HK1099
ALI FARHOOMAND
STARBUCKS CHINA: MANAGING GROWTH
THROUGH INNOVATION
On January 12, 2016, Howard Schultz, the CEO of Starbucks, asserted that Starbucks was
going to open 500 stores that year in China alone and to have at least 3400 stores by the end
of 2019.1 Unlike some others, Schultz was not perturbed by China’s volatile stock market, its
decision to weaken its currency or its general economic slowdown.2,3 His decision to rapidly
expand Starbucks in China would require significant investment in infrastructure including
physical assets, business processes, human resources and IT systems. New shop locations
needed to be identified and new leases entered into, supply chain and logistic facilities
coverage required extension and management governance and decision-making might need to
be decentralized. Operating in the food and beverage industry, Starbucks knew that qualitycontrol processes had to be strengthened. This was especially difficult in China, where even
multinational businesses such as McDonald’s or Nestle had suffered from supply-chain food
scandals in previous years. Rapid expansion might also mean greater focus on opening
licensed stores, which could potentially drag down the service quality Starbucks expected of
its stores.
Starbucks was not only facing the challenges presented by rapid growth [see Exhibits 1 and 2]
but as a leader in innovation, it would also be the first to deal with the Fourth Industrial
Revolution - “the fusion of technologies that blurred the lines between the physical, digital,
and biological sphere to which response must be integrated and comprehensive.” 4 [see
Exhibit 3]
The challenges were growing. Sitting in his Shanghai office, Kelly Smith, VP of Digital for
Starbucks China, was wondering how he was going to deliver on the company’s daunting
business plan of 70% growth in three years in this economically weak but fiercely competitive
environment. What could he and his team do to ensure that Starbucks remained the market
1
Yan, S. (12 January 2016) “Starbucks adding 1,400 new shops in China,” CNN Money
http://money.cnn.com/2016/01/12/investing/starbucks-china-expansion/ (accessed 6 March 2016).
2 Burkitt, L. (12 January 2016) “Starbucks to add thousand stores in China”, The Wall Street Journal,
http://www.wsj.com/articles/starbucks-plans-thousands-of-new-stores-in-china-1452580905 (accessed 6 March 2016).
3 Starbucks (12 January 2016) “Starbucks Strengthens Commitment in China,” https://news.starbucks.com/news/starbucksstrengthens-commitment-in-china-2016 (accessed 6 March 2016).
4 Schwab, K. (14 January 2016), “The Fourth Industrial Revolution: what it means, how to respond,” World Economic Forum,
https://www.dropbox.com/s/slpbd7ohuvsmoaj/Screenshot%202016-07-10%2004.17.30.png?dl=0 (accessed 11 June 2016).
Filip Ziolek prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is not intended
to show effective or ineffective handling of decision or business processes.
© 2016 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
Ref. 16/578C
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Starbucks China: Managing Growth Through innovation
leader in China? How could they sustain growth going forward, as the space for growth
would presumably eventually shrink, making further expansion difficult? Finally, with its new
vast, rigid infrastructure, how could Starbucks retain the flexibility to respond to market
demands and interruptions as timely and cost-effectively as it had done so before?
Starbucks Corporation: Origins and a Brief History
Three coffee lovers started Starbucks Coffee, Tea and Spice in Seattle in 1971. Howard
Schultz, the current CEO of Starbucks, joined the company in 1982.5 Schultz was struck by
the knowledge and business philosophy of the founders. In 1983, on a business trip to Italy,
he first saw people gathering, drinking and chatting over cups of coffee and realized where
Starbucks fell short. Starbucks was merely selling coffee in the same, boring fashion and
lacked a salient notion of “the coffee experience.” Only by transforming the business model
from retail to service could Starbucks become differentiated from other American coffee
chains. As his bosses preferred the existing retail business model (which limited his vision for
expansion), Schultz eventually decided to leave Starbucks and start his own company. In
1986, Schultz opened his first Il Giornale store. His new venture started with US$1.65 million
in investment capital. It acquired Starbucks in March 1987 and was renamed the Starbucks
Corporation. Schultz became the president and CEO.6 Over the years, Starbucks executed a
number of acquisitions, partnerships and investments, mainly in the areas of coffee and tea
production, technology and distribution. As of June 28, 2015, the total number of stores had
reached 22,519.7 By April 2016, over 2,000 of these stores were located in China.
Coffee in China
Culturally, China had a firm preference for tea. However, in recent years the market for had
coffee grown, especially among the younger members of the population. With merely four
cups per person per year on average in 2015, the number remained humble, yet represented
significant growth potential. Starbucks contrived to double its number of locations in China to
over 3,000 by 2019, whereas Costa, one of its competitors, was aiming for 900 by 2020.
