Starbucks Pushes Expansion in China

Starbucks has announced plans to make China its second biggest market and is set to open almost 1,400 new shops by 2019.

Raising its bet on Chinese consumers, Starbucks has announced plans to make China its biggest market outside of the US and is set to open almost 1,400 new shops by 2019. In defiance of any slowdown in the world’s second-largest economy, the ambitious 70% expansion plan will see 500 new locations and 10,000 new jobs created in China every year to 2019.

Starbucks CEO Howard Schultz comments: “As Starbucks’ second largest and fastest-growing market globally, China represents the most important and exciting opportunity ahead of us. We have confidence in the future of the Chinese economy, despite all the rhetoric, noise and issues. People are looking for reasons not to believe. I’m on the ground and I see firsthand. I am bullish.”

Going against the market

The move continues a long and successful affair between the world’s largest coffee chain and China, the tea-drinking nation. Starbucks entered the Chinese market in 1999 with a first shop in the China World Trade Building in Beijing, which has since been followed by 2,000 further stores in 100 cities across the country. And even as the Chinese market suffers slow growth (last year saw the country’s lowest GDP increase in 25 years of 6.9%) and a downward-spiralling stock market, Starbucks is avoiding fallout. Last year the company posted its best fourth-quarter earnings globally, with revenue for the China and Asia-Pacific region more than doubled from the previous year, at $652.2 million.

As a point of comparison, certain food and beverage companies are struggling in the Chinese climate: Yum Brands, parent company of KFC, Taco Bell, and Pizza Hut, is cutting its China unit, which accounts for 52% of operating profits, and chocolate maker Hershey Co saw Chinese sales fall 14% in the third quarter of 2015.

Although Starbucks doesn’t break down its sales by single countries, Schultz has commented that he expects China to become Starbucks’ largest market in coming years. And he may be right, because while China currently consumes a small amount of the coffee consumed in the US (4.5 billion cups to 133.9 billion cups), analysts at Euromonitor International forecast that Chinese coffee consumption will rise 18% annually to 2019, significantly outpacing growth forecasts for the US of 0.9%.

Establishing a coffee drinking culture in China

Starbucks ChinaStarbucks itself has played significant role in establishing this coffee drinking culture in China. Carving out a role as the go-to venue to hang-out with friends, family, or for business has enabled the company’s success. As James Roy, an American analyst at China Market Research Group, a Shanghai-based consulting firm, comments: “[Starbuck’s] popularity is not necessarily due to the drinks… [It] offers a strong experience and premium image. Unlike in the U.S., most drinks are ‘drink in’. It’s the right place to be seen. It could be for meetings, business, socializing or relaxing. It offers a good setting in key locations.” In accordance, Chinese Starbucks locations are bigger, with more seating, and are fashionably designed.

Starbucks has also created a premium image in China, choosing to make the coffee expensive. Originally a cause for outcry in the Chinese state media, the company charges 20% more for coffee products in China than in any other market. But these premium prices have driven up the aspirational status of the brand, and made Starbucks an affordable luxury item in China.

Adapting to Chinese culture

Starbucks has also successfully adapted to China’s own cultural norms. It trades under a popular Chinese name, Starry Hope. And it has adjusted its menu options to include, for example, green tea beverages and traditional Chinese sweets such as mooncakes.

Starbucks has also adopted Chinese cultural norms of employment, recently announcing that the company will invest millions in giving about 10,000 full-time China-based baristas and store supervisors a subsidy to cover around 50% of their housing costs. Chinese industrial firms have long offered dormitory housing complexes to attract workers moving from the country or young, unmarried workers. The Starbucks plan adapts that manufacturing custom to the retail sector.

Starbucks’s Chinese expansion comes as the company is seeing significant global financial success. Last year the company reported record revenues of $19.2 billion, up 17% year-on-year. The US is still Starbucks largest market, counting for 65%, but the company is also seeing strong growth in the Americas, and is expanding across Sub-Saharan Africa, India, Russia, Brazil, Chile, and Vietnam. In reward, CEO Schultz was paid $20 million for the year ending September 2015. And if his China strategy pays off, it seems likely he will be able to top that in the coming years.

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