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[Mp4] How Starbucks was able to win over China

 

There are over 34,000 Starbucks in 80 countries but in 1999 Starbucks opened in the world’s largest tea-producing country: China

 

Starbucks operates more than 6000 stores in over 230 cities in the Chinese Mainland. It’s the chain’s second-largest market behind the U.S.

 

They are surprisingly unblooded for a company that’s been operating in China. It’s almost bizarre. Starbucks is expanding rapidly in China. A store opens every nine hours and the company has plans to increase the number of stores in the region to 9000 stores by 2025.

 

They’ve done something that very few companies from outside of China have been able to do which is they were successful almost from day one.

 

So how did the Seattle-based coffee giant find massive success in the country known for its love of tea?

 

In January 1999 Starbucks entered the Chinese Mainland by opening its first store in the China World Trade Center in Beijing.

 

Howard Schultz had the idea of : hey let’s take Starbucks to China and everyone around him said you’re you’re crazy that’s a terrible idea uh it’s a tea drinking culture nobody in China drinks coffee.

 

The company didn’t focus on coffee when it first opened. Its intent was to assimilate into a tea house culture that had existed in China for thousands of years.

 

Initially, they said look we know they’re not going to fall in love with coffee immediately so they added a wide variety of tea drinks then they took it a step further and actually started offering Chinese tea.

 

The company entered the Chinese market through a licensing agreement with Beijing Mei Da Coffee – a wholesale distribution company that supplied coffee beans to hotels and restaurants. Over the next few years, the coffee chain operated in China through a combination of licensed and joint venture business partnerships and company-owned operations. Part of the company’s strategy was to build a rapport with Communist Party officials.

 

Well, the major challenges are you don’t see any foreign signs so you really need to establish very strong relationships with government officials.

 

In 2014 the brand built its first Starbucks Reserve, debuting the format in mainland China. In the wake of a successful growth strategy, Starbucks expanded rapidly, opening a new store in China every 15 hours. In 2017 the coffee giant bought out its joint venture partner for 1.3 billion dollars.

 

The balance that we try and strike is (that) are we building stores at a pace that allows us to stay in control? Building a beautiful store in the right real estate location and do every store in the right way and I think now we’re building more Net News stores – company-operated stores in China than we are in the U.S.

 

China is the only market where 100% of stores are on and operated by Starbucks compared to 59% in North America. In 2017 the company debuted what it calls the first fully immersive coffee experience in Asia – a 30 000 square foot Shanghai Starbucks Reserve Roastery and in 2019 it announced a partnership with the Nestle to bring at home options to Chinese consumers. To date, Starbucks has over 6000 stores in China. The country accounts for more than 15 percent of Starbucks’s net revenue and the bulk of its International segment sits there.

 

Starbucks was intentional about creating a growth strategy that assimilated the coffee chain seamlessly into Chinese culture. To ensure a smooth transition into China, the company collaborated with local partners and businesses. The chain also developed its own domestic supply chain and plans to train more than 50,000 Farmers by the end of 2023. Adopting local technologies and building out its own has been an important part of the company’s growth strategy.

 

Their digital initiatives have been behind the curve compared to most other companies but their loyalty program is fantastic. 90%  of its 7 million loyalty members are actively engaged via Starbucks’s app for mobile ordering. China leads Starbucks’s global portfolio in terms of digital payment with 80 cashless payments. Starbucks has about 1700 rewards members per location in the US compared to 3300 rewards members per location in China. The American coffee giant also partnered with Alibaba to bring new technology to its stores from in-store face recognition to 15-minute delivery.

 

Not only did Starbucks adjust to the new retail model in China, they’ve successfully imported a lot of what they were doing in new retail from China back to their global markets. So when you think about things like delivery and the loyalty program, and more technology in the store, localized products, the integration of the online and offline offerings at Starbucks,… all of that had its genesis in their China operations.

 

Starbucks worked with local partners to modify its menu to fit local tastes.

 

They also localized the food items, not just to a Chinese taste but regionally. So you would find Shanghai Specialties or Beijing Specialties and Chongqing favorites in the different Starbucks stores. The company’s target consumer base is China’s rising upper middle class and its Westernized young population. The stores are strategically located in business districts, urban centers and tourist attractions.

 

Starbucks has faced ongoing criticism over the high prices of its menu items in China despite the country having a lower GDP per capita. And it’s only getting more expensive.

