6010MKT: Starbucks’ Internationalisation Plan in the China Market: Opportunities, Challenges and Recommendations Way Forward: Global Marketing, Course Work, CU

1. Introduction

This report is about an American coffee company and coffeehouse chain called Starbucks (Starbucks Coffee Company, 2019) which pursue its internationalization strategy into the markets in China. The SLEPT framework will be applied to assess the impact of the macroenvironmental factors on Starbucks and conclude with recommendations that harness the market opportunities and overcome the challenges experienced by Starbucks.

2. Macro-environmental factors

2.1 Social-Cultural Factors

At a high masculinity score of 66, Hofstede Insights (2019) infers that China’s population is highly driven by success, status and their demand for more luxury goods to reward themselves (Doole & Lowe, 2012). This creates primary opportunities in Tier-1 cities (e.g. Beijing and Shanghai) and secondary opportunities in the growing middle-class Tier-2 cities (e.g. Wuhan and Tianjin) for Starbucks based on the Business Portfolio matrix (Harell & Kiefier, 1993). Both markets’ consumption for high-end food lifestyles such as designer coffee beverages offered by Starbucks is predicted to grow with a CAGR of 10.15% between 2019-2024 (Mondor Intelligence, n.d.). Refer Figure 1.

Figure 1: China Coffee Market –

Growth, Trends and Forecasts (2019-2024)

2.2 Legal Factors Hedley (2019)

cited that intellectual property rights laws are opaque and varies across states and provinces. Licensing its business can be cumbersome when dealing with the local authorities and the red tape (Devault, 2018). Partly attributed by these circumstances; Patton et al. (2019) claimed that Starbucks restructured its internationalisation strategies mid-2019. The company licensed its Thai Operations to F & N and Maxim’s Caterers to focus on driving the China’s market growth. Prior to that, Starbucks had licensed its HongKong and Taiwanese businesses and soon, its plan is to extend to the European markets (Patton et al., 2019). It poses a challenge for Starbucks to constantly register its business trademarks amidst of the presence of copycat companies, which can be costly and distracting. Finding suitable Joint Venture partners and licensees can be difficult and Starbucks could lose some business control (Doole & Lowe 2012).

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2.3 Economic Factors

The GDP of China’s tier-level cities differs (Devault, 2018; Hedley, 2019; Wong, 2019). Wong (2019) found Shanghai’s annual GDP (Tier-1 city) is close to USD500 billion (equivalent to the Philippines) compared to the lesser-known Gansu city that generates an annual GDP of USD2billion. Despite the Tier-1 cities being the wealthiest, Starbucks can find opportunities to tap on the cost advantages in the Tier-2 and Tier-3 cities that have rising middle-class populations (Hedley, 2019).

If Starbucks can ‘best fit’ with a glocalised range of coffee products, it can capture the Tier-2 and Tier-3 markets who are willing to pay extravagantly for its products (Wong, 2019). It would be a classic Ansoff’s market development strategy (Hussain et al., 2013). The market entry strategy used in the different tier-level cities will be critical. Gaining the first-mover advantage is vital to capture the Tier-2 and Tier-3 market opportunities.

2.4 Political Factors

PRS Group (2019) found China’s political risk is slightly higher (67-70) over other Starbucks’ markets (76-93) during 2014-2018 (Table 1). Hedley (2019) cited with China’s entry into the WTO in 2001 has attracted Starbucks to enter its markets due to its liberalised trade environment. However, the recent US-China trade war in a bid to bring jobs back to the US and the tit-for-tat tariffs imposed between the two nations, has prompted firms to leave China (Behsudi & Bermingham, 2019).

The ensuing results include lower sales and higher costs amidst the political tensions (Behsudi & Bermingham, 2019), thus will be challenging for Starbucks to continue pursuing its growth strategy in China.

Table 1:

Political Risk Index of Starbucks’ markets 2014 to 18th April 2018

2.5 Technological Factors

Moh and Jiang (2018) reported that China reached the 800 million-mark (58%) internet penetration in this year. However, Starbucks needs to be aware that the internet penetration rate for the urban Chinese cities is 73%; higher than the lower-tier and rural cities (37%). Both authors added social media marketing and mobile payments are pervasive among the 98% of China’s internet users.

It can be a market opportunity for Starbucks to tap on the internet/mobile users to access markets who prefer product home-deliveries in the urban Chinese cities. On the contrary, Starbucks will face challenges as will need to develop different marketing campaigns. This is to cater to the different media behaviour. A combination of mobile advertising and mass media adapted to local needs will require higher allocation of promotional budget.

3. Opportunities and Recommendations

3.1 Social-Cultural Factors It is gathered from Section 2.1; Starbucks’s primary market opportunities are located in the Tier-1 cities and the secondary market opportunities are found in Tier-2 cities with rising middle-class societies.

