China Marketing Blog

Can Starbucks Remain China's #1 Coffee Brand? A Review of Past Successes and Future Challenges

Wiktoria Marszałek — Thu, 09/06/2018 - 15:45

Nearly 20 years ago in January 1999, Starbucks opened their first store in Beijing basically introducing coffee culture to China. However, twenty years later China and its consumers have changed and competition has blossomed – so, where does Starbucks now stand on the Chinese market?

Starbucks Has Been a Synonym for Coffee in China

Starbucks in China

The brand now associated with Starbucks in China is Luckin Coffee, one of the country’s latest unicorns. After recently becoming an overnight phenomenon, a slogan was quoted in every article: “Luckin Coffee was there to teach coffee culture to the Chinese.” The problem is that they obviously stirred up the market but Starbucks was the coffee culture premier brand. Nineteen years ago, Starbucks entered the market without commercials nor persistent advertising. So, how did their brand name become synonymous with coffee in China?

In 1999, Starbucks was an internationally well-recognized brand that entered a market with basically no competition. They got attention for many reasons: being a big foreign brand entering China (same worked for McDonald’s) symbolizing not just China’s opening up but also a part of the American dream China was then pursuing. Coffee was not the only fresh concept Starbucks introduced – part of their success was excellent in-store experiences. When I first came to China in 2015, Starbucks was one of a sparse quantity of places marked as an A-quality food spot, a label rare among domestic restaurants. Tidiness and high-quality service were a symbol of luxury, achieved for only a few dollars. Since the beginning, Starbucks’s aesthetic has been copied by many, i.e. the popular and luxury-branded Japanese-chain store Muji.

In the west, we know Starbucks is not truly quality coffee; but in China, where no one really understood coffee, Starbucks easily positioned itself as a luxury brand. Just compare the prices of a Starbucks latte in different countries. For a tall latte, it’s around 3$ in the US and over 4$ in China – unless you go to Starbucks Reserve where a cup goes for over 6$. So, considering minimum wages, an hour of work can get about two cups of coffee in the US. In China, you have to work at least 2 hours to get the same.

It’s obvious that the cup of coffee is not exactly what Chinese consumers have been chasing for almost twenty years now. Starbucks products like coffee beans, cups, and snacks are exuberantly priced in China. Yet, in 2018, Chinese consumers don’t say “I went to grab a cup of coffee” they say: “I went to Starbucks” and it bears the same meaning.

 

How Starbucks Became a Social Experience

Starbucks shares beautiful content

Personally, when I think of summing up Starbucks’s China marketing, I say: a perfectly told story. I’ve mentioned Starbucks didn’t spend millions on commercials. Because early on they understood how powerful word of mouth and social media were. With the money saved on not doing expensive TV spots, they created beautiful content telling a consistent brand story.

Having chosen social media as the main marketing channel, they showed an understanding of how Chinese consumers function. In China, people love sharing – and that’s how Starbucks wove an image of “other people go there, I go too.”

Another strategy that worked, but certainly cost them, was opening their stores in the most visible spots in Chinese first-tier cities. Most of Starbucks’s 3,000+ stores are located on the first floor of shopping malls, where having that famous cup of coffee is just a complimentary piece of a lifestyle. Among young people, there’s not a better way to spend the weekend, than going to a shopping mall downtown. And trust me, there are ten Starbucks cafes (that I am aware of) on the 15-min ride from my flat to the office – and no chance of finding a free spot to sit on the weekend.

Starbucks Stores in Nanjing and Shanghai

And although back in 2007, Starbucks was forced to close its controversial store in the Forbidden City, it has since been welcomed in other cultural sites, such as Laomendong (老门东) in Nanjing. Not to mention that Starbucks’s biggest store is located not in the US, but Shanghai.

Starbucks is a social space rather than a place to get coffee on the go. Just look at local tea or coffee shops: they offer much cheaper drinks (1 to 3 USD) with menus suited for Chinese consumers (bubble tea and cheese latte…), but are usually designed as grab-and-go booths rather than cafes. Starbucks, on the other hand, offers a well-designed space to meet your friends and I’ve even seen some work meetings in Starbucks, though it’s not a common work setting.

Och, before we move on to how Starbucks’s dragged its feet in China for too long, let’s mention one more successful aspect of their social marketing.

