Why Is China The Center-Piece Of Starbucks’ Growth Story?

by Trefis Team
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China is the brightest star of the Starbucks growth story. The company has almost 2,300 stores in over 100 cities in China, and continues to open more than one store per day. China outshone the other regions in the June quarter, by posting 7% comparable sales growth due to increased traffic. Further, China accounts for over 10 million of the 19 million Starbucks Reward members in China and Asia Pacific (CAP). To reinforce China’s growth potential, Starbucks has plans to open up 2,500 stores for the next five years in the region.

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Why Is The Focus On China?

Starbucks is facing intense competition from western brands like McDonald’s, Dunkin’ Donuts, and Burger King, to establish a foothold in China, not to mention the existing domestic players. However, Starbucks differs from the other food chains in the fact that it is seeing continued success in the region, while others, like McDonald’s, which is selling-off its restaurants in mainland China, are seeing their business flailing. The question to be asked here is why is everyone focusing on China. There are a number of reasons. Firstly, the American market is largely mature. Consequently, a large growth impetus cannot be expected from the U.S. That means Starbucks, like others, needs to look at emerging countries and markets with low penetration to drive revenues. This leads us to China, which is the second largest economy in the world. The middle income class in China is expected to double over a period as short as five years. Although, its economy has slowed down recently, China is still among the fastest growing nations, far ahead of Europe and the States.


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What Is The Reason Behind Starbucks’ Success In China?

According to data from Roland Berger, Starbucks dominated the Chinese coffee market with an impressive 60% share, while McDonald’s and Costa only make for 13% and 11% of the total. One of the major reasons behind Starbucks’ success in China, when others are failing, is its commitment towards delivering what customers want. Instead of trying to pitch the U.S. bestsellers in China, it came up with new and innovative products, such as green-tea flavored coffee, which holds appeal for the country’s masses. Secondly, rather than pushing take-out orders, which account for the majority of American sales, Starbucks adapted to local consumer wants and promoted dine-in service. Although dine-in services bring in lesser revenue per square meter, Starbucks’ high pricing strategy in the area results in China being as profitable a market as the U.S.

In addition to all this, Starbucks proved itself to be an employee-friendly workplace. While most western conglomerates treat their Chinese employees like cheap labor, causing the turnover rate to be high, Starbucks has invested in its employees through programs like student loans and subsidized accommodation. This further strengthened Starbucks position in China as satisfied employees are the best marketing agents a company can possibly ask for as they are the ones responsible for customer experience. Moreover, it has smartly partnered with local companies in various parts of China to overcome hurdles, deal with the complex foreign laws, and thus, grow effectively. The recent partnerships with the Chinese company, Tingyi, to manufacture and sell “ready to drink” products in China, is one example.

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What Is Next For Starbucks In China?

According to the management, Starbucks plans to make China its largest retail market by the end of 2019. As mentioned before, it plans to open 2,500 new stores over the next five years in the region, even as the concerns about the slowdown in China increase. In 2017, it plans to open up a 30,000 square-foot Starbucks Shanghai Roastery and Tasting Room to appeal to the growing and increasingly rich upper class of China.

Starbucks has also begun sourcing its coffee beans from areas within China, to seem less foreign and help the domestic coffee industry flourish. Further, Starbucks has branched out into selling tea drinks, such as Teavana, in China. According to Euromonitor, the size of China’s retail tea market was nearly $10 billion in 2014, the largest in the world and far ahead of second-positioned Russia.

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Have more questions on Starbucks? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Starbucks

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