Independent coffee shops opened as an alternative to the international chains and became
popular because of their uniqueness. On a supply level, the coffee grown in China came from
the Puer area of Yunnan province, where the famous Puer tea had been grown. Coffee
production showed constant growth from 60,000 to 120,000 tons per year within five years
and farmers themselves found coffee more profitable than tea.8 At the 115th Session of the
International Coffee Council in Milan in September 2015, it was revealed that Chinese
consumption was larger than Australia’s.9 The numbers made China the 17th largest coffee
consumer in the world.10
5
Starbucks (n.d.) “About Us,” http://www.starbucks.com/about-us/company-information/starbucks-company-timeline (accessed
13 April 2016).
6 McGraw-Hill (1999) “Starbucks,” http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html (accessed 13
April 2016).
7
Startbucks (n.d.) “Company Timeline,” http://www.starbucks.com/about-us/company-information/starbucks-company-timeline
(accessed 13 April 2016).
8 Duggan, J. (18 May 2015), “Spilling the beans on China's booming coffee culture,” The Guardian,
http://www.theguardian.com/sustainable-business/2015/may/18/spilling-the-beans-chinas-growing-coffee-culture
(accessed 14 April 2016).
9 Brown, N. (16 November 2015), „Growth of the Chinese Coffee Market Carries Unknown Global Implications,” Daily Coffee
News, http://dailycoffeenews.com/2015/11/16/growth-of-the-chinese-coffee-market-carries-unknown-global-implications/
(accessed 14 April 2016).
10
International Coffee Organization (23 October 2015) “Coffee in China,”
http://icocoffeeorg.tumblr.com/post/131751774255/new-ico-study-coffee-in-china (accessed 14 April 2016).
2
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Starbucks China: Managing Growth Through innovation
Penetrating Impervious China (1999)
The first Starbucks in China was opened in 1999 in Beijing. To cater to tea drinkers, the green
tea frappuccino was introduced in 2002 and in 2010 nine other varieties of Starbucks tea were
introduced. Starbucks won numerous awards, including the 100 Trusted Brand Award, the
Best Employer Award (awarded by Guangzhou Daily in 2012, 51 Job in 2014, Aon Hewitt in
2013 and 2015) and the Seven Star Food Quality Award, among others. In 2016, with over
2,000 stores, leaving the competition far behind, China became Starbucks’ second largest
market after the US.11
Doing Business in China
[shàngyǒuzhèngcè, xiàyǒuduìcè]: “Above there are policies, below there
are ways of getting around them.” This saying reflected the way business was often done in
China. Starbucks quickly learned this and even managed temporarily, from 2000 to 2007 to
open a store in the Forbidden City in Beijing, in the face of public criticism. 12
China offered great market potential, yet came with challenges on the cultural and regulatory
fronts. The business culture was strongly embedded in Chinese philosophy and related to
Confucianism, Taoism and military strategy texts such as The Art of War by Sun Tzu. The
first principle foreigners noticed was guangxi, which, as an extremely simplified definition,
meant relationships that regarded personal trust above any written contracts or agreements.
Guanxi was developed over time, often over generations, and included relations between
individuals, businesses and government. There was no chance a foreigner could able to
develop guangxi . Starbucks solved this problem partly through partnerships and partly by its
early appearance in the market.
Another prime cultural aspect of doing business in China was gifting and reciprocation, which
in the modern world had been renamed bribery. For foreigners, the gifting practice was an
issue on moral and cost-control grounds, not to mention challenging regulatory practices at
home. Despite recent government efforts to cut down on the phenomenon, it was still a
common practice in many areas of business.
Aside from cultural differences, there was considerable legislative discrepancy. Government
policies and laws could change diametrically overnight, bringing any business down instantly,
sometimes impacting the brand’s global presence.
Quality control was a further challenge. The infamous 2008 incident of milk tainted with
melamine opened the eyes of many companies and government regulatory bodies, but quality
control still posed a threat to business. The risk was especially great in the food and beverage
industry, where even international giants fell victim to food scandals. On a corporate level,
the biggest challenges were intellectual property theft and staff rotation. So far, Starbucks had
managing those challenges successfully, but the bigger it grew, the greater the statistical
chances of stumbling.
11
Starbucks (n.d.) “Starbucks China, A journey of memories,” https://www.starbucks.com.cn/en/about/history (accessed 13
April 2016).
12
Lingua Franca (16 July 2007), “Case Study: Forbidden Starbucks,” https://thelinguafranca.wordpress.com/2007/07/16/casestudy-forbidden-starbucks/, (accessed 17 June 2016).
3
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Starbucks China: Managing Growth Through innovation
Success Factors
1. Different Thinking: Despite skepticism, Starbucks’ marketing research suggested that the
new Chinese middle class were open to Western products and customs. This was exactly
what Starbucks needed as the first-mover in bringing the coffee experience to China.
2. Smart Positioning: By selecting strategic locations, Starbucks reduced the need for
traditional advertising. It also introduced green tea, which facilitated the acquisition of
potential coffee and Starbucks lovers. Finally, it created a Starbucks experience, which at
that time was equated with Western experience. The three factors positioned Starbucks
above its competitors.
3. Global Branding: Starbucks consistently maintained its global standards. Unlike many
other international businesses, who tried to cut costs by lowering benchmarks to beat
local competitors, Starbucks kept its prices higher, preserving quality.
