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Starbucks Case Study Jessica Lortie

University of Calgary MKTG 467

November 28, 2017

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Table of Contents

Introduction.........................................................................................................................1 China: Situational Analysis.................................................................................................2 Cultural Analysis.....................................................................................................2 Political Analysis.....................................................................................................4 Economic Analysis..................................................................................................7 Market Analysis.......................................................................................................9 Competitive Analysis.............................................................................................11 Why China is the Best Option for Starbucks.....................................................................14 Alternative Strategies.........................................................................................................15 Alternative 1: Product Mix Strategy......................................................................15 Alternative 2: Pricing Strategy...............................................................................16 Alternative 3: Coffee/ Cafe Culture Strategy.........................................................17 Evaluation of Alternatives.................................................................................................19 Profitability............................................................................................................19 Market Share..........................................................................................................20 Local Culture.........................................................................................................21 Innovation..............................................................................................................22 Recommendation...............................................................................................................23 4V Model...............................................................................................................23 Joint Venture..........................................................................................................24 Store Atmosphere and Location.............................................................................25 Procurement...........................................................................................................26

Research and Development....................................................................................27 Advertising and Promotion....................................................................................27 Risks.......................................................................................................................28

Business Generalizations and Conclusion.........................................................................30 References..........................................................................................................................31 Appendices.........................................................................................................................36 Appendix A: Hofstede’s Cultural Scores for China..............................................36 Appendix B: Situational Analysis Matrix..............................................................36 Appendix C: Competitive Positioning Map...........................................................37 Appendix D: Starbucks China Market Share.........................................................37 Appendix E: Decision Criteria Matrix...................................................................38 Appendix F: Number of Starbucks Stores in China...............................................38 Appendix G: Starbucks Company Operated Stores Around the World................39

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Introduction

Starbucks is an American-based global coffee chain, which was initially designed to

imitate Italian cafes. Since the company’s establishment in 1971, approximately 22,519

Starbucks stores operate globally (Starbucks Coffee Company, 2017). Although the company is

remarkably successful thus far, Starbucks is currently faced with a significant challenge in its

home market. Western coffee consumption is reaching a maturity stage as consumers are cutting

back on nonessential goods such as coffee. Due to economic factors, consumers are now finding

it difficult to justify buying their morning cup of coffee. Furthermore, the American coffee

market is highly saturated as indirect competitors such as instant coffee, tea companies and

artisanal coffee shops have entered the market. This information has led to the formation of the

following problem statement:

Coffee consumption in the U.S. market is beginning to decline. Starbucks needs to

determine a global expansion strategy, which aligns with its global consumer culture and

allows the company to broaden its current market share of the coffee shop industry.

China: Situational Analysis

Cultural Analysis

Hofstede’s cultural dimensions (see Appendix A) can provide valuable insight in terms of

understanding the Chinese market. Awareness of the specificities of Chinese culture can provide

acumen with respect to conducting business in China, as well as knowledge regarding the

motivations of Chinese consumers. This will enable a business to tailor their marketing

communications accordingly.

The first dimension is power distance. China scores high in this factor, which is

indicative of a high tolerance and respect for authority. High power distance scores suggest the

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potential for abuse of power as well as feelings that ambition beyond your role or position should

be suppressed. Secondly, China is a collectivist society meaning that the benefit of the greater

good takes precedence as opposed to individual success. Thirdly, Chinese society is on the more

masculine end of the spectrum. This means that achievement is highly stressed as opposed to

caring for others, or concerns over quality of life. Fourthly, China scores low on uncertainty

avoidance. Culturally, the Chinese are comfortable with ambiguity and do not have a high

concern for ironing out fine details. Lastly, China is long-term oriented, as Chinese individuals

generally perceive time to be a plentiful asset (Hofstede Insights).

One notable phenomenon is that culture is rarely homogenous in a single country,

especially one as geographically expansive as China. There are many unique factors that

contribute to the cultural differences between Northern and Southern China, which are divided

by the Yangtze River. Not only does this river provide a physical barrier between the two sides

of China, it also symbolizes a cultural barrier between the two. Differences in climate and

agriculture have resulted in distinct cultural differences between Northern and Southern China

(Talhelm et al, 2014). Due to climatic factors, Southern China focused on rice production, while

Northern China is focused on wheat production. Because rice is more labour intensive, collective

work is necessary to produce a sustainable amount of rice. Coordination and cooperation with

neighbours is often required, whereas the success of wheat crops is based on rainfall, thereby

requiring minimal coordination with surrounding neighbours (Talhelm et al, 2014, p. 604). As a

result, Southern China has more cultural markers of East-Asian culture, whereas Northern China

is culturally shifted in favour of Western ideals (Talhelm et al, 2014, p. 607). Additionally,

Southern China is slightly more collectivist than Northern China. Northern China tends to

demonstrate more individualism and self-reliance, in contrast with South China, where social

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interactions and relationships take more of a priority. Southern China is more is fixated on

holistic thought and decision-making, while Northern China generally adopts more analytical

decision-making and thought processes (Talhelm et al, 2014, p. 607). It is imperative that these

cultural differences are considered when a making decision to expand operations in the Chinese

market. Starbucks must examine these cultural differences to determine if they are able to

produce customized marketing campaigns, materials and offerings that appeal to both Northern

and Southern China.

While China does not have a rich cultural history of coffee drinking, tea plays a key role

in China’s history. Tea is a rich part of Chinese tradition, with honoured practices like the tea

ceremony holding a place of high esteem in Chinese culture. According to scholar Li Xiusong,

“Tea is a basic necessity in the life of the Chinese people. To eat and to drink is a matter repeated

with regularity every day” (Xiusong, 1993, p. 75). Tea houses also present a subculture with a

rich tradition in China. In China, tea houses are valued for their environment (Xiusong, 1993, p.

81). The frequency of tea consumption presents a major opportunity for Starbucks. The affluent

tradition of tea culture, poses both an opportunity and threat from Starbuck’s perspective. While

the Chinese consider tea a major part of life and are high frequency users, careful consideration

will be needed to customize the Starbucks environment in a way that is positioned to meet

Chinese consumer’s needs.

