Advertising Coffee in China - Case Study Example

Advertising coffee in China The Asian market for coffee has emerged as the largest in the world. Recent market trends suggest that the Asian market will contribute almost 90% of the world’s volume growth in coffee, with China expected to dominate this market. (www.coffeefestivalchina.com). During the 1980s most coffee in China was imported, by 1997, the Mainland was producing 3,573 tons of coffee and this jumped to 11,568 tons by the year 2000 (www.friedlnet.com). Research in China has shown however that most of the consumption occurs among the more affluent, Westernized sections of Chinese society, with instant coffee dominating the market. For the locals, coffee is still a relatively new drink and their consumption if any, thus far, has been limited to instant coffee. Tea has been the staple drink in China for a long time, but coffee is making inroads into the market, largely driven by a growing, affluent middle class that is receptive to western tastes. In the middle kingdom, per capital consumption remains low and tea consumption is still dominant, but there is plenty of scope for expansion of coffee into the market (www.friedlnet.com). This Report will assess the best potential strategy that a coffee company could adopt in order to adapt to the existing market trends in China. The case study chosen for this Report is Starbucks and how it could improve its marketing potential in Shanghai. The hypothesis of this study is that Starbucks could benefit from capitalizing on its fashionable new lifestyle image and worldwide reputation to improve coffee sales and establish itself firmly in the Shanghai market. Starbucks: Starbucks is a retail coffee outlet that emerged as one of the Fortune 500 companies in 2003. It has been pursuing a strategy of international expansion in order to promote growth. This is because while the domestic American market has offered it the maximum profits so far, this market is being saturated and if the Company is to continue to experience growth, it needs to expand internationally As pointed out in an OXFAM Report on coffee, 70% of coffee consumption is in the United States and developed European countries, which are OCED countries. Demand has reached a saturation point and there is not much elasticity in demand that may be expected in these markets. On this basis, the less mature markets such as Asia, Eastern Europe, South America and North Africa provide much better prospects for a growth in coffee consumption over the long term, since coffee is still primarily a luxury good in most of these countries (Oxfam Report). Moreover, high end coffee products are still a luxury and a novelty in most of these countries which offer excellent market potential for coffee sellers. But as compared to this, in developed countries, the current recession has impacted upon the sales of high end, speciality coffee products, which have slowed down a little because of the difficulties faced by smaller companies in securing funding.(Merrill, 2009). Despite the slowdown, most companies are still doing well and there is considerable scope for them to expand their business into China to tap into the markets there. The belief in the beneficial effects of free trade that exists today is largely a function of the theory of comparative advantage that underlies the Ricardian model of international trade (Henderson, 1993:827). Comparative advantage is the ability possessed by a particular organization to produce and provide a particular good or service at a lower cost relative to competing goods. Therefore, comparative advantage possessed in one area of production indicates that the country has some favourable factors working on its behalf or has perfected specialized techniques in the production of that good, so that it is able to produce it more efficiently (Mankiw, 2007: 52). Starbucks has been successful in this aspect, because it has been able to acclimatize itself to its host country culture by varying the range and nature of its products. According to Porter (1996:64), “Competitive strategy is about being different.” Porter also states that “Strategy is the creation of a unique and valuable position, involving a different set of activities……different from rivals.” (Porter 1996: 68). Starbucks has already established itself as the leader in the coffee marketplace in China and it has pursued its normal global strategy of opening up many large outlets within one city, despite running losses initially, because this strategy successfully pushes out all competitors already existing in the marketplace. In its entry strategy into China, Starbucks had initially acquired only a 5% stake in ownership, while leaving the rest to its local Chinese partners. But after making its entry into the Chinese marketplace, Starbucks coffee became the icon of a fashionable lifestyle and has produced huge profits for the local Chinese stakeholders. In view of this, Starbucks has now taken steps to increase its stake in its Chinese operations (www.thechinaexpat.com). The objective of the Company is to transform China into its second biggest market, after the United States. In Shanghai, Starbucks outlets sprang up during the 1980s (Wasserstrom, 2008). The menus and the decor of Starbucks outlets in Shanghai are similar to those around the world with the characteristic circular logo of the Company and they are co-existing side by side with competitor tea houses that have been around for a long time. Starbucks outlets have successfully integrated into the city’s landscape; for instance, one has opened right around the corner from the site of the Communist Party’s founding Congress (Wasserstrom, 2008). Where Starbucks in Shanghai