A Report for Starbucks Challenges
in China
Beifang Yang, Kaiqun Xian, Meng Wu
BKM Consulting Corporation
Prepared for
Mr. Troy Alstead
Chief Operating Officer of Starbucks Corporation
May 4, 2014
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Table of Contents
LIST OF ILLUSTRATIONS……………………………………………………………….iii
ABSTRACT……………………………………………………………….………………....iv
INTRODUCTION……………………………………………………………………………1
Background……………………………………………………………….……………….1
Problem……………………………………………………………….…………………...2
Purpose……………………………………………………………….……………………2
Scope……………………………………………………………….……………………...2
DISCUSSION………………………………………………………………………………...3
Negative Publicity on State-owned Media………………………………………………..3
Controversial Response on Chinese Social Media………………………………..............4
Different Response of International Companies……………………..…………………...5
A Small Chain………...……………..…………..…………………...…………………...6
A Competitive Market……………………………...………………..………....................7
CONCLUSION……………………………...………………..……………………………... 9
RECOMMENDATIONS……………………………...…………………………..…………9
REFERENCES……………………………...……………………………………………....11
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List of Illustration
Figure 1 Different Price In Four Major International Cities…………………………..………3
Figure 2 Pricing Grounds...........................................................................................................4
Figure 3 Consumer Attitudes toward Apple Product.................................................................5
Figure 4 Consumer Attitudes toward Starbucks .......................................................................5
Figure 5 The Distribution of Starbucks in Chinese Cities.........................................................7
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Abstract
This report investigates how Starbucks must gain a competitive advantage in Chinese
marketplace by reinforcing public relations and retaining widespread marketing promotion.
The overpriced products of Starbucks in China are attracting much of the ire from local
watchdog groups and media, under the background of China has been cracking down on
pricing in markets. The state-controlled media outlets have accused Starbucks in China of
squeezing higher margins out of its operation in China than in other markets. The brand
image of Starbucks in China has been heavily severely damaged. Instead, We need to adapt
new marketing and public relations strategies to redeem image and attract more customer
supports. To do this, we need to develop poll through local consumers to indicate the what’s
the degree of satisfaction of current pricing.
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Introduction
Background
Since the opening of the first Starbucks store in Taiwan in March 1998, Mainland China
at the China World Trade Building in Beijing in January 1999, Hong Kong in May 2000, and
Macau in August 2002, the growing interest and appreciation of high quality coffee and the
Starbucks Experience by Chinese consumers has produced steady store expansion throughout
China. In the Mainland region with the fastest growth, there are over 1000 stores in 60 cities
including Beijing, Tianjin, Shanghai, Guangzhou and Shenzhen.
Within a period of time, Starbucks has successfully established itself as the premium
coffee leader in China with great brand recognition and high customer satisfaction. Its
inspirational, progressive, professional and intellectual image has been widely accepted by a
variety of the Chinese l customers including, but not limited to, a rising upper-middle class
“modern Chinese”, white-collar workers, college students etc. The growing expat population
and Chinese who know us from visiting overseas also form a core of our consumers. For
many Chinese, Starbucks is not just the best coffee but also a synonym of a universal quality
life, a “modern” way of living, a positive life attitude, or an icon of a pioneering, progressing,
transforming modern Chinese city.
Taking a long-term vision in China, Starbucks remains confident in its success in the
Chinese market, as it views itself as a “different kind of company” which is developing in
China exactly at the time when the Chinese people are looking for more leisure lifestyle and
when the company ideals mesh perfectly with China’s aspiration to develop a “harmonious
society.” The fact that corporate social responsibility is at the heart of our company’s values
is greatly appreciated by the Chinese people and society.
In China, Starbucks maintains the unique character of serving the finest coffee in the
world and high quality globally appreciated food. While continuing to offer the best coffee, it
is also leading in China in spreading coffee knowledge and expertise, and creating a coffee
culture in a traditional tea-drinking society. The Starbucks store atmosphere is one, which is
similar to the old teahouse of China—a gathering place and a community living room.
