Starbucks Changes Tactics in China

Here's an interesting article about Starbucks in China: "Starbucks adjusts its formula in China" Being somewhat familiar with Starbucks from a professional standpoint as well as a recent business student who worked on numerous Starbucks case studies, I think I can safely say that Starbucks expected to enter the Chinese market with the same business strategy it uses in the US. However, market penetration was slower than expected.

Facing declining stock prices, (what surely must be close to) domestic market saturation, and supply issues that loom in the foreseeable future, Starbucks has put a lot of its earnings expectations in the Chinese market. Starbucks is currently forecasting a full 20% of their profits to be from the growing Chinese market.

In this article it appears that they are finally starting the see the Chinese market as a different kind of animal. In contrast to the US, Chinese consumers see the coffee giant as a destination restaurant of sorts. With a cup of coffee costing as much as a days earnings for many, the newly emerging Chinese middle class see Starbucks as a trendy place to present themselves as affluent and sophisticated. I think that being seen with a cup of coffee rather than the traditional tea, they are also presenting an image of "westernization".

By increasing their seating area and focusing sales on the "Starbucks experience" or "third place", Starbucks is starting to realize its challenge and its true product in China: BRAND. This is a relatively unique situation in business. In China Starbucks' value proposition is actually its brand, and by increasing prices there, it will actually increase its value proposition to customers. This is a rare window of opportunity... I wonder if they'll get it?

Starbucks' second challenge in China will be in protecting its brand. Opening a store in the Forbidden City (which was closed by the government) and at the Great Wall was a huge mistake, outraging and alienating the proud Chinese. They'll need to balance market penetration with cultural sensitivity if they wish to continue to capitalize on their brand in China.