Learn How Starbucks Brought Coffee to China
A Case Study of Market Research
Starbucks has developed an internationalization strategy to enable the company to open stores and franchises in countries across the globe. Market research is at the core of many of the market entry strategies Starbucks is employing. This case study will consider how market research has strengthened Starbucks entry into the Chinese markets.
Starbucks International Business Strategy
Starbucks entry into emerging and developed markets is informed by market research.
Starbucks conducted market research to enable a deeper understanding of the Chinese markets, and the way that capitalism functions in the People's Republic of China (PRC). China contains a number of distinct regionally-based markets, a factor that makes market research crucial to launching new stores and franchises in China.
A deep understanding of intellectual property right laws is critical to successful market entry in emerging markets. Starbucks articulated an entry strategy that would address the dominant Chinese markets and that was designed to be as inoffensive with respect to the Chinese culture as possible.
Instead of taking the conventional approach to advertising and promotions -- which could have been seen by potential Chinese consumers as attacking their culture of drinking tea -- they positioned stores in high-traffic and high visibility locations.
Moreover, Starbucks very deliberately began to bridge the gap between the tea drinking culture and the coffee drinking culture by introducing beverages in the Chinese stores that included local tea-based ingredients.
Market research supported the development of Starbucks' competitive internationalization strategy. The overarching competitive strategy was to create an aspirational brand. Prospective Starbucks customers in China could look forward to what Starbucks refers to as The Third Place experience.
The Starbucks experience conveys status that is highly appealing to those aspiring to Western standards or to climbing the ladder in their own culture.
Market research indicates that brand consistency is important to Starbucks' customers. When Starbucks opens a new store in an emerging market like China, the best baristas are sent for the launch and to conduct training of the baristas who will carry on when once the launch has completed.
Market Research Addresses the Emerging Market Political Environment
Market research helped to identify the attributes of capitalism in the Peoples' Republic of China (PRC). The middle class in China has rapidly accepted Western standards as an acceptable standard of the bourgeois class. Moreover, Chinese consumers accept purchases of luxury goods as a means to pursuing quality lifestyles.
Under the influence of Communism, the Chinese considered conspicuous consumption to be decadent or indicative of a lack of a nationalistic orientation. Capitalism in The Peoples' Republic of China supports the status-conscious population that manifests its interest in keeping up with the Jones' through excessive luxury consumption.
The Chinese government's support of luxury consumption is particularly apparent in certain cities in China. The second-tier city of Chengdu serves as a market research case study in Chinese governmental support of capitalism.
Chengdu promotes capitalism at a level evidenced by the presence of stores like Louis Vuitton and Cartier in its downtown.
According to Chengdu Retail Industry Association, stores selling 80 percent of international luxury brands are located in Chengdu, and the city ranks just third in luxury sales after Beijing and Shanghai. It is easy to see how this national orientation toward luxury goods extends to the Starbucks brand, which is characterized by a certain degree of exclusivity.
Market Research Reveals Attributes of Emerging Market Legal Environment
It is essential to understand the intellectual property rights laws and licensing issues when planning market entry in an emerging market. Starbucks has used intellectual protection laws to prevent its business model and brand from being illegally copied in China.
Four years after opening its first café in China - in 1999 - Starbucks had registered all its major trademarks in China. A number of Chinese businesses have overstepped legal bounds in their efforts to mimic the successful Starbucks model.
The organization and structure of Starbucks' global operations was informed by market research. The organizational strategies employed by Starbucks were derived from Starbucks' experiences in other emerging markets supported an early recognition that China is not one homogeneous market.
The organizational strategies employed by Starbucks addressed the many Chinese markets. The culture dominant in northern China differs radically from the culture in the eastern parts of China, as reflected in the differences in consumer spending power inland which is considerably lower than the spending power in coastal cities.
The complexity of the Chinese markets led to regional partnerships to aid in Starbucks' plans for expansion in China; the partnerships provided consumer insight into Chinese tastes and preferences that helped Starbucks localize to the diverse markets.
- Northern China - joint venture with Beijing Mei Da coffee company
- Eastern China - partnered with Taiwan-based Uni-President
- Southern China - worked with Maxim's Caterers in Hong Kong
Starbucks' competitive advantage is built on product, service, and brand attributes, many of which have been shown through market research to be important to Starbucks' customers. Western brands have an advantage over local Chinese brands because of a commonly accepted reputation for consistently higher quality products and services, a factor that establishes the Western brands as premium brands in the minds of consumers.
When Western brands attempt to increase market share by cutting prices, they erode the very competitive strategy that gives them an edge in consumer perceptions. Moreover, Western brands cannot effectively maintain a lower pricing strategy than local Chinese brands.
Maintain brand integrity in new markets. Starbucks' global brand is valuable and maintaining brand integrity is a fundamental focus in Starbucks' internationalization efforts. The baristas in China acted as brand ambassadors to help embed the Starbucks culture in the new market and ensure that high standards for customer service and product quality are maintained at each new and established local store.
