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Starbucks, founded in 1972 in Seattle, has been methodically building the popularity of its brand since the very beginning. Today, the distinctive logo of the two-tailed siren is already internationally recognised. Starbucks has become a powerful player in the market by producing and selling many different types of beverages, pastries and confections in more than 8,400 coffee shops in 30 countries worldwide. But the company is not only focused on coffee and desserts. Starbucks cafés also offer a wide range of mugs, cups and other coffee accessories. The company supplies airlines, restaurants, hotels and private companies. Innovation and thoughtful actions of the company's management have allowed the brand, which is basically just another coffee shop chain, to achieve such an incredible success.
One of the best examples of these clever and thoughtful strategies is their surprising success in China. A market where other major global corporations, such as Amazon, have been unable to survive. Unlike the Amazon, Starbucks has understood that the key to success in a foreign market, with a commercial culture so different from the US, is to understand the rules that govern China. Fitting the company to the lifestyle of the Chinese instead of forcing their, american approach with the expectation that they will adapt was a big hit.
Most large companies are already introducing their services to the Chinese market as developed corporations that have been successful in Western countries. They forget what it was like to be a Start-up, to be able to adapt quickly to new situations and realities. They simply want to introduce exactly the same thing that worked outside China to their market. But it's not enough to switch American employees to Chinese ones and build a café in Beijing to really bring the company into the Chinese market. It is precisely because of this misconception that so many very well recognized brands in the Western world do not achieve the expected success in China.
Starbucks also failed to adapt to Chinese reality for the first nine years. One of Howard Schultz's key decisions after an initial, unsuccessful attempt to bring Starbucks into this new market was to appoint a new CEO for Starbucks in China, Belinda Wong. She, through her background and ability to understand both Starbucks culture, the American lifestyle and the Chinese consumer, became a common element that allowed Starbucks to spread its wings.
Today, China is the world's second largest economy, a permanent member of the United Nations Security Council and a country that is constantly seeking to accelerate its development and open up to foreign markets through FTDs. At present, China has already signed 16 such agreements and another 24 are in the process of negotiations.
China is considered to be a politically stable country although ruled by the political party of the People's Republic of China. It is thanks to its stable political environment, cheap labour and better infrastructure that China is positioning itself as an excellent destination for foreign direct investment (FDI), in 2016 China attracted 139 million USD to its market. But it does not stop at attracting investors alone. In 2019, China spent more than $22 million per quarter on foreign investment not only in underdeveloped continents such as Africa, but also in Australia, many European countries, and the USA.
The Chinese tax system is based on State Administration of Taxation decisions. It sets top-down rules and tax rates in the country, but often, in the case of tax law, there are differences at regional level. There are different reasons for this. Often, special tax reliefs are created for local policy purposes or apply in free trade zones. Tax reliefs also exist for specific industries or for innovations tested in a particular region. The complex tax system and frequent changes in rates are partly due to the developing business environment and the desire of the government to improve the current situation.
Despite its closed-market policy in the past, China is now the second largest economy in the world in terms of nominal GDP, thanks to its smooth economic reforms. The country has moved from a centrally planned to a free-market economy, raising GDP by an average of 10% per year. One of the major advantages of China over other countries is it's easily accessible, cheap labour force, whose average wage, however, is constantly rising. It has tripled between 2005 and 2016 and is now higher than the statistical salaries in Brazil and Mexico.
The standard income tax rate is about 25%, but the Chinese government has introduced discounts for verified entrepreneurs who operate in government-supported industries and will reduce their rate to 15%, individual tax rates vary and reach up to 5%.
China is the most populated country in the world, with a population of over 1.4 billion, so it is an ideal market for all companies producing consumer products. The latest five-year plan of the Chinese government, by 2020, also assumes a significant increase in the living standards of the Chinese, whose middle class is constantly growing. More and more citizens are pulling away from the status that allows them to be more consumerist, the literacy rate in China is 96.4%. As well as impressive progress in literacy rate, the country has made staggering progress in reducing poverty. Over the last 5 years, the country has lifted 68 million people out of poverty.
The largest age group in China is between 30 and 32 years old, which together make up over 80 million citizens. These are people working in a market that is open to the world and increasingly smuggles Western culture and views into Chinese society. Young people are becoming increasingly open to Western influences.