 

There were arguments being made that we should you know keep the price lower because look, China at this time is a developing country and I don’t think that people can go in and spend four dollars or at that time the equivalent of 32 RMB on a cup of coffee. It sounded outrageous really. Actually Starbucks went in with the same pricing that they did globally. In some cases it was probably a little bit more expensive and so even would people leave Starbucks and they’d be walking around the streets with their Starbucks cup and it was a status symbol. You could be walking around with your Balenciaga bag and your Manolo Blahnik shoes and your Starbucks cup.

 

Starbucks adapted to China’s Culture by focusing on the country’s strong values when it comes to family, community and status. Since 2012 Starbucks has hosted an annual partner family forum where its employees and their parents can learn together about the company and its future in China. And in 2017 it announced the launch of the Starbucks China Parent Care Program which currently provides critical illness insurance plans for the parents of its employees.

 

China’s Starbucks stores are designed to fit traditional Chinese architecture and have open layouts to welcome crowds noise and lounging. The spaces tend to be much bigger than in the U.S.

 

The way people were going to use Starbucks in China was much in the way they would use the tea house: go in large groups, hang out with your friends. You might go in a group of four six eight ten people. Everybody wants to order a drink, maybe have a little snack and that’s where they’re going to socialize for the next hour, two hours, three hours. So obviously if you have a small store with limited seating, that’s going to turn off Chinese consumers.

 

Starbucks prices are much higher in China compared to other parts of the world. It chooses high-end locations for its outlets including luxury malls and office towers. And since foreign brands, particularly in food and beverage are viewed as premium, Starbucks makes it a point to include from which country its products are imported from.

 

You’ve got faster and competitors like Luckin Coffee and like Tim Hortons many times they tend to slide down towards that value-driven segment of the market, you know, two-dollar coffee on the way to work. So they don’t really compete in Starbucks sandbox.

 

More recently Starbucks sales took a plunge in its Chinese market due to the country’s strict covid-19 restrictions. Pandemic-related lockdowns caused Starbuck’s same store sales in China to sink 44% and 16% in the third and fourth quarters respectively in 2022 compared to the year prior.

 

So you’ve seen China has maintained some of the most Draconian mobility restrictions and covid-19 policies of anywhere in the world.

 

To this effect, if you look at Starbuck’s fiscal third-quarter earnings, this other same-store sales fall 44% in the quarter with the Shanghai stores lockdown for two-thirds of that period which is really astounding, I mean about half of your business disappears.

 

Driven by Rising U.S China tensions, lockdowns and inflation, Starbucks’s operating income has declined 42 percent in the fourth quarter of 2022 compared to the year prior. Since it entered the country Starbucks has had a huge share of China’s over 11 billion dollar coffee market. In 2020 the company held 36.4 percent of the tea and coffee shop market. But in 2021, the company faced new competition from a Chinese coffee startup called Luckin Coffee – the company quickly became the second-largest coffee chain in China behind Starbucks.

 

They went from startup to something like three or four thousand locations in a few years and there was a lot being written about this is the end of Starbucks in China.

 

But in 2021, Luckin Coffee filed for chapter 15 bankruptcy. In its balance sheet the company fabricated more than 300 million dollars in sales. Luckin was fined 180 million dollars by the Securities and Exchange Commission and was forced to de-list from the NASDAQ.

 

It was a house of cards that fell apart and collapsed you know roughly a year or two after they hit their peak. Luckin is still in business but they’re certainly not a major threat to Starbucks.

 

Things change in China very quickly. You can have a competitor you never heard of open 2000 outlets in a year and suddenly you have an issue. So we see these dynamic sorts of companies pop up all the time and so far they haven’t hit Starbucks, which is sort of cruising along at a premium level. Down below it’s a lot more brutal.

 

According to experts, the biggest threat to Starbucks in China today is a beverage company called Heytea.

 

They basically copied Starbucks for tea. They said we’re going to make premium teas, beautiful locations and they’re super, I mean, there’re lines out the door. You don’t see lines out the door to Starbucks. You could go to Haiti you’ll see it in the mall by the line,  you just look for the long line.

 

Despite Covid restrictions and increased competition, analysts are confident that Starbucks will come out on top.

 

Any other company you look at in China, it was a brutal fight. You know L’Oreal, Coca-Cola all of them. Google, you know. It’s a brutal environment. It’s just a sort of dynamic environment but Starbucks has never taken a major hit. It’s surprising really, it’s not the norm. Even McDonald’s and KFC and these other long-term players have had food safety issues and media exposure and you know. Starbucks just kind of cruises above. It almost seems unfair.