Although Chinese culture is generally on the more collectivistic end of the spectrum, the

modern Chinese consumer believes that individualism and collectivism are linked to one another.

The urban upper middle-class understands consumption to be a set of filed norms and practices

that are symbolic of one’s individualism. Individualism is seen as a set of choices and the

‘obligation to choose’ and collectivism is seen as ‘choosing the right thing’ (Smith Maguire &

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Hu, 2013). In essence, the modern Chinese consumer is encouraged to adopt a self-identity

through their purchasing decisions, however these decisions must ultimately reflect the

traditional values of the group. Consumption allows one to project their individuality and status

through fashion, lifestyle and Western associations. Purchasing behaviour is also interpreted as a

social process because buying products and services stimulates inclusion and belonging (Smith

Maguire & Hu, 2013).

In China, an increasing interest in Western culture coincides with the rise in the

popularity of American brands, as well as interest in American lifestyles and ways of life. The

specific appeal for American culture originates in Chinese youth, who are now beginning to have

enough discretionary income to purchase and demand American brands. The appeal for

American brands stems from the concepts that American society represents, such as an emphasis

on individuality, as well as freedom of speech, something of which is not afforded to Chinese

citizens (Buckley, 2015). This heightened appeal of American culture coupled with the rise in

global consumer culture means the attractiveness of American brands in China is steadily

increasing. A substantial opportunity exists for American brands to begin building even more

customer loyalty in the Chinese market.

Political Analysis

The political situation in China is interesting as the country has a one-party system, with

the Communist Party of China (CPC) in power. Ideologically, the party officially follows

Socialism with Chinese Characteristics, a version of Marxism adapted to what the party claims to

be specific conditions in the Chinese market that must be accounted for (BBC News). These

“Chinese Characteristics” essentially include the establishment of state capitalism, a free market

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economy that is socialist and controlled by government owned corporations. Notably, these

government corporations oversee many of the country’s natural resources.

The political risk in China is also quite interesting. China has a Politburo, which is

essentially a policy-making committee that operates within the CPC. This Politburo is

responsible for establishing a policy perspective to drive the future of China (BBC News).

Political risk is moderate in the Chinese government due to the Communist Party’s history of

aggressive moves with the aim of protecting and advancing national interest. The Chinese

government has a history of employing strong-arm tactics to stimulate economic development.

Furthermore, the Communist Party is well aware of the attractiveness of the Chinese market,

something the government frequently wields as a way to leverage firms into technology and

intellectual property transfers (Hout & Ghemawat, 2010). While the coffee shop industry is not

currently of national interest, the risk of the Chinese government taking an authoritative stance

against Starbucks is one that should be considered.

However, the existing political stability is under threat, as China’s Chairman Xi Jinping

is becoming a more powerful dictator. Jinping is consolidating power, purging rivals and

building a personality cult around himself at a level not seen in China since Mao Zedong was in

power (Fulford, 2017). Xi is also anticipated to remain in power past the end of his last term, a

move generally unprecedented for Communist Party Chairman (Fulford, 2017). Xi’s ascension to

dictatorship adds a layer of uncertainty for businesses in China. Any semblance of democracy in

China is under major threat, as Jinpeng moves to build himself into an absolute leader with

untouchable power. As the democratic decision making process of consensus is eroded in China,

businesses are now vulnerable to Xi’s increasing ability to personally dictate all aspects of

commerce within China. Rapid changes in tariff structures, profit repatriations and other factors

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that can jeopardize Starbucks’ profitability and long term success in China are now major risks

that can happen at a moments notice if Xi so decides.

Traditionally, there have been internal power struggles between the local and provincial

governments and the central government over the application and observance of laws. This

unique political risk will have a greater potential impact on Starbucks because laws will

constantly be in flux depending on the influence of the dominant governing level (Fogel, 2010, p.

20). Since Xi’s rise has centralized power in China, it will be interesting to see how much of a

factor this intergovernmental rivalry will have. Starbucks and coffee as a whole are not strategic

industries and therefore are likely to avoid Xi’s radar. The local government laws will likely be

the ones that need to be followed by Starbucks. Given Xi’s new stature in the CPC, nothing is

certain, adding a layer of risk to Starbucks’ market expansion strategy in China.

Furthermore, in 2014, the Fourth Plenum set out an agenda of giving greater autonomy to

the judicial system. This included plans to give greater judicial independence, improve

transparency and governance, and give greater accountability to Party and government officials.

While this initially sounds promising, it remains clear that the CPC is above the law (Foreign and

Commonwealth Office of the UK, 2017). For Starbucks this poses low political risk since it is

unlikely for the corporation to attract negative attention from the CPC.

In general, political risk is higher in China relative to other countries mostly due to the

influence the CPC has due to their economic success. The CPC is above the law, creating huge

political risk compared to stable democratic regimes like the United States. Exchange controls

are a political risk that have a significant impact on Starbucks as their profitability may be

hindered, depending on how the CPC sets the value of the Renminbi. The CPC has made it clear

that in any dealings, China comes first. If Starbucks swallows up a major portion of the market

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and begins to hurt domestic teahouses and other Chinese players in the industry, the CPC will

intervene to protect them at Starbucks’ detriment. Intervention may take the form of equity

restriction, repatriation restriction, taxation discrimination or any combination of the three.

Economic Analysis

While China’s intense growth in GDP of 14% has slowed since 2008, China still boasts a

GDP growth of approximately 6.5% in 2017 thus far (Trading Economics, 2017). A growing

GDP indicates an uptick in retail sales, which presents a large opportunity to a retailers such as

Starbucks. As long as this growth maintains a similar level as to what is being observed today, a

large opportunity exists in China as the spending power of Chinese consumers increases. With

more money circulating in the Chinese economy, the opportunities for success for a premium

brand like Starbucks are very encouraging. China’s GDP per capita adjusted for the Purchasing

Power Parity (PPP) for 2016 was 14400.90 USD and has been growing at a rate between 6%-7%

per year since 2006 (Trading Economics, 2017). This is substantially higher than the Chinese

GDP per capita without the PPP, indicating the Chinese consumer can buy more with their

money than consumers located in the United States.

