Starbucks in China

Company: Starbucks

Written By:

Charlie Douille, Lauren Levinson, Phoebe Luongo, and Joe Nappi

Roles:

Charlie: Research and Development

Joe: Marketing

Lauren: Supply Chain

Phoebe: Finance

This paper will focus on Starbucks Corporation’s decision to continue expansion into

China in the time period 2012-2018 which led to an increase in the company’s annual revenue
and led to the opening of a Reserve Roastery in Shanghai. The actions taken by the company to

pursue this opportunity are researched along with the resulting financial and market success. The

paper’s conclusion includes the team's assessment of the company’s actions and results along

with team recommendations for future actions such as expansion into new markets and increased

growth efforts in China.

Our project will be studying the ever growing global market for Starbucks, with the focus

being placed on the expansion of Starbucks locations and the Reserve Roastery line in China.

The second largest market for Starbucks, according to their annual financial report, is in their

China/Asia Pacific region, with the highest number of location openings being placed in China.

In the past five years, Starbucks has doubled the number of stores in Asia as a whole, specifically

opening a majority of the new locations in China. According to an article published by CNBC in

December 2017, just around the same time as the opening of the roastery location in China,

Starbucks was opening a new store in China every fifteen hours. As of December 2017, the

company opened a new location for the Reserve Roastery line in Shanghai, which has quickly

become known as the most profitable roastery that Starbucks has developed. Though our

research of the expansion of Starbucks will be covering all locations in China, we will also be

paying close attention to the addition of the roastery in relation to the growing market for

Starbucks in Asia. The basis behind the decision to focus on the market and growth in China

versus the growth in the Americas comes down to the speed of the growth: the China/Asia

Pacific region has been consistently growing at a faster rate than other regions in which

Starbucks has expanded their market.

Before Starbucks became a household name known globally for their relatively

affordable coffee and delicious breakfast sandwiches, the king of coffee opened for the first time
in 1971 across the street from the infamous Pike Place Market. The founders of the powerhouse

coffee brand are Jerry Baldwin, Gordon Bowker, and Zev Siegel who shared a common love for

coffee and tea, and were inspired to open their own chain after Peet’s Coffee. Later on in 1987,

when the partners developed varying opinions on the future of the brand, Howard Schultz

purchased Starbucks and began to exponentially expand the brand and made the decision to go

public in 1992. This was the beginning of the boom that would be Starbucks. Within the eight

years leading up to the 21st Century, Starbucks expanded into over 20,000 locations across the

United States, including the first store to come to China in January of 1999. As of now, they

have 28,218 locations. The coffee brand began taking over the global market in 1996 with their

first international store in Tokyo, Japan. Over the years, Starbucks has acquired various brands to

add to their menu selections such as Tazo and Teavana. Expanding their coffee products even

more, the company came out with its own coffee machine: the Verismo.

Aside from their popular drinks (including the famous trademarked Frappuccino which

was purchased from The Coffee Connection in 1994), Starbucks sells breakfast items and

desserts to consumers. Starbucks began their penetration into the food market in 1999, with their

own chain of restaurants title Circadia. The restaurants were located in Seattle, along with the

original Starbucks location, and in San Francisco. The chain gained little traction in Seattle, with

the BizJournals, a local Seattle newspaper, predicting in October of 1999 that the chain would be

completely dead at the turn of the century.

One of the main perks that sets Starbucks apart from other coffee chains is their high

valued rewards program. Though the popular rewards program started out with just a gift card,

the Starbucks app that was released in 2009 has gained popularity through the years with perks
that include free WiFi, annual birthday drinks, and a point earning system that rewards loyal

customers with stars for purchasing items from Starbucks.

Recently, Starbucks has begun to announce the closing of high numbers of stores within

the next few years. In 2019, they plan to shut down 150 locations, which is nearly three times the

typical rate of closure for Starbucks. Starbucks announced that the reason behind the closures is

because of declining sales in the United States. This is said to be due to the recent boycotts of

Starbucks after the incident in Philadelphia with the two black men who were targeted in a

Starbucks locations. It is also said that the closures are related to the ever growing drive

Starbucks has to expand their market into China, and the rest of the globe, with new Reserve

Roasteries opening in Shanghai and Milan.