Despite both tier-cities seek high-end lifestyles, different market entry strategies and product adaptation will need to be applied by Starbucks. For the more matured, affluent and highly-educated Tier-1 cities (Wong, 2019), the franchising model will be useful to market Starbucks products that grants the legal right to franchisees in adopting the modus operandi, products, trademarks and branding (Doole & Lowe, 2012). There is with less needing to adapt its products as Tier-1 societies are familiar with the original American flavour (Wong, 2019).

However, for the middle-class Tier-2 societies who are less familiar with the Starbucks products, Wong (2019) cited the company needs to focus on marketing their brand and the experience of drinking coffee; thus, piggybacking on established distribution networks (Doole & Lowe 2012) might be worthwhile to pursue. Starbucks can consider leveraging on the familiarity of the convenience store brands, example 7-eleven, Suning Xiaodian and Bianlifeng which had opened over 700 new stores this year (Xinhuanet.com, 2000-2019).

3.2 Economic Factors

The discussion in section 2.3 highlighted the potential market opportunities despite the varying GDP levels recorded from Tier-1 to Tier-3 cities (Wong, 2019). Devault (2018) emphasises that Starbucks was deemed successful to capture the market as understood the different market needs. In the coming years, it is recommended that Starbucks focuses on gaining the first-mover advantage in the Tier-2 and Tier-3 cities. This is to achieve an initial competitive advantage (Yang et al. 2017), while keeping in mind to bundle value-for-money and maintaining premium offerings on the menu. Although it is not going to be easy, it is necessary for suiting the local preferences of these cities (Gupta et al., 2018).

3.3 Technological Factors

Following the discussion by Moh and Jiang (2018) in section 2.5, both claimed market opportunities can be harnessed from the sophisticated technology powering the social media marketing and mobile payments that is prevalent in the urban Chinese cities with 73% internet penetration rates. Therefore, other than the brick-and-mortar business, Starbucks outlets can intensify its products distribution in Tier-1 cities by bundling product and loyalty programs such as collecting mileage for corporate events and home-delivery orders using popular ride-hailing company services such as Ele.me and Meituan Waimai (All Tech Asia, 2019) in exchange of Starbucks’ deals.

Working with two of China’s Mobile Wallet Giants (AliPay and WeChatPay) that account a dominant 90% market share (Shao, 2019), it will be crucial to not only make access to Starbucks products more convenient but also for its product payment purposes.

4. Challenges and Recommendations

4.1 Legal Factors Hedley (2019) cited in section 2.2, the different regulatory framework across states and provinces, as well as the non-transparent intellectual property rights laws had Starbucks having to closely monitor the erratic laws and undertaking the laborious documentation to ensure its trademarks and copyrights are protected in China. It is crucial so that Starbucks can fend off the copycat companies that are trying to ride on the Starbucks’ brand success (Devault, 2018).

Devault (2018) and Hedley (2019) similarly recommend engaging experienced legal and market consultants to ensure that no oversights occur. This approach has been working well for Starbucks so far. There was a legal case embroiling its fans who used its logo illegally and ended paying damages worth RMB10 miilion to the company (Lai, 2018).

4.2 Political Factors

One of the major political concerns is the recent US-China trade war aforementioned in section 2.4 (Behsudi & Bermingham 2019). Starbucks may need to curb the internationalisation plan in China should the trade war continues and readjust its focus on less tougher markets. It means Starbucks will need to adopt the polycentric company orientation; applying different market development strategies to capture similar targeted consumers in other geographical markets (Hussain et al., 2013), while diversifying its business risks. Starbucks can consider moving into the large populated markets in Indochina, South America and South East Asia (SEA) that are less restrictive on the tariffs and non-tariffs imposed and that offers lower cost advantages (Behsudi & Bermingham, 2019).

Starbucks can plan to open single-unit franchise outlets in the more matured and affluent SEA cities to further gain from the royalties and brand mileage (Doole & Lowe, 2012). The company can also adopt piggybacking on established distribution networks (Doole & Lowe, 2012) for the less familiar cities located in South America and Indochina. Example, the Mexico City and the Ho Chi Minh city in Vietnam are the few most concentrated cities and have a rising middle-class societies who are living there.

5. Conclusion (10% word count ≤ 200 words):

recap main points Based on the SLEPT findings, the economic, legal and social-cultural factors have a big impact on Starbucks’s business. The more affluent markets Tier-1 and Tier-2 cities will require a high degree of customization for its products and of higher quality. Starbucks products must be perceived as a premium brand which can be reinforced through various consumer advertising. However, Starbucks also faces legal issues with companies trying to copycat the company’s business model though the matter is manageable as the firm had all trademarks registered in China. It has been gathered that the Chinese society is heterogenous. Therefore, Starbucks needs to constantly perform market research to blend into China’s tea-drinking culture and localize to its products that suit the diverse markets with the help of local partners that understand the local tastes better.

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