The Chinese market presents a significant amount of economic risk. While China is one

of the largest receivers of Foreign Direct Investment (FDI) in the world, China’s poor adherence

to many parts of the World Trade Organization (WTO) conditions of accession present barriers

to foreign companies interested in entering the market. One of the main issues facing foreign

companies interested in entering the Chinese market is China’s substandard protection of

intellectual rights (United States Trade Representative, 2017, p. 8). China’s inadequate

protection of intellectual property is an area of concern for any brand bringing their products into

China. Despite joining the WTO, China is still employing a number of export restraints, which

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are proving to be trade barriers. Despite the WTO’s rules not allowing this, China continues to

implement export quotas, minimum export prices and export duties (United States Trade

Representative, 2017, p. 44). These non-tariff barriers present challenges for companies

interested in exporting their goods into China. China’s ability to use tariffs also presents a

significant risk. While China has lowered several tariffs, China is granted the right to impose

high tariffs on sensitive industries. This flexibility in China’s ability to levy tariffs, sometimes as

high as 30% (United States Trade Representative, 2017, p. 44), exposes risk to many foreign

companies. Chinese customs officers have been noted to apply tariff classifications very loosely,

with classifications varying by port. This inconsistency is a cause for concern for exporters.

Although this risk does complicate the economic situation in China, as coffee and related

beverages are not a key industry in China, this risk is not of high concern to Starbucks. While the

policies pertaining to customs valuations have been brought into alignment with WTO policies,

variance in application exists from port to port (United States Trade Representative, 2017, p. 45).

Frequent discrepancies exist in what valuations are applied, adding uncertainty and risk to

bringing product into China. Frequent delays at ports are a common occurrence due to the

discrepancies in procedure appliance, presenting major concerns for the shipment and arrival of

goods and supplies needed to maintain daily operations.

Overall, China’s protection of intellectual property and copyrights are very poor and as a

consequence, counterfeiting runs rampant. Starbucks has worked very hard to build brand equity,

and has created a very popular brand. Unauthorized merchandising of the Starbucks brand

presents a risk to Starbucks branding positioning and equity that will receive little protection in

the Chinese market (United States Trade Representative, 2017, p. 8).

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Market & Segmentation Analysis As a result of the rise of the middle class in China, interest in coffee culture has been

growing steadily. Chinese consumers are stimulating a higher interest and demand for coffee

products, both out of home (coffee shops) and in home (instant coffee). Coffee consumption in

China demonstrated growth of 16% per year between 2004 and 2014, with China being the

seventeenth largest coffee market worldwide (“The Coffee Market Explodes in China”, 2016).

Mintel predicts that the Chinese coffee industry will increase from $1.9 billion to $3.1 billion by

2019 (Foong Li, 2015). With a highly dense population, the rise of the middle-class and an

increased standard of living, China has the potential to challenge the economic position of the

United States. Furthermore, China’s considerable investment in research and development makes

China an attractive host country to foreign companies seeking investment opportunities (Cheng

& Yiu, 2016).

The Chinese Coffee Consumer typically belongs to the upper middle-class, with an

income level of $16,000-$34,000 USD (Iskyan, 2016). This consumer group typically lives in

urban, high-density cities (Smith Maguire & Hu, 2013). This individual views coffee as

fashionable, trendy and modern, thereby coffee consumption is a way for these individuals to

demonstrate their individualism and self-concept. The urban, upper middle-class Chinese

Consumer aims to be seen as a modern, young professional who still upholds traditional Chinese

values by selecting trusted brands with a good reputation (Smith Maguire, & Hu, 2013). As a

result, brand consistency is crucial in order to gain the trust of the modern Chinese consumer

(DeVault, 2017).

The Chinese upper middle-class is becoming more accepting of Western culture. In

China, American brands are perceived to be synonymous with premium brands. American

products are believed to possess higher quality and are seen as symbols of status (DeVault, 2017)

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that are representative of the ‘new China’ (Smith Maguire & Hu, 2013). As a result, Chinese

consumers seek products that provide them with a gateway to the coveted American

culture. Additionally, Chinese consumers interpret product quality to be positively correlated

with global success. They believe that a brand can only be successful on a global level if it has

superior quality (Smith Maguire & Hu, 2013), hence their perception of Starbucks products as

high quality.

A notable characteristic of the Chinese consumer is that they do not go to coffee shops

for coffee itself. Instead, these consumers go to cafes for the experiential and emotional benefits

in which they derive from spending time in this environment (Venkatraman & Nelson, 2008).

This phenomenon can be attributed to two factors, which are the desires for status and social

interaction. The desire to openly display social status is characteristic of the modern Chinese

consumer. Being seen enjoying a latte is almost as important as enjoying it (Foong Li, 2015), due

to the status associated with a premium coffee drink. Coffee shops provide consumers with a

setting to present himself or herself as a modern Chinese consumer in a public setting (Fowler,

2003).

In terms of social interaction, the Chinese consumer views the act of drinking coffee as a

social event. Venkatraman and Nelson (2008) conducted an experiential study on the modern

Chinese consumer in which they gave consumers $10USD to spend at a Starbucks location and

filmed their behaviour. They also asked participants to take photographs and then later

interviewed participants about their experience and the reasoning behind the photographs they

took. The pictures were primarily of the store décor and furniture as opposed to the food and

drinks that the participants bought. When asked about the meaning behind the pictures,

participants explained that they took photographs that depicted their experience at the café.

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Venkatraman and Nelson describe several themes that emergence from their findings. One

notable theme was the perception of Starbucks as “home”. Participants described Starbucks

shops as warm, secure, private, comfortable and peaceful (Venkatraman & Nelson, 2008).

Furthermore, Starbucks was perceived to be a “constellation of personal space” in which

individuals could do homework, read, chat with peers and do business with colleagues. These

findings reinforce the perception of Starbucks coffee shops as a medium to facilitate social

interaction and relaxation. Ultimately, coffee shops in China need to need to project a unique

ambiance and a trendy environment to attract visitors.