Starbucks' ability to address changing markets is honed by effective and ongoing market research. Establishing and maintaining a global Starbucks brand does not mean having a global platform or uniform global products. Starbucks marketing strategy in China was based on customization in response to diverse Chinese consumer target segmentation.
Starbucks created extensive consumer taste profile analyses that are sufficiently agile to enable them to change with the market and to create an attractive East meets West product mix. Moreover, the localization effort is sufficiently flexible to permit each store to have the flexibility to choose from a wide beverage portfolio.
Case Study on “Starbucks Entry to China” with Marketing Strategy!
Starbucks is one of the largest coffee chains in the World. The company has a unique style and atmosphere in their coffee houses. We chose China because it is the world’s most populous country with over 1.3 billion people live there and second-largest country by land area. After 1978, the country’s economy underwent dramatic changes which involved such relief as permission for entrepreneurs to start up. Their own business and opening the country for foreign investment. It is obvious that Starbucks managers decided to take advantage of such opportunity to expand their business into the new region. To evaluate Chinese market the company used several steps of analyses. Also learn, What is the Growth Strategy for Case Study Starbucks? Case Study of “Starbucks Entry to China” with Marketing Strategy!
Who might be interested in buying coffee in China?
To introduce the Starbucks brand the company begun to distribute coffee for free to guests in several Beijing’s hotels in 1994. This initiative indicated that there was a strong demand for their products, particularly among foreigners in China. Local people, who strived to imitate the Western lifestyle. Also showed interest in coffee drinking. In addition young generation was enchantment by brands and products from the West. These factors led Starbuck’s managers to learn and understand more about the business climate in that Asia country.
Next step for Starbucks was to determine financial and economic conditions of China. Company’s managers were aware that Chinese Gross Domestic Product (GDP) continuously grew approximately 9 % on an average and a GDP per capita was US$3.800. All these factors led to rising income of middle class. That was an undoubted advantage for entering Chinese market for Starbucks.
At the third level of screening Starbucks faced with political restrictions. China is the highly bureaucratic country with difficult processes of getting permissions and sanctions to start and run the business. In order to avoid these challenges the company built and maintain. The firm relationship with Chinese local partners as well as government officials. In addition, Starbucks Soong Ching-Ling Foundation received $5 million donations from Starbucks to support education in country’s poorest regions.
The fourth level of screening involved socio-cultural forces. It showed the biggest challenges for Starbucks, because of the old tradition of tea drinking in China. In the beginning, managers didn’t know how to accustomed Chinese to drink and appreciate coffee. To acquaint employees and Chinese executives with coffee drinking experience Starbucks provided different training programs for them in which they learned more about coffee and Starbucks’ culture. The same way the company taught customers about different flavors and types of coffee. Another aspect was Chinese shopping behavior which was different from the US market. People in China spent the main slice of their monthly budget on foods. This also led to success for the company.
The fifth level of China screening was focused on competitive forces. As we mentioned before China is a tea country and the share of coffee was low. Little or no competition for Starbucks was considered as an advantage. Chinese people were familiar only with one international brand which was Nestlé’s Nescafe. However, Nescafe is not a coffee house like Starbucks. As regards local competitions, it was a well-known Chinese brand Li Shen and Japanese brand Zhen Gou Coffee.
Starbucks’ Entry to Chinese Market!
Although Starbucks encountered several challenges in the process of entering the Chinese market. Starbucks had successfully expanded its business in over 20 large or medium-sized cities of China and opened about 560 storefronts in these cities by 2012. The astonishing achievement owes to its careful marketing assessment and various marketing strategies in different periods. These strategies mainly refer to 2 different modes of entering foreign markets: licensing agreement and joint venture.
Licensed agreement of Starbucks!
In 1998, Starbucks adopted the mode of licensing agreement to license its Chinese partner (Beijing Mei Da), a wholesale distribution company to supply coffee beans to some selected hotels and restaurants. Starbucks realized that local partners can have the best understanding of local cultures customers and some related laws. and they have already established the good relationship with local government. So it was easy to obtain the permissions and sanctions required to start and operate the business in a bureaucratic country like China. Moreover, Starbucks could also maintain a high standard on the control of production, and achieve an ideal revenue in the Chinese market. So licensing agreement was an optimal option for Starbucks to enter into a booming China’s market in the mid-1990s.
A joint venture of Company!
Starbucks formed a joint venture with different partners at different times when it entered the Chinese market. Starbucks achieved considerable knowledge about the Chinese market conditions and then began to open Starbucks stores in China. The company adopted a strategy of having three different partners to enter different regions in the Chinese market. September 1998, Starbucks entered China under a licensing agreement with Beijing Mei Da Coffee Co.Ltd, which was as their first partner. In 1999, Starbucks formed a joint venture with the Taiwan based Uni-President Group and opened stores in Shanghai. At 2000, Starbucks entered into a joint venture with Mei-Xin International Ltd, it also called “Coffee Concepts Ltd”. It managed the operations in the region of Hong Kong, Shenzhen, Macau, Guangzhou, and other parts of southern China.
