing Globablly
by

Katie Lee

on 4 May 2015

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Transcript of Starbucks in the Chinese Market

Destination
Cultural Differences
Products
Reflection
Competitors
Challenges
With my own experiences of attending to many western cafes in Korea (which are ideally similar to Chinese cafes), here are my own insights on Starbucks in China. As a foreigner, I very much enjoyed the classic western menu like the sandwiches, paninis and cappuccinos. However, my family from Korea said they preferred the smoothies and juices. Although the majority of western menus consist of their traditional foods and drinks, they weren't as popular in Korea. Therefore, I believe Starbucks should be even more careful with their menu. Also, by looking at China's most sold drink, the strawberry cheesecake frappuccino, presentation also seemed to be key. In addition, by looking at Nestle's instant coffee domination in the coffee market shows that instant coffee could be the way to go. Starbucks should be encouraged to have their own instant coffee as well to attract more consumers. On a final note, I believe in the success of Starbucks when it comes to growing globally. Their achievements in China reflects on their potential to do well in other countries.
To blend in with China, Starbucks remodeled their interior, menu, and operations to satisfy Chinese consumers and their culture.

Starbucks in China are much larger, to keep more tables and arm chairs where customers are encouraged to stay and socialize. Coffee shops in China are a destination where people sit back and chat with friends, rather than Starbucks stores in the U.S., where they're hectic and rowdy. Chinese consumers seek out Starbucks to enjoy tranquility. It's much more of a gathering place for social occasions, and a lifestyle.
One of the best-selling items in Starbucks China right now is a Strawberry Cheesecake Frappuccino, which is topped with a cream cheese whipped cream, graham cracker crumbles, and strawberry syrup. The Frappuccino set instant records for the top-selling limited-time Frappuccino
ever. I believe it's success came from its presentation.

On that note, Chinese consumers claim that
they do not like the taste of caffeine because it
resembles bitter medicine. So brewed coffee or any
drinks with a high caffeine content seemed to be
the least popular of the drinks served in China.
Starbucks' chief rival would be Nestlé, the world’s largest food producer. Nestlé’s new emphasis on Yunnan as a major coffee production center is pushing Starbucks, which established a Farmers Support Center in Yunnan, toward direct competition. Instant coffee still reigns supreme in the country, comprising around 85% of all coffee consumption, and Neslte controls 75% of the instant coffee market in China. Nestlé has long dominated China’s instant coffee market.

Nestlé’s coffee products are widely available in Chinese grocery stores. Starbucks is currently considering the prospect of selling ground coffee and bottled drinks in Chinese grocery stores.
Some challenges that Starbucks had faced when entering China was the competition they had to face, cultural differences and the cost of their products.

The success in China attracted the attention of many businesses. Competition is fierce in between the brands controlled by foreign corporations and those controlled by Chinese businesses. In addition, health and safety concerns drive consumers toward local names that they know and trust.