However, a major challenge with China is that its market is lacks education with respect

to coffee. Although China’s coffee market demonstrates steady growth, Chinese consumers

possess a high demand for tea. Historically, tea has been the drink of choice amongst the Chinese

market. Tea is perceived to be a healthy drink that has traditionally been used for medicinal

purposes (“The Coffee Market Explodes in China”, 2016). In contrast, many Chinese consumers

believe that coffee is harmful to one’s health and causes sleeping problems. Therefore, Chinese

consumers are not adapted to the unfamiliar, bitter taste of coffee (DeVault, 2017). Because

consumers do not particularly enjoy the taste of coffee or the effects of caffeine, they are not

convinced of the benefits of drinking coffee. Although Starbucks offers several tea products,

coffee is the company’s main product offering.

Another market challenge is the disproportionate growth in cities and the cultural

differences varying across different regions in China. With many emerging and evolving cities,

adjusting coffee shops and product offerings to embody the local lifestyle may be a challenge

that requires extensive research to overcome (Fowler, 2003).

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Competitive Analysis

Starbucks is the first major multinational coffee company to enter the Chinese market

(Smith Maguire & Hu, 2013). Starbucks captures 35% of the market share in the Chinese coffee

shop industry (DeVault, 2017) making it the most dominant player (See Appendix D). Starbucks

is already well-positioned in China compared to competitors, and 50% of consumers indicate

they would find another Starbucks if their usual store was closed (Towson, 2016). As a first

mover, and because the market was slow to emerge, Starbucks does not have a strong competitor

in China, however it does have smaller competitors.

Direct main competitors include UBC Coffee and Costa Coffee Brand. On a local scale,

Costa Coffee from the UK is one of Starbucks’ largest competitors (Costa Coffee, n.d.). Costa’s

unique selling propositions are its handcrafted drinks and trendy environment. Part of Costa’s

strategy is to identify convenient locations to open its stores. It appeals to a very similar

customer base and is a strong competitor to Starbucks (Graceffo, 2016). However, Costa has a

shorter history and consequently a lower volume of stores in China. There is also UBC Coffee

which originates from Taiwan. However, UBC is more of a sit-down restaurant than a coffee

shop. Unlike Starbucks, UBC’s menu includes a wide array of Chinese and Western dishes, and

the items are typically higher priced. In addition, perhaps due to its Chinese origin, its interior

design is more similar to a traditional teahouse, which is attractive to older generations

(Graceffo, 2016).

There are other competitors, which make up lower market shares. One of them is McCafe

by McDonald’s, which competes on low price. By contrast, Starbucks utilizes a premium pricing

strategy in China to enforce the perception of higher product quality. This is higher than the

average price of a single cup of coffee in China is 30 RMB (Marketing to China, 2016). Larger

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competitors also include Hong Kong based Pacific Coffee. After having been well-established in

Hong Kong, they expanded into mainland China. Pacific Coffee offers lower prices than

Starbucks, but establishes a similar coffee shop atmosphere. Furthermore, Vancouver based

Blenz Coffee was one of Starbucks’ early competitors in China. Blenz succeeded in entering the

first-tier city Guangzhou before Starbucks. One of the ways they tried to differentiate themselves

from Starbucks was by allowing smoking (Towson, 2016). However, Blenz’s market share has

declined rapidly since 2005. Lastly, Taiwan’s 85 Degrees is another competitor who sells baked

goods primarily, but also offers premium coffee (Towson, 2016). One weak point for 85 Degrees

is that it offers minimal seating, as their business enforces more of a to-go coffee structure.

Starbucks is also faced with South-Korean competition (Balenieri, 2016), which

demonstrate steady growth in terms of market shares. South Korean competitors such as Caffe

Bene, Mango Six or Zoo Coffee all project stable growth. These coffee shops come from Seoul

and rely on their interior design, which includes large space, rough-wood accents and unpaired

chairs (Balenieri, 2016). They also portray Korean culture, which is an emerging trend in China.

These Korean competitors have not penetrated major Chinese cities due to the competition of

Starbucks, instead they have entered smaller or emerging cities. Additionally, Caffe Bene

opened its first coffee shop in 2014 and has opened more than 400 stores in only two years. In

comparison, Starbucks opened the same amount of stores in a 13 year timeframe. Mango Six is

another Korean competitor, which offers deserts and hot drinks. Mango Six differentiates itself

through its appearance on a popular TV series in China. The company targets young females

who want to share and enjoy a good experience with their friends. Lastly, Zoo Coffee is a large

competitor from Korea, targeting Chinese children and students. The store is unique in that it has

a variety of large stuffed-animals in order to mimic a zoo atmosphere.

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Although Starbucks’ primary competitors are other coffee shops, Starbucks competition

does not come solely from coffee consumed in a café. Starbucks also has many indirect

competitors such as instant coffee companies (Marketing to China, 2016). Chinese consumers

almost exclusively drink instant or powdered coffee. Nestle dominates the retail industry with a

66% share in the instant coffee sector (Marketing to China, 2016). Many local restaurants choose

to serve instant coffee such as the Nestle 3 in 1 packet, which contains coffee mixed with sugar

and milk powder. Other instant coffee brands are Maxwell House and Kopiko.

Artisanal coffee shops are also beginning to enter major Chinese cities (Foong, 2015).

Starbucks has to compete with these small, independent and local coffee shops in traditional

streets in Historic Beijing and Shanghai (Balenieri, 2016). Some artisanal coffee shops offer hot

meals of curry and noodles that appeal to consumers. They also carry desserts and snacks suited

to local tastes such as black sesame green-tea cake-rolls. These locally owned coffee companies

could impose a threat to Starbucks’ market share. Artisanal coffee shops compete on high

product quality and unique café experiences both of which are attributes that Starbucks

encompasses in its own business model.

Why China is the Best Option for Starbucks

In summary, the Chinese market is the most viable country to expand Starbucks’

operations in, as it has the most market potential. As our situational analysis demonstrates,

China’s GDP growth presents a large opportunity for Starbucks as the spending power of

Chinese and the demand for Western-based goods are rapidly increasing. Although China

currently has political risks, these risks are less likely to affect coffee companies such as

Starbucks. From a cultural perspective, the Chinese are tea drinkers, however coffee

consumption is predicted to reflect steady growth trends in China. Furthermore, Starbucks is

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already a major competitor in China, and the coffee market is unsaturated relative to other

countries that Starbucks operates in. Ultimately, expanding in the Chinese market would help

Starbucks counter its declining sales in the American market.