4. 4. Local Partnerships: In order to tackle the size and diversity of Greater China, Starbucks
established joint ventures with Beijing Mei Da coffee, Taiwan-based Uni-President and
Hong Kong-based Maxim’s Caterers, who brought in valuable local know-how and
reduced the learning curve.
5. 5. Long-Term Commitment: The best long-term commitment that Starbucks made was to
plan and invest in employee recruitment and training programs. Its staff would make a
difference and complement the overall Starbucks experience. 13
Those five steps not only kept Starbucks alive as a first mover, but also allowed it to outfox
the competition, who were merely selectively following what Starbucks was doing.
Tough Competitive Landscape
Relative ease of market entry in the coffee business attracted coffee shop chains and
individual players. Many of them learned from first mover Starbucks and it became more
difficult for the latter to differentiate itself. As a multitude of new entrants offered similar
service and products, price-sensitive customers could choose to please their egos and tastes by
sipping from the competition’s cups. Those who were not particularly interested in mocha or
frappuccino could comfort themselves at healthy salad bars or pastry cafes like Paris Baguette
or Dunkin’ Donuts].14 [see Exhibit 4]
Costa Coffee, like Starbucks, ran its business on a joint-venture model and shared the
aspiration for China to become its second market. In June 2015, it operated 2,861 stores in 30
countries, and aimed at increasing its Chinese locations from 365 to 900 by 2020 (although
recent news suggested the figure would only be 700 by 2020).15 Applying a similar strategy of
listening to client needs and localization, it appeared to localize even more than Starbucks,
offering unique products in different parts of China. With half of Starbuck’s years of Chinese
experience (eight, as opposed to 16 years), it attained a 25% market share.16 Costa was also
testing a pay-and-collect app in England, which offered some of the features of Starbucks
13
Wang, H. (August 2012) “Five Things Starbucks Did to Get China Right,” Forbes,
http://www.forbes.com/sites/helenwang/2012/08/10/five-things-starbucks-did-to-get-china-right/2/#663a38ae56fe
(accessed 14 April 2016).
14 Law, M. (10 April 2013) “Starbucks Challenges in China,” https://prezi.com/berhhyuzxn8n/starbucks-challenges-in-china/
(accessed 08 June 2016).
15
JKollewe, J. (16 April 2016) ”China expansion brewing for Costa Coffee owner,” The Guardian,
https://www.theguardian.com/business/2016/apr/26/costa-coffee-whitbread-china-expansion-sales , ( accessed 08 June 2016).
16
DaXue Consulting, (30 June 2015),” Costa Coffee in China,” http://daxueconsulting.com/costa-coffee-china/
(accessed 14 April 2016).
4
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Starbucks China: Managing Growth Through innovation
Order & Pay. 17 Working in strategic partnership with Yueda Group in Jiangsu province, Costa
quickly penetrated the Chinese market by leveraging Yueda’s local knowledge and
connections.18
UBC Coffee, a Chinese-style chain with branches in most Chinese first-, second-, and thirdtier cities, was one of the most recognized coffee houses among local customers. Offering a
wide selection of teas, dishes of local cuisine, imitations of “Western food” and special drinks,
it acquired a significant Chinese clientele. UBC Coffee began operating in Taiwan in 1968
and had over 1,300 stores in China by 2014.19
85 Degrees from Taiwan anticipated 450 Mainland Chinese stores offering coffee and pastries
by 2017.20 Although it was founded only in 2004, it was already known as the “Starbucks of
Taiwan,” and had over 700 branches worldwide.21
SPR Coffee, also of Taiwanese origin, dove into the China market in 2001.22
Café Bene, a large Korean coffeehouse chain, had opened 580 stores in China by 2015 but
was reported to have been making losses.23 Another Korean chain, Maan Coffee, had over
100 locations, which it intended to double.24
Pacific Coffee began in Hong Kong in 199225 and had a well-established brand there. While it
opened shops in several cities in Mainland China, it showed no visible sign of being a threat
to Starbucks.
Coffee Bean and Tea Leaf, a California-based chain, struck a deal with Korean retailer E-land
to open 700 new coffee shops in China26 within ten years, with the first opening in March
2016.27
McDonald’s and KFC, with over 2,200 and 5,00328 Chinese locations respectively, served
coffee and began extending their offerings of premium coffee. In 2015, KFC drafted a plan to
compete with Starbucks in the Chinese market and serve premium coffee in the first instance
17
Kollewe, K. (16 April 2016), ”China expansion brewing for Costa Coffee owner,” The Guardian,
https://www.theguardian.com/business/2016/apr/26/costa-coffee-whitbread-china-expansion-sales , ( accessed 08 June 2016).
18
Olivier (31 August 2015), “Case study of Costa Coffee’s marketing in China,” Marketing China,
http://marketingtochina.com/case-studies-of-costa-coffee-marketing-in-china/,( accessed 08 June 2016).
