Marketing Strategies: Starbucks in China
LAHTI UNIVERSITY OF APPLIED SCIENCES Degree Programme in International Business Bachelor’s Thesis Spring 2016 Siyu Wen
Lahti University of Applied Sciences Degree Programme in International Business WEN, SIYU:
Marketing Srategies: Starbucks in China
Bachelor’s Thesis in International Business, appendices
70 pages, 4 pages of
Spring 2016 ABSTRACT
With the rapid development of the Chinese economy, a coffee consumption market with huge potential develops. China becomes a hot place that many foreign companies are struggling to enter. Depending on the expected development of China’s coffee consumer market prospects, Starbucks decides to choose the Chinese market as another important overseas market. The thesis is carried out in a deductive and quantitative method. The study consists of two parts: theoretical part and empirical part. The theoretical part analyses the macro environment of Starbucks with PEST analysis and points out the strengths, weaknesses, opportunities and threats of Starbucks in the Chinese internal market with SWOT analysis. In addition, the 7Ps Marketing Mix proposes appropriate marketing solutions for Starbucks future development. In the empirical part, the study utilizes the quantitative method with the use of a questionnaire. The thesis uses a large number of research and reading literature information, with an objective to analyse the macro and internal environment of Starbucks in the Chinese market. The purpose of the thesis is to develop a marketing strategy system for Starbucks, which includes the determination of the target market and marketing mix strategies in Chinese market. Starbucks has high quality services and provides a rich customer experience, which gives it extremely high brand loyalty. Key Words: Starbucks, China, SWOT, PEST, 7Ps Marketing Mix
CONTENTS 1 INTRODUCTION
1
1.1
Background
1
1.2
Thesis Objectives, Research Questions and Limitations
2
1.3
Theoretical Framework
3
1.4
Research Methodology and Data Collection
3
1.5
Thesis Structure
5
2 ASSOCIATED BASIC THEORY
7
2.1
PEST Analysis
7
2.2
SWOT Analysis
8
2.3
Experiential Marketing Theory
9
2.4
STP Analysis
10
2.5
Marketing Mix 7Ps
13
3 ANALYSE CURRENT SITUATION OF STARBUCKS
14
3.1
Overview of Starbucks
14
3.2
Overview of Starbucks Development in China
15
3.3
Existing Problems of Starbucks
16
4 MACRO ENVIRONMENT ANALYSIS
18
4.1
Political Environment
18
4.2
Economic Environment
20
4.2.1
Increased Resident Income Level and Upgraded Consumption Structure
20
Economic Development Indicates a Huge Market Potential
22
4.2.3
Opportunities of Urbanization and Population
23
4.3
Social and Cultural Environment
24
4.4
Technological Environment
25
4.2.2
5 INTERNAL ENVIRONMENT ANALYSIS
27
5.1
Resources and Capabilities
27
5.2
Core Competence
29
5.3
SWOT Analysis of Starbucks
30
5.3.1
Strengths
30
5.3.2
Weaknesses
31
5.3.3
Opportunities
32
5.3.4
Threats
32
5.3.5
SWOT Matrix Analysis of Starbucks
33
6 EMPIRICAL RESEARCH & ANALYSIS
35
6.1
Results Analysis of Questionnaire
35
6.1.1
Personal Information of Participants
35
6.1.2
Customers’ Opinions and Evaluation
38
7 STARBUCKS’ MARKETING STRATEGIES
47
7.1
Determine Target Market of Starbucks
47
7.1.1
Market Segmentation
47
7.1.2
Target Market Selection
48
7.1.3
Market Positioning Strategy
48
7.2
Product
49
7.3
Price
50
7.4
Place
53
7.4.1
Starbucks Direct Sales Mode
53
7.4.2
Location Strategy
54
7.5
Promotion
56
7.5.1
Advertising and Word of Mouth
56
7.5.2
Limited Sales and Charity
58
7.6
People
58
7.7
Process
60
7.8
Physical Evidence
61
8 CONCLUSION & SUGGESTIONS
63
8.1
Answers to the Research Questions
63
8.2
Reliability & Validity
65
8.3
Suggestions for Futher Research
65
9 SUMMARY
66
REFERENCES
APPENDICES
LIST OF FIGURES: FIGURE 1. Inductive Research (Lardbucket 2015) ................................................ 4 FIGURE 2. Deductive Research (Lardbucket 2015) ............................................... 4 FIGURE 3. Thesis Structure .................................................................................... 5 FIGURE 4. Macro Environment Forces Affecting Firm (Jurevicius 2013.) ......... 18 FIGURE 5. China Urban Per Capita Disposable Income 2002-2012 (China Urban Per Capita Disposable Income 2015.) ............................................................ 21 FIGURE 6. Engel Coefficient of Urban Residents and Rural Residents in China 2000-2012 (Engel Coefficient of Urban Residents and Rural Residents in China 2015.)................................................................................................... 22 FIGURE 7. Age Group .......................................................................................... 36 FIGURE 8. Gender ................................................................................................ 36 FIGURE 9. Occupation.......................................................................................... 37 FIGURE 10. Monthly Income (RMB) ................................................................... 38 FIGURE 11. The first café that comes to your mind when you want to drink coffee.............................................................................................................. 39 FIGURE 12. The frequency of visiting Starbucks in a month ............................... 39 FIGURE 13. Average consumption amount during one visit in Starbucks (RMB) ........................................................................................................................ 40 FIGURE 14. Price level of Starbucks .................................................................... 41 FIGURE 15. The way to know Starbucks ............................................................. 41 FIGURE 16. Reasons to choose Starbucks ............................................................ 42 FIGURE 17. Personal taste of food in Starbucks .................................................. 42
FIGURE 18. Respondents’' satisfaction to the environment of Starbucks ............ 43 FIGURE 19. Respondents' satisfaction to the food and dishes in Starbucks ......... 44 FIGURE 20. Respondents' satisfaction to services at Starbucks ........................... 44 FIGURE 21. Overall evaluation to Starbucks........................................................ 45 FIGURE 22. Starbucks can do better ..................................................................... 46
LIST OF TABLES: TABLE 1. SWOT Matrix ........................................................................................ 9 TABLE 2. SWOT Matrix Analysis of Starbucks .................................................. 33
1
1.1
INTRODUCTION
Background
Starbucks has created one of the world’s most valuable brands in just twenty years. Starbucks was founded in 1971. It is the world’s leading specialty coffee franchisor and brand owner. This company already has more than 22,000 coffee shops and more than 200,000 employees in North America, Latin America, Europe, the Middle East and the Pacific Rim. Over the years, Starbucks has been committed to providing the highest quality coffee and service to customers. It creates a unique “Starbucks experience” so that Starbucks stores around the world become warm and comfortable, a “third living space” for people in spite of people’s workplace and living accommodations. At the same time, Starbucks continues to reflect back to society, improve environment, repay partners and coffee producing farmers through various corporate social responsible activities. Because of Starbucks’ unique corporate culture and philosophy, it has been nominated “Most Admired Company” by the US Fortune magazine. (Starbucks 2015.) There is huge commercial opportunity in China’s coffee business because China’s current coffee consumption is far below the world average level. According to experts’ prediction, China will become the world’s largest coffee consuming country in 2020, if every Chinese person drinks one cup of coffee per day. Then, the coffee beans market will reach 50 billion US dollars per year. The whole coffee industry chain will generate hundreds of billions of dollars’ markets. Starbucks is optimistic about China’s huge market potential and it is actively promoting its entering Chinese market strategy. Since 1999, the first time Starbucks entered China, it has opened more than 400 stores in Greater China including Hong Kong, Taiwan and Macao. Nowadays, Starbucks is actively expanding into second-tier market in mainland China. It is committed in making China to become the largest international market outside United States in the near future. At the end of 2005, Starbucks established its Greater China Headquarter in
2 Shanghai, which is mainly responsible for Starbucks’ strategic development, marketing and operational affairs in Greater China. Starbucks growth process is greatly due to its unique values and culture. It provides customers with a unique Starbucks experience. These values and culture form the core competence for Starbucks, which makes the Starbucks expanded worldwide rapidly. (Soupu 2012.)
1.2
Thesis Objectives, Research Questions and Limitations
After years of economic growth in China, social wealth has gained huge accumulation. Moreover, Chinese enterprises are still at a low level of competition and lack of core competence. After years of development of Starbucks, it has become a world famous brand. Starbucks’ brand operation mode and core competence is worth studying by Chinese domestic enterprises. Through the study of Starbucks, the thesis hopes to inspire Chinese domestic enterprises, which is the objective of the thesis. The main research question of the thesis is: How can Starbucks develop its business in China with its marketing strategies? In order to attain the objective and answer the research question, sub research questions are as follows: I: What problems does Starbucks currently encounter? II: What opportunities does Starbucks have in Chinese market? III: How does Starbucks carry out its marketing strategies in China? One of the limitations of the thesis is it cannot deal with other industries but the coffee industry, as Starbucks is a company famous for its coffee industry. The thesis cannot be used in other countries because the main idea of the thesis is to analyse Starbucks marketing strategies in China. The analysis result from the questionnaire is only a guide for Starbucks in its future development in China. It still needs a more comprehensive research. Furthermore, as the thesis is the analysis of Starbucks’ marketing strategies in China, it does not mean that the marketing
3 strategies of Starbucks will also help other companies doing business in China.
1.3
Theoretical Framework
The study’s theoretical framework is mostly based on theories of marketing. The theoretical part consists of how Starbucks developed in China and what marketing strategies it used in those years. To analyse the company and data from the questionnaire, the thesis uses some basic strategic analysis tools, such as PEST analysis and SWOT. Based on the analysis, the thesis sums up the strategies of Starbucks and summarizes the core competence of Starbucks which comes from its unique values and corporate culture. According to the classic STP (Segmenting, Targeting, and Positioning) theory, the thesis analyses Starbucks’ market segmentation, target market and market positioning. It points out the unique charm of Starbucks as an experience-based marketing strategy. Last but not least, the thesis combines service marketing and experiential marketing theory. It summarizes Starbucks’ marketing mix with the 7Ps model. The thesis aims to analyse current situation of Starbucks and proposes measures to reverse its current situation at the policy level and the strategic level of Starbucks.
1.4
Research Methodology and Data Collection
The thesis must choose an approach of whether inductive or deductive to use. The inductive approach is an inference of a generalized conclusion from particular instances and the deductive approach is a conclusion about particulars following necessarily from general or universal premises. (Lardbucket 2015.) For this research, the deductive approach is applied because it goes from general theory to empirical.
4
FIGURE 1. Inductive Research (Lardbucket 2015)
FIGURE 2. Deductive Research (Lardbucket 2015)
The thesis uses a series of classic contemporary marketing and management theory and models to analyse marketing opportunities, core competence and marketing innovation of Starbucks in China. The thesis applies the SWOT analysis tool to analyse comprehensively the external environment, competition in coffee industry, internal environment and prospects of Starbucks. Through horizontal comparison of different regions, the thesis researches Starbucks marketing strategy in China. And through comparison of a marketing competitive strategy between Starbucks and other companies, especially combined with experiential marketing theory, the thesis studies the Starbucks experience as it is very important for Starbucks’ core competence and brand value. After knowing what approach is to be used in the thesis, the study has to decide whether to use the quantitative method or qualitative method to collect data. Quantitative research is more closely aligned with what is viewed as the classical scientific paradigm. And qualitative research is a much more subjective form of research. (Wisegeek 2015.) The quantitative method requires numerical and standardized data to analyse. So the thesis will collect data by using questionnaire survey. The questionnaire consists of several multiple choice questions. By collecting answers from the questionnaire, the thesis will use tables and charts to make comparisons between data and help the case company improve their service.
5 The thesis uses two types of data sources: primary sources and secondary sources. The primary sources mainly come from the questionnaire and the secondary sources are gathered from books, journals and e-resources.