Alternative Strategies

Alternative 1: Product Mix Strategy

One strategy that Starbucks can implement in the Chinese market is to modify its current

product mix in order to appeal to the needs and wants of the upper-middle class Chinese

consumer. While the popularity of lattes and coffee is growing in China, tea is a traditionally a

symbolic element of Chinese culture. Although Starbucks is primarily known for its coffee, tea is

also a smaller part of the product mix. One way to appeal to the large tea drinking market in

China is to complement the offerings of coffees and lattes with a higher focus on tea as a core

product offering. Starbucks has two choices to develop a product mix that is more tea focused.

The company can either develop its own teas using internally created recipes and product, or it

can form a strategic alliance with a Chinese tea company to utilize the expertise and local market

knowledge that new partner already possesses.

While Starbucks has closed its Teavana retail locations globally, it still retains the brand

for sale under the Starbucks banner (Wahba, 2017). The Teavana Brand struggles to compete in

a stand-alone store setting, but the tea is a way that Starbucks can appeal to the tastes of its

targeted Chinese consumers. Starbucks has its own in house tea brands available, however the

Chinese tea market is incredibly competitive, with many local companies strongly entrenched

with firm grips on their market shares. Teavana is available as an internal tea option, however

using Western style tea may not be a successful strategy. This is due to the prevailing tea

drinking culture in China.

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Starbucks already creates its own coffee, and carefully sources ingredients to create a

high-quality product that appeals to their consumers in coffee focused markets. Starbucks can

use its already established distribution channels and transfer its procurement expertise in order to

acquire and produce tea. Starbucks can focus on producing tea that fits into the traditional

Chinese tea categories, such as Green, Oolong, White, Black, Yellow, Flower and Pu’er Teas

(Fu, 2017). Testing the new tea with Chinese consumers, and conducting careful market research

is a prerequisite to a nation-wide rollout of the new tea flavours.

With this in mind, Starbucks could also focus on developing new products that are

tailored to Chinese tastes. Starbucks could make instant coffee the focal point of its operations in

order to keep up with the Chinese trend towards at-home coffee. Starbucks could also add more

baked goods that are desired by the modern Chinese consumer to expand their product mix.

Starbucks has already developed Nitro Cold Brew, which was first launched in Beijing stores in

2016 (Starbucks Coffee Company, 2017). Nitro Cold Brew is not specific to Chinese store

locations, but it retains a sweet, smooth taste that is more appealing to the flavour profile of

Chinese consumers. Furthermore, Starbucks also introduced moon-cakes, a Chinese desert, to

their baked goods menu.

Alternative 2: Pricing Strategy

Adjusting Starbucks’ current pricing strategy may be an optimal solution in capturing

more of the Chinese coffee market. China is still a developing economy, and while the middle

class in China has expanded greatly, the average income of a Chinese citizen is still relatively

low. Starbucks can utilize a target costing strategy, which aims to achieve prices that are

comparable to their competitors in the market. This will enable Starbucks to continue producing

viable products for Chinese consumers in larger cities such as Beijing.

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It is essential for Starbucks to account for the extra costs associated with their global

business. The costs of transporting coffee and possibly tea to China can add to another layer to

the overall price of the product. Even after transportation, the tariffs and taxes associated with

imports can be detrimental. Despite warnings from the World Trade Organization, China

continues to pursue high barriers to imports. This may be an incentive towards foreign direct

investment, which Starbucks has pursued by partaking in joint-venture entry into China.

As a result of the strong central control of both the central bank and the Chinese

economy, it can be difficult to fully predict the risks involved in FDI with China. Commercial

risk exists in exporting and importing to and from China. Should the central bank devalue the

Renminbi, this would result in a loss of income and profit for Starbucks.

Alternative 3: Coffee/Cafe Culture Strategy

Instead of focusing on coffee and tea products, Starbucks can expand its market share in

China by emphasizing the unique environment that Starbucks provides for its customers.

Teahouses traditionally serve as an institution that is valued for its environments as it reflects

China’s deep cultural roots (Almeida, Giammona, Liu & Gretler, 2017) Starbucks will face

direct competition from these teahouses in trying to capitalize on the environmental market, but

this is where Starbucks can leverage their brand power and assets. Chinese consumers stated that

they find coffee houses to be more comfortable than teahouses (Almeida et al., 2017), which is

something that Starbucks has the ability to capitalize on. To be successful, Starbucks needs to

differentiate themselves from teahouses and other places of casual social gathering. There are a

few methods Starbucks could pursue to gain considerate market share in the environment market.

The first option is to offer a “traditional” Starbucks setting, similar to that of its Western

locations. This would mean the same products Starbucks customers have come to love, and the

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atmosphere for social gathering that attracts both students working on assignments, couples,

colleagues and friends wanting a place to sit down and enjoy a cup of coffee. Since Starbucks is

a global company that follows a global branding logic, this would appeal to the global-minded

consumer segment of the Chinese population. Cost wise, this is an inexpensive strategy, as

Starbucks would not have to make elaborate customizations. This strategy attempts to capitalize

on China’s enormous population of 1.4 billion people. Even attracting five percent of the

population would result in 70 million more Starbucks customers, which is comparable to the

populations of many of the other countries Starbucks operates in. Given the trend of the average

Chinese consumer developing modern tastes and experiencing greater buying power, Starbucks

market share and revenues in China should result in steady growth given that this trend persists.

The second option is for Starbucks to create a hybrid environment based on their global

culture and Chinese culture. This would mean adapting some Chinese traditions and cultural

elements. One prominent adaptation Starbucks could make is to use Chinese methods to make

their products, such as brewing multiple times. In terms of environment, aspects of Chinese

culture can be incorporated into the interior design of the Starbucks stores. Longevity is an

important cultural theme in China, and plants reflecting this theme, such as pine and bamboo,

could be in the stores themselves (The British Museum, 2009, p. 1). The chrysanthemum is

another good choice as it is a flower strongly related to Chinese tea culture (The British

Museum, p. 2). Starbucks should avoid using the number four as much as they can because it is

unlucky in Chinese culture (The British Museum, p. 5). Likewise, they should try to capitalize

the use of the number eight because it is a number related to good fortune (The British Museum,

p. 5). Building relationships is a big part of Chinese culture, as reflected by Hofstede’s fifth

cultural dimension, long term orientation. Implementing extensive staff training policies so that

21

staff can connect with customers and enhance their experience is of great importance. This

relationship-building element could give Starbucks a competitive edge, and facilitate brand

loyalty.

