Why Starbucks succeeds in China and others haven't
— -- About 14 years ago, I met an entrepreneur who wanted to open up coffee shops around China. I never thought the coffee business would work there. The Chinese would not easily give up their tea-drinking culture for a bitter, overpriced drink, I told him.
What did Starbucks do to succeed in a market where so many other Western food and beverage brands such as Dunkin Donuts, Krispy Kreme, and Burger King have failed to live up to their own expectations? What Starbucks did right in China is a textbook case study in how food brands can succeed despite rising labor and real estate costs and increased competition on the Mainland.
Instead of trying to force onto the market the same products that work in the U.S., such as whip cream-covered frozen coffee concoctions, Starbucks developed flavors, such as green tea-flavored coffee drinks, that appeal to local tastes. 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.
By offering comfortable environments in a market where few restaurants had air conditioning in the late 1990s, Starbucks become a defacto meeting place for executives as well as for the gathering of friends. In other words, Starbucks adapted its business model specifically for the Chinese, rather than trying to transplant everything that worked in America into China, as so many brands such as Best Buy and Home Depot have done. Such approaches often proved shortsighted and ill-fated.
The challenge with pushing dine-in service in large, comfortable outlets rather than take out is that revenue per square meter is less than in the U.S. The average revenue per outlet in China is one third to two thirds of what it is in the U.S., according to Alstead, the CFO.
Starbucks offset the relative lack of revenue in China's outlets by positioning the company and its products as aspirational purchases. The average coffee sold in China is far more expensive than in the U.S. Carrying a Starbucks cup is seen as a status symbol, a way to demonstrate sophistication and the capability to afford a personal luxury for the up-and-coming middle class in China.
Starbuck's high pricing strategy of specialty drinks allows it to have its Chinese outlets be more profitable per store in China despite the lower sales volume. Overall in Asia, its operating margins are 34.6% in 2011 versus 21.8% in the United States. Too many brands are willing to push for market share by cutting prices in China. In reality, they should aim for fatter margins.
Not only does Starbuck's premium pricing strategy fit market demands but it also allows it to regularly roll out higher-margin specialty products, such as gift sets that offset rising commodity costs. If you think Starbucks is pricey here, imagine what you'd pay in Shanghai. Still, it will be an ongoing juggling act for Starbucks. As China's urbanization rate nears 52%, Starbucks and other companies there need to implement strategies to offset the impact of rising commodity costs.
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