1.5
Thesis Structure
The study of the thesis is to analyse the marketing strategy of Starbucks and to find out how Starbucks has succeeded in China. In order to answer all the research questions clearly, the study is organized as follows:
1. Introduction 2. Literature Review 3. Analyse Current Situation of Case Company
4. Macro Environment Analysis 5. Internal Environment Analysis 6. Empirical Research & Analysis 7. Starbucks’ Marketing Strategy 8. Conclusions & Suggestions 9. Summary FIGURE 3. Thesis Structure
The thesis is divided into nine chapters. The thesis begins with an introduction. The introduction covers the background, objectives, research questions, theoretical framework and research methodology of the study.
6 Chapter 2 will discuss some basic theory that will be used in the study, such as PEST, SWOT and Marketing Mix 7Ps. Following is the analysis of the current situation of Starbucks. Chapter 3 will introduce the development of Starbucks in China and what problems Starbucks is facing now. Chapter 4 will use the PEST analysis to cover macro environment analysis and the coffee industry environment analysis. Chapter 5 will go through an analysis of the internal environment of Starbucks. This chapter will find out what resources and capacities Starbucks has. This chapter will also use SWOT to analyse Starbucks. Chapter 6 is going to use a questionnaire to do the empirical research and analysis of Starbucks. Based on deep marketing research, the author will suggest some marketing strategies that will help Starbucks in chapter 7. Chapter 8 will answer all research questions, as well as give suggestion for further study. Chapter 9 will be the last part of the study. It will draw a brief but thorough summary for the thesis.
7 2
ASSOCIATED BASIC THEORY
This chapter is the overall view of theories that will be used in the thesis. This chapter is divided into three parts. The first part explains macro environment with PEST analysis. The second part introduces SWOT analysis, which summarizes and integrates the internal and external environment of a company. The third part applies experiential marketing theory, which helps a company to stand in consumer position to think about development of the company. The next part is the STP analysis that will help a company in segmenting, targeting, and positioning. Last but not least, the marketing mix 7Ps is applied to propose suitable strategies for a company.
2.1
PEST Analysis
PEST analysis is a method helps companies review their external macro environment. PEST analysis refers to the analysis of the macro environment and macro environment is generally known as the external environment that affects all industries and enterprises. Different industries and enterprises vary a little bit according to their characteristics and management needs in analysing macro environment. But PEST analysis generally analyses categories of political, economical, technological and social aspects that affect a company in a company’s external environment. (PEST 2015.) Political environment includes the social system of a country, the nature of the ruling party and the government’s principles, policies, laws and regulations. Political environment is constantly changing, so enterprises must comply with country’s laws, regulations and political systems in the society. (PEST 2015.) Economic environment includes macro economy and micro economy. Economic factors are the first consideration when an enterprise makes a decision to develop. When analysing economic environment of an industry, it is important to look at the economic investment and future
8 trends of an industry. In addition, local consumption levels, consumer preferences and employment are closely related to a company’s economic. (PEST 2015.) Social and cultural environments include a country’s education and cultural level, religion, customs, aesthetic point of view and values. Population environment and cultural background have greatest impact on social and cultural environment. Religions and customs will prohibit some activities. Values will affect residents’ recognition of organization goals, organization activities and the organization itself. Aesthetic will affect people’s attitude towards the contents of organizational activities, the way of activities and the results of activities. (PEST 2015.) In the past half century, the most rapid changes took place in the technological environment. Technological environment includes not only the invention, but also includes new technologies, new processes, the emergence of new materials, development trends and application prospects that related production of an enterprise. (PEST 2015.)
2.2
SWOT Analysis
SWOT analysis is a tool for analysing a company’s strengths, weaknesses, opportunities and threats by integrating and summarizing the company's internal and external conditions. (Guo 2000.) SWOT analysis combines a company’s internal resource with its external environment. Among them, advantages and disadvantages analysis mainly focuses on comparing the enterprise’s own strength with its competitors, and opportunities and threats analysis focuses on possible impacts on the enterprise from external environment changes. The fundamental purpose of this tool is to compare enterprise’s own strengths, weaknesses, opportunities and challenges with its competitors, and then select an appropriate development strategy. SWOT analysis tool analysis is more structured as it lists related factors of the enterprise and the key issue is to find a suitable business development
9 strategy. There are three steps in using SWOT analysis in strategic decision making process. TABLE 1. SWOT Matrix
Strengths-S
Weaknesses-W
Opportunities-
SO Strategy (Growth-oriented
WO Strategy (Torsion
O
Strategy)
Strategy)
Threats-T
ST Strategy (Diversified
WT Strategy
Business Strategy)
(Defence Strategy)
The first step: List the company's strengths, weaknesses, potential opportunities and threats. The second step: Combine strengths, weaknesses, opportunities and threats to form SO, ST, WO, WT strategy. The third step: Screen and select SO, ST, WO, WT to determine what strategies and tactics the company should take.
2.3
Experiential Marketing Theory
Experiential marketing is the product which comes from certain stages in marketing development. Dr. Bernd Schmitt says in his book Experiential Marketing that experiential marketing is based on consumer’s sense, feel, thought, act and relate. Although experience is an individual subjective experience, it can still create a value carrier which is distinct with product and service. (Wang & Peng 2005, 1.)
10 Experiential marketing is a further development of service marketing. Its emphasis is on providing unique experiences which is based on standard service. Experiential marketing breakthrough traditional “emotional consumer” assumption. Consumers are emotional when they are spending money, the experience before consumption, during consumption and after consumption is the key to analyse consumer behaviour and for corporate brand management. The key to using experiential marketing is through product design to marketing promotion. Companies must always stand out in the consumer experience perspective to design. It is important for companies to consider the feeling when consumers see it and use it. In today’s dazzling market competition, interest demand is not enough to impress consumers’ hearts. It is more resonating with consumers when companies can meet consumers’ self-esteem and high levels of taste pursuit. (Sun 2004, 26.)
2.4
STP Analysis
The STP theory (target marketing theory) was put forward by Philip Kotler. STP theory states that target marketing usually goes through three steps: segmenting, targeting and positioning. In fierce market competition, companies cannot put the entire market as their target market. Companies should select a specific market as their target market based on their strengths, and form a competitive advantage in this target market. (Kotler 2000.) Target marketing needs to go through three steps. The first step is market segmenting. According to buyers required products and marketing mix, the market is divided into a number of different buyers’ groups. Market segmenting is a classification process. According to differences in consumers needs, desire, buying behaviour and buying habits, marketers apply market research to divide the market into a number of consumer market groups. Each consumer group is a market segment. Each market segment consists of consumers with similar demands. So companies can use personalized products to meet
11 personalized demands. Basic methods of market segmenting are geographic, demographic, psychological and behaviour. The second step is market targeting. Companies can select one or several market segments to enter. After doing market segmentation, companies decide which market segments to choose and to provide service and products based on the enterprise’s resources. When assessing the various market segments, companies must consider two factors. Firstly, companies need to consider whether the market segment is attractive to companies, such as the market segment’s size, growth, profitability, economic scale and risk. Secondly, companies must consider whether investment to a market segment is the same with the resources that companies have. There are generally three strategies when selecting target market. I. Undifferentiated marketing strategy. Undifferentiated marketing strategy is where the company selects the entire market as its target market. The company only considers market needs regardless of market differences. The company uses one product, one price and one promotion method to attract more consumers, such as Coca-Cola. The advantage of this strategy is that the product is single, easy to guarantee quality, easy to mass produce and has lower production and marketing costs. (Trout 2002.) II. Differentiated marketing strategy. Differentiated marketing strategy is where a company divides the whole market into a number of sub-markets. The company designs different marketing strategies and different products for different sub-markets and different consumer needs. The advantages of this strategy is that it meets different requirements of different customers, it expands sales, it dominates the market and improves corporate reputation. The disadvantages of this strategy is that due to product differentiation and promotion differentiation, it increases the difficulty of management, production cost and marketing cost. (Trout 2002.)
12 III. Focus marketing strategy. Focus marketing strategy is to select one or few market segments as target market to implement specialized production and sales after the market breakdown. The advantages of focus marketing strategy are to benefit marketable products, reduce cost and improve the visibility of companies and products. But there is a great business risk because the size of the target market is small. If consumers’ demand and preference change in the target market, companies may be in trouble due to delayed changes. (Trout 2002.) The third step is market positioning. Philip Kotler states that positioning is one design for company’s supplies and images, which can occupy a unique position to act in the heart of target customers (Kotler 2000). The final outcome of the positioning is to clearly show why the target market will buy the product. Based on positioning theory created by Ries Trout, positioning starts with product. It is not mean to take action on the product itself. Positioning means to take action on potential customers psychologically. Therefore, positioning is a theory that pertains to customers’ mind. Trout thinks people should cope with this over-spread community. Customers will create a “ladder” in their mind for each category, then put each brand on each level of the “ladder” according to their understanding. Thus, the process of corporate brand building is to use marketing tools to occupy its own brand on the first layer of the “ladder” in people’s mind. However, once a brand has already formed a “ladder” in customers’ mind, it is very difficult to change it. In this case, the positioning theory tells companies to try to establish a new “ladder” in customers’ mind, then put their own brand on the first layer of the “ladder”. (Trout 2002.) From the meaning and theory of positioning, the core idea of market positioning theory is market segmentation and differentiated marketing. To some extent, positioning is synonymous for differentiation. A corporate brand can be called a strong brand if it is starkly different with its competitor brands, which directly promotes sales of the products under the brand.
13 2.5
Marketing Mix 7Ps
The marketing theory 4Ps is produced with the proposed marketing mix theory in 1960s in the United States. In 1953, Neil Borden coined the term “marketing mix” in his inaugural speech to the American Marketing Association. The marketing mix refers to the market demand affected by market variable or marketing elements. The marketing mix 4Ps means product, price, place and promotion. Product focuses on the development of function. The product requires a unique selling point and functional demands is in the first place of the product. Price is based on corporate brand strategy and focuses on the value of the brand. Place means companies do not directly face consumers but focus on building a sales network. The contact between companies and consumers is carried out through distributors. Promotion means companies focus on changing selling behaviour to stimulate consumers, such as buy one get one free. The promotion is to attract other brand consumers to promote sales growth. (MBA 2015.) In 1981, Booms and BItner proposed to add three “service Ps” in the traditional marketing theory of 4Ps, which are people, process and physical evidence. People are directly or indirectly involved in the process of consumption of a service, which is a very important point of view in marketing mix 7Ps. Process carries out through certain procedures, mechanisms and activities, which is a key element of marketing strategy. Physical evidence includes service environment transferred by service supply, the ability to carry and express tangible products, invisible consumer experience of current consumers and the ability to deliver potential consumer satisfaction. (Marketingmix 2015.)
14 3
3.1
ANALYSE CURRENT SITUATION OF STARBUCKS
Overview of Starbucks
Starbucks founded by J. Baldwin, G. Bowker and Z. Sieg in April, 1971, and was originally only a small retail shop located in Seattle’s Pike Market sold coffee beans, tea and spices for business. In 1983, Howard Schultz, the incumbent president of Starbucks, was just a sales management employee. He decided to introduce an Italian-style café and beverages related business model to the United States after his trip to Europe. But his business philosophy clashed with Starbucks executives. So Schultz left Starbucks in 1985 and opened a Italian café on his own, using Starbucks roasted coffee beans to make Italian-style coffee. In 1987, Schultz purchased Starbucks and renamed it to Starbucks Corporation because Starbucks was in a financial crisis. From that point on, Starbucks gradually developed from a small coffee roaster retailer in Seattle to the largest coffee chain store in the United States. Moreover, Americans coffee drinking habit changed with the rise of Starbucks. American coffee, light like water, gradually changed to heavy roasting Starbucks-style coffee. Since the transformation of Starbucks to a professional chain store in 1987, Starbucks continued to develop outside of Seattle and built strategic alliance with different brands to expand its footprint in North America. From 1987 to 1992, Starbucks expanded to 190 franchisor stores from 11 chain stores originally. Starbucks total revenue also reflected this extraordinary pace of development in these three years 1987, 1990 and 1992. The total annual income of Starbucks in 1987 was only 1.3 million dollars, in 1990 it developed to 40 million dollars and in 1992 it achieved up to 92 million dollars for total annual income. Not only that, Starbucks stock was listed on Wall Street in 1992. Due to its stock price stability and high profitability, Starbucks won the “Star Money” reputation. After that, Starbucks continued its rapid expansion. At the end of 1999, Starbucks had 2,200 chain cafés in the United States. In addition, SCI (Starbucks Coffee International Inc.) was founded in 1995 and signed a contract with Japanese SAZABY Inc. as joint venture authorisation way to develop
15 Japanese market together. In the following year, in 1996, Starbucks opened its first café overseas in Ginza in Tokyo, Japan. From then on, Starbucks officially set on its international expansion path. From 1996 to the end of 2000, Starbucks established chain stores in 16 countries around the world, mainly in areas of Western Pacific coastal countries and Middle East. (Chen 2005.) In addition, an interesting phenomenon occurred in that the countries Starbucks selected most were not in advanced Western countries with a habit of coffee drinking. Instead the customers were almost all in so-called Third World countries, e.g., Philippines, Thailand, China, etc. And further we can also find that these so-called Third World countries are rather newly industrialized countries or oil-exporting countries in the Middle East. In addition, Starbucks selected a country’s capital city or the country’s largest city to open its café. This enthusiasm and confidence of untapped market is an important factor in Starbucks successful long journey.