Evaluation of Alternatives

In order to compare the strengths and weakness of the three proposed alternative

strategies, a set of four decision criteria is established to aid in selecting a solution that best

aligns with the goals and objectives of the company (see Appendix E). The strategy that

Starbucks implements in the Chinese market must be profitable, increase its market share, align

with the local culture and foster innovation.

Profitability

Starbucks cannot adopt a strategy that may hinder its financial stability. The adopted

strategy must promote revenue growth or lower operating costs. By focusing on the pricing

strategy, Starbucks may be able to narrow in on the most feasible financial structure for its

operations in China. As the middle-class evolves, income levels and consumer spending habits

are changing. A focus on pricing strategy may enable Starbucks to fully grasp modern Chinese

consumer behaviour. Additionally, Starbucks’ supply chain is quite complicated as members of

the chain are located in different nations. Extensive research efforts in terms of pricing strategy

may help Starbucks cut costs of production in its supply chain. Enhancing café culture is also a

strategy that can stimulate healthy profit growth as Starbucks can focus on adding more value-

added services in its coffee outlets. Starbucks will be able to charge a premium price if it

provides intangible benefits (Fowler, 2003) such as an atmosphere for social interaction and high

levels of customer service.

However, focusing on the product mix may not be the most profitable solution for

22

Starbucks. Changing the product mix requires a high degree of investment in R&D efforts as

Starbucks will need to allocate a large portion of its budget to coming up with new drinks.

Specialized drinks have a short product life cycle because it is easy for other coffee companies

are able to imitate new flavours or seasonal drinks. A rapid product life cycle requires extensive

financial investments in research to develop new products. This may prove to be

counterproductive, as spending large sums of money on developing products that can be easily

copied by competitors will not increase Starbucks’ sales.

Market Share

As more indirect competitors enter the market Starbucks will need to differentiate itself

to remain a dominant player in China. Starbucks must adopt a plan that has the potential to

increase its current market share in the coffee shop industry and maintain a firm grasp on its

competitive position.

The pricing strategy and product mix strategy are flawed in terms of broadening

Starbucks’ market share. First, Starbucks’ current pricing strategy seems to be effective in the

sense that positioning itself as a premium brand attracts the middle-class Chinese consumer who

believes that premium pricing is symbolic of higher social status. If Starbucks’ were to lower its

current price, the company may compromise its identity as a status symbol and in turn, lose its

current target market.

Subsequently, focusing on the product mix could also deplete Starbucks’ market share.

Although Chinese consumers possess a high demand for tea-based products, Starbucks appeals

to consumers because of its Western myths and symbolism. Changing the product mix too

drastically may contradict Starbucks’ appeal as an American brand. Chinese consumers do not

go to Starbucks to immerse themselves in Chinese culture, instead they want Westernized

23

products and experiences. Another option in terms of product mix modifications is to develop

more tea products or instant coffee products. However, tea and instant coffee products cannot

compete with the current market giants. Tea companies are already highly sophisticated in China

due the long history and traditional uses of tea. Being that Chinese consumers are brand loyal,

they may not be incentivized to try Starbucks tea, because of the high switching costs. Chinese

tea-drinkers have likely been using the same local tea brands for a long period of time and are

particular about the quality and flavour of their tea. Overall, American teas may not meet

Chinese consumer standards. Furthermore, if Starbucks were to focus on its instant coffee

products, the company would be challenging Nestle, who has a majority share in the instant

coffee sector.

In contrast, the café culture strategy may be a more effective strategy, as the modern,

upper middle-class Chinese consumer is not enticed by coffee itself as they perceive coffee to be

a secondary reason for going to Starbucks. Research demonstrates that the main reason that this

target market chooses to go to coffee shops is because they provide a convenient, trust placed for

them to relax or socialize with others. Focusing on the enhancing the café environment to meet

the needs of Chinese consumers will increase customer satisfaction and drive traffic into

Starbucks’ stores.

Local Culture

The Chinese coffee market is tough due to the lack of consumer education on coffee

products and the prevailing tea-drinking culture. Chinese coffee drinkers need to be convinced of

the value associated with coffee consumption. Thereby, Starbucks must adopt a strategy that

aligns with the local culture and clearly communicates the benefits of coffee to consumers.

Focusing on pricing strategy will not necessarily help Starbucks align with the local

24

culture. Pricing strategy focuses primarily on demographic variables such as income levels as

opposed cultural factors.

However, analyzing Starbucks’ product mix or café culture could help Starbucks’

communicate the benefits of coffee consumption to its Chinese target market. Enhancing the

product mix could allow Starbucks’ to develop food and drink products that align with the tastes

and flavour profiles of the local Chinese consumer. More research on the product mix could help

Starbucks’ select which products to eliminate from their menu and which new products to add.

Focusing on the café culture of Starbucks could also be a strong strategy for Starbucks in terms

of creating an atmosphere that attracts their target market. Focusing research efforts on creating a

desirable atmosphere for the modern Chinese coffee consumer will enable Starbucks to

determine which décor, music, and furniture that enhance the experience of the local consumer.

This strategy will also focus on finding high traffic locations that are easily accessible to the

local people and that align with their lifestyle.

Innovation

The coffee company strategies can be easily replicated as competitors can easily mimic

promotions, flavours and the business model. Therefore, Starbucks’ must adopt a solution that

facilitates creativity and innovation, in order to keep up with current market trends. However,

there may be a ceiling in terms of innovation and Starbucks could face diminishing returns.

Adjusting the current pricing strategy is a weak alternative in terms of innovation.

