Starbucks in China

In Iceberg Model of Culture, the difference of the people come from varieties countries is not only their behaviors, but also their attitudes, assumptions, values, beliefs which cannot be seen easily. The difference can influence almost every aspect of natives’ living. That is the reason why some good management styles didn’t have much work in other regions.

So comparative management is really useful to analyze the extent to which management principles are applicable from one country to another. In this assignment, we choose Starbucks as the case to research. Because we think Starbuck is one of the firms can operate their business well in Mainland China. Its opreation principle and management style in China can be a good example for other foreign enterprises who want to set foot in China market. However, we still found some problems or potential business issues of Starbucks as well. Therefore, we will apply the Five Force Model and

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Value Chain Theory to analyze it and try to come up with some suggestions to help Starbucks become more successful in China. Introduction: When it comes to tea, it is believed that you may think about China at the first time. In China, there are ten great Chinese teas, such as Dragon well, Spring snail, Iron Goddess, etc. In their culture, they will drink tea after having meals and at spare time in several thousands years. How about in Western? It must be coffee, like Latte, Cappuccino, Mocha and single estate, etc. People in Western will drink coffee in breakfast, in lunch, in tea, in dinner, when sleepy, whenever they want.

The drinking culture is completely similar with China, but the content is different. Coffee is in western and tea in China. If you are given a task to promote coffee in China, you may think impossible. However, Howard Schultz, who is the Starbucks chairman, president and chief executive officer now, achieves this impossible. Let introduce the history of Starbucks first. The first Starbucks was opened in Seattle in 1971. The name comes from Herman Melville’s Moby Dick, a classic American novel about the 19th century whaling industry. Howard Schultz joins Starbucks in 1982.

While on a business trip in Italy, he visits Milan’s famous espresso bars. Impressed with their popularity and culture, he sees their potential in Seattle. He’s right – after trying lattes and mochas, Seattle quickly becomes coffee-crazy. In 1990s, Starbucks expands beyond Seattle, first to the rest of the United States, then to the entire world. After becoming one of the first companies to offer stock options to its part-time employees, Starbucks becomes a publicly traded company. Starbucks opened the first store in Peking in China on the January of 1999 and the second in Shanghai on the May of 2000.

The third store was in the Central in Hong Kong. Today, there are over 230 stores opened in China while over 17000 stores in 55 countries. Starbucks sets an aggressive target in China, 1500 stores in 2015. According to the collected data, it is discovered that Starbucks did well in exploring the Chinese drinking market. It not only has become one of the Top 10 valuable coffee brands in China in 2012, but also the biggest coffee chain brand in China. Besides, the net income of Starbucks in China and Asia-Pacific region had reached 214 million USD in 2012.

Comparing with 2011, the net income from Asia-Pacific increased 28% while the whole company’s income (global) was 11%. However, it is not denied that there are still some problems in Starbucks in China drinking market. Starbucks’ problems: The collision between western culture and China traditional culture is always attractive in Mainland China. The culture gap made a big obstacle for the foreign companies when they came in the Chinese market. In fact, Starbuck has handled this problem very well. But it is not the native enterprise after all, so there are several culture problems are waiting for being solved.

Firstly, even though Starbucks has explored the Chinese coffee market and attracted many long-term customers, it is far away from enough. As you may know, the tea-drinking culture has been lasted over several thousand years. Moreover, there are a lot of products about tea in high-class, mid-class and low-class market. It is hard for Starbucks to enter the China market. As a result, Starbucks targeted the middle class market, especially the young people. In details, this kind of people contains some students, overseas returnees, foreigners, and white-collar employees.

Due to the narrow range of customers, Starbucks limited herself to become more popular in China. Besides, the Chinese traditional tea drinking culture affects Starbucks expansion. Since China has 56 nations and huge size of land, there are different drinking styles in China. For example, the people in the north of China prefer to drink tea using bowl and drink fast, while the people from south are keen on drinking Gongfu tea and drink slowly. That’s why it is difficult for Starbucks to attract all kind of people by only one business model.

Additionally, some researches show that tea is more suitable for the physical conditions of the oriental people. It is showed that the culture problem is still a big challenge for Starbucks developing Chinese market further. In Chinese culture, many people like to try new thing due to curiosity, so it is discovered that many people stand Starbucks outside with a long long queue when Starbucks first enter into China. However, it cannot last for a long time. When the curiosity decreases, the people’s consuming behavior is back to be rational. Besides, with expanding the retail stores, Starbucks’ brand value had been diluted.

