Much has been written about one of the biggest success stories of an American brand, Starbucks in the Chinese market. In 1999, Starbucks entered a market with a dominant ‘tea culture’ where consumers believed that Starbucks’ high prices were too luxurious a product.
“We were not successful in the early years,” acknowledged Howard Schultz, founder of Starbucks. “It took a number of years for us to get traction and gain success and loyalty. There were many people, some inside the company and certainly outside the company that said Starbucks would never succeed in China.”
Today, the company is launching a store a day and expecting to have 5,000 stores in the next few years. Howard Schultz announced that China is set to become its largest market outside the United States. According to the chain`s Chief Financial Officer Troy Alstead, it has successfully opened over 500 outlets in the Chinese market, which are more profitable per outlet than in the US.
The company faced quite an uphill journey to reach this pinnacle. In 19 years, it has fostered a coffee culture in China, beyond expectations. The question lies, how did Starbucks succeed in a place where numerous other western food and beverage brands like Dunkin Donuts, Krispy Kreme and Burger King have failed to prosper? Often regarded as a ‘lesson for retailers’, the company’s success is owed to its long-term commitment to the market, well-executed collaborations along with localisation, superior supply chains, adopting Chinese technologies, and offering a menu with local items. It understood that the market they were entering was starkly different from the US. They were able to adapt their business model to the needs of Chinese customers while upholding their core values.
From the beginning, Starbucks has valued the essence of Chinese culture. Attention to and execution around Chinese culture is the root of the company’s success. Starbucks understood when it entered the market that it was not about the coffee in the initial stage. The company adopted the fundamental strategy of reviving a “tea house culture” that had existed in China since times immemorial. Starbucks’ global success was based on being the “third place” between home and work and they brought that ethos to China — but with a modern, Western, upscale sensibility.
Developing a Local Base in China
Starbucks strategically bridged the gap between the tea-drinking culture and the coffee drinking culture by introducing beverages that were based on local tea-based ingredients. They introduced a highly localized menu of beverages and snacks that are particularly customized and accepted by Chinese taste buds.
In a country like China, culture and demographics differ between regions. Starbucks partnered with local companies like Beijing Mei Da, Uni-President and Maxim’s caterers to build expertise and access diverse, local markets. Starbucks gained insights into the preferences of Chinese consumers by working closely with these partners.
Similar to its approach in other nations, the company tailored the “Starbucks experience” that appealed to consumers. Today, Starbucks has revolutionized itself as an aspirational brand and is viewed positively as a ‘premium brand’.
The Three Pillars of Chinese Society
Starbucks’ efforts have been guided by the three pillars of Chinese society: family, community and status from the early days. The Chinese treat family as the key source of security, care and education. Taking from this value, Starbucks engaged parents in its operations. Since 2012, Starbucks has hosted an annual “Partner Family Forum,” where its employees and their parents learn about the company and its future in China. Employees (who are called “partners”) talk about their experiences in the company and Starbucks leadership, even the CEO interacts with the parents.
In an interview with BCG, Schulz described the event as- “Think about an annual meeting of shareholders; we had an annual meeting of parents in Beijing and Shanghai, and we had about 90% participation. We did not know who or how many would come. In most cases, there were whole families. There were parents, grandparents, aunts, and uncles. It was unbelievable . . . it was a breakthrough for the company and a milestone for local relevancy and sensitivity.”
The “Starbucks China Parent Care Program” currently provides health insurance for elder parents of 10,000 employees and is likely to expand. The initiative gives rare financial support to employee’s families. Much more importantly, it says to Chinese “partners” that it respects their parents in a manner that truly touches their ingrained emotions.
Chinese highly value their community, traditionally labelled as their “inside circles.” Unlike in the United States, where Starbucks chairs are often the quiet corners of laptop users and the go-to spot for coffee and work, China’s Starbucks is organised in a way to welcome crowds, noise and lounging. The spaces are up to 40% bigger than in the U.S. in some cases and the locations are very visible and easily accessible.
Consequently, Starbucks customers visit the coffee house with their friends and family.
Starbucks has positioned itself as a premium coffee brand and spoken to the sentiment of upholding status and reputation. It charges 20% higher prices in China compared to other parts of the world and selects very high-end locations for its outlets including luxury malls and iconic office towers. Starbucks often labels its products with the country from which its products are imported as foreign brands are often viewed as premium and exotic.
The Journey Ahead
Starbucks has been able to refurbish its image of an American brand penetrating the Chinese market. The company has positioned Chinese culture close to its roots and thrived in the country. It is now expanding in China faster than in any other country. However, domestic coffee brands are eyeing a piece of the market, with companies like %Arabica and Luckin, basing its business model online. Starbucks aims to expand to 6,000 stores in China by 2022.
While the story of Starbucks China has largely been a story of China’s mushrooming middle class, facing internet competition as a brick-and-mortar chain could be the brand’s next big challenge.