Also as in other parts of the world, the Starbucks Experience is unique and provides
much more than a premium cup of coffee to customers. The “third place” concept, with the
legendary Starbucks service, has resonated in China, as the Chinese people’s living standard
rises and as they seek new leisure places and habits. It is a destination for human connection,
meetings, dating, gathering with friends or be oneself. It fits nicely with Chinese society’s
increasing yearning for a place that ‘makes them feel good’ in a hectic world. Moreover,
Starbucks is fully respectful of the long history of Chinese tradition and culture and integrate
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the Starbucks experience with local customs, in store design, local food and drink offering
etc., to uplift the unique Starbucks Experience, which it is committed to offer.
And finally, Starbucks is not only running a for-profit business in China, but also
contributing to the society through its corporate social responsibility programs—both at
national and local levels. In September 2005, Starbucks sets up a 5 Million US dollars
nationwide China Education Project to help improve education in the comparatively
underdeveloped western and central areas, the first phase of which is a 2-week training for
500 schoolteachers from rural schools in Western China. In addition, locally, Starbucks
partners across China are engaged in projects such as book drives, beach cleanups, disaster
relief fundraising, coffee grounds environment project, school building, children tutoring, etc.
Problem
Starbucks like other companies in China often be blamed for high prices. Due to import
tax, labor and other expenses, prices in China will be higher than in other places. Press and
media reveal the over price products and thus arise the anger of consumer to the over-priced
products. This impairs the reputation of Starbucks and causes a lot of obstacles need to be
solved in the future.
Purpose
The purpose of this report is to show that because of the news of overpriced product to
damage the public relation with the customers and negative impact of brand image, Starbucks
in China must adapt its marketing strategy to rebuilt and reconstruct the brand image and the
relationship with customers, especially with the state-controlled media outlets.
Scope
This report explores the drink culture in the current china market and suggests ways for
Starbucks in China to complete new marketing strategy successfully and providing the pricy
strategy to reconstruct the brand image. Doing so, we will expand new promotion strategy to
coordinate with current public relation situation to reconstruct our brand among the Chinese
customers to own more target market in china.
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Discussion
Conducting business in a different country from its original country faces a lot of
challenges such as the cultural differences, consumer’s taste, regulation and rules. All these
differences require customized strategies to the particular market. Starbucks has been doing
business in China more than a decade, owning more than 800 coffee stores and a well-built
brand awareness in China. In general, Starbucks is the leader in China’s coffee industry and
has established a good reputation in the industry. Undeniably Starbucks is the game changer
in China’s coffee industry, transforming the idea of drinking coffee from a foreign and
luxurious concept to a daily basic need among Chinese consumers. However, earlier in this
year, Starbucks encountered new issues, and existential issues are starting to emerge.
Negative publicity on State-owned media World Consumer’s Right Day was established on March 15, 1983 to promote consumer
rights around the world. And the state-owned media, China Central Television (CCTV),
covers the annual events on television. This TV program has a growing audience in China
every year. With more scandals exposed by the media, the Chinese consumers have a
growing sense of protecting their own rights. The Chinese market was not opened for foreign
companies until the late 1980s. And the foreign companies were perceived as more high-end
and better quality. But as the market gradually opens and consumers have more choices, they
also change their perception of brands from overseas. On March 15, the state-owned media
CCTV exposed that the Chinese consumers are paying higher price for a cup of beverage
than consumers in any other countries around the world, including countries where living is
expensive such as Japan, United Kingdom, and Starbuck’s home United States. The
correspondents at CCTV reported: “A cup of 354 milliliters of Latte coffee costs 27 yuan
(US$4.4) in China as compared to only 19.98 yuan in Chicago, 14.6 yuan in Mumbai and
24.25 yuan in London.”(CCTV).