3.2
Overview of Starbucks Development in China
The China strategy is an important part of the global strategy of Starbucks. Schultz, Starbucks CEO said Starbucks is optimistic about the huge potential of the Chinese market and efforts to promote China to become the largest overseas market outside of the United States. In March 1998, Starbucks opened its first shop in Taiwan. In January 1999, Starbucks’ first shop in mainland China was opened in Beijing. In 2000, Starbucks opened its first shop in Shanghai Lippo Plaza. In 2002, Starbucks opened its first café in South China, in the Shenzhen CITIC Building. In 2005, Starbucks entered into second-tier cities such as Dalian, Qingdao, Chengdu and Shenyang, which opened up the southwest and northeast market of China. Starbucks has opened more than 500 cafés in mainland of China, Hong Kong, Taiwan and Macau, of which about 300 cafés are in mainland China. At the end of 2005, Starbucks founded Starbucks Enterprise Management (China) Co., Ltd. Shanghai, on behalf of the United States to manage the
16 entire Greater China to respond to strategic development, marketing exploitation and operations. At present, in addition to the eastern region of China, Starbucks cafés in northeast, north, southwest and south part of China are managed and operated directly by the Starbucks United States headquarter. In just a few years’ time, Starbucks in China has a rapid development, which begins with license agreement to a joint-solo investment mode. This reflects the fact that the Starbucks brand has been universally accepted in China. (Starbucks 2015.)
3.3
Existing Problems of Starbucks
Over the past decade, Starbucks brand value has reduced because of its pursuit of financial figures and rapid expansion in the world, which is very dangerous. The thesis analyses three aspects that cause a reduction in the value of Starbucks brand. The first aspect is the desalting of Starbucks experience. From the first Starbucks café opened in 1986, Starbucks mission has been to do their best to make consumers feel that its mission is not to just sell coffee, but a meticulous recreation lifestyle. Starbucks becomes partners with its employees by ESOP (Employee Stock Ownership Plan). Starbucks establishes an emotional relationship with consumers. But with the rapid expansion of Starbucks, the customer experience that Starbucks tried to bring to decreased that affecting the Starbucks core competence. After trying the success of Starbucks experience, Starbucks tries to reach its financial goals by rapid expansion of shops but with a loss of consumer experience. And the financial result in the third quarter of 2008 showed a net loss of 6.7 million dollars. (Zhang, 2008.) As a strong international brand with “sell temperament”, emphatic experience and culture, Starbucks’ sacrifice of customer experience and quantitative expansion let it fall into a trap. The second aspect is degradation of service quality. In order to obtain economies of scale and achieve satisfaction from a financial point of inputoutput ratio, Starbucks must complete service processes as an assembly
17 line. But the consequence is that Starbucks previously bring customers high-quality personalized service is now replaced with standardized streamline service, which makes Starbucks development similar to a much cheaper franchisor store. The third aspect is loss of business culture. Another source of Starbucks core competence is its enterprise culture with attention to staff. Starbucks changes its staff from traditional employees to business partners by coffee beans options and sound health care plan, so that employees become partners and operators with consistent business interests. Starbucks leadership creates an intense experience to its partners and partners will pass dignity and respect to their customers. (Michelli 2007.) This corporate culture of emphasis on staff is a source of Starbucks core competence. But with the rapid expansion of Starbucks, the culture of emphasis on staff is gradually lost. The selection of new staff and staff training are relaxed. Starbucks previously had two hours of closed shop staff training on a fixed period (monthly or weekly), and now a lot of cafés of Starbucks have no idea of this tradition. Previously, all employees working at Starbucks, no matter where they come from, have to go to Starbucks headquarter in Seattle for three months training. But now, this tradition no longer exists.
18 4
MACRO ENVIRONMENT ANALYSIS
Macro environment brings challenges and opportunities to companies. It has a significant impact to corporates’ strategic decisions. Successful companies need to continue to observe and adapt to the environment, react and create new profit models to unmet needs in the market. It is crucial to analyse the market to determine whether there is opportunity to choose the right marketing strategy. The thesis uses the PEST model to analyse the macro environment that Starbucks is now facing. The macro environment can be divided into four dimensions: Political, Economical, Technological and Social, which is called PEST analysis.
FIGURE 4. Macro Environment Forces Affecting Firm (Jurevicius 2013.)
4.1
Political Environment
Political environment includes a country’s international relations, social system, the nature of the ruling party, the government’s principles, policies, laws and regulations. (Jurevicius 2013.)
19 Firstly, Starbucks, as a US company operating in China, will inevitably receive the impact of Sino-US relations. If the Sino-US relations deteriorates, it is difficult for Starbucks to have good development in China. With the rise of China’s economy, the attitude of the United States to China is shifting to corporate. The United States realizes the benefit of cooperating with the world’s key market China is greater than the benefit of confronting with China. The US government also recognizes that although United States is strong, it is not omnipotent, it is unable to cope alone with the challenges and cannot completely address these issues in accordance with their wishes. Although China and the US have a history of conflict in political economy and trade friction, China and the US have broad prospects for cooperation. Cooperation can lead to a peaceful international relationship and background for Starbucks expansion in China. Secondly, the China is based on the centre of economic construction. Long-term and stable political environment provide confidence for multinational companies operating in China. There are more than 400 multinational companies of the global top 500 enterprises settled in China, which indicates that China, with political stability, in a good development stage for foreign companies. China is now a member country of WTO (World Trade Organization), which creates Starbucks a favourable condition to do business in China. Starbucks, as a multinational company, can reduce operating costs within the framework of the WTO, such as reducing tariffs on imported raw materials. This can make Starbucks control costs more effectively in order to achieve better returns. WTO also contributes to China’s economic prosperity, and a prosperous expanding market brings development opportunities to Starbucks which is targeting a high-end market. In the non-tariff protection, China is gradually reducing barriers for developed countries, such as liberalization of the financial industry permit, which will provide better financial services to multinational companies to improve their business performance. Thirdly, China’s legal environment is gradually improving. In the protection of patent rights, the fight against unfair competition and consumer
20 protection is being developed into a favourable legal environment to protect the healthy operation of the economy. Until 2005, Chinese retail industry is fully opened to foreign investment and the restriction of multinational retailers in region, equity ownership and quantity is cancelled. (Feng 2007, 44.) Before the introduction of this legislation, Starbucks took a cooperative approach in development in China. After the introduction of this legislation, it paved the way for Starbucks’ direct management and liberal legal environment providing more freedom for Starbucks’ business model. In terms of administrative intervention in the economy, the Chinese government is slowly eliminating the role of administrative intervention in the economy and adopting internationally accepted comprehensive legislation to regulate and guide the industry’s healthy operation.
4.2
Economic Environment
Economic environment refers to national economic development, international and domestic economic situations and economic trends, and industry and competitive environments that corporates face. Marketers need to look at a country’s economic and trade from short and long term, especially during the time of international marketing. (PEST 2015.)
4.2.1 Increased Resident Income Level and Upgraded Consumption Structure Firstly, the Chinese per capita income and disposable income have maintained high growth rates. In recent years, with a substantial increase of China’s economy, China’s per capita income has steadily increased year by year. In 2002, per capita income was 8,177 CNY, and in 2006 10,000 CNY. Substantial growth in China’s per capita income provides Starbucks development opportunities. In 2009, urban per capita disposable income is twice more than it was in 2002. China’s per capita disposable income has doubled within seven years and maintained a high annual growth rate of 12%. Income growth increases growth in
21 consumption and Chinese consumers’ steady growth in spending has created a steady growth in the expansion of consumer market. This growing demand creates development opportunities for Starbucks which is in the coffee retail business.
China Urban Per Capita Disposable Income 2002-2012 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 ¥0.00
¥26,959.00 ¥23,979.20 ¥21,033.40 ¥18,858.10 ¥17,067.80 ¥14,908.60 ¥12,719.20 ¥11,320.80 ¥10,128.50 ¥9,061.20 ¥8,177.40 ¥5,000.00
¥10,000.00 ¥15,000.00 ¥20,000.00 ¥25,000.00 ¥30,000.00
FIGURE 5. China Urban Per Capita Disposable Income 2002-2012 (China Urban Per Capita Disposable Income 2015.)
Secondly, in recent years, the consumption structure of urban residents also changed dramatically. The Engel coefficient declined rapidly. Engel coefficient reflects the general trend of people’s income and expenditure changes. It has become an important parameter to measure a country, region, city, and the level of family life. The Engel coefficient of urban residents and rural residents in 2006 decreased by 1.9% and 3.2% in comparison to those in 2002. In recent years, China’s Engel coefficient decreased faster, the Engel coefficient of urban residents in 2012 is 36.2%. With the Engel coefficient’s decline and upgrading of consumption structure, Starbucks that represents high-quality coffee experience is accepted and consumed by more and more people. After China’s consumers meet their food and clothing needs and with an increase of income, the consumption expenditure increases in high-grade service. Since the last century, the proportion of Chinese people in the consumption of coffee shows a rising trend, especially with low-income people, which brings Starbucks development opportunities.
22
Engel Coefficient of Urban Residents and Rural Residents in China 2000-2012 60 50 40
49.1 47.7 46.2 45.6 47.2 45.5 43.1 43.7 42 43 42.2 40.4 39.4 38.2 37.7 39.3 37.1 37.7 36.7 35.8 36.3 37.9 36.5 35.7 36.3 36.2
30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FIGURE 6. Engel Coefficient of Urban Residents and Rural Residents in China 2000-2012 (Engel Coefficient of Urban Residents and Rural Residents in China 2015.)
4.2.2 Economic Development Indicates a Huge Market Potential Firstly, China is still a developing country in economic initial phase. Since 1997, China’s economy has entered a stage of rapid development. The average annual GDP growth rate was close to 10%, while the average annual inflation rate was only 3%. The trade surplus grew from 334.7 billion RMB in 1997 to 834.7 billion RMB in 2005 and the fiscal revenue grew from 865.1 billion RMB in 1997 to 3.165 trillion RMB in 2005. The statistics show that in 2007 China’s GDP surpassed Germany which ranked fourth in the world. The per capita GDP is 2,460 dollars ranked 104 in the world and the growth of per capita GDP is strong. According to economists, this strong growth will be maintained for at least 20 years. After several years of economic growth in the future, China will move towards economic maturity and mass consumption stage. Starbucks took a fancy to the strong growth of China’s economy at present and future good situation. This is why Starbucks implemented expansion strategy in China. (GDP 2015) Secondly, since the beginning of the last century, China’s net exports leading role in economic growth is weak or even negative. China is initiating a series of economic policies to stimulate domestic consumption
23 to let consumption become the most critical driving force. In recent years, consumption growth remained at about 16% and still showing a strong growth momentum. Consumption expansion and stimulating domestic demand of Chinese macro-level policy also gives Starbucks opportunities. Economists believe that China has entered a new cycle of economic growth autonomy. The upgrading of consumption structure depends on the generation and the rise of China’s middle class. The National Bureau of Statistics of China has done a nationwide sample survey of social class. The survey basically concludes that China’s middle class increases dramatically, which accounts for 15% to 18% of overall population. Rapidly growing middle class consumers prefer to buy high-end fashion goods and this promotes the upgrading of consumption structure. Currently the per capita GDP is more than 3,000 dollars. And the middle class are concentrated in Shanghai, Beijing, Guangdong, Zhejiang and other coastal areas. According to Maslow’s hierarchy of needs, these high-income people have begun to seek the needs of respect (Maslow Hierarchy Theory 2015). The goods they consume is a pursue of an expression of self-identity and value, so their consumption expenditures are high-end fashion goods. This provides Starbucks a growing target markets. These regions have been close to the level of developed countries and has become Starbuck’s market segments in China’s strategic choice. (GDP 2015.)
