China Specialty Coffee Industry - Assignment Example

The China Specialty Coffee Industry: A Management Report TABLE OF CONTENTS I. Executive Summary 3 II. Introduction 4 III. An Overview of the Chinese Specialty Coffee Market IV. A Review of Internal Influences 6 V. External Environment Scanning 9 VI. The China Specialty Coffee Industry in the Face of Social and Cultural Diversity 13 VII. Recommendation and Conclusion 16 VIII. References 18 I. EXECUTIVE SUMMARY This report looks at the internal and external influences of the China specialty coffee industry through the employment of strategic management tools such as the Porter’s Five Forces Model and PEST Analysis. In terms of internal analysis: barriers to entry and exit are moderate; rivalry is weakened by market under saturation and differentiation strategies; threat of substitutes is moderated by the different value added features attributed by companies to their products; supplier power is low; and buyer leverage is very high. Externally, the industry is influenced by: the country’s accession to the WTO; economic development; creation of a middle class; Westernized culture; and technological advancements like the internet. The industry players have been prompt in taking into account the social and cultural diversity issues in the country through their efforts in creating an efficient marketing mix and adding value added features to suit the need of every possible market segment. However, this can be further enhanced by the employment of strategies which recognizes the different profiles of customers in each key cities and emphasizing on the promotion of health benefits from coffee products. II. INTRODUCTION The existence and mere survival of an industry lies in its ability to efficiently respond to the internal and external influences. It is irrefutable that business organizations’ strategies mirror their unique responses to the external challenges and opportunities in the environment which, in turn, is facilitated by their internal resources and competences. This paper will concentrate on the responses of the China specialty coffee industry to the various internal and external influences that it currently faces. Recognizing that this sector can be properly examined through the use of different strategic management tools, this report will be utilizing famous technique PEST Analysis for the external environment scanning. Meanwhile, the internal environment will be assessed through the identification of its various stakeholders through the Porter’s Five Forces Model. The next section will focus on the Chinese specialty coffee market responses in the face of social and cultural diversity. This report will thoroughly examine the impact of the social and cultural trends in the industry’s strategies while assessing the efficacy if their responses. Lastly, recommendations for improvement will be identified. III. AN OVERVIEW OF THE CHINESE COFFEE MARKET Gaining the traditional recognition of being a tea country, marketers are aggressively and strategically transforming China into a coffee drinking nation. From its strong preference of” jasmine, oolong, green, black, and myriads of other fragrant teas the Chinese mainland is becoming more and more attuned to the rich flavor of the coffee bean, driven by the urban savvy rich and an increasingly wealthy middle class more receptive to Western taste” (Analysis: The Chinese Coffee Industry 2003). The current perception of coffee as a statement of fashion leads to the creation of the China coffee industry. Coffee consumption has always been associated with a cosmopolitan lifestyle which originated from the Western nations. Thus, the Chinese coffee market is largely concentrated in large cities like Beijing, Shanghai, and Guangzhou and is dominated by adventurous, young, open-minded, affluent, urban consumers (Lee 2004). There has been an observed uptrend both in domestic production and consumption of coffee and coffee products. Euromonitor reports growth rate of almost 90% on total coffee sales volume in China during the five-year-period 1998-2003 to 6,504.5 tonnes (Lee 2004). This robust growth in sales is supported by the increasing demand and consumption of coffee products. It should be noted that most coffee product consumed in China are instant or soluble coffee as “it is easier to prepare and more akin to tea making” (Nillson 2007). The relatively higher price of freshly made coffee diminishes its appeal to the mass market while encouraging patronage only from those segments which have high purchasing power. Production of coffee beans in China also signals a thriving and growing coffee industry. The China Agricultural Yearbook records a modest output of 3, 573 tonnes in 1997 which jumped to 11, 568 tonnes in 2000. The United States Department of Agriculture estimates that this figure has further risen to 13, 000 tonnes during the following year. The China coffee industry is dominated by foreign firms. Nestle is widely recognized as the pioneer in the introduction of coffee in the Chinese market with its aggressive effort in promoting