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Although Starbucks claimed that the price of a cup of coffee is influenced by many
factors, and the price is reasonable considering the costs of operating coffee shops in China,
some may find the issue to be very controversial. Starbucks said that the Chinese consumers
like to have their coffee in the store and are prone to stay in the store for a longer time while
the western consumers are used to grab and go. But the Chinese media questioned that the
rent in world cities such as London and Tokyo is much higher than the rent in China. Here is
a chart of the cost of a grande latte in China.
Regardless of the fact whether Starbucks is enjoying a higher profit margin by squeezing
the Chinese consumer’s wallet, the negative publicity has drawn huge attention among
Chinese consumers. The issue was not only a hit on the state-owned media, but also
discussed by hundreds of thousands of people on the most popular Chinese social media,
Weibo, which is the equivalent to Twitter in China. The CNN says: “CCTV was widely
ridiculed on Chinese social media, where its report drew almost 30,000 comments on Weibo
alone.”(CNN)
Controversial Response on Chinese Social Media
If we say the CCTV’s practice on accusing Starbucks charging unreasonable price to
Chinese customers is arguable, however, the way that Starbucks responded to the media
heated the hot issue even more. The next few days after the CCTV published that editorial on
press and released the segment on television, Starbucks didn’t issue any response to it
positively. Instead, Starbucks’s official Weibo profile posted a picture of an alpaca with a
note saying “Happy new year of horse”, which is very odd not only because the Chinese
lunar new year had passed way earlier but the pronunciation of alpaca in Chinese is a rude
word. Many people view Starbucks’s negative response to the media as a passive aggressive
response. The post annoyed many Internet users on Weibo. And a huge part of their
customers said they didn’t care that much about the price of Starbucks coffee, but Starbucks
saying rude thing on their official profile did offend the customers. Starbucks deleted that
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post later with no explanation to the whole issue, both the negative editorial and the post on
Weibo, which makes the purpose of posting a picture of an alpaca more skeptical.
Different response of international companies
It is not the first time that an international company being accused of charging higher
price to Chinese consumers on Chinese media, but different companies response in different
ways. Earlier this year, Apple was criticized that Apple offers one year warranty to Chinese
consumer whereas they offers two years warranty to other countries. Unlike Starbucks, an
apology letter signed by the CEO of Apple Tim Cook was released. The contributor Hillary
Dixler at eaters.com wrote: “Earlier this year Apple was similarly criticized, prompting an
apology latter signed by CEO Tim Cook. That letter acknowledged “the perception that
Apple is arrogant and doesn't care or attach enough importance to consumer feedback” and
offered apologies for “any concerns or misunderstandings this gave consumers.” (Dixler). On
the contrary, the spokesman at Starbucks said it is unfair to accuse Starbucks earning a higher
margin in China because their pricing strategy is based on the local market. And Starbucks
didn’t show any clues of being apologetic about their pricing strategy. To find out what
impact has done to consumer’s perception of these companies, we had conducted a survey of
consumer’s attitude toward the price of foreign product. According to our survey, 62% of
consumers would continue to use and purchase apple product, 21% of them said they didn't
care about the change of warranty policy, 9% of them thought they were frustrated by.
From the chart above, it is very clear that the way that apple responds to customers and
medias is more sophisticated than Starbucks. By listening to the consumers, Apple pictures a
open-minded image to the consumers, showing Apple care and value their opinions and
feedback. After all, it is the attitude that makes the difference.
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A Small Chain
The first Starbucks store in China was opened in the late 90s and now there are more
than 800 hundreds stores in the nation. With a licensing agreement with a Chinese
corporation, Ma Da coffee company, Starbucks not only owns many stores but also a
reputation for being the pioneer in China’s coffee industry. The rate of new Starbucks store
opening is not very low considering China’s business environment is vastly different from the
United States, but Starbucks’s pace of opening new stores does not rival the increasing
demand of the consumers. Drinking coffee daily is not a new idea among young Chinese
generation in first tier cities such as Beijing and Shanghai, and even to people living in
second-tier cities. Although China is considered a more tea-drinking coffee rather than coffee
drinking, but people are adapting the concept of drinking coffee as an ordinary need very
quickly.