19 Fang, M. (10 June 2014), “What are the closest competitors to Starbucks in China?” Quora. https://www.quora.com/What-arethe-closest-competitors-to-Starbucks-in-China (accessed 08 June 2016)
20
China Briefing (9 October 2013) “China’s Coffee Industry is Brewing,” http://www.chinabriefing.com/news/2013/10/09/chinas-coffee-industry-is-brewing.html (accessed 8 June 2016).
21 Wendy Lee (29 January 2013), Starbucks of Taiwan - 85 Degrees C – Expands in Southern California,SCPR.
http://www.scpr.org/news/2013/01/29/35753/85-degree-c-taiwanese-bakery-open-more-stores-cali/ (accessed 8 June 2016)
22 www.sprcoffee.com /history.html (accessed 8 June 2016)
23 Korea Herald, (21 09 2015), Caffe Bene faces uphill battle in China,
http://www.koreaherald.com/view.php?ud=20150921001133 , (accessed 8 June 2016)
24 Wang, Y. (25 February 2015) „Mocha Migration: Korean Entrepreneur Taps Into China’s Coffee Craze,” Forbes,
http://www.forbes.com/sites/ywang/2015/02/25/mocha-migration/#35b578d67bcc (accessed 08 June 2016).
25 www.pacificcoffee.com/eng/franchise/index.html, (accessed 15 April 2016).
26 World Tea News (1 September 2015), “Coffee Bean & Tea Leaf Announces Major China Expansion,”
http://worldteanews.com/news/coffee-bean-tea-leaf-announces-major-china-expansion (accessed 8 June 2016).
27
Food & Beverage Magazine (April 20016) “The Coffee Bean & Leaf opens at Tocumen International Airport in Panama,”
https://www.fb101.com/2016/04/the-coffee-bean-tea-leaf-opens-at-tocumen-international-airport-in-panama/ (accessed 8 June
2016).
28 http://www.yum.com/app/uploads/2015YumBrands_AnnualReport.pdf (accessed, 8 June 2016)
5
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Starbucks China: Managing Growth Through innovation
at 2,500 of its shops.29 McDonald’s planned to increase its number of locations in China from
2,200 to 3,500 by 2021.30
Independent coffee shops run by foreign and local owners, also opened rapidly in China. They
grew in popularity and catered to everyone who disliked global chains or simply wanted to try
a place with a local touch and truly unique atmosphere, often spiced with some creativity.
China was a web connected country. Lyancoffee, a coffee-delivery WeChat app, which
started in 2012, had been delivering beverages from Starbucks, Costa Coffee and other brands.
Acquiring over 800,000 clients, it was selling over 15,000 cups of Starbucks per day, and had
become its largest distributor. It planned to sell 1,000,000 cups of coffee daily in 2017. These
1,000,000 cups would become its own brand, called Coffee Box. Initially, its strategy for
intercepting clients was based on a lower fee for delivery of its own coffee, set at 2 RMB, as
opposed to 5 RMB for competitors’ coffee.31 It was looking to raise 17,000,000 RMB and
solicited the endorsements of two TV celebrities in its promotional campaigns.32 It received
7,720,000 RMB in series B funding in April 2016.33
The list of competitors did not stop here. There were many chains and privately owned cafes
that directly and indirectly shared customers with Starbucks. Despite all this competition,
Starbucks remained the market leader.
Premium Positioning
To differentiate itself, Starbucks offered a premium experience. New local brands started
popping up, trying to imitate the experience at lower prices. McDonald’s and KFC also lured
customers to their “premium” locations with lower-priced coffee. Unlike its competitors,
Starbucks won its position by providing customer prestige. Lower prices at competitors’
shops had not yet endangered the status quo. However, if coffee became a commodity,
Starbucks would risk losing customers initially attracted by its premium allure.
The Customer
Young, urban adults aged 18 – 42 represented Starbucks’ core customer group. Brand affinity
and socioeconomic and psychographic attributes were transparent in customer profiling.
Initially, Starbucks attracted upper-class and nouveau-riche or tuhao (“vulgar rich”) 34
individuals frequenting places driven by Western, expensive and higher quality branding.
This snobbish element allowed the first coffee drinkers to show off by appearing in a Western
place, which was not affordable for a regular city dweller. This upholding “face” was a salient
concept for any Chinese and would register well both personally and professionally. In
29
Wong, V. (5 March 2015), “KFC Thinks It Can Out-Coffee Starbucks in China,” Bloomberg,
http://www.bloomberg.com/news/articles/2015-03-04/kfc-thinks-it-can-out-coffee-starbucks-in-china (accessed 15 April
2016).
30
Burkig, L. (31 March 2016), “McDonalds Plansto Add More Than 1,000 Restaurants in China,” The Wall Street Journal,
http://www.wsj.com/articles/mcdonalds-plans-to-add-more-than-1-000-restaurants-in-china-1459407784 (accessed 15 April
2016).