its Nescafe brand in mid-1980s. The business organization has introduced soluble coffee in the market which now accounts for 90% of the total coffee sales. With this move, the company leads the market cornering 45% of total retail sales. Nestle’s main rivals are Kraft’s Maxwell House and Sara Lee. These three large market players account for 70% of the sales of the China coffee industry (Lee 2004). Starbucks brought specialty coffee in China in 1998. Currently, the company is by far, the largest coffee chain in the country having a total of 450 stores in Greater China with more than 200 stores in 21 cities on the Chinese mainland region undergoing the fastest growth (Nillson 2007). Competing head-on with Starbucks is the partnership of Taiwan-based Barista Coffee and Want Want Group and Japanese Manabe (Nillson 2007). IV. AN IDENTIFICATION OF INTERNAL INFLUENCES: PORTER’S FIVE FORCES MODEL The competitive forces analysis is concerned with the various stakeholders in the industry. According to Porter, there are five competitive forces in the environment of a business entity namely the suppliers, buyers, customers, potential entrants, and product substitutes. Thus, environmental analysis reveals the different internal influences which are faced by the industry or sector in coming up with its strategies (Thomson 2004). Barriers to Entry/Exit: MODERATE In general, the policies established by the Chinese government is favorable to potential entrants in the coffee industry both domestic and foreign players. As mentioned above, the Chinese government has a tendency to lean towards local players yet is also offering relaxed and encouraging policies for foreign business organizations. There are huge opportunities for entrants since the market is largely untapped and unsaturated. However, potential entrants need to heavily invest in marketing in order to compete head-on with more established players especially Starbucks. Otherwise, they are required to capitalize on different core competence and utilize unique strategies in order to effectively indirectly compete with incumbents. Intensity of Rivalry: MODERATE As stated above, the China specialty coffee market remains highly unsaturated making competition relatively less intense. This is even weakened by the business organizations’ strong effort to differentiate themselves from each other. It should be noted that industry players are not competing head on with each other but are capitalizing on their different capabilities and competencies. For example, as Starbucks is leveraging on its ability to offer the Starbucks experience, Blenz Coffee irrefutably eyes on other niches by the provision of smoking areas on its premises (Analysis: The Chinese Coffee Market 2003).. Threats of Substitutes: MODERATE In terms of other drinks in China, specialty coffee competes with the traditional tea, sports drinks, and other beverages. With its effort to market itself as a statement of trend and fashion, the China specialty coffee industry strongly insulates itself from these competitors. Thus, specialty coffee is seen to be not substitutable by other beverages in the market. Within the industry, it becomes apparent that different players’ products and offerings are also heterogeneous. As mentioned above, rivals concentrates on differentiating their products from each other by adding up unique features which appeals on different sets of patrons. This high level of differentiation insulates the players from the threats of substitutes. Buyer Power: HIGH The success and even mere survival of a business organization is directly linked to the extent in which it satisfies the needs and preferences of its target market. This is true in the case of the China specialty coffee industry where buyers hold a very strong leverage. It should be noted that switching costs in the industry is almost negligible if not non-existent. Coffee, being a non-consumer good and is promoted only as a status symbol, is only patronized if the buyer perceives to derive value from its consumption. With the varied choices in the market, buyers strongly determine the success of any industry player. Supplier Power: LOW The coffee production in China cannot adequately supply the demand in the country. Thus, companies export coffee beans and products from neighboring coffee producing countries like Vietnam. With the lowering of tariffs and its accession to the World Trade Organization, business organizations engaged in coffee products manufacture find it relatively easy to find a potential supplier (Lee 2004). As foreign firms consider the huge business opportunity in China, they are more than willing to supply their products to any firm operating within the country. V. EXTERNAL ENVIRONMENT SCANNING: PEST ANALYSIS PEST stands for Political, Economic, Social, and Technological (Thomson 2004). This analysis looks at the different aspects of the external environment of the business organization and the industry as a whole. Political. The political landscape is a strong driver in the growth and development of the China specialty coffee industry. In