4.2.3 Opportunities of Urbanization and Population Firstly, China is constantly entering the era of urbanization. According to data from the National Bureau of Statistics of China, in 2006 the total number of cities was 661 in China, the urban population was 577.06 million which accounts for 43.9% of total population. The level of urbanization increased 4.8% than it was in 2002. But compared with developed countries whereby urbanization is 80%. This big gap means that there is a huge opportunity for development of urbanization in the future. After 1992, China’s urbanization process accelerated. The annual urbanization rate increased 1.19%, which is three times the world average
24 speed at the same period. By the end of 2004, the proportion of China’s urban and rural population rose to 80% and in 2010 this proportion was almost 99%. Urbanization brings markets to Starbucks. With the acceleration of urbanization, potential customers group have also increased. Starbucks strategic layout in China corresponds with China’s urbanization layout. After opening cafés in Shanghai, Guangzhou, Beijing, Shenzhen and coastal cities, Starbucks entered central city Wuhan. The next step planned for Starbucks is to expand to the second-tier cities in China. (Urbanization 2015.) Secondly, a large number of population has been one of the most notable features of China. The National Bureau of Statistics of China indicates that on January 6th 2005, the total Chinese population is 1.3 billion excluding Hong Kong, Macau and Taiwan, which accounts for about 21% of the world’s total population. And the current total fertility rate of 1.8% predicts that China’s total population will reach 1.46 billion in 2020. The total population peak will appear in 2033, which will be about 1.5 billion. With China’s economic development, China will be a huge market. In recent years, the Chinese government accelerated the development of education. Especially since China’s higher education enrolment, China is training the world’s largest population of higher education students. The experience of a high-quality coffee culture that Starbucks provides fulfils the needs of highly qualified people. At the same time, as China becomes more open, the international mobility of the population also increases. There are more and more foreigners and overseas students doing business and living in China, which also provides favourable conditions for Starbucks to spread its coffee culture. (Population 2015.)
4.3
Social and Cultural Environment
Any corporates’ marketing activities will be influenced and constrained by certain social and cultural environments. Social and cultural environment is the sum in the form of a community that includes values, religion, customs and ethics.
25 Firstly, China is an ancient country with a long cultural history. Confucian culture is ancient Chinese mainstream culture. And this culture has an impact on Chinese people’s manners and moral values. Confucian culture emphasizes harmony between people and advocates “and” culture. Schultz had made an assessment of Starbucks’ service:” we are not engaged in the coffee business and serve customers, but we are engaged in the people business and provide coffee service to people.” (Chen 2005.) So the environment of Starbucks is as important as its coffee. The pursuit of interpersonal harmony values is easy to be accepted by Chinese people that grow up with the influence of Confucian culture. Starbucks culture and values based on the customer experience coincides with the Chinese people’s “and” culture. To meet the aesthetic aspect of Chinese culture, Starbucks utilizes the décor of Chinese antique and old-fashioned teahouses. This makes Starbucks more connected to Chinese consumers and eliminates negative impact caused by cultural barriers. Secondly, cultural communication of China and western world makes China accept many advanced ideas and culture from western world and forms a strong cultural inclusiveness. With China becoming more open, China’s tolerance and acceptance of Western culture also gives marketing opportunities for Starbucks in China. Especially since the Chinese economic reform, there are more and more cultural exchange between China and the Western world. Young Chinese people are in pursuit of a western lifestyle. Such cultural openness and longing for western culture makes it easier for Chinese people to accept Starbucks.
4.4
Technological Environment
Firstly, the coffee technology in China is still relatively fall behind, regardless of raw coffee beans roasting or brewing pressure filtration technology. Starbucks, as the leader of coffee culture, has more coffee related technologies which can provide a technical basis to carry out the promotion of coffee culture in China. Advanced technology not only means to improve product quality, reduce costs and process reengineering, but it
26 also means unlimited opportunities for innovation. Since Starbucks was founded, Starbucks’s uncompromising spirit of innovation performs in the pursuit of new technology, e.g., its unique Starbucks heavy roasting, espresso extraction technology and packaging to preserve coffee. These practices create coffee technological superiority for Starbucks. Secondly, Starbucks makes good use of IT technology to provide customers with a richer Starbucks experience. Starbucks connects itself closely with the IT and Internet to provide Internet access services to the customers in store, and through the network promote their coffee culture. Between 2003 to 2004, Starbucks cooperated with China Netcom and China Telecom respectively to launch WIFI services. Starbucks constructs wireless Internet access in each of its café to bring more experience and value to customers. In 2007, Starbucks management company integrated Starbucks website in every region and launched a new website with a “virtual café” to promote Starbucks culture and coffee knowledge and communicated with their customers. Through the development of innovative electronic payment tool, it makes it easier for Starbucks customers to pay at Starbucks. In addition, Starbucks has a good data platform. In this platform, Starbucks can use computer data processing technology to understand customer’s preferences. At the same time that Starbucks brings perfect experience for customers through high technology, it also provides comprehensive data on customer preferences for Starbucks. (Starbucks 2015.) In addition, Yunnan in China is suitable for planting high-quality coffee. Nestle and Maxwell House Coffee Company has purchased coffee beans and other raw material from them. But now almost every coffee bean in Starbucks are imported. The environment in Yunnan, China is not only suitable for the cultivation of coffee in quality, but also meets the standards of Starbucks, which provides greater convenience for Starbucks’ storage and transport. Starbucks has made it clear that it plans to establish a long term strategic partnership between Yunnan and coffee suppliers. This implements a part of Starbucks global procurement plan. (Starbucks 2015.)
27 5
INTERNAL ENVIRONMENT ANALYSIS
The thesis will analyse the internal environment of Starbucks in resources, capabilities and core competence. Capabilities and core competence is the foundation of an enterprise’s competitive advantage. Resources, capabilities and core competence progress step by step, but the core competence is the basis of an enterprise’s competitive advantage.
5.1
Resources and Capabilities
Corporate resources are divided into tangible resources and intangible resources. Tangible resources are visible, quantified assets or production equipment. Intangible resources are long-term accumulated assets that are rooted in the history of development. Because intangible resources exist in a unique way and are not easily imitated by competitors, companies are willing to use intangible resources as a basis of capabilities and core competence. The intangible resources of Starbucks are listed in several ways, see below. Human resource: Starbucks spares no effort in training staff. The highly authorized trained staff can bring the coffee culture to customers and communicate with customers more effectively each time. This is the bond for customers to contact with Starbucks. Starbucks uses highly motivated and professional trained staff to transfer Starbucks cultural values, coffee culture and coffee knowledge to customers. Starbucks also brings customers the unique Starbucks experience. Starbucks’ human resource plan is the foundation of Starbucks’ inside out success. Innovation resource: Starbucks has been at the front of coffee chain stores in innovation. The huge success of Starbucks’ new ideas and innovative products: Cappuccino, Frappuccino and coffee flavoured beer indicates that Starbucks has a great advantage in innovation. Reputation resource: This is not a cup of coffee. This is a cup of Starbucks coffee. Starbucks coffee has almost become the standard of coffee industries. Starbucks has a very high brand value, its brand, worth more
28 than three billion dollars was evaluated to be included in the Fortune Global 100 Brand by “Business Week” magazine. The reputation of Starbucks brand is a huge competitive advantage. (Xu & Qiao 2004.) Capabilities refers to the efficiency of enterprises to allocate resources. In order to achieve a desired final state, these resources are integrated together on purpose. Many capabilities’ basis is built on employees’ skill and knowledge. The knowledge of a company’s human capital is the most important capability and will finally become a source of competitive advantage. The capabilities of Starbucks can be analysed and summarized in several ways from its functional areas. Human resource: Starbucks can encourage, authorize, retain employees effectively. Starbucks turns its staff from employees to become its enterprise partner by implementing an all employee health insurance plan and issuing coffee beans options. This greatly motivates employees to dedicate themselves to work and employees are also allowed full authority. For example, if a customer knocks over a cup of coffee, the Starbucks employee can give a new cup of coffee to this customer for free. This is free even if it is not the responsibility of the Starbucks employees. So the turnover of Starbucks employees is quite low in the service industry. Marketing: Starbucks has effective brand promotion and various products. Starbucks uses unique word of mouth strategy that creates a worldrenowned brand with no advertising investment. This comes from its efficient unique shopping experience that delivers to customers, which is known as the Starbucks Experience. Starbucks Experience creates a high degree of customer loyalty. Research and development: It can be said that Starbucks is the quickest and growing coffee franchisor company to introduce new varieties and is always leading in the coffee industry. This leads to other cafés imitating Starbucks. Starbucks invests heavily in research and development, has established its own scientific laboratory and hires scientists to research
29 Espresso extraction technology. This continued investment in research and development allows Starbucks to have strong ability in product innovation and research and development.
5.2
Core Competence
Core competence is being able to bring competitive advantage resources and capabilities to the enterprise. The concept of core competence is proposed in the book “The Core Competence of the Corporation”, which is written by US professor C.K. Prahalad from University of Michigan Business School and UK professor Gary Hamel from London Business School in 1990. From the perspective of the relationship of the product and service, the core competence is actually implicit in the company’s core product or knowledge and skills inside the service, or the aggregation of knowledge and skills. The core competence is the ability of an enterprise to acquire competitive advantage for long-term. It is the technology and capacity a enterprise has that can afford the test of time, is malleable and is difficult for competitors to imitate. (Shi 2002.) There are four identification standards for the core competence of corporations. The first one is value. Competence can achieve the value of goods that a customer values. For example: it can significantly reduce costs, improve product quality, improve service efficiency and increase customer utility that brings competitive advantage to an enterprise. The second one is scarcity. Competence must be scarce and only a few enterprises can have it. The third one is irreplaceability. Competitors cannot replace this competence by other competences. The competence has an irreplaceable role in the process of creating value for customers.
30 The fourth one is inimitability. The core competence must be unique in one company and is difficult for competitors to imitate. The competence of imitability can bring above-average profits for enterprises. The thesis believes that the core competence for Starbucks comes from Starbucks’ unique corporate culture and value. Starbucks corporate culture has gradually formed since the seventies, which makes it difficult for competitors to imitate. Corporate culture can enhance staff cohesion and the employees can get a lot of inspiration and encouragement. Then it becomes a source of competitive advantage. For Starbucks, the brand is the external expression of its value and culture. And this brand is created by Starbucks employees. Starbucks disseminates and consolidates this culture and value through its excellent employees.
5.3
SWOT Analysis of Starbucks
The sub-chapter will use SWOT analysis tool to evaluate the strengths, weaknesses, opportunities and threats involved in Starbucks.
5.3.1 Strengths Firstly, the brand strength. According to “Business Week” and the Interbrand released 2014’s Top 100 Global Brand list, Starbucks ranked 31, that the brand value increased 25% from the previous. (Wang & Ren 2007.) Secondly is the coffee technology strength. Starbucks’ huge investment in research and development makes it the expert in coffee industry. Thirdly is the store location strength. Starbucks already occupies relatively favourable locations in bustling places in large and medium-sized cities in China. Good location not only brings Starbucks greater traffic, but also brings the advertising effect. At the same time, the preconception advantage of Starbucks results in higher barriers and obstacles for new entrants.
31 Fourthly is the financial strength. Enterprise development is inseparable from financial resources. Starbucks has an obvious financial advantage. Starbucks headquarter currently has more than 16,000 cafés around the world. In 2004, the total turnover was more than 500,000 dollars and the company’s profit reached 600 million dollars. (Starbucks 2015.)