31 Huifeng, H. (19 January 2016) “Cashing in on Starbucks: China’s Lyancoffee sets up own Coffee Box brand as WeChat App
moves on from delivering foreign brews,” South China Morning Post, http://www.scmp.com/tech/appsgaming/article/1902841/cashing-starbucks-chinas-lyancoffee-sets-own-coffee-box-brand (accessed 15 April 2016).
32 Ruello, A. (23 February 2016) “Lyan Coffee, celui qui veut concurrence Starbucks,” Les Echos Entrepreneurs,
http://business.lesechos.fr/entrepreneurs/startup/021709823460-lyan-coffee-celui-qui-veut-concurrencer-starbucks207628.php# (accessed 15 April 2016).
33 TechinAsia (n.d.) “Lyan Coffee,” https://www.techinasia.com/companies/lyancoffee (accessed 15 April 2016).
34
Volodzko, D. (1July 2015), “The Coffee Drinker’s Guide to China,” The Diplomat, http://thediplomat.com/2015/07/thecoffee-drinkers-guide-to-china/ (accessed 15 April 2016).
6
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Starbucks China: Managing Growth Through innovation
relative value adjusted to per capita income, the price of a grande latte in China equalled
US$27 (converted to China’s per capita income) and cost a dollar more (US$4.80) than in
America.35 Business professionals acknowledged Starbucks’ comfort and quality and many
Chinese business meetings took place at Starbucks’ tables. A number of entrepreneurs,
freelancers and even students chose Starbucks as their hang-outs and working spaces.36
The “Third Place” Experience
The greatest trick Starbucks ever pulled off was to convince the world it was selling coffee in
China. In reality, it was renting couches to make its millions.37
For many, the reason to pay Starbucks a visit extended beyond the desire to grab a cup of
coffee. One would go there to indulge in a place that was complementary to one’s home or
work – the “third place,” where one could either relax and chill out or engage in study, work
or business conversation.38 “Starbucks is a destination for human connection, meetings, dating,
gathering with friends or be oneself (sic). It fits nicely with Chinese society’s increasing
yearning for a place that ‘makes them feel good’ in a hectic world.” 39 Conceptualizing
Starbucks as the third space was one of the highlights of Starbucks’ innovation.
The Perpetuum Mobile of Innovation
Calling it one of the most innovative things it had done, Starbucks held an annual meeting of
employees’ parents in the cities of Beijing and Shanghai, hitting 90% attendance. The
approach showed again that, for Schultz, innovation was not all about technology.40 However,
this did not mean that Starbucks was ignorant of technology either. In a March 2014 CNN
Money interview, the following conversation took place:
Schultz: “We believe that there is a digital opportunity to leverage the equity
of the brand and the mobile platform that we have that could
potentially be another source of revenue and profit for the
company”
Interviewer: “Does that mean not just using mobile for buying the products
Starbucks offers you are eventually selling your mobile
platform, licensing it out?”
Schultz: “I don’t wanna comment specifically, but I think you are on the right
track.”
Schultz had a broad smile on his face as he said this.
35
Schiavenza, M. (6 September 2013), “Why Is Starbucks So Expensive In China?” The Atlantic,
http://www.theatlantic.com/china/archive/2013/09/why-is-starbucks-so-expensive-in-china/279394/ (accessed 15 April 2016).
36 Bardsley, D. (28 March 2011), “Tea Loving China Warms to Coffee,” The National,
http://www.thenational.ae/business/retail/tea-loving-china-warms-to-coffee (accessed 15 April 2016).
37 Guilford, G. (17 September 2013) “In China Starbucks doesn’t sell coffee to make its millions. It rents couches,” Quartz,
http://qz.com/125138/in-china-starbucks-doesnt-sell-coffee-to-make-its-millions-it-rents-couches/ (accessed 8 June 2016).
38 Sgarro, V. (14 July 2015), “Coffee Culture is Catching On in Tea-Steeped China, “ National Geographic,
http://theplate.nationalgeographic.com/2015/07/14/coffee-culture-is-catching-on-in-tea-steeped-china/, (accessed 15 April
2016).
39 Starbucks (n.d.) “In China,” https://www.starbucks.com.cn/en/about/inchina (accessed 15 April 2016).
40
Nisen, M. (31 October 2012), “Sturbucks Has a Brilliant Strategy for Dominating the Chinese Market,” Business Insider,
http://www.businessinsider.com/starbucks-strategy-in-china-2012-10 (accessed 15 April 2016).
7
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Starbucks China: Managing Growth Through innovation
In the same interview, Schultz remarked, “If you are a retailer today you have to reinvent the
opportunity to drive new traffic into your store.” He also commented on the digital payment
system Starbucks had introduced, stating, “We are going to ultimately be a cashless society
and the phone is gonna be our wallet.” He added that already 14% of transactions happen on
mobile phones and that people now came to Starbucks more often having a mobile payment
option. 41 which Smith confirmed. It was then officially announced that China and Japan
would be the next two countries, after the US and Canada, where Mobile Order & Pay would
be introduced. This was bound to be successful given citizens’ affinity for technology and
mobile.42
As Schulz said, “We have insulated ourselves from the brick-and-mortar problem that will
face many retailers as a result of the experience that we created, the innovation both in
product and partner investments, as well as our technology…. We see no signs
whatsoever that we are going to be hit in any way by the seismic change in consumer
behavior because we invested ahead of the growth curve and continue to invest in those things
that are customer-facing, partner-facing, and technology.”43
Starbucks’ strategy covered almost all aspects of its internal and external concerns. However,
the Chinese and global economy appeared to be one of the crucial factors beyond its control.