Research & Development - Charlie

Market research is the most essential aspect of Starbucks’ strategies to enter new markets.

This allows them to gain data and information regarding emerging and developed economies that

they are considering expanding business to. This knowledge allows them to consider the

conditions of a previously unexplored market and assess what strategies are best to pursue

moving forward. Through the process of Research and Development, Starbucks has been able to

gain cultural, political, and legal advantages in China.

Starbucks has been able to achieve success in China by showing consideration to their

existing culture. They avoided signs of offensiveness, such as giving locals the impression that

they are minimizing the value of their cherished tea with the effort to replace it with coffee. They

focused less on traditional advertising for this reason, and prioritized strategies focusing more on

location and interior design. Joe’s section will further detail these strategies.
 Market research has helped guide Starbucks through political questions as well. They

have been able to identify the characteristics of capitalism in China and exploit those attributes.

Middle class Chinese citizens have popularized western goods as luxury items, and thus a means

of pursuing a lavish lifestyle. Some cities show less communist influence than other. For

example, the peripheral city of Chengdu provides an excellent example of Chinese governmental

support for capitalism. The city boasts stores like Louis Vuitton and Cartier in its downtown.

Chengdu is impressively home to stores selling 80% of these high-class international brands.

Starbucks, which has developed a reputation internationally for being relatively exclusive,

sought expansion into a market that would comfortably accept their brand and orient itself to

purchase their goods.

Furthermore, researching the Chinese market allowed Starbucks to gain legal advantages

when developing. Soon after 1999, when Starbucks opened its first location in China, the

company had already registered all its major trademarks through the Chinese government. Using

intellectual property laws allowed Starbucks to prevent their brand or business model from being

illegally replicated. Starbucks had previously gained experience with other emerging markets,

assisting their operational strategies in recognizing the heterogeneity of the Chinese market.

Starbucks aimed to contact each of these many markets. Establishing partnerships has been a

quintessential aspect of Starbucks’ success in China. In their effort to localize to the diverse

markets, they have used their partnerships to gain better insight regarding the tastes and

preferences of the people of China. For instance, Starbucks has worked with Beijing Mei Da

coffee company, Taiwan-based Uni-President, and Maxim's Caterers in Northern, Eastern, and

Southern China respectively.

 This research has also lead to the understanding that Western brands, which are generally

considered to be higher quality, are prefered over local Chinese brands because of the perception

of exclusivity to consumers. These leaves Western brands unable to compete with low pricing

strategies, though. For this reason, the other components of market research are capitalized on to

a much more significant degree. Cultural, political, and legal advantages all arise for successful

development based on accurate market research.

Marketing - Joe

Starbucks has seen an incredible growth in China, with many companies eyeing their

successful strategy. With a new store opening daily, the company aims to have over 5,000 stores

open in the next few years. This unbelievable growth can be contributed in part to their

marketing strategy which has an intense level of detail and commitment to their market.

According to Forbes, Starbucks’ meteoric rise in China with respect to their personal marketing

mix can be contributed largely to the well executed collaboration with Chinese partners, which

allows the American company to adopt local technologies and offer local items on their menus.

This attracts reluctant customers to their doors as it bridges the gap between an American coffee

company and local Chinese cuisine. This attention to the cultural details in China has given a

foreign company success in the root of Chinese culture. Another major marketing contribution to

Starbucks success in China was the shift from the focus of a ‘coffee-house’ to a ‘tea house

culture’, something that would integrate smoothly in Chinese streets. Since Starbucks marketing

technique targets the idea of the ‘third place’ between home and work, the ‘tea-house culture’

was integral to the integration into Chinese culture that has existed for thousands of years, but

with a more modern upscale vibe.

