According to a report from the company newsroom, Starbucks plans to go from around 500 stores to at least 1,500 stores over the next three years, and predicts that its operations in China will be its second largest, outside of the U.S., by 2014. Starbucks coffee stores are currently located in 48 Chinese cities.
The company has had mixed success with expansion. Although it has strongly rebounded from flat sales in the U.S., it faces continuing resistance in Europe — where regional palates and a sagging economy have weighed down performance. Starbucks has yet to make a profit in France and, even in the parts of Europe where the company makes money, sales and profit growth lag far behind results in the Americas and Asia.
Given this uneven track record, and continuing uncertainty over the global economy, how successful will Starbucks be in China?
“There is a segment of consumers willing to buy premium coffee – given the huge success that Starbucks enjoys in big cities of China,” says Wharton marketing professor Qiaowei Shen. “In recent years, the number of coffee shops – national chain stores or local independently owned stores – that target high-income white collar consumers has been increasing dramatically. This is another piece of evidence to show that there is demand for high quality premium coffee, and the potential demand is likely to grow in the future.”
Also, according to Shen, the assumption that Chinese consumers tend to favor tea over coffee “may not be true for the young generation in China who grew up with Western food and drinks — such as McDonalds, KFC and Pepsi.”
Wharton management professor Lawrence Hrebiniak is enthusiastic about the expansion. “China looks very good for Starbucks. Coffee sales are up significantly as traditional tea drinkers opt for the newer form of caffeine. Sales are booming — revenue is up 38% — and margins are high, 35% versus 22% in the U.S. When the company raised prices last year in China, demand actually went up, a sign of a luxury good. Chinese customers enjoy the socializing at Starbucks’ sites. In addition, coffee sales forecasts show predicted increases of more than 50% by 2015.”
So, is there anything at all to be concerned about? “Perhaps,” he says. "While the projected rate of growth is very robust — 200% in only three years — not all cities in China are alike. Smaller cities with lower income levels may not react as strongly as their larger counterparts. Lower economic growth may affect the smaller markets more than the larger ones.”
Given the size of the Chinese market and the projected high growth rate — 7% to 8% — for the coming decade, some investors question why the company does not aim to grow faster. For instance, KFC already has more than 3,000 restaurants in 650 cities in China and is adding a new one every day.
As for the competition that Starbucks faces in China, Shen cites McDonald’s as one candidate, “but probably not the major one because McDonalds’ coffee is much cheaper and attracts different segments of consumers…. Currently, major competition comes from similar coffee chain stores from Taiwan and Japan, with some well-known brands. Competitors also include bakery stores that serve high-quality coffee. Many independently owned local coffee shops also are starting to populate the large cities. They typically have a very unique style and beautiful atmosphere,” attracting the same type of consumer that Starbucks is targeting. “The local competition,” Shen adds, “is intensifying.”
adapted from Knowledge@Wharton