How can Starbucks achieve the stable income? It is believed that it is also a problem Starbucks has to face. In China, many experts appreciate the localization strategy of Starbucks, but there are some counter opinions. They think some of its business has been localized too much. For example, Starbucks promotes the dumpling in its retailers in Chinese dragon boat festival. In our view, even though this dumpling in Starbucks is looked really special and beautiful, the taste is not traditional dumplings. Chinese are still traditional and the Starbucks dumpling is excessively expensive.

It is expressed that they prefer the traditional products rather than those in Starbucks. Therefore, Starbucks need to trade-off whether it is worth enough to offer Chinese traditional food to its customers. The threats of competition and local rivals: In this part we are going to analyze the strategic situation Starbucks is facing using the Five Force Model. The first factor is the bargaining power of the suppliers. In the Starbucks’ case, the main materials are coffee bean, milk and sugar. Traditionally, the raw material is from the suppliers all over the world.

Taking coffee bean as an example, 50% of the suppliers are in Latin America, 35% come from the Pan Pacific Ocean area and 15% form east Africa, due to the abundance of the suppliers, the bargaining power of the Starbucks’ suppliers is weak. It can divide the threats of supply chain into several parts, so that it is sure the supply and quality demand are provided stably. So Starbucks is in a advantage position when negotiating the materials’ price with its suppliers. The second factor is the bargaining power of the buyers, actually not like in the European market, in Asia especially in the emerging market in China.

Starbucks is considered as a mid and high class coffee shop chain. The coffee culture devotes trendy in order to attract a group of consumers who have high and steady income. Meanwhile Starbucks has a complete and stable pricing structure, leading to the bargaining power of the buyers is strong. The culture marketing Starbucks built up brought in enthusiastic consumers. Besides, there are many coffee stores opened in China in recent years, so the consumers have more choice to drink coffee. It Strengthens the bargaining power of buyers with customers as well.

The third factor is the threat of the new entrants. As we know, the market entry barrier of catering industry is not very high for investors and the catering market in China is really profitable. The great success of Starbucks attracts a lot of potential competitors who want to copy its success or even take its place. For example, some big companies, like Kraft and Nestle, are able and willing to enter the coffee chains industry in China. These are the potential challenges to Starbucks. The next factor is the substitute goods. Asia market is rapidly increasing.

Many of the new drinkers and leisure facility appears every day, such as tea houses and ice dessert bars. They are also very unique and provide the similar environment as Starbucks. In addition,some of them have the local predominance that enable them to make change faster than Starbucks more easily. This is a big threat to Starbucks when they begin to get more share of the market. What’s more, in Asia especially in China there is no coffee drinking habit, although coffee shops like Starbucks have developed some consumers but when facing other kinds of competitors, it is hard for Starbucks to attain more customers.

Another threat is from the companies who produce the instant coffee, like Nestle, the famous instant coffee supplier, who can provide similar products like the coffee shops but is much cheaper and convenience this will inevitably seize the market share. The last factor is the existing competitors, such as 85? C. It is a coffee shop chain from Taiwan, who is a big threat to Starbucks in Asian market with its low price. Cstraits Cafe, a native brand, is also expanded fiercely. It has an advantage of local supply chain compared to Starbucks. Moreover, a lot of local coffee houses have the more attractive price than Starbucks.

Hence, it is obvious that the entrant threat is increasing and much more fierce competition is up ahead. According to our team’s analysis, the coffee industry in China is profitable and attractive. However, it still exists many challenges need to be solved for Starbucks. Management problems: The first one is the food management problem. Many people in China think Starbucks are good because of a well-known and international brand and supply chain supervision. In fact, its food is not as good as we think. There is much news about the poor management of food security management in Starbucks.

For instance, the sugar in the juice, cakes and sandwiches are all overdue. The moon cakes sold in Tianjin was found their Bacteria levels had under the minimal standards. The question is why Starbucks’ food is safe in the US, but in China is not very good. We think it is related to the strategy of Starbucks. In China, it take the authorization strategy to expand the market. The cooperated companies have the most of power to operate the retailers, so these firms may take some measures to decrease the cost and enlarge their profit as possible as they can. This leads to some bad food management.

Another reason is the acquiescence of Starbucks’ behavior. As Starbucks has understood the culture and policies in China more and more in the recent years, it thinks the supervision of the industry is weak in China market and Chinese government will not punish these behaviors harshly. Besides, I think the human resource management of Starbucks faces several difficulties in China. In America, Starbucks regards all its employees as partners, and all of them working in a harmony atmosphere. Most of the employees have good occupational skills and abundant knowledge about coffee.

However, in Mainland China, the situation is quite different. Obviously, lacking high quality employees is a serious problem because of the fast expanding the drinking market. Starbucks has to let the new comer without enough training go to the working positions. For example, a net friend named 123123fish said that some waiters in Mount Putuo Starbucks always made mistakes on booking menu. And another one named “smoking is my ring” complained some employees’ coffee knowledge is less than him. These phenomenons indicated the bad service quality in the retail stores.