 There are three aspects of Chinese society that Starbucks analyzed before launching into

the market: Family, Community, and Status. For Family, Starbucks focused on their annual

‘Partner Family Forum’ where the company (even the CEO Howard Schultz at times) speaks to

the partners and their families/parents about the future of Starbucks in China. The company built

on this, and in 2018 started the ‘Starbucks China Parent Care Program’ which focuses on

providing health insurance for the elderly parents of over 10,000 employees. This shows respect

to the families of Starbucks employees and is a huge ethical positive for Starbucks brand image

in China. As for community, Starbucks recognizes that China has an innate sense of togetherness

that may be lacking in the more desolate individualism amongst plugged in laptop users in the

US. In China, on average, Starbucks spaces are 40% bigger than those in the US and filled

primarily with couches. This facilitates a boisterous, lounging, togetherness feeling that fits right

in across all generations of Chinese customers. In this fashion, Chinese customers not only go to

Starbucks to enjoy a good cup of local variety Chinese coffee, but feel comfortable bringing a

large group of friends or family with them. As for Status, Starbucks acknowledges the idea that

Chinese place an importance on brands that portray status and success, and position themselves

as such. They open stores in high-end locations like luxury malls or iconic office towers, as well

as charging 20% higher prices in China alone as compared to other parts of the world. Starbucks

relatively new addition to their constantly adapting strategies, the Reserve Roastery, highlights

this symbol of status as a desired product for potential consumers. The Reserve offers a

sophisticated and obsessive detail oriented coffee experience, curated for status and symbol.

Everything from the beans to the locale to the actual roasting process is on display in a sleek

modern environment. This integrates all three of the Chinese-centric marketing approach into an

elite experience located in the Jingan District in Shanghai. As seen in the graph from the
Euromonitor International Market Research Blog, Starbucks ability to observe these three

generic aspects of Chinese society shows a deep commitment to the marketing long game

approach and has integrated a Western coffee company into the centuries old Chinese culture

rather smoothly through intelligent research and market variation and adaptation.

Supply Chain - Lauren

In order to have a functioning corporation that is able to sell a product, a system to

manage the supply chain is necessary. Starbucks is known widely for their use of a vertically

integrated supply chain, as their supply chain is studied widely among undergraduate and

graduate business students. The purpose of having a vertically integrated supply chain is the fact

that Starbucks is able to have control of the process along virtually every single step from the

physical growth of the coffee bean to the pouring of a steaming cup of coffee. While having

control over the majority of the supply chain, Starbucks is also able to set standards for their

growers in order to align with their moral and social values, which is something that sets

Starbucks as a brand apart from their competitors. The coffee company only sells or uses beans

that are ethically sourced and certified Fair Trade. Starbucks has two main standards set for their

growers: C.A.F.E. (Coffee and Farmer Equity) and CSG (Coffee Sourcing Guidelines). Both of

these sets of standards help Starbucks ensure that their coffee beans are being ethically sourced,

grown sustainably, and hold the same quality across farms. This can come at a cost to customers,

as it makes the coffee and beans being sold more expensive than competitors like Dunkin

Donuts, who are known for more affordable prices.

The process of their supply chain goes as follows: Growers farm, pick and package

beans. The beans are then shipped to six different storage sites located in the United States and

Europe where the beans are roasted, packaged up, and again shipped off, this time to one of the
56 distribution centers that Starbucks owns (eight of these are central; 48 are regional). Starbucks

is involved in every step of this process, as goes with the vertical integration, and the close

control that the brand has over the supply chain helps to maintain consistency among the

products.

Former EVP of Global Supply Chain Operations for Starbucks (and current Board

Member of the Jesuit School of Theology here at Santa Clara University) Peter Gibbons

simplified the supply chain of Starbucks in 2008, when the company began to look at the global

market with wide eyes. He developed four categories to manage the supply chain: plan, source,

make, and deliver. He also implemented a centralized logistics systems that coordinates the

global network for the supply chain. After Gibbons’ simplification of the supply chain in 2008,

he developed a way to assess the supply chain based on four metrics: safety in operations,

service measured by on-time delivery as well as order-fill rates, cost of goods sold, and savings.