Chinese Economy 2016
China’s Q42016 growth reached 6.8%, although some analysts believed it only reached 4.5%,
which was described as “very slow growth” [see Exhibits 6 and 7]. Regardless of which
number was true, the real underlying strength of the Chinese economy could not truly be
assessed based only on that number. The Chinese paradox of losing control of the economy,
despite its being strictly controlled, led to general confusion as to where that economy really
was.
In previous years, China’s economy had been driven by the industrial and manufacturing
sector. The overall demand for production declined as domestic and international orders went
down, while the government’s US$600 billion program (introduced during the financial crisis,
to promote development of infrastructure and housing estates, which also drove economic
growth), came to an end. What had previously generated economic growth went into
recession.
A high-income economy relying on the service industry became the new driving force.
Unfortunately, both consumer spending and the service sector were not expanding at a rate
sufficient to offset the slide in the old industrial economy 44 [see Exhibit 8]. This did not bode
well for the long run. Furthermore, other service industry sectors also suffered due to the
general slowdown. In the banking industry, for instance, the number of loans approval
declined, as industrial players could no longer qualify.45
41
CNN Money, (20 March 2014), Text, call or email for your latte, http://money.cnn.com/video/news/2014/03/20/n-starbucksceo-howard-schultz-digital-payments-mobile-data-store-of-future.cnnmoney/ (accessed 15 April 2016).
42 Jaekel, B. (1 April 2016), “Starbucks Success with Mobile Order & Pay Spawns Asian Expansion,” Mobile Commerce Daily,
http://www.mobilecommercedaily.com/starbucks-mobile-order-and-pay-20-pc-increase-spawns-asia-rollout-plan, (accessed 8
May 2016).
43 Soper, T. (21 January 2016), “Starbucks mobile order-ahead program reaches 6M orders per month,” Geek Wire,
http://www.geekwire.com/2016/starbucks-earnings/, (accessed 8 May 2016).
44 Langfitt, F. (n.d.) “Starbucks and Steel: The Divergent Directions of China’s Economy,” NPR,
http://www.npr.org/sections/parallels/2016/05/02/476460617/starbucks-and-steel-the-divergent-directions-of-chinaseconomy?utm_source=facebook.com&utm_medium=social&utm_campaign=npr&utm_term=nprnews&utm_content=201605
02, (accessed 11 May 2016).
45 Ibid.
8
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The expected change from an “export-driven economy to the consumption driven economy”
could last for decades characterized by slow-downs, crises and tribulations, without ever
attaining previous growth levels. 46 Nevertheless, Schultz persisted: “I personally have no
doubt that the Chinese government's commitment to true economic reform is genuine.” He
expressed his belief that Beijing’s plan to double per capita income was achievable, which
would create the growth of a whopping middle class of 600 million.47 This middle class might
not stick to Starbucks forever, though.
Third Wave
The first wave of American coffee culture was probably the 19th-century surge that
put Folgers on every table, and the second was the proliferation, starting in the 1960s
at Peet's and moving smartly through the Starbucks grande decaf latte, of espresso
drinks and regionally labeled coffee. We are now in the third wave of coffee
connoisseurship, where beans are sourced from farms instead of countries, roasting
is about bringing out rather than incinerating the unique characteristics of each bean,
and the flavor is clean and hard and pure.48
- Jonathan Gold, Pulitzer Prize Winner
Starbucks’ first Seattle Roastery was opened post the Third Wave. Schultz was confident that
“it would transform the future of specialty coffee.” 49 Belinda Wong, president Starbucks
China, remarked: “The launch of Starbucks Reserve coffee will bring a unique coffee
experience to China.” 50 By then, a number of Reserve Roasteries had already been opened
worldwide, and there were already seven in the Chinese cities of Beijing, Guangzhou,
Shanghai and Shenzhen in 2014.
Delocator.com
The first, second and third waves ensconced the coffee-drinking experience firmly within the
framework of trends and fashions. However the common admiration of Western brands also
created brand antipathy movements. Delocator.net [see Exhibit 9] was a website committed
“to find independently owned & run stores in your neighbourhood”51 as it helped to locate
unbranded establishments. Similar websites might soon appear in China. “When I think about
Starbucks, I think about Comfy Chairs, Great Smells, Pretty People and WiFi. To be honest,
if the choice is between Starbucks and a local provider, I will always try to support the little
guy” 52, wrote one industry commentator.
46
Miller, L. (19 January 2016), “Executive Edge: ‘Paradox’ of China’s Growth,” CNBC,
http://video.cnbc.com/gallery/?video=3000480797, (accessed 14 May 2016).