is concerned however, the Company has not yet taken steps to acquire direct control of its existing outlets, hence most of these outlets are still run by its China partners. Some of the problems that have been identified at these outlets, which may also impact negatively upon sales, are: (a) mediocre locations (b) lacklustre designs (c) small stores and (d) lack of little extras that please customers. Shanghai has a handful of stores but most of them are located in areas that are somewhat out of the way and not frequently trafficked. Lighting is lacking in many of the stores, with seating and layout lagging behind those in other cities such as Schenzen (www.thechinaexpat.com). Starbucks stores in Shanghai are also smaller than normal Starbucks outlets, which normally offer the customer an experience of spaciousness and casual comfort that may be missing in Shanghai’s more cramped outlets. Suggested potential strategy for successfully marketing coffee in China: The case study example that is being used in this study is Starbucks. The objective of this Report is to assess how Starbucks could improve its marketing strategy to boost sales. With the current recessionary trends, sales of all consumer products have been affected and coffee is no exception. Furthermore, one of the major problems posed to boosting sales is the competition offered by tea consumption in China, although coffee is already becoming popular in the country. It would be a good strategy for Starbucks to focus upon reaching the younger segment of the Chinese population, hence its advertising and marketing strategy should be geared towards this section of the public. With increasing globalization and the emergence of China as a major player in the global marketplace, especially during the current recession, there is a higher level of transfusion of western ideas and culture into China, especially in cities such as Shanghai. This is especially so among Chinese youth, who through the medium of the Internet, have been placed in touch with a global community. Since American music and culture are a big draw with the youth in China who are gradually being exposed to elements outside the traditional structure of Communism and thereby being freed from its restrictions, the stores could feature many of the symbols of American culture that are popular abroad. The advertising for Starbucks retail outlets should present it as a successful American icon, a ubiquitous symbol of American culture. Products such as burgers and hot dogs could also be offered at Starbucks outlets. This is likely to prove to be a strong draw for the younger generation. Starbucks could also consider setting up entertainment centres within its retail outlets, where extra large television screens could broadcast videos of American pop stars such as Eminem, Christina Aguilera, Justin Timberlake and other popular stars of today. Music is an integral part of youth culture and China has been experiencing a trend for increased number of bars and dance spots where rock bands play. While Starbucks cannot convert its outlet into a dicso, nevertheless, the music lends an ambience and atmosphere of youth which will attract Chinese youth. While retaining its no smoking policy at its outlets, Starbucks could however offer smoking outside by placing tables on the street where patrons can enjoy coffee and smoke as well, thereby tapping into a segment of the population that might have otherwise been excluded. Starbucks could also offer its health variety of hot drinks and cold coffee to appeal to health conscious people. The health benefits of green tea are well known and it has been a staple drink in China for decades, hence Starbucks marketing strategy must be directed at promoting coffee as a healthy alternative, by offering its healthy options of the drink. This is likely to attract the older demographic segment of the population, who may be more resistant to the notion of Americanization. Marketing specialty coffee products offers another viable alternative to improve coffee consumption. In colder countries such as Bulgaria for example, analysis of the coffee industry has revealed that the most popular hot beverage in the country is coffee, accounting for 90% of sales and Euromonitor’s Reports reveal that there is a growing demand for specialist coffee shops in eastern Europe (Merrett,2006). According to the Euromonitor report, the reasons for the growing demand for coffee in Bulgaria have been summarized as follows: “The reason for the increase in the number of specialist coffee shops outlets was that these places became more popular as meeting places for young people and because the sub-sector was previously under-developed.” (Merrett, 2006). This would also apply in China, especially in its cities where cold weather stimulates the consumption of hot drinks and where the youth are likely to appreciate a place like a Starbucks coffee shop where they can meet to discuss political and social issues of the day. Since specialist coffee products are a relative novelty in Chinese markets, including Shanghai, the Company could also benefit from being a First Mover in the market, because other Companies have not so far ventured into the specialist coffee market. Some of the advantages inherent in being the first mover in a business opportunity are (a) technological leadership (b) pre-emption of assets and (c) buyer switching costs (www.pearsoned.co.uk). However, there are also disadvantages associated with being the first mover, notably market uncertainty and shifts, as well as incumbent inertia and free rider effects. Starbucks is fortunate in some aspects that it is not the first entrant, because it has not been subjected to market uncertainty