Gibbons also included an automated information system that provided a fast way to monitor

inventory, scheduling, demand, and capacity. These systems and processes put in place by Peter

Gibbons directly connect to the topics discussed in OMIS.

Comparing the supply chain of Starbucks to Dunkin Donuts, their main competitor,

Starbucks clearly controls a superior supply chain. Dunkin Donuts uses a third party

intermediary, National DCP, to run their supply chain instead of using the vertical integration

method that Starbucks utilizes. In contrast to the model Starbucks uses for their store locations,

Dunkin Donuts are usually franchises, while less than half of Starbucks stores are franchised. To

add on, Dunkin Donuts also sources from less ethical and sustainable farms, though they claim to

source “as sustainably as possible.” This leads to cheaper coffee, which is why many customers

in New England prefer Dunkin over Starbucks. However, it comes at a cost as the lack of profit
from cheaper products leads to less opportunities to expand, as Starbucks has been able to do in

China.

Finance - Phoebe

Expansion into Asia, specifically China, has been one of Starbucks’ main drivers in

growing their bottom line. They have been able to penetrate one of the largest populations and

markets very successfully and established a large presence in Asia. Starbucks measures its

growth by opening new stores and increasing their sales per store. Since 2012, they have have

nearly doubled their stores, opening 3,597 new stores over the four year span to reach its current

total of 7,479 stores open in the China Asia segment (as of their latest 10K released in 2017)

(Starbucks Corporation 2017, 22). Out of 27,339 total stores, 27% are located in Asia, nearly a

10% increase from 2012 when Asian stores made up 18% of all stores (Starbucks Corporation

2013, 21). Their store sales have also increased rapidly: in 2012 the China segment grew 15% as

compared to 8% in the Americas (Starbucks Corporation 2013, 20). Between 2015 and 2013,

sales growth was between 7 and 9%, beating both the Americas and EMEA segments (Starbucks

Corporation 2017, 21). Overall Starbucks’ Asia presence has been enjoying healthy growth rates

with Net Revenue growing at 10% from 2016 to 2017 and bringing in $3.24 billion in 2017, up

$301 million from 2016 (Starbucks Corporation 2017, 28). Given the low and stable growth rates

in the Americas, Starbucks had reached the maturity phase of their product life cycle in the US

and relied upon the China Asia segment to provide long term growth opportunities and add value

to the company. Ultimately the market delivered and has merited management labeling long term

growth in China as one of their six operational priorities going forward in their 2017 10K

(Starbucks Corporation 2017, 24).

 With its massive population and evolution towards a more capitalist economy, China has

been a large opportunity for a number of different companies across various industries. To put

Starbucks’ success in perspective, it would be apt to look at the performance of a similar

company in China to better gauge how Starbucks’ actions have propelled them towards success.

McDonald’s, given its size and international presence, is one of Starbucks’ major competitors

and has also labeled China as being a “high growth market” (McDonald’s Corporation 2018, 14).

With only 2,600 restaurants in China, they don’t have quite the same presence in China as

Starbucks, however they are looking to expand to 4,500 restaurants by 2022 (Pisani). Their 2018

growth in store sales is 5.3%, which is a fraction of the growth Starbucks saw in five years ago,

however beats Starbucks’ latest store sales growth of 3% in 2017 (McDonald’s Corporation

2018, 16). Overall, McDonald’s has penetrated the Chinese market, but still has a lot of room for

growth and expansion.