There is a Chinese idiom, “haste makes waste”. That’s why there are many complaints about the Starbucks’ service in the websites and the SNS. Now, we look back what Starbucks has been doing to promote and introduce coffee while tea drinking culture is deeply ingrained in China. How do Starbucks solve the existing problem for entering and exploring China Market? Localization with partnership When companies want to enter the new market, it needs to pay a lot of effort for the change. Starbucks is very smart on choosing its strategy entering a new market.

It has three kinds of business organization structure, which are licensing, sole proprietorship, and JV. In China, it selected joint ventures. It chooses a local business partner to help for the operation, setup relationships with the supplier and the government, and understand the market environment. The chosen partner can share the investment, retails experience, company “local” culture, customer service commitment, etc… As Starbucks runs in this smart and effective way, it can step into a new market by involved a relatively small investment.

A great partnership is a key to a win-win situation in every company. To lower risks in overseas markets, Starbucks uses different types of ownership structures. It either authorizes a local developer to use the Starbucks brand or sets up a joint venture with partners. In Asian market, still in the developing stage, it has an opportunity to position Starbucks as the leader in the coffee industry. By penetrating coffee culture through the joint ventures, it can help to educate the customers about the quality and the perception of coffee. Beijing Meida Coffee Co Ltd. , Shanghai Uni-President Starbucks Coffee Ltd. nd Maxim’s Caterer are the partners with Starbucks in the different Regions in China.

Below is the brief introduction of them. Beijing Meida Coffee Co Ltd is Starbucks’ authorized developer in northern China. It is 90% owned by a Hong Kong-based firm, of which H&Q Asia Pacific, one of the largest venture-capital companies in the Asia-Pacific region, is a major shareholder. Shanghai Uni-President Starbucks Coffee Ltd is responsible for operations in Shanghai and eastern China’s Jiangsu and Zhejiang provinces. The joint venture used to be 95% owned by Taiwan-based Uni-President Group, while Starbucks held a 5% stake.

Starbucks raised its share to 50% in 2003. In Hong Kong, Starbucks established Hong Kong catering with Maxim’s Caterers Ltd. which has the experience of food and beverage business in 46 years. Maxim’s Caterer provides Starbucks with the insight of Chinese preferences and knowledge about establishing and running the business in China. As selected Maxim’s Caterer as the joint venture, it can show the extensive relationship mapping for the competitor, government and the allies. Starbucks is capable to display the success in Hong Kong and Guangdong province market.

Partnership is not only for operation, but also for the material sourcing. It contain the suppliers as well. In KUNMING, China, February 06, 2012 – As part of its ongoing efforts to help elevate the coffee industry in China’s Yunnan Province, Starbucks Coffee Company has established a joint-venture company with Ai Ni Group, one of the coffee operators and agricultural companies in Yunnan. The joint-venture company, which will be controlled by Starbucks, will purchase and export high-quality arabica Yunnan coffee beans, as well as operate dry mills in the province.

As Starbucks Yunnan Coffee Project and together with partner Ai Ni Group, they are committed to help local farmers elevate the quality of the coffee in the region while bringing the best of Yunnan coffee to the rest of China and the world. With support from the provincial government, Starbucks worked closely with coffee farmers and suppliers in the Yunnan region to create Starbucks first coffee blend that featured high-quality arabica coffee beans from the region. Starbucks® South of the Clouds Blend® is now sold across numerous Starbucks locations across Asia and the United States.

Pricing Strategy and Service The Second point is Pricing Strategy and Service. In China, what kind of product can be regarded as slap-up goods? Most Chinese people think the only criteria is how high their price is. If the goods they are hardly to afford that means these are slap-up products. Starbucks is an international and high awareness brand, so brand-driven strategy can be used. The first step is the designing of price. The price of coffee is set higher than that in U. S. , around US$2 higher, because the targeted customer is mid-high class people in China.

It is suggested to make an environment that only high class people can afford the Starbucks. It can make a smoke screen that the people drinking in Starbucks are high-fliers. And Chinese people prefer to drink something in house, so it is necessary to create a comfortable and gorgeous environment in stores. This investment cost becomes higher in China. This strategy is reasonably applied together with “mid class” price strategy in order to compensate the cost. Brand global, think local Starbucks is one of the international catering companies.

It ensures to control the services and beverage standards globally. Even though Starbucks has its own international global standard, the Chinese culture cannot be ignored at the same time. Firstly, the menu is localized. As coffee culture is quite mature in Taiwan, localized menu is easy and it is not necessary to translate and create the Chinese name. Secondly, the best baristas are transferred to China to maintain the global standard. Also, knowledge transfer can be processed and the staff can be trained with the best baristas from Starbucks at the same time.