5.3.2 Weaknesses Firstly, the unstable product line. Starbucks constantly introduce new products. For example, Starbucks plans to sell ready-to-drink coffee in supermarkets and sells CD and books in its cafés. Secondly, comes the management problems of Starbucks’ franchisor stores in China. It is a challenge for any corporate to have efficient management of a number of stores in China. Moreover, Starbucks’ equity is complex in China. This equity complexity increases the conflict between the US management staff and Chinese management staff. Starbucks does not achieve 100% equity control in its cafés in China and only masters operational management of most parts of China. The Starbucks in Jiangsu, Zhejiang and Shanghai still remain under the direct management of Taiwan Uni-President Group. Starbucks management team from the United States apparently is not totally familiar with China’s various economic and legal environments. So they still need time to adapt to localization. Thirdly, the watering down of the Starbucks experience and reduction of customer service level issue concern. In the time of Starbucks expansion, it results problems of the watering down of its Starbucks experience.. Fourthly is the high price. The drinks in Starbucks is much more expensive than other cafés in China.
32 5.3.3 Opportunities Firstly, China’s economic development is good. Since the end of last century, China’s economic development trend is good, which created a huge consumer market and gradually formed a huge target market suitable for Starbucks. In the mean time, China’s policy on attracting foreign investment brings an historical opportunity for Starbucks development in China. Secondly, since 2005, Chinese law released the control of foreign retail enterprise’s direct chain stores (Ministry of Commerce 2005.) Thirdly is the process of urbanization. The developed cities in China are concentrated in the coastal areas, that being the first choice for Starbucks to open its café. But with the advance of urbanization in China, there are more cities in China, that may become the potential market areas for Starbucks. Fourthly is the great potential of Chinese coffee market. According to expert analysis, the Chinese coffee market will develop into the world’s largest coffee market with increase at a rate of 30% per year. While the Chinese market is still in complex situation, the market is far from saturated. This market development and market structure brings Starbucks huge profit expectations.
5.3.4 Threats Firstly, increased competition. With the opening of the coffee market, professional competitors begin to enter the Chinese market to seize their market share., which results in competition for Starbucks, such as COSTA from Italy. Secondly, the Sino-US cultural conflict. Starbucks represents American culture. It creates challenges for Starbucks on how to better reduce cultural conflicts in a strong Chinese traditional culture.
33 Thirdly, the rise of the cost of raw materials. China’s CPI is on the rise, especially the rise in food prices puts pressure on Starbucks cost control and profit margin. Fourthly, the imbalance of regional development. Imbalanced regional development creates people’s income differences, which challenges Starbucks’ high price.
5.3.5 SWOT Matrix Analysis of Starbucks The thesis uses the SWOT matrix to combine the above factors to get appropriate marketing strategies. TABLE 2. SWOT Matrix Analysis of Starbucks INTERNAL FACTOR
STRENGTHS
WEAKNESSES
Brand
Unstable product line
Coffee technology
Management problems of Starbucks chain stores in China
Store location Water down of experience, reduction of Financial
service level
EXTERNAL
High price
FACTOR OPPORTUNITIES
SO
WO
China’s economic development is good
Expanded market share
Concentric diversification
Chinese law released the control of foreign
Brand extension
Direct sales
retail enterprise’s direct chain store Brand crisis turnaround Process of urbanization Differentiation Great potential of Chinese coffee market THREATS
ST
WT
Increased competition
Differentiation
Product line shrinkage strategy
Sino-US cultural conflict
Public relations
Turn off unprofitable café
Rise of the cost of raw materials
Price rising
Look for lower price suppliers
Imbalance of regional development
Flexible price system
34
According to the SWOT analysis, Starbucks should take the following strategies. I.
SO. Utilization strategy,
Starbucks should implement expanded market share and brand extension strategies by combining Starbucks’ internal strengths and environment opportunities. II.
ST. Monitoring strategy,
Starbucks should implement differentiation, public relations, price rising and flexible price system strategies by combining the Starbucks’ strengths and environment threats. III.
WO. Improvement strategy,
Starbucks should implement concentric diversification, direct sales, brand crisis turnaround, differentiation strategy by combining Starbucks’ weaknesses and environment opportunities. IV.
WT. Eliminate strategy,
Starbucks should implement product line shrinkage strategy, eliminate unprofitable cafés and look for lower price suppliers by combining Starbucks’ weaknesses and environment threats. According to SWOT analysis, the thesis suggests Starbucks to use of marketing strategy of expanded market share, brand extension, differentiation, brand crisis turnaround, public relations and concentric diversification.
35 6
EMPIRICAL RESEARCH & ANALYSIS
The thesis uses quantitative marketing research as the main research method and make a questionnaire to gather responses from customers. Using of questionnaire is an effective way to collect customers’ reviews for Starbucks. After considering questions in the questionnaire that will help Starbucks know more about its customers, an online questionnaire survey is put on the Internet and answered by people who participate in this questionnaire. According to the feedback from customers and results of the questionnaire, Starbucks can make improvements to its marketing method and services. The questionnaire consists of sixteen questions and all answers are kept anonymous. The questionnaire is published on the Internet and Wechat from 14 December 2015 to 18 December 2015, i.e. for five days. According to the statistical result, there were a total of 113 participants that completed the questionnaire. The following analysis and suggestions for Starbucks is made based on the data collected from the questionnaire survey.
6.1
Results Analysis of Questionnaire
The questions in the questionnaire can be divided into two parts. The first part is about personal information of participants who answered the questionnaire, such as age, gender, occupation and monthly income. The second part is mainly about customers’ opinions and evaluation to Starbucks in different aspects.
6.1.1 Personal Information of Participants In this part, four pie charts are used to illustrate the respondents’ age group, gender, occupation and monthly income. All of these four questions can help Starbucks know more about its customers’ basic personal information.
36
Q1:Age Group 1% 10%
1% 6% Under 21 21-30 31-40 41-50 Over 50
82%
FIGURE 7. Age Group
In the questionnaire, 113 respondents participated. Most respondents are 21-30 years old, which accounts for 82%. On the contrary, respondents over 41 years old is only 2%. So the main customer group of Starbucks is young people aged 21-30, which means Starbucks is more popular among young people.
Q2:Gender
41% 59%
Male Female
FIGURE 8. Gender
The second question in the questionnaire is the gender of participants. Female customers are the main customers for Starbucks, which accounts
37 for 59% of the total. To be specific, 67 female and 46 male completed this questionnaire.
Q3:Occupation
Student
25%
31%
Worker 5%
9% 30%
Office employee Self-employed businessman Other
FIGURE 9. Occupation
According to the occupation of the respondents, the pie chart clearly shows that self-employed business-people and others account for 60% in total. In contrast, worker only accounts for 5%. Based on the data of occupation, we can see that self-employed business-people are willing to choose Starbucks. Since self-employed business-people’s work are always busy and they need to meet their business partners quite often, so Starbucks is a good place for them to have meetings and relax after their busy work. Moreover, self-employed business-people in China have a higher salary and the price level in Starbucks is much higher than other café, so Starbucks is much easily accepted by self-employed businesspeople.
38
Q4:Monthly Income (RMB) Under 1000
13% 27%
1000-2000 15%
2001-3000 3001-4000
15%
18% 12%
4001-5000 Over 5000
FIGURE 10. Monthly Income (RMB)
Figure 7 clearly shows the monthly income of respondents. There are six income levels and it shows in the pie chart, the income level of over 5,000 accounts for the largest proportion, which is 27%. The second largest amount of respondents is from the income level of 2001-3000, which makes up 18%. Based on the data concerning monthly income, we can find that most people that choose Starbucks are middle class in China. So Starbucks can set suitable price for its products and upcoming products according to the income level of its main customers.
6.1.2 Customers’ Opinions and Evaluation This part is about customers’ opinions and evaluation to Starbucks in different aspects. There are 11 questions in this part, which consists of customers’ purchase opinions, frequency of visiting, average cost and evaluation about Starbucks’ food, environment, services and price level.
39
Q5:The first café that comes to your mind when you want to drink coffee Starbucks Maan Coffee
19%
UBC Coffee
4% 4%
Caffe Bene
6%
3% 1%
57% 6%
Zoo coffee Costa DIO Café
FIGURE 11. The first café that comes to your mind when you want to drink coffee
The seven cafés listed in Figure 8 are seven popular cafés in China. As we can see from Figure 8, Starbucks has the largest proportion, which accounts for 57%. 19% of respondents choose other cafés like some new opening cafés. The data in question 5 shows Starbucks is still the first choice for most people in China. This question helps Starbucks to know its competitors in China and Starbucks can put more effort in marketing research to attract more potential customers to visit.
Q6:The frequency of visiting Starbucks in a month 12%
5% 0-2 times 3-5 times More than 5 times 83%
FIGURE 12. The frequency of visiting Starbucks in a month
40 Figure 9 clearly shows that 83% of respondents visit Starbucks up to two times per month. Respondents visiting Starbucks 3-5 times makes up 12% and customers visit Starbucks more than five times accounts for only 5%. As coffee is still on the way to becoming popular in Chinese people’s daily lives, so customers who visit Starbucks more than three times are loyal customers for Starbucks. Starbucks can provide more discounts and activities for loyal customers to attract them to visit Starbucks more often.
Q7:Average amount during one visit in Starbucks (RMB) 9% 11%
35%
Under 50 50-100 100-150
45%
More than 150
FIGURE 13. Average consumption amount during one visit in Starbucks (RMB)
Question 7 is about average money amount a customer spends during one visit at Starbucks. Nearly half of respondents spend 50-100 RMB during one visit. Following are respondents who spend under 50 RMB during one visit, which accounts for 35%. On the other hand, only 9% of respondents spend more than 150 RMB during one visit. So Starbucks can offer more set meals with combines such as food and drink that cost around 100 RMB.
41
Q8: Price level of Starbucks 1% 4% Very expensive Expensive
46%
Average
49%
Cheap
FIGURE 14. Price level of Starbucks
In Figure 11, respondents’ opinions about the price level of Starbucks for expensive and average accounts for almost even. Only 1% of the respondents believes the price level of Starbucks is cheap. The results of question 8 can effectively help Starbucks to make some changes in its further practices.
Q9:The way to know Starbucks 35
Others' recommendation 19
TV Internet
43
Advertisement
28 21
Movies Others
55 0
10
20
30
40
50
60
FIGURE 15. The way to know Starbucks
Question 9 is a multiple choice question so respondents can choose more than one option. Figure 12 shows that 55 respondents know Starbucks from other channels, which accounts for the biggest part of the total. There
42 are 43 people that choose the Internet as a way to know Starbucks and 35 people know Starbucks through others’ recommendations. But there are only 19 respondents who know Starbucks from TV. This bar chart helps Starbucks to know its advertisement strategy in its future.
Q10:Reasons to choose Starbucks Prie
3 33
Taste
61
Good environment and atmosphere 18
Good service Location
26
Other
30 0
10
20
30
40
50
60
70
FIGURE 16. Reasons to choose Starbucks
Question 10 uses a bar chart to illustrate the reasons people choose Starbucks. More than half of the respondents choose good environment and atmosphere as being the reason to choose Starbucks. There are 33 people that prefer the taste of Starbucks and 26 respondents are satisfied with the location of Starbucks. Moreover, only three participants selected price as the reason to choose Starbucks.
Q11:Personal taste of food in Starbucks 22%
Espresso
9%
Frappuccino 30%
6% 33%
FIGURE 17. Personal taste of food in Starbucks
Coffee Tea Other
43 This question is about customers’ personal preference of food in Starbucks. It can be seen from Figure 14 that coffee and Frappuccino are the two most popular drinks in Starbucks and it accounts for 63% of the total. There are 22% respondents that chose other foods such as bread and dessert as their favourite food at Starbucks. Last but not least, there are 9% of the respondents like to order Espresso and 6% of respondents prefer tea at Starbucks.