 

Starbucks plans to increase the number of stores in the region by 50% to 9000 stores by 2025. In other words, the coffee giant is expected to open a new store every nine hours for the next three years. It also plans to double its sales and quadruple its operating income. There’s store expansion, growth and Omni Channel and at-home and on-the-go coffee services. Starbucks China is betting big on digital. It’s investing 220 million in launching its Digital and Technology Innovation Center in the country to further its digitization of store operations.

 

To replace the interim CEO Howard Schultz in 2023, Starbucks tapped Laxman Narasimhan –  a multinational corporation veteran with experience in China.

 

I think it’s it’s really important to point out that despite the pressures that we’ve seen in China Starbucks, comparable store sales have conceded to recover very quickly as lockdown restrictions have been eased. So the underlying demand appears to be strong and the firm continues to invest very heavily in that market which suggests that it’s still a strategic priority. So in the fourth fiscal quarter last year they still opened more than 12 percent net units: more than 260 stores in that Chinese market and it figures to continue to be a pillar of their growth strategy moving forward.

 

Source: CNBC

WORD BANK:

bizarre /bɪˈzɑːr/ [C1] (adj): kỳ lạ

expand /ɪkˈspænd/ [B1] (v): mở rộng

rapidly /ˈræpɪdli/ [B2] (adv): nhanh chóng

assimilate /əˈsɪməleɪt/ (v): hòa nhập

offer /ˈɔːfər/ (v): cung cấp

license /ˈlaɪsns/ [C1] (v): cấp phép

wholesale /ˈhəʊlseɪl/ [C2] (adv): bán sỉ

partnership /ˈpɑːrtnərʃɪp/ [B2] (n): quan hệ đối tác

rapport /ræˈpɔːr/ (n): mối quan hệ

format /ˈfɔːrmæt/ [B2] (n): loại hình/nền tảng

immersive /ɪˈmɜːrsɪv/ (adj): đắm chìm

revenue /ˈrevənuː/ [B2] (n): doanh thu

segment /ˈseɡmənt/ [C1] (n): hạng mục/khu vực

intentional /ɪnˈtenʃənl/ (adj): có ý định/có chủ ý

seamlessly /ˈsiːmləsli/ (adv): liền mạch/vô cùng tự nhiên

collaborate /kəˈlæbəreɪt/ [C1] (v): hợp tác

domestic /dəˈmestɪk/ [B2] (adj): nội địa

portfolio /pɔːrtˈfəʊliəʊ/ [C1] (n): danh mục (đầu tư)

retail /ˈriːteɪl/ [B2] (n): bán lẻ

integration /ˌɪntɪˈɡreɪʃn/ [C1] (n): sự tích hợp

genesis /ˈdʒenəsɪs/ (n): khởi nguồn

modify /ˈmɑːdɪfaɪ/ [B2] (v): chỉnh sửa

taste /teɪst/ (n): khẩu vị

criticism /ˈkrɪtɪsɪzəm/ [B2] (n): lời chỉ trích

outrageous /aʊtˈreɪdʒəs/ (adj): bất hợp lý/thái quá

status /ˈstætəs/ [B2] (n): địa vị

insurance /ɪnˈʃʊrəns/ [B2] (n): bảo hiểm

architecture /ˈɑːrkɪtektʃər/ (n): kiến trúc

plunge /plʌndʒ/ [C1] (v): giảm mạnh

fiscal /ˈfɪskl/ [C2] (adj): tài chính

balance sheet /ˈbæləns ʃiːt/ [C2] (n): bảng cân đối kế toán

fabricate /ˈfæbrɪkeɪt/ (v): làm giả

fine /faɪn/ [C1] (v): phạt tiền

brutal /ˈbruːtl/ [C1] (adj): tàn bạo/khốc liệt

quadruple /kwɑːˈdruːpl/ [C2] (v): tăng bốn lần

veteran /ˈvetərən/ [C1] (n): người kỳ cựu/lão làng (trong lĩnh vực nào đó)

recover /rɪˈkʌvər/ [B2] (v): phục hồi

strategic /strəˈtiːdʒɪk/ [C1] (adj): chiến lược

figure /ˈfɪɡjər/ (n): con số

pillar /ˈpɪlər/ (n): trụ cột


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