There are some advantages for Starbucks with the joint venture to enter the Chinese market. First of all, Starbucks choose a good local partner to form a joint venture which can help it better understand the local laws and negotiate better with the authorities. It is beneficial for Starbucks to obtain required permissions and sanctions so that it can be opened easily. Secondly, local partners know Chinese market condition better than Starbucks; therefore, it is the effective and efficient method for Starbucks to adopt a few localization strategies to satisfy different regions of customers. Last but not least, the joint venture is a good way for Starbucks to reduce operation expenditure, and it also helps to reduce risks in the Chinese market.
Marketing and Pricing Strategies!
“We want our customers to recognize that we’re not coming to China just to make money, we are coming to China to build an enduring company that they can trust and they can view as one of their own”. – Howard Schultz.
Starbucks modified their menu and tried to localize its brand name by selling some food items. According to the choice of the Chinese people and selling a different kind of tea. They also changed their marketing and pricing strategies based on needs for the Chinese market.
When Starbucks started in China, one of the biggest challenges it faced was to make the consumers accustomed to drinking and appreciating coffee. According to analysts, compared to other countries in which Starbucks operated this task was more difficult in China because of the age-old tradition of tea drinking in the country, where coffee was seen as nothing less than a kind of Western invasion.
Starbucks, like any other multinational company, had to go through the dilemma of choosing whether to follow Chinese traditional tea or take a big risk of following Starbucks’ culture of promoting premium coffee. The company chose to opt for its own culture and sell the idea of the ‘Coffee drinking experience’.
Starbucks started by projecting the stores as a place for social gathering. The stores were also larger in area than the ones in the US, as the idea was to make the customers feel at home, relax and spend more time there.
Similarly, the company took initiatives to teach the customers about the different types of coffees and how to distinguish between flavors. The customers were given some samples to smell as well as sip and then describe their experience. At times if the customers did not enjoy the sample, the store employees asked them to come back again later for another ‘tasting’ session or they offered them some other drink that they enjoyed. They also spoke to the customers about the positive effects drinking coffee. For example, they spoke about how drinking coffee helped to change their mood and how it was good to have coffee in the morning.
Localization Strategies of Starbucks!
Normally Starbucks follows a high standard technique to maintain its stores worldwide. But in the case of China, it adopted some strategies influenced by local culture and market conditions to gain Chinese people’s trust and confidence.
Small changes were made in the texture, menu and store layout just to match with Chinese culture and food preferences. Within few months of opening the coffee stores. The company started observing that coffee culture is different for Chinese people than the US. Where people are very busy in their daily lives and they just grab their coffee and leave. But in China coffee stores were more like a place for social gathering. Where they can sit and talk for hours with their friends and families. Therefore, according to the market needs they had to square bigger stores. In the US a normal size of Starbucks store is about 1,200 to 1,500 square feet whereas in China. They started opening stores bigger than 2,000 square feet.
It was observed that the Chinese also like to have some food along with their drink. In response to that Starbucks started offering some popular Chinese foods like curry puffs, moon cakes, and traditional cookies.
Starbucks incorporates another localize strategy in every country they go, by modifying the name of Starbucks to suit the local language. Like in China they Change the name to ‘Xing Bake’ where ‘Xing’ represents ‘Star’ and ‘Bake’ was pronounce as ‘bucks’.
Starbucks accepted the reality that maximum people in China like tea more than coffee though young generation is more likely to go for coffee. So they decided the different menu for different stores in China. In Shanghai and westernized, the stores a standard menu where they served coffee. And in Beijing stores they introduced different tea-based drinks like coffee-flavored milk tea, green tea-flavored frappuccino etc. to attract more people.
Promotional and Pricing Strategies!
To promote themselves in China the company chose a different way. It mostly depended on the people to spread goodwill through word of mouth than commercial advertisements and media products. Their knowledge, organized way of business left a good impression on customers’ mind. The customers were willing to pay a higher price for the brand name. As a result young, urban Chinese, who solely start to associate visiting Starbucks or being seen with a Starbucks cup, as a symbol of social status. They tire to build their reputation in terms of, product quality, customer service, employee relationship, etc.
To enhance the name of “Starbucks” they had different strategies. From professional to students they had different ways to attract them. They started selling latest DVD’s, free access to the Internet. And, also use to provide different wireless services so people can feel it like their 3rd home.
Starbucks uses the highest quality coffee beans from ideal coffee-producing climates. They helped Chinese farmers, made good relationships with their workers. They also made a good reputation in the supply market. As a result of good reputation, good quality, and high price. They were able to attract people and also maintain their luxury appeal. The company price its coffees at around US$ 6 for a cup. Which was considering analysts as too costly? Even though it was too costly by Chinese standards but they decide to continue with it because in China. A high price was directly associating with quality.