Q12:RESPONDENS' SATISFACTION TO THE ENVIRONMENT OF STARBUCKS Satisfied
Average
Unsatisfied
71%
DECORATION
29%
TABES AND CHAIRS
64%
35%
RESTROOM
65%
32%
WAITING AREA ATMOSPHERE WAITERS UNIFORM
51%
46%
57% 68%
0% 1% 4% 3%
42% 31%
1% 1%
FIGURE 18. Respondents’' satisfaction to the environment of Starbucks
The bar chart in Figure 15 displays respondents’ satisfaction to the environment of Starbucks. Respondents could choose satisfied, average and unsatisfied to state their satisfaction to the basic facilities in Starbucks. The bar chart in question 12 shows that more than half of the respondents were satisfied with Starbucks’ decoration, tables and chairs, restroom, waiting area, atmosphere and waiters uniform. There were no respondents that were unsatisfied with the decoration in Starbucks. In contrary, there are 46% of respondents and 42% of respondents that think the waiting area and atmosphere are average, which will help Starbucks improve its waiting area environment in its future development.
44
Q13:RESPONDENTS' SATISFACTION TO THE FOOD AND DISHES IN STARBUCKS Satisfied
Average
Unsatisfied
76%
FRESHNESS OF THE FOOD
24%
69%
TASTE OF DRINK
31%
66%
TASTE OF DESSERTS
0%
32%
80%
STARBUCKS DISHES
0%
2%
19% 1%
FIGURE 19. Respondents' satisfaction to the food and dishes in Starbucks
Respondents need to give their evaluation to the food and dishes in Starbucks in question 13. According to Figure 16, an average of 70% of respondents are satisfied with the freshness of the food, taste of drink, taste of desserts and dishes at Starbucks. Even more strikingly, 80% of respondents like the Starbucks’ dishes. However, there are still 1% of the customers who are unsatisfied with Starbucks’ dishes and 2% of respondents do not like the taste of the desserts at Starbucks. This bar chart in Figure 16 offers Starbucks a future development idea so to continue providing good food and dishes.
Q14:RESPONDENTS' SATISFACTION TO SERVICES IN STARBUCKS Satisfied
Average
Unsatisfied
WAITING TIME BEFORE FOOD
68%
29%
3%
COMMUNICATION CAPABILITY OF WAITERS
70%
27%
3%
WAITERS' ATTITUDE TO CUSTOMERS
73%
23% 4%
61%
WAITING AREA SERVICES
69%
RECEPTION SERVICE PROMOTIONAL ACTIVITIES TAKE AWAY SERVICE
37%
39% 51%
FIGURE 20. Respondents' satisfaction to services at Starbucks
28% 57% 47%
2% 3% 4% 2%
45 In question 14, respondents are asked to give their evaluation to services at Starbucks. All of the seven services are used in all Starbucks cafés in China. The data in Figure 17 shows that the waiters’ attitude to customers is the best service to customers, which accounts for 73%. The reception service and waiting time before food service are also good service considered by respondents, which takes up about 70% of the respondents’ satisfaction. However, promotional activities provided by Starbucks only makes up 39% being satisfied. Thus Starbucks should increase their promotional activities in its future marketing activities.
Q15:Overall evaluation to Starbucks 0% 1% 21%
21%
Very good Good Average Bad
57%
Very bad
FIGURE 21. Overall evaluation to Starbucks
Question 15 is to find out the overall respondents’ evaluation of Starbucks. According to the pie chart in Figure 18, most customers choose good to the evaluation of Starbucks, which takes up 57%. The proportion of average and very good are even whether each accounts for 21% of total. Last but not least, there are only 1% respondents that choose very bad to evaluate Starbucks. Although 1% is a very small proportion, Starbucks still needs to pay attention and make improvements to do better in future marketing activities.
46
Q16:Starbucks can do better Discount and promotion 7% 8% 39%
Types of food and taste of food Service enthusiasm
17%
Location 29%
Other
FIGURE 22. Starbucks can do better
The last question of the questionnaire asks about in which way Starbucks can do better. The pie chart in Figure 19 illustrates that Starbucks needs to have more discounts and promotion, which accounts for 39%. Following is the types of food and taste of food, which takes up 29% of total. As mentioned before in Figure 11, the price level at Starbucks is expensive, so it needs to do more promotional activities. And Starbucks also needs to improve its types of food and taste of food to let it suit better for the Chinese people. In summary, the analysis of a questionnaire is a good way for Starbucks to know more about its customers and is beneficial to Starbucks to realize what marketing strategies and improvements it needs to do better.
47 7
STARBUCKS’ MARKETING STRATEGIES
This chapter will use marketing mix 7Ps to analysis marketing strategies for Starbucks.
7.1
Determine Target Market of Starbucks
There are three methods to determine target market of Starbucks: market segmentation, target market selection and market positioning strategy.
7.1.1 Market Segmentation I.
Segment consumer market by geographic.
Megalopolis in China: Beijing, Shanghai. Southeast coastal economically developed cities in China: Hangzhou, Suzhou, Guangzhou, Ningbo, Qingdao, Shenzhen. Inland China relatively developed cities in China: Xi’an, Chengdu, Chongqing, Dalian, Shenyang. II.
Segment consumer market by population.
Lower educational segments with no university education and well educated segments with university education. III.
Segment consumer market by behavioural.
Coffee lovers: They drink coffee regularly, have higher requirements with coffee quality and are willing to learn coffee knowledge and culture. Random coffee consumers: They drink coffee occasionally and coffee is not their lives essential drink. They do not have understanding of coffee knowledge. They tend to prefer the café atmosphere more than the coffee itself. They buy coffee because of recreational or social needs.
48 Coffee excluder: They refuse coffee and rarely choose coffee when they go to a café. They would rather choose tea or other drinks instead of coffee.
7.1.2 Target Market Selection The target market of Starbucks in China is the megalopolis, southeast coastal economically developed cities and inland China’s relatively developed cities. Most of Starbucks’ consumers are people with higher education, upper-middle class with higher income, coffee lovers and random coffee consumers. Starbucks should implement differentiation market strategy to provide differentiated products and service for different sub-markets. For coffee lovers, Starbucks should provide ground Espresso and other coffee drinks with the finest quality coffee beans to fulfil their pursuit of coffee inherent quality and discerning taste. For young people whose pursuit is fashion, Starbucks should provide Frappuccino to fulfil their pursuit of fashion and being cool. For consumers who prefer to experience Starbucks, Starbucks should provide great music, exquisite taste decoration, large comfortable sofas, wireless Internet access and other services to increase consumer demand for experience besides coffee. Starbucks implementation of differentiation strategy customizes different products and services for different market segments, which can better expand the sales and meet different consumers’ demand.
7.1.3 Market Positioning Strategy I.
Starbucks Experience,
Starbucks Experience is the combination of romance, luxury that the middle class can afford, a spiritual oasis and relaxed social events.
49 II.
The Third Place,
Starbucks positions itself to be The Third Place except home and working place. The goal of Starbucks is to provide a fresh and fashion style social place for China’s upper middle class. III.
Coffee Expertise,
We can use Starbucks as the voice of coffee to spread coffee culture and knowledge. We can show expertise of Starbucks coffee through educating target customer groups with high quality coffee. IV.
Passionate Staff,
We can establish a partner team full of passion by continued spreading of Starbucks experience and positive image of Starbucks brand. V.
Enthusiasm to Improve the World,
Starbucks believes and advocates to promote a virtuous circle with a good start, which is reflected in its relationship with customers, employees, suppliers, government department and social relationship.
7.2
Product
First of all, it is to achieve differentiation of product and service, form customer loyalty, so that customers feel greater value to pay a higher premium of a Starbucks product. Starbucks provides tangible products such as coffee as well as an intangible spiritual experience. Starbucks’ fanatical pursuit of experience creates Starbucks brand positioning. It is difficult to imitate customers’ unique emotional feeling and psychological sensation when they consume Starbucks products. This brings customer loyalty as well as benefits. Because it is difficult to imitate and copy, it forms the core competitiveness for Starbucks. Secondly, Starbucks as a coffee industry leader, its product innovation strategy is very important. When a successful brand develops to a certain
50 extent, it is bound to be imitated. Thereby, through continuous product innovation strategy, Starbucks can maintain a sustainable competitive advantage. Starbucks turns coffee from a normal drink to life taste. In addition, Starbucks might consider product brand extension strategy to make Starbucks coffee sell in supermarkets, which heirs ready to seize the drink coffee market. But Starbucks should be careful with brand extension strategy. The thesis suggests that Starbucks can consider the primary and secondary brand extension strategies. The primary and secondary brand refers to a corporate with a variety of products. At the mean time all products have a unified brand, Starbucks should name products according to each product’s different features. This avoids the brand image desalting problem and product positioning confusion problem which is caused by single brand extension. (Dao, 2006.) Thirdly, Starbucks is implementing its product management diversification strategy as well as its rapid expansion. Starbucks tried to run bookshops and restaurant before, but all ended in failure. This is because all these businesses do not have good correlation with Starbucks’ original core competence and resource. It will lead to failure to implement diversification or brand extension strategy when the correlation with core competence is small. Blind diversification will bring brand positioning confusion and corporate resource waste to the company, which causes reduced corporate brand value. (Zhang, 1998.) As Marketing Professor, Barbara E. Kahn states, “mature developed companies, considered to have special customer positioning companies, are often in trouble when they attempt to attract other clients. For the current instability product line of Starbucks, the thesis recommends that Starbucks does not leave its core strengths which is based on the experience of the coffee when implementing diversification.
7.3
Price
There are six steps for Starbucks to set price.
51 I.
Select pricing objective,
As a profit-oriented enterprise, Starbucks choose product quality as an objective when it first entered the Chinese market. With the changes in the competitive environment, Starbucks now began to choose a pursuit of sales growth and market share as an objective. As a unique cultural marketing company, Starbucks pricing objective is more on a psychological level. Starbucks wants more than just the coffee, they want a network or an exclusive club. Thus, the result of pricing is a long-term pursuit of high profit. II.
Identify needs,
Starbucks target customers price sensitivity is low and price demand elasticity is small. Due to the Chinese market being the cultivation stage, even having coffee prices falling significantly, will not attract more people to buy coffee. III.
Estimate cost,
Starbucks operating costs in China is relatively easy to estimate. It mainly consists of two parts. One part is the trade and transport costs, which is relatively easy to control because the main raw materials are imported from the Starbucks US headquarter. Another part is the rent and labour costs. Rent is occupying an important position to Starbucks. When Starbucks opens a café, it will put the rent as an important factor in calculating the return on investment. Due to the uniform pricing strategy and limited price upsides in China, Starbucks’ pricing in China needs to refer to the target cost management to control the cost within a reasonable range. IV.
Analyse cost of competition and price,
Starbucks competitors have lower prices than Starbucks on pricing, so Starbucks needs more research on how to provide differentiated service experience to customers to maintain its high pricing.
52 V.
Select pricing method,
Starbucks’ pricing is based on customers’ perceived value of the product. As mentioned earlier, Starbucks implements different strategies to meet customers’ need in different customer segments. Starbucks uses different Starbucks experience to enhance its value, which makes Starbucks possible to sell its coffee at a higher price. VI.
Select the final price,
Starbucks uses psychological pricing. Starbucks takes price as quality, taste and upscale as indicators to meet its target customer features, the company’s culture and value system. A cup of Starbucks coffee in China is 4-6 dollars, because Starbucks has a coffee culture that can be experienced nowhere else. Starbucks takes psychological pricing by using coffee culture connotation and experience connotation to cultural consumers. Pricing strategy is inseparable from the analysis of target market segment. Starbucks coffee pricing is high because Starbucks choose people with higher income, pursuit of taste and fashion, mainstream middle class as target group. And Starbucks offers fine coffee culture, perfect Starbucks experience, comfortable third place’ positioning fulfils its target group. So the high pricing fits its selected target market. Starbucks’ high pricing is inseparable from its Starbucks experience it brings to customers. When customers buy coffee, they also buy an experience and a way of life. But at the same time, with Starbucks expansion, Starbucks encounters crisis of desalination of Starbucks experience, which leads to its high price positioning being doubted. So Starbucks should be concerned about the experience and service it gives to customer as well as expansion. This service and experience is a powerful anchor for its high pricing positioning.
53 7.4
Place
This sub-chapter will introduce place strategies for Starbucks. There are basically two place strategies: direct sales mode strategy and location strategy.