general, the Chinese government has been influential in the performance of the sector as evidenced by the impact of policies that it created. The country’s accession to the World Trade Organization together with its stronger favor to domestic players both contribute a lot to the specialty coffee industry. China’s accession to the World Trade Organization in the 2000 has signaled the opening of the largest potential coffee market to the world. With its large population, China represents huge opportunity for prospective investors. This is enhanced by the fact that the country’s accession to the WTO lessens if not fully eradicates the barriers to trade and facilitates the influx of foreign goods and foreign direct investments. This political move “has led to the gradual relaxation of the policy governing foreign owned retail outlets” (Lee 2004) making China more attractive to foreign investors and prospective market entrants. With the more relaxed trade and investment policies, foreign firms are now encouraged to operate in this large market without the previously imposed trade restrictions. It should be noted that China strongly supports foreign investors by offering fiscal incentives such as tax holidays. Furthermore, the accession to the WTO also signals the reduction of import tariffs on coffee which encourages influx of coffee and coffee products in the market (Lee 2004). One of the biggest concerns of business organizations operating in China is the constant interference of the government in their operations and most notably in the competition within the industry. The Chinese government is seen to strongly favor local players than foreign firms. This protectionist policy often discourages foreign business organizations in entering the market as they cannot compete efficiently with their domestic rivals. The government’s discrimination is highly detrimental to foreign players in the industry (LaMoshi 2007). Economic. During the past decade, the world has witnessed how the Sleeping Giant rose from its slumber. The economic reforms in China initiated by Deng Xiaoping have ushered an era of fast economic growth and development. Currently, the country is recognized as the fastest growing economy in the world in terms of GDP (Gross Domestic Product) growth which is even more impressive than what has been observed in the economic giant Japan (Economy of the People’s Republic of China 2007). This strong economic performance provides a fertile ground for the operations of business organizations. The continued success and existence of the specialty coffee industry can be directly linked to economic factors such as increase in per capita income and the influx of foreign firms and products within the nation’s boundaries. As coffee is regarded not as a healthy drink but rather a statement of fashion, the specialty coffee industry capitalizes on the growth of China’s per capita income. Simultaneous with the economic development which pushes the level of the country’s GDP, China is also enjoying robust expansion in per capita income. The World Bank reports that the economy’s per capita income has reached $1, 740 during 2006. This further improved to $2, 034 during the following year from the 10.7% increase in nominal GDP (Economy of the People’s Republic of China 2007). The rise in per capita income signals the enhanced purchasing power of the economy’s consumers. Higher disposable income affords them of non-consumer goods like coffee. As the Chinese economy makes its mark in the global arena, foreign companies begin to realize the profit potential in the country. Business organizations from all over the world have opted to invest in China hoping to capture the growing income of the large population. Some are encouraged to use the lower cost inputs and skilled labor force of the country through business process outsourcing. These companies create and provide jobs to the citizens while creating a middle class of young, urban, affluent professionals which becomes the main target market of the specialty coffee industry (Economy of the People’s Republic of China). Social. The discussed factors above largely contribute to the social factors influencing the Chinese coffee industry. With the rapid globalization, Chinese are exposed to the Western culture through the influx of Western goods in the country. This introduced the Chinese consumers with the lifestyle and culture of the West. The relative affluence of the Western nations has created a deep impact in China by instilling in their mind the concept of an ideal lifestyle which is Western. Thus, Chinese attribute Western goods with fashion and luxury. It is notable that this trend is even more pronounced in the younger generation who are more exposed to Western culture through channels like media and internet. Western products and culture are irrefutably looked upon by the younger generation (Lee 2004). Technological. Technology has become the major driving force of the global business arena in the past decade and is expected to be in the coming years. Compared to the economic giants like United