The main difference between Starbucks’ and McDonald’s China strategy is the timing

and intensity at which they invested in the new opportunity. Starbucks invested heavily in China

in 2011, 2012, and 2013, which resulted in high growth rates and rapid expansion of stores in the

following years. McDonald’s, however, was more conservative and did not invest as much effort

and resources into the Asian market, as evidenced by their low number of restaurants and

relatively slow growth rate, though they have plans to continue expanding their presence by

doubling their stores in the near future. Starbucks took advantage of China early and as a result

now enjoys a large portion of the market as it has become one of their strongest and most

profitable segments. Their decision to move into China was a great success financially as it

brought them a strong revenue stream at $3.2 billion in 2017 and solid growth rates of 10%
(Starbucks Corporation 2017, 28). China and the Asia Pacific sector should continue to be

beneficial for the coffee makers in the future as they expect continued long term growth.

Recommendation

As far as recommendations are concerned, the continued expansion into China and the

rest of the Asian Pacific market comes with great benefits alongside detrimental costs. A major

roadblock that Starbucks has already come across relates to foreign currency. Exchange rates can

lead to massive losses of profits, which are already low from high spending on marketing to

promote the new Starbucks locations in the newer markets. The costs of expanding into China

were also high, with the need to have a Chinese Business Partner in order to gain approval.

Starbucks has already overcome this obstacle, as they continuously open new locations in China.

The legal prevention of new businesses being opened could actually stand to benefit Starbucks,

as they would be able to gain control of the market and essentially hold a monopoly over the cafe

market.

The main driving factor in the benefits of continuing the expansion is the great success of

the Reserve Roastery in Shanghai. Though various locations for the roasteries have been opened

in the United States, the first one being in Seattle to match the original Starbucks location, the

recent addition to the roastery collection of the Shanghai location in December of 2017 has

already become the most profitable roastery Starbucks has come out with. The Roastery also

relates to the con for consumers of the cost of Starbucks coffee. Many customers opt out of

purchasing from Starbucks because of the price that comes with ethically and sustainably

sourced products, but labeling the locations as Reserve Roastery makes the coffee feel

prestigious and worth the extra few dollars. It would be in Starbucks’ best interest to continue

releasing Reserve Roasteries to increase profits, as sales in the United States are continuously
dropping. Because of the success of the roasteries in China, Starbucks may want to look to other

regions where the roasteries could be equally as successful. Latin America would be a great

place to start, as the culture surrounding a cup of coffee, or “cafecito”, makes for a large market

to promote the locations to.

Figures:

Shanghai Roastery

Source: https://news.starbucks.com/news/photo-gallery-inside-the-shanghai-roastery
Sales in Cafés/Bars in China: 2009-2014
Source: https://blog.euromonitor.com/strategies-for-consumer-market-success-in-china/

Visualization of Starbucks Supply Chain

Source: https://mpk732t12016clusterb.wordpress.com/2016/05/16/coffee-travels-fast-starbucks-supply-chain/
Net Revenue and Operating Income for Starbucks’ China/Asia Pacific segment for 2016 and

2017

Source: Starbucks 2017 Annual Report, pg. 28

 Bibliography:

Cassara, Kyle. "Starbucks Can Succeed In China." Seeking Alpha. April 26, 2018. Accessed

November 27, 2018. https://seekingalpha.com/article/4166233-starbucks-can-succeed-china.

Bondarenko, Peter. "Starbucks." Encyclopædia Britannica. November 14, 2016. Accessed

November 27, 2018. https://www.britannica.com/topic/Starbucks.

Boumphrey, Sarah. "Strategies for Consumer Market Success in China." Euromonitor

International. August 3, 2015. Accessed November 27, 2018.

https://blog.euromonitor.com/strategies-for-consumer-market-success-in-china/.

Default, Gigi. "How Starbucks Brought Coffee to China." The Balance Small Business. October

29, 2018. Accessed November 26, 2018. https://www.thebalancesmb.com/market-research-case-

study-starbucks-entry-into-china-2296877.

"Financial Data." Starbucks Corporation - Starbucks Ceo Kevin Johnson Unveils Innovation

Strategy to Propel the Company's Next Decade of Growth at Starbucks 2018 Annual Meeting of

Shareholders. Accessed November 27, 2018. https://investor.starbucks.com/financial-

data/annual-reports/default.aspx.