7.4.1 Starbucks Direct Sales Mode Firstly, the way of place expansion. Starbucks refuses franchising because the unique Starbucks experience and service standards is difficult to implement in its franchisees stores. Starbucks’ high price is actually due to its brand success. Behind the brand are the people doing business. Starbucks strictly demand its operators to agree with the company’s philosophy and values and emphasize consistency of service and quality. But investors’ franchisee may only use Starbucks as a way to make money. So Starbucks is not open to franchising because Starbucks wants to do better control on its quality. Franchisee utilitarian approach will hurt the brand of Starbucks, so Starbucks does not the implement franchising development method. Secondly, when Starbucks entered China, due to legal restriction on foreign retail business, the way of Starbucks entered China was to grant power of attorney to a Chinese enterprise that occupies a certain share. Starbucks granted Hong Kong and Guangdong’s power of attorney to Hong Kong Maxim’s Group, Taiwan, Jiangsu, Zhejiang, Shanghai’s power of attorney to Taiwan Uni-president Group, Beijing, Tianjin and northern China’s power of attorney to overseas venture capital firm, which is HandQ Asia Pacific and Beijing Sanyuan Group. These two companies established Beijing Mei Da Coffee Co,.Ltd. The way of doing this is partly because Chinese law does not allow foreign retail business to have single proprietorship in China. It is also a way of Starbucks to avoid business risks. But this way weakens Starbucks’ control and forms a situation of less independences. With the opening of Chinese law to full liberalization of foreign retail industry, Starbucks began
54 the approach of buying back shares and to become a wholly owned company in China in order to better implement control. Since 2003, Starbucks began to acquire its equity franchise in China and Starbucks raised its cafés stake in Shanghai and Taiwan to 50%. (Starbucks 2015.) The advantages of direct marketing mode are to ensure the coffee quality, employees quality in the cafés and corporate culture. It is because of a direct marketing strategy, Starbucks can quickly establish its brand in China and screen itself out from other cafés in China. In order to guarantee Starbucks Experience that Starbucks bring to customer, Starbucks has a set of unique values and of corresponding management system, which is difficult for its alliance business to copy. When Starbucks first entered China, a joint venture of Starbucks just copied the external manifestation of the firm culture and did not reach the requirements of Starbucks. So Starbucks’ culture and management system determines its direct sales mode.
7.4.2 Location Strategy For Starbucks, the business district’s success is the key for its rapid development and also its response to a place expansion strategy of competition. For a café, a good place is a kind of competitive resource. If the Starbucks opens its café in the busiest section of town, there is no space for its competitors. Starbucks café selection mode is more decided by local Starbucks. The general place selection process is divided into two stages: the local Starbucks audit and Starbucks headquarter audit. The local Starbucks selects of place according to the local characteristics and sends the place data to the Starbucks headquarter in the Asia Pacific to assist them to evaluate it. Starbucks global company will provide some standardization data and tables to be the main criteria for measuring the place. These standardized data are often analysed from the local Starbucks database. In fact, the place’s main decision is in the hands of local Starbucks. Local Starbucks has a separate expansion unit responsible for the choice of
55 place, including the choice of the place, investigation, design and instrumentation equipment. Of course there is of constraints agency to access the local work. Starbucks positioning determines its location is generally in the heart of the downtown with many visitors, such as business centre and transport hubs, which helps customers find Starbucks anywhere. The maturity, stability and growth of business district are important factors for Starbucks to consider. Starbucks also breaks the basic business rule of hot repeated shops within a hundred metres radius. Starbucks opens a number of cafés in one area to provide more convenience to customers and implement its expansion strategy. More intensive space occupation is difficult for its competitors to intervene, which is better to respond to competition. However, Starbucks’ place expansion strategy of intensive store openings is to better respond to competition but brings huge pressure on cash flow. In the economic boom circumstance, this expansion strategy can help companies better occupy the market. But in the economic recession, there exists great risk. So Starbucks place expansion strategy should fit the overall development of the Chinese economy. When the Chinese economy in general works well, but the growth rate slows, Starbucks in China should have steady expansion. In recent years, China’s urban housing and rents continue to rise. Starbucks’ cafés in China basically rent and do not have property ownership. Starbucks store rent is a huge part in its operating costs. Especially for Starbucks located in a prime location, this rent cost is much higher. In recent years, China’s commercial real estate rental price has been soaring, and in the long run, with China’s economic development, commercial real estate rental price is increasing. From the perspective of rent, Starbucks’ operating costs is on the trend of increasing, which will bring a lot of pressure to control Starbucks’ operating cost and bring risks and uncertainty to future profitability. In order to meet Starbucks’ expansion strategy in China, Starbucks can consider the strategy of McDonald’s. McDonald’s has real estate business besides selling hamburgers. After McDonald’s investigation of an appropriate place to open its store, it will buy out the property and lease to franchisees that
56 have McDonald’s license to operate. Because] of McDonald’s strong brand, there is a big increase in the land price after it opens its store, which brings great profit to McDonald’s. Starbucks is one of World Top 100 Brands, its brand will give added value to bring positive effects of real estate. So Starbucks can consider real estate strategy to achieve a stable place expansion strategy.
7.5
Promotion
There are basically two ways of promotion. The following text will introduce advertising and limited sales promotion.
7.5.1 Advertising and Word of Mouth Eugene W. Ander Son, from University of Michigan, believes that word of mouth is informal spread of individual views on products and services, which includes positive and negative point of views. But it is not like a formal complaint or appreciation to the company. In short, word of mouth is the information about the credit and trustworthiness of an organization, management method, products, and services. It can be spread from one, but it is the result of long-term business efforts. Good corporate reputation is the fundamental guarantee for companies to attract customers in longterm. (Jin & Lin 2005.) Word of mouth is the main way for Starbucks’ promotion. Corporate influence expansion needs to rely on spread. The traditional way of spread is advertising, but Starbucks invests very little on advertising. In the past two decades, Starbucks’ investment in advertising costs less than one million dollars per year. Starbucks develops into Global Top 100 Brand almost without advertising, which is benefited by word of mouth strategy. First of all, Starbucks’ word of mouth begins between its employees. The employees are regarded as assets of Starbucks. They are Starbucks sales-people and educators. They effectively promote Starbucks brand image. Starbucks believes that it should bring the effect to its employees
57 before it brings the enthusiasm and Starbucks’ cultural values to its customers. Starbucks employees’ promotion mode is similar to the transmission mode of religion. Starbucks uses internal marketing to its employees to make its employees become the source of word of mouth. Starbucks is a service brand that mainly sells coffee, the service brand value is provided by people and is decided by people’s feelings and experiences. It is easier to get consumers recognition by Starbucks employees’ friendly explaining of professional service knowledge, which forms the word of mouth. Starbucks transfers the budget savings from advertising promotion to the employees’ benefits and training, which maximizes its employees’ enthusiasm. It is good for Starbucks to provide better service quality and form a virtuous cycle of word of mouth. Secondly, Starbucks’ word of mouth focuses on each customer that has experienced from Starbucks. The customers’ pleasant experience at Starbucks will let them tell their experience to people around them, which is free advertising for Starbucks. Compared with commercial advertising, word of mouth is not for profit, but advertising is for the purpose of profit. Especially in the flood of information, the intensity of advertising is much higher than the affordability that consumers are able to receive. In this situation, advertising will lead to consumers’ psychological boredom and rejection and advertising does not gain profit. Word of mouth strategy is to spread the experience after consumption between familiar people, so word of mouth can better promote consumer buying behaviour. Starbucks focuses on every detail in that service process to provide customers with high-quality service to get customers satisfaction and customers loyalty, which provides the foundation of Starbucks’ word of mouth advertising. Thirdly, another way of Starbucks’ word of mouth is to select the crowd opinion leaders or consumer groups who are willing to preach new things to let them understand the benefits of Starbucks products and service. Once they enjoy Starbucks’ products and services, they will become compulsory advocates of Starbucks’ products. Starbucks regularly organizes coffee classroom activities to its customers to help them understand coffee knowledge, identify coffee and taste coffee. This activity
58 can help the intimacy and understanding between Starbucks and its customers, which also helps customers communicate with each other and exchange their Starbucks experience. Starbucks uses these purposeful word of mouth strategies to diffuse its brand reputation.
7.5.2 Limited Sales and Charity Starbucks occasionally or seasonally forms promotions by limited sales. The limited sales consist of limited edition cups, seasonal coffee and festival dedicated modulation integrated coffee. These limited sales products are a good choice to send to friends and family. Limited sales give commodity special significance. The limited sales are relatively scarce, so it increases its values. The way of limited sales improves Starbucks high-end brand image. Starbucks often organizes or sponsors charity events like actively participating in community activities and sponsors poor orphans to narrow its distance with consumers. This helps Starbucks to establish a good corporate image and use good corporate images to influence consumers. The consumers can separate Starbucks from other cafés, which enhances the visibility of Starbucks and the corporate image.
7.6
People
People is the most important factor in service. People means all personnel involved in service, which includes employees, customers and other customers in service environment. Firstly, Starbucks uses stock options strategy which greatly stimulates the enthusiasm and creativity of employees. Starbucks’ success comes from revolutionary stock options programme that Schultz implements at Starbucks. Starbucks offers stock options programme “coffee beans stock” to all its employees, including part-time employees. With the establishment of Greater China, Starbucks also began to implement stock options programme in China. According to 2006 fiscal coffee beans stock options
59 programme, the employees who have the right to operate at Starbucks, whether full-time or part-time can enjoy this benefits as long as they joint company before 01 April 2006 and have 20 hours’ work weeks (Best Welfare Company 2015). Every employee becomes a partner through this programme which links every employee’s performance with the company’s performance. According to these incentive ways, Starbucks turns its employees to company’s partner, which greatly stimulates employees’ enthusiasm. So passionate creative employees can provide better quality service to every customer. Secondly, Starbucks’ success comes from its emphasis on the training of employees. The employees become experts with knowledge of coffee through training, which makes employees communicate well with customers and becomes ambassador to disseminate coffee culture and knowledge. In 2001, Starbucks conducted a total of 1.9 million hours of training. This means that every Starbucks employee has to accept one hour of training every day (Starbucks 2015). Every well-trained Starbucks employee becomes the coffee industry benchmark through coffee knowledge and dissemination of Starbucks’ culture. Furthermore, because of the high-end positioning of Starbucks, the overall quality of Starbucks’ customers are relatively high. Because of Starbucks’ high price and high quality, it attracts high income people with relatively high quality. In Starbucks suggestive environment, customers get along with each other in harmony and pleasant atmosphere. So the Starbucks third place positioning provides a good happy human interaction between customers, which strengthens the consumer experience and helps customers long-term consumption with loyalty. Employees are an important asset for Starbucks. Employees are always full of passionate attitude to serve customers under incentive of generous welfare policy, which provides the most important source and guarantee to establish good customer relationship and beat other competitors.
60 The thesis argues that the current crisis of Starbucks is its changes in the human resources strategy. With rapid expansion of Starbucks, there appears to be a loophole in its management of human resources strategy. It is not as strict as before on its hiring and employees’ training, which leads to the problems of service level drop during the Starbucks’ expansion process. The high-quality staff is always the most important competitive resource for Starbucks. So Starbucks has to increase training for employees to ensure consumer satisfaction. If the service cannot keep up, it will result in the loss of customers. It becomes a weakness that is easy for its competitors to enter. Starbucks should re-adjust its business resource to deploy more resource on staff training while expanding.
7.7
Process
Process refers to actual process, mechanisms and workflow that is provided by service (Zeithaml 2004). Starbucks takes standardized management mode on each Starbucks’ café. Starbucks is taking the direct-sale store mode and only accepts company’s joint venture. In order to ensure that each Starbucks’ café uses standardized procedures, Starbucks refuses individuals to join. The standardization is clearly defined standards of work in the chain work process, which facilitates staff training. Every employee of Starbucks has a staff operating manual on codes of conduct and standards of service processes. All employees have to follow this manual to complete their work. This can help employees to note every detail in the service process. For example, the waiting time of customers in receiving their coffee after the ordering should not exceed one minute thirty seconds. So when there is changes in employees, Starbucks can use this manual to make new employees quickly get into working conditions. Starbucks provides self-service in their cafés. Customers can find a place to rest after the ordering and when they hear the waiters call them, they can go to get their orders. Customers can take what they need in the seasoning supplies and utensils. The self-service reduces the waiting time
61 pressure of customers, increases customer control and customers can fully enjoy more freedom. Starbucks also provides customers with a more personalized service besides the standardization. Starbucks employees make their service skills standardized and humane through their training of basic etiquette, sales skills and coffee knowledge. During the service process, Starbucks employees should not only demonstrate expertise but also reveal a nature of being kind and passion of that they want. They should meet the customers’ individual needs and deeper emotional needs by providing special service to customers as well as interaction with customers. This personalized emotional service process is an important part to bring the Starbucks experience to customers.