States, Canada, Australia, Japan, and other European countries, China lags behind in terms of technological advancements. Even though some urban cities recognize the importance of computing devices in the improvement of efficiency, most places in China still remains technologically lacking. However, in general, there has been an increasing usage of internet and mobile phones which has direct implications for the specialty coffee industry. The internet technology has been very instrumental in the social and cultural transformation in the Chinese society. This technology has allowed consumes to interact with individuals from all over the world while exposing them to different cultures. The internet has also become a venue where individuals know what’s trendy and fashionable in the global landscape. This technology is become influential in the consumers’ buying behavior by giving them access to the different product reviews which are submitted by different buyers worldwide. The internet technology has also irrefutably changed the mind of Chinese consumers by influencing their concepts of what is acceptable, fashionable, and trendy. The recognition of the importance of computing equipments and internet technology is also used by business organizations in the specialty coffee industry in order to differentiate themselves from other players. The best example of this is Starbucks which provides internet access to its coffee shops for its customers. Thus, customers can now check their mails and surf the web as a value added feature in the coffee shop experiences. VI. THE CHINESE SPECIALTY COFFEE INDUSTRY IN THE FACE OF SOCIAL AND CULTURAL DIVERSITY The current trends in the Chinese market bring about the creation of social and cultural diversity. When operating in China, business organizations recognize that a single product cannot fully satisfy all the preferences of the different buyers in the country. Thus, they strive to create and offer different products in order to suit the needs of the different market sectors. A publication entitled “The Changing Face of the Chinese Women” identifies the different lifestyle, buying habits, and preference of women in three key cities in China namely Shanghai, Beijing, and Guangzhou. It should be noted that these cities are included in the top five cities in the country in terms of per capita income. However, the study reveals that there are huge disparities in the consumer profile in these areas. In Shanghai, women are described as trendy, sophisticated, brand conscious, and have a high level of preference for Shanghai made products. In Beijing, the emphasis is on intrinsic beauty and buyers are more price conscious looking for higher value for their money through product durability. On the other hand, women in Guangzhou are described as faddish, fashion follower of Hong Kong, time conscious, nonchalant, and are very much inclined in buying imported products (China Statistics 2002). The Chinese market can also be subdivided in to four psychographic classifications which include the riche, yuppies, salary class, and working class. Looking at the descriptions of each category the specialty coffee industry is only opting to capture the first two market segments. The riche are generally described as optimistic, innovators, trend setters, low risk aversion, high preference for foreign goods, and is engaged in wheel and deal, dines in exclusive clubs and has frequent shopping binges. Yuppies, on the other hand, are hopeful, early adopters, opinion leaders, has moderate risk aversion, bust work schedule, and frequent dining out and excursions (China Statistics 2002). In response to the social and cultural diversity in the Chinese specialty coffee market, industry players have highly concentrated their effort in the creation of a marketing mix which will only appeal to the market that they specifically want to target. It should be noted that specialty coffee only appeals to the upper and middle class who has ample purchasing power to back their preferences while soluble coffee is for the mass market. There is a clear delineation of the purpose of coffee buying between the salary and working class and the riche and the yuppies. While the former wants coffee for its invigorating benefits the latter go to coffee shops to socialize and be considered trendy and fashionable. The marketing mix of the players in the China specialty coffee industry is appropriate for the image and the position that they want to project in their target market. In terms of product, companies strive to offer Western coffee products in order to emphasize their quality and enhance their effectiveness as a statement of fashion. It should be noted that business organizations are identifying coffee cultures which are unique to the Chinese market. For instance, “Chinese coffee lovers pay more attention to presentation than those in the West and have penchant for elaborate latte art” (Nillson 2007). Chinese also prefer siphon pots and they put a high value on the freshness of coffee. Thus, while Westerners are more inclined to brew a large pot of