Lowering the price of its products is not necessarily an innovative or unique selling position that

will drive Starbucks’ sales. Many of Starbucks’ competitors already compete on price, so

lowering prices would not set Starbucks apart from the rest of the market.

Innovation is a strong point for the café culture as Starbucks’ can focus its efforts on

25

finding unique ways to enhance the Starbucks café experience. Starbucks could come up with

new services, or find creative ways to make the store setting different from its competitors.

Focusing on the product mix is also an innovative strategy because it would enable Starbucks to

enforce a product expansion strategy to come up with recipes and product offerings that are not

yet on the market.

Recommendation

Through an analysis of potential alternatives based on the decision criteria, the most

viable strategy for Starbucks’ market expansion is to focus on enhancing the company’s café

culture in the Chinese Market. Enhancing the culture of Starbucks shops in China will solve

Starbucks’ problem of needing to gain more share of the Chinese market to make up for

declining coffee consumption in the U.S. This is a profitable business strategy, which will allow

Starbucks to be innovative and still appeal to the local culture, thus enabling them to capture

more market share. This strategy is primarily horizontal segmentation because Starbucks is

leveraging their global brand and café culture, which appeals to global consumer culture. It will

not be entirely horizontal however as it will encompass some aspects of vertical segmentation,

mainly to address cultural differences within China. Starbucks can implement this strategy by

utilizing the 4V model. Starbucks’ joint ventures, procurement, store atmosphere, research and

development and advertising are all areas that will be utilized to implement the café culture

alternative.

Creating Value

The 4V Model can help explain how Starbucks will execute the café culture strategy

(Steenkamp, 2014). First, in terms of value brands, Starbucks is a prestige brand. This is because

26

they using a premium pricing strategy in conjunction with an emphasis on the emotional benefits

derived from their products. This emotional pay-off is the motivation for consumers to enter a

Starbucks store and purchase a coffee. Second, the value sources Starbucks utilizes in China

include myths of cultural origin, global availability and symbols of cultural ideas. Starbucks

consumers are global dreamers (Holt, Quelch & Taylor, 2004) meaning that they admire

multinational firms such as Starbucks, because of their quality and they buy into cultural myths.

There is a positive connotation associated with American products, as Chinese consumers

associate American products with status, modernity and quality. Starbucks can capitalize on

these myths in its advertising strategy and in the physical environment of their stores.

Highlighting Starbucks as a Western brand has many emotional benefits in the eyes of the

modern Chinese consumer. Third, in terms of value delivery, Starbucks can capitalize on its

value sources by implementing a Foreign Consumer Culture Positioning strategy. While

Starbucks is often considered a global brand, and views itself as such, we recommend Starbucks

position its brand in China on values that originate from its Western locations. Chinese

consumers will perceive the atmosphere of Starbucks China locations as foreign culture,

although Starbucks would argue that it brings a global culture to China because of its higher

degree of standardization. If Starbucks’ café culture was oriented around Chinese culture rather

than American culture, this might deter the target market from Starbucks. Starbucks’ consumers

do not go into Starbucks for the product itself, but rather to feel like they are a part of Western

culture or because they seek to adopt a global identity. If Starbucks executes this strategy, the

valued outcomes will be higher consumer loyalty, trust, and higher market share.

Joint Venture

27

Starbucks currently utilizes joint ventures to help understand the local culture. Starbucks

should continue these partnerships so that they can leverage the market intelligence of their

partners in terms of the values, attitudes and behaviours of the local culture. This information

will be essential to creating a coffee shop atmosphere that enhances the experience of the

Chinese coffee consumer.

Recently, Starbucks announced that it would be initiating a buyout of partner shares in

their joint ventures in China (Wahba, 2017). It appears that Starbucks intends to maximize its

profits after using joint ventures to expand their market position and learn more about the local

market. This buyout would represent the largest acquisition in Starbucks’ history at $1.3 billion.

Ultimately, Starbucks should use joint ventures to maximize its understanding of the local

market and expand to have a strong foothold in the environment.

Store Location & Atmosphere

Store selection is critical in expanding operations in China. Ensuring Starbucks locations

are situated in high traffic areas is critical to raising brand awareness. Placing stores in areas with

other complementary businesses that focus on premium pricing will allow Starbucks to capitalize

on the cumulative attraction generated by luxury brands in settings such as designer goods

outlets. Currently, Starbucks focuses on opening locations in airports (Starbucks Newsroom,

2009) as it expands into new markets. Starbuck should continue to operate these locations, but

focuses on expanding to more densely populated urban areas. Starbucks should focus on major

and emerging cities such as Beijing, Shanghai and Chengdu. These cities are more interested in

premium, luxury products and are more accepting of Western brands. Locating in large shopping

malls, as well as busy downtown centres will allow Starbucks locations to benefit from the foot

traffic generated by themselves, as well as surrounding business. Driving traffic into stores will

28

be important initially, as it will stimulate more product trial from customers in the Chinese

market.

Furthermore, Starbucks’ should enhance the ambiance and social environment of its

stores to meet the needs of its target market. Having stores that are bigger space wise relative to

the stores in America will allow for more seating. The target market values the coffee shop

experience because it allows them to socialize, to work on job-related or academic tasks and to

conduct business meetings. Providing bigger spaces with more comfortable seating, and playing

quiet background music will accommodate the Starbucks customers who are looking for a

suitable place to relax or converse with others. Having American style decor will appeal to the

target market as they value products and services that provide them with a bridge to Western

culture. Ultimately, these modifications to the store location and atmosphere will help to drive a

higher volume of customers to the stores and will aid in increasing customer satisfaction.

Procurement Strategy

Expanding operations in China will require the procurement of more resources and fresh

ingredients to ensure that product offering in Chinese locations will be standardized with the rest

of the world. Starbucks organizes procurement into two categories, “coffee” and “non-coffee”

(Cooke, 2010). Starbucks procures coffee beans from Latin America, Africa, and some regions

in Asia, which are used in different roasts and blends (Cooke, 2010). Starbucks should begin to

source their ingredients for non-coffee products locally from China to maintain low transport

costs and lead times. Starbucks should continue to standardize its coffee bean procurement

strategy, as standardizing the supply chain represents a chance for massive cost savings.