47 Haleem, F. (23 April 2016) “Starbucks Corporation Is Just Getting Started In China,” CBN, Chinese Business news,
http://www.chinabusinessnews.com/2636-starbucks-corporation-is-just-getting-started-in-china/, (accessed 11 May 2016)
48 Beezer, (6 August 2010), Home Barista, http://www.home-barista.com/cafes/explanation-of-3rd-wave-and-what-were-firsttwo-t14910.html, (accessed 12 May 2016).
49 Brown, N. (5 September 2014), “Starbucks Unveils Don’t Call It Third Wave’ Concept, Plans Seattle Roastery Opening,”
Daily Coffee News, http://dailycoffeenews.com/2014/09/05/starbucks-unveils-new-dont-call-it-third-wave-concept-plansseattle-roastery-opening/, (accessed 12 May 2016).
50 Starbucks(28 October 2014) ”Startbucks Reserve Coffees Launch in China,” https://news.starbucks.com/news/starbucksreserve-coffees-launch-in-china, (accessed 12 May 2016).
51
www.delocator.net, (accessed 12 May 2016)
52 Dollinger, M. (November 6, 2008), “Starbucks ‘The Third Place,’ and creating the ultimate customer experience,”
FastCompany, http://www.fastcompany.com/887990/starbucks-third-place-and-creating-ultimate-customer-experience,
(accessed 12 May 2016).
9
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The Anti-Chain Trend
Starbucks had its eyes wide open and quickly realized that the “little guys” mattered. It soon
commenced planning and executing its “debranding” strategy, which was “the removal of
branded visual identifiers such as logos, fonts, company colors in an effort to appear less
corporate and more independent.”53 Starbucks first proceeded by changing only its logo, yet
later it went further and launched Stealth Starbucks, which in the long run prompted further
opening of more shops that did not carry the Starbucks brand. 54 Occasionally, these debranding efforts put Starbucks in the uncomfortable position of being accused of stealing its
neighbors’ designs. "It's got a lot of salvaged wood, it's the same paint color inside as Smith
and some of the wood framed chalkboards look very, very similar," said Linda Derschand, a
mountaineer-looking coffee bar owner who felt Starbucks had copied her ambience. "If they
had decided to do that look in a different neighborhood or city that would be one thing, but
trying to position themselves as an independent coffee house? Where's the independent spirit
in knocking someone off?"55
As the Chinese customer’s affinity towards brands came a bit later than that in the Western
world, so might the behavioral change and attitude shift towards brand antipathy also follow
at some point in the future.56
Paradox of Growth
Fast growth management required the employment of a license model. In January 2016,
Starbucks had 9,600 licensed and 10,200 company-operated shops worldwide. The licensed
shops, however, generated only 9% of the total revenue,57 which might suggest that the more
licensed shops Starbucks opened, the lower their revenue per shop [see Exhibits 10 and 11].
Furthermore, quality control in licensed stores was much more difficult to sustain. On top of
that, profits were shrinking [see Exhibits 12 and 13] due to increasing labor costs [see Exhibit
14] and skyrocketing rents. Starbucks was flooding the market, dragging down product and
service quality [see Exhibit 15]. As a consequence, it was changing its global image from
luxurious to widely accessible.
The Future
In 2000, Schultz resigned as Starbucks CEO, drained after successfully growing Starbucks
into a global company.58 Eight years later, in January 2008, in response to a 50% drop in share
prices and unease related to rapid growth, he came back to the CEO post to save Starbucks.59
With the changes he executed, the company started a new growth cycle. In 2016, after another
eight prosperous years, was Starbucks on the way to never-ending growth or was this the
53
Cooper, A. (24 September 2009), “Debranding,” Urban Dictionary,
http://www.urbandictionary.com/define.php?term=debranding, (accessed 12 May 2016).
54 Drew Reed, (14 January 2015), “Your Local Indie Coffee Shop May Be a Stealth Starbucks”
http://www.citymetric.com/business/your-local-indie-coffee-shop-may-be-stealth-starbucks-637 , (accessed 12 May 2016)
55 Kiesler, K. (15 July 2009) “Neighbor Starbucks Stole My Ambience,” Seattle Pi,
http://www.seattlepi.com/local/article/Neighbor-Starbucks-stole-my-ambiance-1305154.php, (accessed 12 May 2016).
56 Schiavenza, M. (6 September 2013), “Why Is Starbucks So Expensive In China?” The Atlantic,
http://www.theatlantic.com/china/archive/2013/09/why-is-starbucks-so-expensive-in-china/279394/, (accessed 12 May 2016).
57 Sharma, A. (16 Jan 2014), “Starbucks: 5 Key Growth Rates To Watch,” The Motley Fool,
http://www.fool.com/investing/general/2014/01/16/starbucks-5-key-growth-rates-to-watch.aspx, (accessed 16 May 2016)
58 Investopedia, (March 30, 2015), ”Why did Howard Schultz leave Starbucks, only to return eight years later?”
http://www.investopedia.com/ask/answers/033015/why-did-howard-schultz-leave-starbucks-only-return-eight-years-later.asp
(accessed 8 June 2016).