coffee, Chinese prefer to make coffee in cups (Nillson 2007). In terms of price, industry players have become very much effective in attracting only their intended markets. The price of specialty coffee in China averages at 12RMB which is too much for an ordinary citizen who can purchase tea or soluble coffee at a fraction of the cost (Analysis: The Chinese Coffee Industry 2003). This pricing strategy even enhances the value of specialty coffee as a statement of fashion. Specialty coffee shops promote their products not through the employment of media but usually through word of mouth marketing where customers speak in behalf of the products of the business organizations. This strategy has been very much effective in the specialty coffee sector as it creates an image of quality. Employing word of mouth also attracts more potential buyers than commercial advertisements. It is mentioned above that China is remains highly unsaturated in terms of number of coffee shops and the scope of coverage. It should be noted that outlets are only located in key urban cities in China while the rural areas remain largely untapped. This, in turn, limits the scope of the target market of the specialty coffee shops. However, this also symbolizes that companies are attuned to the different purchasing capability of the Chinese customer as they only choose to locate in areas where buyers have high purchasing power. In order to emphasize the sense of trendiness and exude the Western ambiance, business organizations also strive to decorate their shops with furniture and lightings like that of the Western tradition. The China specialty coffee industry, in general, is efficient in addressing the social and cultural diversity issues that it current face. Recognizing that Chinese customers have different preferences, they capitalize on the employment of different value added features. Not competing head on but focusing only on certain aspects enable them to lay different choices for the diverse market. VII. RECOMMENDATION AND CONCLUSION The China specialty coffee industry is faced with the important issue of social and cultural diversity. With this diversity, industry players have devised various strategies which aim to satisfy the needs of different market segments. The business organizations accomplish this by concentrating in the creation of an effective marketing mix in order to capture only the market segment that they intend to focus on and adding unique value-added features which are not offered by their competitors. In general, the sector has been able to take account diversity in its strategies. However, there is still enough room for improvement for the industry players. As mentioned above, even though some cities like Shanghai, Guangzhou, and Beijing are in the same annual income range, consumers in each city have their own lifestyle, preference, and shopping habits. Thus, specialty coffee shops should not employ a single strategy to capture all the cities but rather make the distinctions in the profile of the different buyers apparent by taking these into account through their strategies. For example, as Shanghai customers are brand conscious, efforts should be focused on enhancing the brand equity of business organizations through a more intensive and aggressive marketing effort. On the other hand, as Guangzhou buyers are focused on fad and time conscious, specialty coffee shops should focus more on the frequent introduction of trendy coffee products. Furthermore, specialty coffee shops should also prepare themselves for the possible entry of the sector into the maturity stage. Companies should not only emphasize coffee as a statement of fashion but also inform customers of the health benefits of coffee. It should be noted that coffee has more antioxidants than tea. Emphasizing this can also attract customers which are health conscious. VIII. REFERENCES Analysis: The Chinese Coffee Industry 2003, Retrieved 08 April 2007, from http://www.friedlnet.com/news/03031606.html China Statistics 2002, Direct Marketing of Asia Limited, Retrieved 08 April 2007, from http://www.dm-asia.com/en/misc/china_stat/index.php#con De Witt, B. and Meyer, R. 1998, Strategy: Process, Content, Context, 2nd ed., Oxford: International Thompson Business Press. Economy of the People’s Republic of China 2007, Retrieved 08 April 2007, from http://en.wikipedia.org/wiki/Economy_of_the_People's_Republic_of_China LaMoshi, G. 2007, Hong Kong Politics: Business as Usual, Retrieved 08 April 2007, from http://www.atimes.com/atimes/China/FD08Ad02.html Lee, H. 2007, “Coffee brews a future in China?” Retrieved 08 April 2007, from http://www.euromonitor.com/Coffee_brews_a_future_in_China Nillson, E. 2004, “Is Coffee the New Black?” Retrieved 08 April 2007, from http://www.chinadaily.com.cn/bizchina/2007-03/02/content_817845.htm Porter’s Five Forces Model 2007, Retrieved 08 April 2007, from http://en.wikipedia.org/wiki/Porter_5_forces_analysis Strategic Management, Strategic Management Journal, Vol. 11 pp.171-195 Thompson, J. 2002, Strategic Management, 4th Edition, London: Thomson Read More