Barriers and Obstacles to Growing Globally
Starbucks in the Chinese Market
Starbucks wanted to expand internationally, so they decided to expand in China. China was an appealing destination for the company to enter because it already presented an attractive market opportunity for multinational companies. Also, with more than a 1.2 billion population, the size of China's market is more than three times larger than the U.S market. Therefore, Starbucks was able to make a large profit due to a mass amount of consumers.
Sources
http://www.forbes.com/sites/helenwang/2012/08/10/five-things-starbucks-did-to-get-china-right/
http://www.123helpme.com/starbucks-expansion-in-china-view.asp?id=159509
http://www.nzcta.co.nz/chinanow-general/1160/marketing-branding-in-china-the-challenge-of-selling-starbucks-coffee-in-a-tea-drinking-nation-and-other-lessons/
http://discoverwith.sauder.ubc.ca/en/global-perspectives/why-culture-matters
http://www.usatoday.com/story/money/business/2013/09/16/starbucks-china-flagship-stores/2820885/
http://www.businessinsider.com/how-starbucks-is-different-in-china-2014-8
http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR306.htm
http://www.theatlantic.com/china/archive/2013/09/why-is-starbucks-so-expensive-in-china/279394/
http://qz.com/125138/in-china-starbucks-doesnt-sell-coffee-to-make-its-millions-it-rents-couches/
http://www.quora.com/What-are-the-closest-competitors-to-Starbucks-in-China
http://www.bloomberg.com/news/articles/2012-10-16/nestle-to-battle-starbucks-over-chinese-portioned-coffee-market
http://contextchina.com/2013/05/starbucks-nestle-square-off-in-bid-for-dominance-of-chinas-coffee-market/
http://www.forbes.com/sites/greatspeculations/2012/05/04/dont-get-excited-about-starbucks-chinese-expansion-just-yet/
Cultural Differences Cont.
When remodeling their menu, Starbucks partnered with coffee companies and caterers to help gain insights into the tastes and preferences of local Chinese consumers. In the end, Starbucks came to introduce beverages using popular local ingredients such as green tea or black sesame. Also, the food is labeled with the country where it was imported from to address Chinese consumers' concerns about food safety.

Finally, Starbucks' way of operating had also altered on its own, Chinese locations do more than 70% of their business in the afternoon and evening rather than locations in the U.S., where they'd have their rush hour during the morning.
Challenges Contd' 1
Not only did they have to deal with the fierce competition, Starbucks faced several challenges in China ever since it opened its first store in The Forbidden City, which was considered a seat of Chinese culture and tradition. Many local people saw it as an invasion into their traditional lifestyle and culture. Thus, Starbucks focused on selecting high-visibility and high-traffic locations to project its brand image.
Challenges Contd' 2
In addition, when Starbucks started in China, another challenge they had to face was to make the consumers accustomed to drinking and appreciating coffee. In other words, the company had to offer more than just their coffee. Starbucks had to adjust their menu in order to satisfy their tastes. For example, adding a wider variety of teas.
Challenges Contd' 3
Last but not least, Starbucks in china have their products over priced, while their competitors sell their products for less. However, the problem with this is pretty simple, operating a Starbucks store in China is expensive. The reason, transportation fees. On top of the transportation fees there's rent, where the company loses 26% of their potential profit.
Competitors Contd' 1
It won't be a walk in the park for Starbucks as Costa Coffee also plan to increase investments in China. Starbucks plans to have 1,500 stores in China by 2015, while Costa Coffee has stated that they will have 2,500 cafes in China by 2018. In terms of interior design and product offerings, Costa Coffee is very similar to Starbucks. As a result, it appeals to a very similar customer base and is a strong competitor to Starbucks. However, Costa has a shorter history and consequently significantly less stores in China right now: it opened its 200th store in 2013, whereas Starbucks has well over 1,000 locations.
Competitors Contd' 2
Another competitor Starbucks has to deal with is UBC Coffee, a Taiwanese company expanding in China, which currently has over 1,300 store locations in China. It offers espresso drinks as well as brewed coffee, but that's where the similarities end. Unlike Starbucks, UBC's menu includes a wide array of Chinese and Western dishes, and the items are typically higher priced. In addition, due to its Chinese origin, it's interior design is very similar to a traditional tea house, which is attractive to older generations.
Competitors Contd' 3
There are many other minor competitors as well, such as Dunkin’ Donuts. Dunkin’ added pork donuts along with many others to customize its menu to appeal to local tastes. Even McDonalds has gotten in on the act, opening small coffee outlets across the country.

All of these developments have been driven by surging demand for coffee in China. The Chinese coffee market has grown at rates of 15% annually in recent years and is expected to expand from its current size of $11.27 billion to $160.94 billion over the course of the next ten years. The coffee industry is growing very fast in China, and I would expect a much harsher competition in the future.
Katie Lee
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