According to an article from 2018, published by the BBC, China has the largest population of online users and one of the largest technology companies in the world (Baidu, Alibaba). This is one of the reasons why so many foreign tech brands have failed to succeed in China. The Chinese government wants the country's rapid technological development, in 2015 it has set itself the goal of being a world leader in this field and for this reason it has launched a programme of 'mass entrepreneurship and innovation', which is supposed to stimulate entrepreneurship in the Chinese people. All these innovations are primarily aimed at turning China's labour-intensive economy into a more innovative one.
Although China has been recognised as a tea-drinking society for millennia, since the economic reforms, China has begun to become one of the most-promising market for coffee growers and international coffee chains. This makes more and more cafes start trying their hand at China. Not only are these foreign brands opening up, but Chinese entrepreneurs also see great opportunities in the Chinese coffee market. One of the greatest competitors of Starbucks is Luckin Coffee.
A company with a relatively short history, started in 2017 in Beijing where it opened its first 9 cafés. It is the first serious competitor of Starbucks in China, as the previous ones, McDonald's and Costa Coffee were the only ones to be specifically mentioned. Luckin currently has 2,370 stores in 28 Chinese cities and strongly advises that it will further develop the chain. The company's management is not hiding that it hopes to rebound the Starbucks coffee monopoly in China, which now has a 58.6% market share.
The management of Starbucks in China is largely employee-focused. Starbucks understands the culture and approach of the Chinese people to the family, based on the Confucian ideology, and has created a program for employees called 'Starbucks China Parent Care Program', which has already provided health care to the parents of more than 1000 employees. One of the consequences of such a policy is also the 'Family Form Partner', which takes the form of a family feast in which not only employees but entire families participate.
Starbucks has also introduced a division in its production divisions, dividing them into those dealing with coffee, baking, etc. This allows for greater development and competitiveness of its products.
Starbucks also has a very well developed employee hierarchy. Because it is an international network, Starbucks has divided the markets in which it operates into branches, which have been divided into further zones. In this way, Starbucks has facilitated operations and allowed individual regions to change on their own and develop innovation.
Although China still does not dribble in the lists of the most coffee-drinking nations, the consumption of coffee is steadily increasing and is becoming fashionable among a new generation of Chinese people who are more than ever open to the world. Data show that on Alibaby e-commerce platforms, more than 18 million Chinese consumers have bought RMB 2.5 billion worth of coffee products in the last 12 months, and total consumption has increased at an average annual rate of 16%.
Starbucks boasts a very wide range of products. The company constantly strives to introduce new types of coffee, maintains high standards and provides top quality coffee combined with excellent service. The range and choice of products is constantly growing and has been enriched in recent years with 8 new items in the drinks section and 7 in the desserts and snacks menu. In the interests of customer retention, Starbucks offers a large variety of additives such as non-fat or soya milk and seasonal offers such as caramel Frappuccino in summer and gingerbread latte during Christmas.
Strabucks also tries to meet the Chinese market's tea needs. The company has introduced many new tea products to its standard menu, including “Tazo Tea” and products that use local ingredients. The Chinese management of the company understood that coffee in the market such as China has to combine with dessert or a small snack (Bolt, K. 2005), so among other things they proposed a variety of sandwiches, including bagels, paninis and croissants; a whole line of festive treats for 2020 and many breakfast options.
Starbucks has conducted its marketing policy without focusing, like most companies, on spending large amounts of money on online advertising and billboards, instead investing that capital in the location. A big part of Starbucks’ success in China is the fact that this brand is widely regarded as a luxury by Chinese people and indeed Starbucks itself is trying to maintain this reputation by buying locations for cafes in areas or parts of the city associated with luxury and high prices. Before the opening, Starbucks also organises large social events to highlight the local personality of each location.
Another interesting strategy is Starbucks Card, cards for regular customers with special promotions and the possibility of collecting points. Starbucks also supports non-profit organizations as a way to improve image and brand awareness in local communities. In addition, the brand tries to create a Starbucks concept as a third place between home and work. A place where you come in the morning before entering the office to get your morning coffee and then after work, to rest.
Starbucks as a company has always strived to provide the highest quality products and services. That's why Starbucks’ services remain only within the reach of higher income customers who can afford their high quality products. In China, because of its marketing tactics of promoting Starbuck as a luxury ark, there has never been any attempt to reduce prices. This is also because Starbucks uses local producers and growers. However, coffee of course itself is not a widely grown product in China because of China's climate and cultural background. Comparing the prices of coffee in the UK and China, we can clearly see that the price of Espresso that we can buy for￡1.15 in Uk, in China costs 30CNY, which is equivalent to over ￡3.2. Similarly, Caffe Mocha, costs ￡2.65 in the Uniten Kingdom and 28CNY (￡3.0) in China.