In 2012, Starbucks planned to increase the number of their stores in China to more than
1200 by 2015. However, from the fact of operating 800 stores, it is very likely that Starbucks
is not going to accomplish that goal by the original time they have planned. On the other
hand, consumers also find a coffee store is not always feasible, even in Beijing. Not to
mention consumers from smaller cities find it even more difficult to get a sip of coffee. Most
of the Starbucks stores are located in cities on the southeast coast of China. However the
mid-west China is growing very quickly in recent years. You may find an interesting fact that
even Luxury brands, for instance Gucci and Prada, has no less presence than Starbucks in
those smaller cities. And the rent for retail spaces is generally much lower than it is in Beijing
and Shanghai. Therefore opening more stores is a very reasonable move to Starbucks.
A Competitive Market
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As we all know China has thousands of years of history drinking tea, drinking tea is a
strong culture, which is an irreplaceable drink in the Chinese culture. It is hard to imagine
that Chinese people will drink coffee instead of tea. But as time goes on, Chinese people
accept drinking coffee to as a new culture, and China is a huge growing market for coffee
consumption. Although Starbucks has been very successful in China, it is now facing the
challenges from competitors. Especially Costa Coffee, a UK based multinational coffee
house. As the Costa brand story says on its official website: “The first Costa store in China
opened in Shanghai city in 2007. In 2012, Costa celebrated the establishment of the 200th
Costa store in China.”(Costa). Costa Coffee is growing so rapidly and it is the strongest direct
competitor of Starbucks in China. Although Costa Coffee’s brand name is not as famous as
Starbucks, Costa Coffee has been very aggressive on its expansion strategy. Costa Coffee not
only focuses on first-tier cities, but it also expands to the market of second-tier cities very
quickly. The British coffee company aims to compete with Starbucks in a very direct way
and has many locations next to Starbucks store. The battle between the US based coffee
company and the UK based one is intense. The contributor at The Economic Observer Caitlin
Coyle wrote: “Costa Coffee has its own way of competing with Starbucks and their
accessibility to locations. They have managed to open most of their stores next to or in close
proximity to Starbucks. The company is also trying to increase their rate of expansion. Costa
Coffee plans to open 2 to 3 stores a week.”(Coyle). This plan can explain Costa Coffee is a
strong competitor to Starbucks clearly.
However, Costa is not the only international competitor to Starbucks in China. However,
another American company, who is rarely considered as a direct competitor to Starbucks,
McDonald’s, also has involved in the battle of coffee in China. McDonald’s in China sells
freshly brewed coffee, as an individual brand named McCafe. Comparing with Starbucks,
McDonald’s coffee is much cheaper than Starbucks. As Coyle wrote in another editorial,
“McDonald's does not need to displace Starbucks to succeed. It just needs to add to its slice
of what is a huge market.”(Coyle). Though McCafe isn’t considered a head-to-head
competitor to Starbucks, it still has a place in the lower price market.
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Competitors
China has thousands of years of history drinking tea. Drinking tea is a strong culture in
China. It is hard to imagine that Chinese people will drink coffee instead of tea. But as time
goes on, drinking coffee becomes a new culture and thus means a huge coffee market is
growing up. Although Starbucks is very successful in China, it has many competitors,
especially Costa Coffee, a British multinational coffeehouse. “The first Costa store in China
opened in Shanghai city in 2007. In 2012, Costa celebrated the establishment of the 200th
Costa store in China.” According their website, Costa Coffee is growing so quick that Costa
is the strongest competitor of Starbucks in China. Costa Coffee’s brand name is not as
famous as Starbucks in China right now. As Costa Coffee growing fast, more and more Costa
Coffee stores are opening in China. Costa Coffee focuses on first-tier cities, they have 90
stores in Shanghai. As an comparison, Starbucks has 252 stores. “Costa Coffee has its own
way of competing with Starbucks and their accessibility to locations. They have managed to
open most of their stores next to or in close proximity to Starbucks. The company is also
trying to increase their rate of expansion. Costa Coffee plans to open 2 to 3 stores a week.
