Case Study on Marketing Strategy: Starbucks Entry to China

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 were 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 obviously that Starbucks managers decided to take advantage of such opportunity to expand their business into new region. To evaluate Chinese market the company used several steps of analyses.

Starbucks' Entry to China

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 for coffee drinking. In addition young generation were enchantment by brands and products from the West. These factors led Starbuck’s managers to learn and understand more about 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 undoubted advantage for entering Chinese market for Starbucks.

At the third level of screening Starbucks faced with political restrictions. China is highly bureaucratic country with difficult processes of getting permissions and sanctions to start and run business. In order to avoid these challenges the company built and maintain firm relationship with Chinese local partners as well as government officials. In addition, Starbucks Soong Ching-Ling Foundation received $5 million donation 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. At 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 behaviour which was different from the US market. People in China spent 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 into 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: licensed agreement and joint venture.

Licensed agreement

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 good relationship with local government, so it was easy to obtain the permissions and sanctions required to start and operate business in a bureaucratic country like China. Moreover, Starbucks could also maintain a high standard on the control of production, and achieve a ideal revenue in Chinese market. So licensed agreement was a optimal option for Starbucks to enter into a booming China’s market in the mid-1990s.

Joint venture

Starbucks formed a joint venture with different partners at different times when it entered into 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 Chinese market. In 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. In 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 joint venture to enter 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 effective and efficient method for Starbucks to adopt a few localization strategies to satisfy different regions of customers. Last but not least, joint venture is a good way for Starbucks to reduce operation expenditure, and it also helps to reduce risks in 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 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 drink 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

Normally Starbucks follows a high standard technique to maintain its stores worldwide. But in the case of China it adapted 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 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 Starbcks 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 liked 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 Changed the name to ‘Xing Bake’ where ‘Xing’ represents ‘Star’ and ‘Bake’ was pronounced 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 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 was 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 started to associate visiting Starbucks or being seen with a Starbucks cup, as a symbol of social status. They tried 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 of 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 and 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 priced its coffees at around US$ 6 for a cup, which was considered by analysts as too costly, even though it was too costly by Chinese standards but they decided to continue with it because in China, high price was directly associated with quality.