Since the taste of Chinese is much different from western people, Starbucks has developed much type of drinks and foods for the local citizen. Such as push-off some kinds of tea drinks and Chinese traditional snacks. What’s more, some retail stores of Starbucks have changed their decoration which is more closed to traditional Chinese culture. Long term commitment According to the Maslow’s Hierarchy Of Needs, there are five levels about people’s needs—-Physiological, Safety, Belonging, Esteem, Self-actualization.

And only the lower level of needs have been satisfied, people will chase the higher level of needs. Comparing with the human capital management of Starbucks, it did very well in this part. As you may know, a successful company should have seeable and forecast future to the staff. The top layer of the company regards its all employees as its partners. So it offers good salary, welfare, and social insurance to them. Besides, to motivate the staff’s working engagement, in 2007, Starbucks decided that all the workers in China get the stock options of the company.

Moreover, Starbucks also helps its employees draft their career planning and gives them a clear developing direction. Here is the comment from a staff who is working over 5 years in Starbucks. “I feel taken care of by management. I enjoy my job and I enjoy working here so I expect to stay longer. ” There is no doubt that this is a rare comment from youngsters. It is indicated that Starbucks has done an excellent job in China. If the staff is well trained, staff will be at the heart of delivering the “Starbucks Experience” to customers. This is win-win strategy. Our suggestion:

Comparing the problems and the measures Starbucks has done, it is found that some problems still haven’t been resolved. In the next part, we will try to work out them by using the Value Chain Model. To the point of us, the key future problem for Starbucks’ development is how to expand the customer range. It is recommended that Starbucks can step into the higher drinking market in China. The first one is about the inbound logistics. Exploring different end drinking markets in China for Starbucks is a good choice. We suggest Starbucks (China) can try to import some top-level coffee beans from the world-class coffee belts.

Starbucks has cultivated coffee culture in China over 10 years, so some people have fallen in love with this kind of drinkers and they are willing to purchase higher-level and more expensive coffee products. Besides, building up a branch brand which focus on offering the high class and expensive coffee to the customers also can be a good way to improve its sales. And this measure also can let Starbucks set foot in higher-class drinking market in China. That is why we suggest it import better raw materials. The second recommendation is hand-made coffee. In the operation, we think giving different people different services may be better.

As you may know, machines make most of the coffee of Starbucks in China. In our opinion, the hand-made coffee taste better and the process of making coffee can give the customers better feeling. We suggest training some baristas to make the coffee by them to improve the quality and atmosphere to attract more customers. What’s more, according to the mentioned food quality problem, it is recommended to enhance the supervision of the process of producing. It is very important for a catering company. Nobody wants to spend money on the unclean food even it is tasty.

In order to reach the target, Starbucks has to buy-back the right of management in China and put the retailers under its control totally. To the outbound logistics, our recommendation is to keep its products fresh. The news about food quality problem reported by medias can cause terrible influence for any catering company. That means Starbucks should make sure every inventory no matter the coffee or others snacks are natural and not artificial products. What’s more, enhancing the training of its employees on service quality, food preservation, sanitary security is necessary as well.

Nevertheless, it is marketing and sales. It is agreed that Starbucks’ “word-of-mouth marketing” is very successful in China. However, taking multiple marketing strategies may be better. For example, it can give customers some discount in special time of a day. It also does some sales promotion, like buy 1 get 1 free, to attract more customers. Besides, we also recommend Starbucks can open some mini-store in the university. This kind of retailers does not cost too much, but they can make the brand more close to the main customers and give them more convenient.

The next point is the service environment. In order to give customers a clean, quiet and comfortable drinking environment, Starbuck offered the free network and comfortable chairs. Also, it is not allowed people do some group activities in its store, such as playing cards or doing some table games because the company thinks these kinds of behaviors will disturb others. However, according to Hofstede’s theory, China is a country with high level of collectivism. So many people in China prefer to spare their leisure time with a crowd of friends.

This rule may let some young people decide to change a place even to its rivals’ stores to spend their leisure time. Therefore, we suggest Starbucks can set a certain place in its retailers to these people who want to do some games. Last but not least, it is facing the culture problem, Starbucks can keep on cultivating the coffee culture in China. It can do some free exhibitions to let more people understand coffee and show the nutritive value of coffee to public. Also, Starbucks should not focus on using the Chinese traditional food to attract Chinese people. It should focus on coffee or related products.

Otherwise, it may lose herself in the China market. In conclusion, we are appreciated the work of Starbucks in China. Chinese catering market has huge potential waiting for developing, so it is necessary for Starbucks to do more exploration and understand more comprehensive.


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