The head of Costa Coffee said that the goal is to win a third of the Chinese coffee market.”
This plan clearly demonstrates Costa Coffee a strong competitor to Starbucks.
As a competitor, McDonald also sells coffee in China. In contrast with Starbucks,
McDonald’s coffee is much cheaper. According to the website, “McDonald's does not need
to displace Starbucks to succeed. It just needs to add to its slice of what is a huge market.” In
all, McDonald’s is a major competitor of Starbucks. There are two reasons. First,
McDonald’s is famous. Second, McDonald’s coffee is much cheaper than Starbucks.
Conclusion
Starbucks should change their attitude to consumers. Since they deliver a narrow-minded
company image and not willing to listen to the consumers in China.
Although Starbucks has a strong brand reputation, their arrogant attitude could jeopardize
their brand reputation that they built for decades.
With China’s growing demand for coffee, the market keeps growing and has great
potential. There are more famous brand coffee shops opening stores in China to join in the
competition. Starbucks faces a more competitive situation than ever. The competitors are
catching up very quickly. So costumer’s loyalty is essential to Starbucks in the competition
because customers have so many other choices. For that reason, they can easily switch to
other competitors. Thus Starbucks might fall behind if they do not revaluate the competition,
and even lost the leader role of coffee industry in China.
Recommendations
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By implementing the following recommendations, based on the conclusions reached in
this report, Starbucks in China can succeed in rebuilt brand image, target more market in
china, and reconstruct the relationship with customers and mainstream media.
1. Start a campaign to improve Starbucks’s brand image in China and advocate
Starbucks as an open-minded company to Chinese consumer.
2. Recruit new public relation teams, focusing on improving the image of Starbucks on
social media. Starbucks also should increase their interactions with consumers.
3. Keep the current pricing strategy instead of decrease the price of Starbucks products.
Otherwise the value of Starbucks brand is shrinked. But it is crucial to gain
customer’s credit that the price is reasonable.
4. Utilize different promotion strategies to attract customers since Starbucks want to
have a consistency on their pricing strategy. Promotions such as getting bonus on
gift cards are appealing to new customers.
5. Enrich the benefits of loyalty program. To keep and seal the existing loyal members
helps Starbucks to build a stronger customer relation.
6. Focus more on second-tier cities where the purchasing power is robust. Cities such
Chengdu and Chongqing in South-west China have a strong purchasing power but
are not Starbucks’s focusing market right now.
7. Re-decorate old and worn Starbucks stores at premium locations. A fresh
appearance of Starbucks store at premium locations, such as up-scale office
buildings and shopping centers, brings consumers a message of a distinctive brand
image from competitors.
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REFERENCES
Coyle, Caitlin. "Poor Farmer: Coffee’s Next Frontier: The Expansion of Starbucks and Costa
Coffee in China." Poor Farmer: Coffee’s Next Frontier: The Expansion of Starbucks
and Costa Coffee in China. The Economic Observer, 7 Nov. 2011. Web. 08 May 2014.
Kline, Daniel. "Mcdonald S Coffee vs Starbucks Can Mccafe Make a Dent." Mcdonald S
Coffee vs Starbucks Can Mccafe Make a Dent. N.p., 4 Feb. 2014. Web. 08 May 2014.
"Yearly Archives: 2011." China Beverage News. Zhu Wenqian, 1 Oct. 2011. Web. 08 May
2014.
"A Drop of History in Every Cup." COSTA. N.p., n.d. Web. 08 May 2014.
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