How Starbucks Got It Right In China

by Trefis Team
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While Starbucks Corporation (NASDAQ:SBUX) has been diversifying its offerings in the U.S. with its foray into tea, juice, bakery, etc., international expansion still remains a big part of its growth plans. The coffee giant will open soon its 1,000th store in China, making the world’s most populous nation its second biggest market after the U.S.

Kudos to Starbucks for becoming so popular in a country that has a predominantly tea-drinking culture. Starbucks certainly tweaked its menu a bit to cater to the local tastes, but replacing coffee with tea was never a good idea. You don’t want to change your menu to an extent that you lose your identity. So if there were minimal menu changes, how did Starbucks become so popular in China? Moreover, with Starbucks’ prices, it would have been an arduous task to keep customers coming back.

See our full analysis for Starbucks Corporation

Here are some of the things that Starbucks did right:

a) Brand Positioning

Asian countries are quick to embrace Western brands since foreign products are often considered a sign of quality and prestige. Starbucks enjoys an upscale image in the U.S., but it enjoys an even better image in China. This is because Starbucks opens big, swanky stores at posh, highly visible places. Starbucks has also targeted the younger demographics since it is considered hip among the Chinese youth to hang out at Starbucks. (You’ll often find a lot more Facebook tagging at Starbucks among Chinese teenagers!).

For the office goers, being seen at Starbucks is a sign of affluence and sophistication. It is even common to have informal office meetings at Starbucks.

b) Consumer Psychology

You’ll also find a lot of couches and sofas at Starbucks outlets in China. As is often the trend in developing countries, diners seek value in anything they buy. If they are spending $5 per person on average (which probably translates to more than $10 in purchasing power terms), they might as well stay, relax and spend some time before leaving so that it’s money well spent. Take out for food or drinks is not a very big trend in China. Thus, Starbucks in China is truly a social experience and not just for serious coffee drinkers. [1]

Starbucks has also become the go-to place to enjoy a slow meal without spending a fortune. The fast food chains or the local Chinese restaurants can be excessively crowded. At high end restaurants, diners are under pressure to eat and leave. In cities that are packed with people everywhere, finding a decent place to relax without spending too much can be a luxury!

c) Better Work Environment

Labor laws are relatively lax in China and small scale Chinese shops (or family owned single chain stores) often exploit labor. The employees are made to overwork and are often inadequately paid. This is where working at Starbucks is a huge upgrade for the company’s Chinese workforce. Not only are the working conditions better, the employees are paid adequately in case they work a few extra hours.

There is also an opportunity for employees  to get promoted (e.g. you could start from a barista and work your way up to becoming the store manager). The company’s values and ethos are also easier to pass on to the employees if they are made to feel welcome.

Starbucks’ success in China is important as it looks to open more stores in Latin America and India. We will keep a close eye on its developments in the overseas markets.

We  have a $67 price estimate for Starbucks, which is about 10% below the market price.

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Notes:
  1. Starbucks sees big growth in China, July 29, 2013, money.cnn.com []
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