7.8
Physical Evidence
Physical evidence refers to environment provided by service, place for enterprise contact with its customers and tangible elements of performance and communication (Zeithaml 2004). Starbucks logo’s background is in dark green. Starbucks brand name come from a sailor named STARBUCK in an American novel “Moby Dick”. STARBUCK is a coffee lover and a very characterful meaningful person. The middle of Starbucks logo is a goddess “Sirens” from ancient Greek mythology, who likes to confused sailors with wonderful songs with human body and fish tail. This implies Starbucks coffee is very attractive. Starbucks conveys values of romantic experience and dedicated coffee culture by combining this tangible element. On the basis of brand image consistency, Starbucks emerges with a unique style in every Starbucks café. The café designed mostly from US headquarters and will integrate local culture and shopping district features, which makes sure that each of Starbucks café has a different personality in a unified style and beauty. Starbucks is unlike McDonald’s, each of
62 Starbucks café’s different design styles fulfil emotional needs of aesthetic environment for fashion people. The Starbucks coffee bag is also carefully designed. Starbucks has a different packing design for each type of coffee. Each type of coffee has its own mark, portrait, theme colour and graphics. It shows the diversity and variability in the basic unity of artistic style. Starbucks employees are young men and women with casual clothes, which brings energy and happiness to customers. This dressing is a tangible demonstration and conveys a relaxed lifestyle and pursuit of elegant culture.
63 8
CONCLUSION & SUGGESTIONS
This chapter will conclude all the findings and results by answering research questions. Moreover, this chapter illustrates the validity & reliability. Last but not least, this chapter also makes suggestions for further research.
8.1
Answers to the Research Questions I.
What problems does Starbucks currently encounter?
Over the past decade, Starbucks brand value has reduced because of its pursuit of financial figures and rapid expansion in the world, which is very dangerous. There are three problems that Starbucks is currently encounter. The first aspect is the desalting of Starbucks experience. With the rapid expansion of Starbucks, the customer experience that Starbucks bring to declines directly, which affects the Starbucks core competence. The second aspect is degradation of service quality makes Starbucks is developing in the direction to a way of cheaper chain store. The third aspect is loss of business culture. II.
What opportunities does Starbucks have in Chinese market?
The first opportunity is China’s economic development is good. The second opportunity is since 2005, Chinese law released the control of foreign retail enterprise’s direct chain store. The third opportunity is the process of urbanization and the fourth opportunity is the great potential of Chinese coffee market. III.
How does Starbucks carry out its marketing strategies in China?
The thesis applies marketing mix 7Ps, SWOT and STP analysis tool to analyse Starbucks marketing strategies in China. The thesis suggests Starbucks to use marketing strategy of expanded market share, brand extension, differentiation, brand crisis turnaround, public relations and concentric diversification to carry out its marketing strategies in China.
64 IV.
Main research question: How can Starbucks develop its business in China with its marketing strategies?
The analysis of questionnaire is a good way for Starbucks to know more realistic and comprehensive information about its customers and is benefit to Starbucks to realize what marketing strategy and improvement it needs to do in its future marketing development. After the analysis of the questionnaire, the author lists some suggestions for Starbucks to help it have better development. Firstly, based on the data of the research, most customers of Starbucks are between 21 and 30 and most of them are office employees and selfemployed business-people. Because these two types people prefer to have meetings and relax after their busy work, so Starbucks can cooperate with more companies and provide separate rooms for business meeting coffee break. Secondly, according to the research result, 57% respondents will choose Starbucks when they want to have a cup of coffee. The result of research reflects that most of the customers prefer to order coffee and Frappuccino and many customers will spend 50-100 RMB during one visit. Based on this data, Starbucks can set more set meals with combines such as food and drink that cost around 100 RMB and provide more discount and activities for loyal customers to attract them to visit Starbucks more often. Moreover, students are also another big group of Starbucks’ customers, so Starbucks can offer discounts for students which is also a promotional activity for itself. Thirdly, the result of research reflects that the waiting area environment need to be improved and customers don't want to spend much time on ordering the food. Starbucks can offer pre-order service by using its mobile application that customers can pre-order coffee on its mobile application and do not have to wait. Fourthly, according to the research result that good environment and atmosphere is the most important factor that affects customers to choose
65 Starbucks. Most customers choose coffee or Frappuccino during their visit at Starbucks. It is not enough for Starbucks to provide good environment and atmosphere, it is also important that Starbucks need to improve its types of food and taste of food to let it suit better for Chinese people. Finally, it can be found from the research analysis that large number of customers know about Starbucks from the Internet and others’ recommendation. Based on this, Starbucks can integrate its business into Internet marketing. Nowadays, online marketing is very popular among young people in China, especially the Wechat. For this reason, Starbucks can use its official account on Wechat to put its advertisement and promotional activities. Customers can look for the nearest Starbucks on Wechat, make order online and pay their orders on Wechat. Customers can also contact online customer service to leave their comment and suggestions.
8.2
Reliability & Validity
All of the data and information in the thesis are collected through books, published journals and e-resources. The questions in the questionnaire are company-based and all the answer from questionnaire are valid and reliable because the respondents do not hesitate to tell their true feelings as all answers are remained anonymous. Moreover, the analysis result from questionnaire is matching with the analysis of Starbucks company. So all in all, the research is reliable and valid and the analysis results can help Starbucks in its future marketing development.
8.3
Suggestions for Futher Research
One big suggestion for the thesis is the questionnaire can have more open questions that participates can write more feelings about themselves. The questionnaire would give a company more information about customers if more open questions in it and more participates participated in. According to more data collected from questionnaire, the company can make more accurate marketing strategies for its future development.
66 9
SUMMARY
With the expansion in demand of China’s coffee market, more and more coffee enterprises have entered Chinese market. Starbucks, as the leader in coffee industry, its unique marketing model has brought enormous success. Starbucks has created a coffee empire and defined the coffee industry standards. The success of Starbucks is worth studying by other companies. Starbucks also encountered crisis during the expansion, which is also deserves attention by other companies. The thesis sums up Starbucks marketing strategy and tactics through an objective analysis of Starbucks’ internal and external environment and analysis of Starbucks’ opportunities, threats, strengths and weaknesses. The study points out that the core corporate value of Starbucks is based on customers’ experience which forms core competencies that is difficult for competitors to imitate. Starbucks’ brand is the extension of its values and culture. The thesis sums up Starbucks core marketing strategy as an experience marketing strategy. In today’s high-speed economic growth in China, more and more Chinese accept western culture with an open mind. So the Starbucks experience marketing strategy is very worth studying. Of course, Starbucks’ development in China also face some problems, such as the failure of diversification, brand value and core competitiveness reduced by rapid expansion. The thesis tries to propose strategy to reverse these problems and will continue to focus on the future development of Starbucks.
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69 Marketingmix. 2015. The Marketing Mix 4P’s and 7P’s Explained [referenced 13. October 2015]. Available on The Marketing Mix website: http://marketingmix.co.uk. Maslow Hierarchy Theory. 2015. Maslow Hierarchy Theory [referenced 15. October 2015]. Available on Baidu Baike website: http://baike.baidu.com/link?url=_j0XnPKnlqN2lgxoEdFntYsgOIJJAJ2R8y4 GJ4DdAm0ja-sMDCvCV228zGb2FN2FBFgJb1FeF3g5LWF-jZu7k_. MBA. 2015. The Marketing Theory of 4Ps [referenced 20. September 2015]. Available on MBAlib website: http://wiki.mbalib.com/zh-tw/4Ps营销 理论. Ministry of Commerce. 2005. Ministry of Commerce of People’s Republic of China [referenced 01. December 2015]. Available on China Government website: http://www.gov.cn/gongbao/content/2005/content_69235.htm. Ovidijus Jurevicius. 2013. PEST & PESTEL Analysis [referenced 21. October 2015]. Available on Strategic Management Insight website: http://www.strategicmanagementinsight.com/tools/pest-pestelanalysis.html. PEST. 2015. PEST [referenced 15. August 2015]. Available on Baidu Baike website: http://baike.baidu.com/link?url=_AeapyOKozuENqjSZru2gMZBrOkhDlJCpi 2CQfoctXi50hFAmp42cW0bBg3r5lW8. Population. 2015 [referenced 28. November 2015]. Available on Nation Bureau of Statistics of China: http://data.stats.gov.cn/search.htm?s=人口. Soupu. 2012. China Coffee Consumer Market will reach 50 billion US dollars in 2020 [referenced 10. July 2015]. Available on Soupu Information website: http://www.soupu.com/news/450958. Starbucks. 2015. Starbucks in China [referenced 8. July 2015]. Available on Starbucks website: https://www.starbucks.com.cn/cn/about/history.
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APPENDICES APPENDICES 1. Questionnaire for Starbucks’ customers
Dear customer, I am a college student who is currently studying International Business degree program at Lahti University of Applied Sciences in Finland. I am doing a research on marketing analysis of Starbucks for my thesis. The purpose of the questionnaire is to collect and analysis the feedback from customers, and make marketing suggestions to improve customer satisfaction for Starbucks. Your answers and suggestions will help Starbucks to improve the quality of its services. The survey will take you for 5 to 10 minutes to complete and all participants will remain anonymous. 1、Age group. ○ Under 21 ○ 21-30 ○ 31-40 ○ 41-50 ○ Over 50 2、Gender? ○ Male ○ Female 3、Occupation? ○ Student ○ Worker ○ Office employee ○ Self-employed businessman ○ Other 4、Monthly income? (RMB) ○ Under 1000
○ 1000-2000 ○ 2001-3000 ○ 3001-4000 ○ 4001-5000 ○ Over 5000 5、What is the first café that comes to your mind when you want to drink coffee? ○ Starbucks ○ Maan Coffee ○ UBC Coffee ○ Caffe Bene ○ Zoo coffee ○ Costa ○ DIO Cafe ○ Other 6、How often do you visit Starbucks in a month? ○ 0-2 times ○ 3-5 times ○ More than 5 times 7、How much do you spend during one visit? (RMB) ○ Under 50 ○ 50-100 ○ 100-150 ○ More than 150 8、What do you think about the price level of Starbucks? ○ Very expensive ○ Expensive ○ Average ○ Cheap 9、How did you know Starbucks? (multiple choice) □ Others’ recommendation □ TV □ Internet □ Advertisement □ Movie □ Other
10、What made you to choose Starbucks? (multiple choice) □ Price □ Taste of food □ Good environment and atmosphere □ Good service □ Location □ Other 11、What kind of food do you prefer to order at Starbucks? ○ Espresso ○ Frappuccino ○ Coffee ○ Tea ○ Other 12、Evaluate customer satisfaction to the environment of Starbucks. Satisfied Average Unsatisfied Decoration
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Tables and chairs
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Waiters uniform
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13、Evaluate customer satisfaction to food and dishes at Starbucks. Satisfied Average Unsatisfied Freshness of the food
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Taste of drink
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Taste of desserts
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Starbucks dishes
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14、Evaluate customer satisfaction to services at Starbucks. Satisfied Average Unsatisfied Waiting time before food
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Waiters’ attitude to customers
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Waiting area services
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Reception service
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Promotional activities
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Take away service
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Communication
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15、What is your overall evaluation to Starbucks? ○ Very good ○ Good ○ Average ○ Bad ○ Very bad 16、In which way you think Starbucks needs to improve? □ Discount and promotion □ Types of food and taste of food □ Service enthusiasm □ Location □ Other
Thank you for your time and cooperation!