LaVito, Angelica. "Starbucks Is Opening a Store in China Every 15 Hours." CNBC. December

05, 2017. Accessed November 27, 2018. https://www.cnbc.com/2017/12/05/starbucks-is-

opening-a-store-in-china-every-15-hours.html.
Loxcel Starbucks Store Locator FAQ. Accessed November 27, 2018.

https://www.loxcel.com/sbux-faq.html.

McDonald’s Corporation, 2018 Annual Report, http://d18rn0p25nwr6d.cloudfront.net/CIK-

0000063908/ba317975-79e4-41e1-9fcd-4cf8b63a8310.pdf, accessed November 2018.

Nanos, Janelle. "Starbucks Is from Seattle, But the Frappuccino Is from Boston." Boston

Magazine. December 07, 2012. Accessed November 27, 2018.

https://www.bostonmagazine.com/news/2012/12/07/frappuccino-history/.

Pisani, Joseph. "McDonald's Plans to Nearly Double Restaurants in China." USA Today. August

08, 2017. Accessed November 27, 2018.

https://www.usatoday.com/story/money/2017/08/08/mcdonalds-plans-nearly-double-

restaurants-china/548184001/

Rochman, Bonnie. "Securing the Future of Coffee: Starbucks Farm Is Hub for Research and

Innovation." Starbucks Newsroom. March 7, 2018. Accessed November 26, 2018.

https://news.starbucks.com/news/starbucks-farm-research-and-innovation.

Starbucks Corporation, 2013 Annual Report,

https://www.sec.gov/Archives/edgar/data/829224/000082922413000044/sbux-

9292013x10k.htm, accessed November 2018.

Starbucks Corporation, 2016 Annual Report,

https://www.sec.gov/Archives/edgar/data/829224/000082922416000083/sbux-

1022016x10xk.htm#s7FAABF9A1FCDD4C657383264FFDADF75, accessed November 2018.

Starbucks Corporation, 2017 Annual Report,

https://s22.q4cdn.com/869488222/files/doc_financials/annual/2017/01/FY17-Starbucks-Form-

10-K.pdf, accessed November 2018.

"Starbucks Rewards™ | A Rewards Program Designed for You." Starbucks Coffee Company.

Accessed November 27, 2018. https://www.starbucks.com/card/rewards.

"Starbucks Says It Will Close 150 Stores next Year." CNNMoney. Accessed November 27,

2018. https://money.cnn.com/2018/06/19/news/companies/starbucks-store-closures/index.html.

"Supply Chain Putting the." Digital and Content Marketing. November 13, 2018. Accessed

November 27, 2018. https://www.fronetics.com/supply-chain-putting-star-starbucks/.

Szabo, Liz. "Launching Starbucks In Japan -- First Of 15 Stores To Open."Seattle Times

Newspaper. Accessed November 27, 2018.

http://community.seattletimes.nwsource.com/archive/?date=19960729&slug=2341589.

Tice, Carol. "Starbucks Still Seeking a Rhythm for Circadia." Bizjournals.com. October 17,

1999. Accessed November 27, 2018.

https://www.bizjournals.com/seattle/stories/1999/10/18/newscolumn3.html.
"The Rise of Coffee Culture in Latin America." Euromonitor International Blog. July 10, 2017.

Accessed November 27, 2018. https://blog.euromonitor.com/tea-or-coffee-what-do-consumers-

in-the-americas-prefer-part-2-the-rise-of-coffee-culture-in-latin-am/.

Zakkour, Michael. "Why Starbucks Succeeded In China: A Lesson For All Retailers." August

24, 2017. Accessed November 26, 2018.

https://www.forbes.com/sites/michaelzakkour/2017/08/24/why-starbucks-succeeded-in-china-a-

lesson-for-all-retailers/#3e91475c7923.

Zamora, Joshua. YouTube. March 04, 2016. Accessed November 27, 2018.

https://www.youtube.com/watch?v=mmJU-sXZYGA.