Have you ever heard of Chinese “red packets” (红包)? It’s a traditional red envelope with money presented as a gift which has contemporarily become commercialized. You can send a red packet to your friends and family on WeChat, but it’s also a name for a discount coupon. Starbucks took advantage of this tradition and created their own red packet system. It’s called: “Say It With Starbucks” (用星说). You can say “Thank You” or “I Love You” with a digital card purchased and shared on WeChat (recently also on Alipay). They also release a special set of the cards for each holiday – and there are many commercialized holidays in China. After receiving the gift, users just pay with a code displayed on their phone.

Say it with Starbucks

 

Has Starbucks Fallen Behind?

 

Everything was splendid for a long time; an American brand entered China’s market with a completely new product and no competition just like them, allowing them to build a strong brand name. So, how come their growth slowed and stocks dropped in 2018?

Well, first things first, obviously competition arouse. Even if you’re the first of a kind, you can wake up a week later and have ten competitors that needed only a week to learn what you’ve been learning for months or even years. Then you notice your local competitors understand the customer better and adapt faster, and your sales drop. This is what happened to Starbucks. Everyone was surprised and foreign media headlines shouted: “What’s wrong with Starbucks in China?” and “China slows down Starbucks”. Suddenly everyone forgot about their decade-long coffee monopoly in China. First copycats and local coffee shops that are probably not even worth being called a competition appeared. Costa Coffee also push hard on expanding, with over 400 stores (compared to Starbucks’s 3,300) and a plan to open three times more by 2020. And finally, Luckin Coffee piggybacked its way to the top.

Robot Cafe In China
Robot-run cafes become popular in China.
Suning runs a staff-less cafe at Xinjiekou in Nanjing.

 

But I wouldn’t say their presence solely cost Starbucks. Rather, it was how Starbucks relied on what they’d done and ignored competition for too long. As Chinese consumers learnt more about coffee culture, some of them left Starbucks for smaller coffee shops who prioritized quality. Whereas another group of habitual drinkers who didn’t care about quality but rather the price left for more affordable options.

However, the most noticeable issue appeared in the recent two, three years: daily technology picked up the pace, and Starbucks didn’t keep up. For too long they managed to miss (or ignore) contemporary consumers: digital savvies who are not afraid to drop old habits for new and interesting concepts. In terms of latest solutions, all that Starbucks has to offer is gift cards and social media. To keep customers, they also offer pre-paid memberships with built-in discounts. In the meantime, Luckin Coffee handed out 1 billion yuan worth of beverages through their own app delivered straight to the customer’s doors and offices.

 

Is Starbucks Going to Catch Up?

There’s been buzz for weeks on whether Luckin Coffee is going to take Starbucks down. The Chinese company obviously threw down a challenge, I mean, they even threatened to sue them. However, the American Goliath didn’t cave. Instead, it seems Starbucks actually learned its lesson. They recently signed a deal with Alibaba, clearly stating they are stepping up and adapting to the fast-changing Chinese market.

Daniel Zhang, Chief Executive Officer of the Alibaba Group, said, “Alibaba is thrilled to expand our existing partnership with Starbucks by leveraging our cutting-edge New Retail infrastructure and digital power to enable an unprecedented experience for consumers.” For those unfamiliar, “New Retail” is Alibaba’s personal concept to integrate offline and online into one holistic and unforgettable customer experience. So, what does it mean for Starbucks and their customers?

The key points of the new “Starbucks Experience” are:

  1. A cooperation with Ele.me, Alibaba’s food delivery platform. But wasn’t Starbucks on Ele.me already? Yes, but only through third-party sales agents. Starbucks had little control over orders or customer data. Now, the company’s stores will be fully integrated into the platform, making it easier for customers to order and for the company to provide high-quality service.
     
  2. “Starbucks Delivery Kitchens” located in Hema supermarkets, Alibaba’s smart store chain, seems like another lesson learnt from Luckin Coffee, which opens three different kinds of stores (cafes, pick-up stores and delivery kitchens). This assures baristas at offline locations are not occupied by preparing delivery beverages.
     
  3. Full integration into Alibaba’s ecosystem. It means that Starbucks will not need a separated app to interact with customers and collect data – the main inconvenience plaguing Luckin Coffee. Integration into Alibaba’s apps, like Taobao, Tmall, Alipay etc. means access to the data of its 500 mln users. And moreover – there’s no need for Starbucks to learn from scratch what to do with the collected data. Alibaba is one of the Chinese giants of data processing.

There are no numbers yet, but this partnership is Starbucks’s biggest chance to keep up with their promise of opening a store in China every 15 hours until they have 6,000 of them by 2022. That’s bold considering the recent closings of many international branches. For now, China is Starbucks’s fastest growing market and the company seems to have found a way to maintain footing with their quickly evolving consumers.

 

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