Starbucks carefully sources different coffees from different regions for each of its distinct coffee

blends. While it may be tempting to primarily source coffee from China as it is local, it is

29

important to include beans from Africa and Latin America in Chinese stores as they are essential

to the creation of Starbucks’ signature blends. Moreover, over-sourcing Chinese beans for the

Chinese market may cause Starbucks to have difficulty meeting the demand for Chinese beans in

other markets globally. This is why China should customize its non-coffee sourcing, while

continuing to standardize the procurement dimension of the value chain for its coffee products.

Research and Development

Beginning the process of conducting market research is essential for Starbucks to gain a

better understanding of the needs and wants of its customer base in the Chinese market. While

market research studies can be expensive, it is more expensive to sell products or market to your

consumers in a way that they do not connect with. Starbucks should position itself as a

socialization facilitator by taking advantage of the growing appeal of cafe culture in China. To

effectively design an experience that appeals to the target market in China, market research must

be conducted to carefully plan the store design to facilitate the best customer experience.

Highlighting the possibility for the existence of self-reference criterion is key, as cultural bias

and assumptions have the potential to derail market research, especially considering the

differences between Northern and Southern Chinese culture outlined in our previously conducted

situational analysis. To understand the cultural differences that will need to be accounted for

when adjusting Starbucks’ western operations to China, an etic research approach should be

selected to look at China and the United States from an external viewpoint, to eliminate self-

reference criterion, as well as to develop research that is focused and reliable.

Advertising and Promotion Strategy

The main priority of the advertising and promotion strategy surrounding our

recommendation needs to be focused on maintaining a consistent image concerning what

30

Starbucks represents. As the café culture strategy entails that Starbucks taps into global

consumer culture and position itself as a global brand, consistency in advertising is essential.

Starbucks should continue using similar advertising campaigns in China that focus on promoting

the brand as a Western and global favourite, with adaptations to suit the tastes of the Chinese

market. A few considerations will need to be taken into consideration with delivery and

execution of advertising and promotion in the Chinese market. Firstly, different rules

surrounding what is permitted in advertising exist between China and the United States. One

major consideration is advertising in China is banned from using terminology like “the best” or

“highest level” (Advertising Law of the People’s Republic of China, 1995). Advertisements in

China also cannot say anything negative about competitors. These factors must be taken into

consideration when designing advertisements to make sure they comply with the law.

Additionally, Starbucks’ can implement My Starbucks Idea in China. My Starbucks Idea

is an interactive strategy used by Starbucks, which enables customers to submit their ideas to the

company. The company then implements these ideas and gives the customer credit for the idea

on their website (Starbucks Coffee Company, 2017). This is a way to stimulate consumer

engagement by giving a voice to customers, which in turn allows Starbucks to better understand

their customers. Implementing this strategy in China can allow Starbucks to understand the

values of the local culture and the changes that their customers would like to see Starbucks

implement.

Risks

There are several risks that could arise for Starbucks while they are implementing our

recommendation. First, their business model is easy for their competitors to replicate. Because

the competition in the coffee company industry is relatively low and coffee consumption is

31

increasing, new competitors may enter the market and try to implement a similar store model and

location strategy. In order for Starbucks to mitigate this, the company will need to utilize

research and development to stay ahead of its competitors. Furthermore, the company will need

to be quick to launch new stores in emerging markets and to innovate its store design.

Another risk may stem from Starbucks’ use of joint ventures. Because the Chinese

government enforces policies that are in favour of local companies, Starbucks risks losing some

if its market intelligence and business strategies to their joint ventures policies. Starbucks can

mitigate this by having strong legal representation. Furthermore, Starbucks can split information

amongst different partners so that their various joint venture partners only have small pieces of

information. They can also build strong personal links with their partners in order to maintain

control over business operations.

Although, the modern Chinese consumer tends to be accepting of Western brands, there

is pushback from some segments in China who believe that Starbucks threatens their culture.

After protests and resistance from the local people, Starbucks is no longer allowed to operate

stores in the Forbidden City (Fowler, 2003). To ensure that consumers are satisfied, Starbucks

should invest in extensive research and development and leverage the market intelligence of their

partners to try to understand these consumers. They should also emphasize the emotional

benefits of their products and implement changes to their café culture that do not offend the host

community.

The cultural differences across various regions in China also pose a challenge to

Starbucks. Specifically, the values and ideals of the South differ from those of Northern China.

In order to account for regional differences, Starbucks should partner with different joint venture

partners that operate within the respective regions. These various partners will have knowledge

32

of the market segment within the specific geographic area. Starbucks can adjust its store

atmosphere and locations differently across different regions.

Lastly, China’s economic position is relatively stable. However, currency risk is a factor

to consider while expanding operations in China. If Starbucks is going to invest heavily in the

Chinese market, they need to be sure that their financial gain will not be impacted by currency

fluctuations. Starbucks can mitigate this risk by hedging against the currency through foreign

exchange contracts.

Business Generalizations & Conclusion

One of the main lessons learned during the completion of this case is the power and

effectiveness in taking a standardized approach to international marketing. During the course of

conducting our research, it became clear to us that thanks to globalization and the linkage of the

world through technology, global branding to appeal to the quickly growing customer segments

that span countries is a new strategy that must be considered, and usually should be

implemented. Another business generalization comes in the form of recognizing the complexity

of research required to truly understand another culture. To fully understand another market,

extremely thorough and detailed research is necessary. In cases of global expansion, care should

be taken, and no decisions should be rushed. Another lesson we learned is the complexity of

doing business in China. While China is still one of the most appealing markets globally for

businesses, many cultural and legal factors must be taken into consideration. During the research

process, we also determined that all businesses must be wary of the shifting conditions politically

in China. As human rights become more restricted, and Xi amasses more power, instability and

risk in key Chinese markets is bound to increase.

33

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Appendices

Appendix A: Hofstede’s Cultural Scores for China Appendix B: Situational Analysis Matrix

39

Appendix C: Competitive Positioning Map Appendix D: Starbucks China Market Share

40

Appendix E: Decision Criteria Matrix Appendix F: Number of Starbucks Stores in China

41

Appendix G: Starbucks Company Operated Stores Around the World