and its coffee has already gained popularity among the Chinese public. The Company could thus use its existing base in order to further build upon sales by offering coffee variants, health related products and specialty coffees. Conclusions: In view of the discussions offered above, it must be noted that Starbucks has already established itself in China and has been enjoying considerable popularity. But the Shanghai outlets are less well designed and located as compared to other Chinese cities, hence this may be one of the first aspects that would need to be addressed, if marketing is to be successful. Starbucks has a certain kind of layout that all its stores follow, i.e, a wide and spacious one, where people can not only drink coffee but also engage in other activities such as internet browsing, reading, etc. The Shanghai locations in comparison are cramped and located in less populated areas, which cuts into its business activity. Hence, these locations may need to be revamped, with internal decor being improved in order to make them more attractive locations for people to visit. It may also be necessary to advertise well, so that people who would not normally frequent the areas where the outlets exist are encouraged to pay a visit and sample the products. Since most of the Starbucks outlets in Shanghai have been owned by Chinese business partners, Starbucks needs to actively pursue its strategy to take over a higher ownership stake, so that it can improve operations, advertising and promotion to increase the flow of traffic. In the current atmosphere of recession, it may also be necessary to offer incentives such as lower prices or promotional features in order to encourage people to spend their money at Starbucks outlets. The Company is also likely to benefit if it offers healthier products because it could then capture the higher segment of the upper middle class, affluent market where people are more health conscious and are willing to spend more money in order to consume healthy products. Targeting the younger segment of the population is also likely to prove beneficial in improving the Company’s sales. In China, this segment of the population generally comprises Internet savvy people who are enjoying strong employment prospects in a globalized economy that largely relies upon the electronic medium for most communications. As a result, they are likely to be wealthier than other segments of the local population and can be targeted in Starbucks’ marketing strategy, by promoting the Company as an American icon and offering various symbols, entertainment, etc to attract them. Moreover, it is this segment of the population that is most open to and attracted by western ideas and culture, therefore promoting Starbucks as an American icon is likely to improve sales. In reaching the local population, the major challenge posed to Starbucks will be in promoting the benefits of coffee over tea, especially green tea, which has been consumed in China for decades and is also a cheap drink with health benefits. The best way to improve consumption of Starbucks coffee among this segment of the population is by offering lower prices in order to encourage them to sample the product, while also actively promoting the health benefits that may be also be offered by some of Starbucks’ products. Price advantage is the single factor that is likely to be most important where this segment of the population is concerned, because they may not have such a high disposable income. Starbucks could also consider offering special promotions in order to encourage these people to sample the product. Starbucks could start its entry strategy into these hitherto untapped markets by carrying out pre-entry surveys. It could offer samples of its product to Chinese customers in targeted Mainland areas and find out how popular its product is likely to be if its coffee shop is opened in the local area. Such surveys can also include questions about customer preferences and tastes, such as what they would like in a coffee product that would impel them to purchase it. This will help Starbucks to carry out any modifications in its product offerings to suit the local market. All of these measures are likely to be helpful to the Company in planning its marketing and advertising strategy in such a way as to deal with the problems posed by the recession and the competition from the tea market. References “Analysis: The Chinese coffee market”, http://www.friedlnet.com/news/03031606.html; First Mover advantage. http://www.pearsoned.co.uk/Bookshop/article.asp?item=312; Henderson, David R, 1993. “David Ricardo”, The Fortune Encyclopedia of Economics. Mankiw, N. Gregory, 2007. “Comparative Advantage: The Driving Force of Specialization.” Principles of Economics. (4th ed) Thomson learning Merrill, Curt, 2009. “High end coffee business slows during recession”, CNN.com, http://edition.cnn.com/2009/US/04/20/coffee.recession/; OXFAM Report: “The Coffee Market: A Background study” [online] available at: http://www.maketradefair.org/en/assets/english/Background StudyCoffeeMarket.pdf Porter, M.E., 1996. “What is Strategy?”, Harvard Business Review, Nov-Dec.: 61-78 “Starbucks buying out China partners”, The China Expat, http://www.thechinaexpat.com/starbucks-buying-out-china-partners/; “Starbucks in China: Shanghai branches”, http://www.thechinaexpat.com/starbucks-in-china-shanghai-branches/; “The Sixth China International Tea and Coffee exhibition”, http://www.coffeefestivalchina.com/en/; Wasserstrom, Jeffrey N, 2008. “Sipping Starbucks, from Bloomington, Indiana to Shanghai, China”, http://www.worldhum.com/features/speakers-corner/sipping_starbucks_from_bloomington_indiana_to_shanghai_20080128/; Read More