Starbucks, in its international strategy, tries to open its cafés in places with heavy traffic, often on high streets, in shopping malls, at larger manors and railway stations. In China, however, as I've mentioned, another tactic has been adopted, trying to place the cafés in a more luxurious brand environment. Moreover, since the Chinese are historically a tea-oriented society, the older generation or people living in the suburbs and smaller towns could negative reactions towards the opening of a new western-style café. This, and the fact that a more open-minded population works mainly in big cities like Beijing and Shanghai, makes the new Starbucks cafés open mainly in cities. However, over time Starbucks also plans to strategically expand its reach to suburbs and smaller cities.
One of the basic things Starbucks took very seriously was reseach. Marketing specialists took a very close look at the lifestyles and cultural framework of modern Chinese people. They noticed, as has already been mentioned, that Western living standards are considered luxurious and bourgeois by them. So one of Starbucks' basic strategies was to uphold this opinion by locating cafés in luxurious surroundings. Starbucks also prepared to enter a new market in terms of intellectual property regulations and secured its domain against possible attempts to copy its logo or business model. This was a very wise move, given that after Starbucks registered all of its major trademarks, a great many private entrepreneurs and Chinese companies tried to imitate the Starbucks model.
Starbucks also rightly pointed out that China, as one of the world's largest countries, is very culturally divided between provinces or parts of the country. This diversity has forced Starbucks to enter into a number of partnerships with the local community that have given Stabuck a better insight into Chinese tastes.
The strategy of creating an image of luxury brand, maintaining good product quality and working with local suppliers and companies has proven to be a much better strategy than lowering the prices, like some other foreign chains do China, as a way to attract new customers. Discounts and low prices strategy was proven to be ineffective because international chains will never be able to compete with local competitors' prices anyway. Starbacks has also become immune to a constant change of international markets because it is adapting its products to the location and preferences of potential customers.
The launch of Starbucks application was also a very good initiative. It contains not only information about products and locations of nearby cafes, but also the possibility of collecting points. However, most importantly, it gives customers a sense of community, makes them feel part of the company. The number of active users of the application who have actively used it in the last 90 days has increased 3 times in the last 4 years.
Starbucks hasn't spent millions on advertising when entering the Chinese market, even though as a new, unknown brand of coffee in the tea-drinking society it would seem unavoidable. However, Starbucks decided to use a different marketing channel, social media. Instead of renting billboards in the city centre, they created a beautifully told story and let it into the online social world. This created a 'he goes, so do I.'
It is also interesting to use the Chinese tradition of red envelopes, small gifts in the form of money, which the Chinese give out during holidays and special occasions. Starbucks has taken advantage of this tradition to create its own red envelope system. It's called 'Say It With Starbucks' (用星说) and is designed so that the virtual envelopes have individual signatures such as 'I love you'.
Starbucks started out in China with losses in its first years of operation, after which it was incredibly successful and for many years was the only major company in the coffee business in the Chinese market. But now, as new market research shows, more and more coffee shops and international chains are opening up in China. We can mention Luckin Coffee, for example, which is growing rapidly and threatening Starbucks' strong market position. So how can Starbucks keep its place as the largest and most popular coffee chain in China? For starters, I think it's good to take the risks of the newly opening competition seriously. Starbucks' recent response has been to work with Alibaba to further develop applications and other Starbucks innovations in the virtual world. This partnership will also help to process the data collected by the application and use it in marketing. Thanks to this partnership, customers will be able to purchase Starbucks Reserve coffee and other products, as well as order free coffee tasting. Investing in social media, applications and expanding the Starbucks experience with an online zone is the way the company should go. In a country that is committed to rapid technological development, with the largest age group between 30 and 32, it is worth investing in this marketing channel. People like to have everything at hand, be able to check the menu, pay by application or collect points on their phone.
But not all strategies have to be changed when competition appears. I think the idea that Starbucks has developed in China is a very good one. Promoting yourself as a luxury brand, putting up cafes in very well known, recognizable places, taking care of the design inside so that every single element matches the renoma that Starbucks built in China.
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