59
Birchall, J., Politi, J., Guerrera, F. (08 January, 2008), “Strarbucks’s Schultz returns as CEO,” Financial Times,
http://www.ft.com/intl/cms/s/0/e89a896e-bd6b-11dc-b7e6-0000779fd2ac.html#axzz4B5EbtkMz, (accessed 5 June 2016).
10
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beginning of the next cycle of decline? What could people like Kelly Smith and other
members of the Starbucks management team do to prevent the CEO from burning out again
before they roasted more coffee?
11
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EXHIBIT 1: STARBUCKS GROWTH
Source:http://performance.morningstar.com/stock/performancereturn.action?t=SBUX&region=usa&culture=en-US
EXHIBIT 2: QUARTERLY REVENUE OF STARBUCKS WORLDWIDE
Source: http://www.statista.com/statistics/218404/quarterly-revenue-of-starbucks-worldwide/
12
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EXHIBIT 3: FOURTH INDUSTRIAL REVOLUTION
Source: https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-itmeans-and-how-to-respond/
13
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EXHIBIT 4: THE COMPETITIVE LANDSCAPE SUMMARY
Examples of Direct Competition in China
Costa Coffe
UBC Coffee
85 Degrees
SPR Coffee
Café Bene
Pacific Coffee
Coffee Bean& Leaf
McDonald
KFC
Lyancoffee
Independent Stores
UK
Taiwan
Taiwan
Taiwan
Korea
Hong Kong
USA
USA
USA
China
International
365 locations (2015), planned 700-900 by 2020
1,300 locations (2014),
planned 450 stores by 2017
together with UBC Coffee is the biggest competitor
283 locations (2013)
no threat to Starbucks in China
1 location (2016), planned 700 by 2026
2,200 locations (2016), planned 3,250by 2021
over 5,000 locations (2015),
online
no data
Paris Baguette
Dunkin’ Donuts
Other pastry shops
Korea
139 stores (2015), planned 2,000 (CN + USA) by 202560
USA
16 stores (2015), planned over 1,400 by 2045 61
International no data
60
DongA.com, (20 December 2015), “Paris Baguette opens its 200th overseas store in Shanghai”
http://english.donga.com/List/3/02/26/411962/1, (accessed 15 April 2016).
61
Dunkin’ Donunts, (8 January 2015) http://news.dunkindonuts.com/news/dunkin-donuts-announces-expansion-plans-in-chinawith-signing-of-largest-development-agreement-in-company-history, (accessed 15 April 2016)
14
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EXHIBIT 5: THE MAGIC OF MOBILE
Source: http://www.bloomberg.com/news/articles/2016-03-30/starbucks-takes-itspioneering-mobile-phone-app-to-grande-level
EXHIBIT 6: CHINA GDP GROWTH RATE
Source: http://www.tradingeconomics.com/china/gdp-growth
15
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EXHIBIT 7: CHINA GDP
Source: http://www.tradingeconomics.com/china/gdp
EXHIBIT 8: CHINA SERVICES PMI
Services PMI (above 50 indicates that the services sector is generally expanding; below 50
indicates that it is generally declining)
Source: http://www.tradingeconomics.com/china/services-pmi
16
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EXHIBIT 9: DELOCATOR.COM
Source: www.delocator.com
EXHIBIT 10: LICENSED STORE DATA
Source: http://www.sec.gov/Archives/edgar/data/829224/000082922415000038/sbux9272015x10k.htm
17
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EXHIBIT 11: COMPANY OPERATED STORES
Source: http://www.sec.gov/Archives/edgar/data/829224/000082922415000038/sbux9272015x10k.htm
EXHIBIT 12: OPERATING MARGIN CHANGE
Source: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=quarterlyearnings
18
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EXHIBIT 13: FINANCIALS CAP 2014/2015
Source: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=quarterlyearnings
EXHIBIT 14: CHINA AVERAGE YEARLY WAGES
Source: http://www.tradingeconomics.com/china/wages
19
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EXHIBIT 15: CUSTOMER SATISFACTION IN THE U.S.
Source: http://www.statista.com/statistics/216719/starbucks--customer-satisfaction-in-the-us/
20
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EXHIBIT 16: CONDENSED CONSOLIDATED BALANCE SHEETS
Source:http://quote.morningstar.com/stock-filing/QuarterlyReport/2016/3/27/t.aspx?t=XNAS:SBUX&ft=10-Q&d=ceef2993371383e54875c0bf06e449ce
21
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EXHIBIT 17: COFFEE PRICES
Source: http://www.fool.com/investing/general/2014/05/05/why-does-starbucks-likerising-coffee-prices.aspx
22
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EXHIBIT 18: DITCHING COFFEE FOR TEA
Source: https://www.statista.com/chart/3277/younger-americans-are-ditching-coffee-for-tea/
23
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