Starbucks

1. Internal Audit The entrance on the Chinese market was a big challenge for Starbucks, especially because Chinese people are famous for their tea drinking habit. With 15,700 retails stores world wide, it was considered powerful enough to compete with tea and eventually change peoples habits. The main strengths of Starbucks are its wide experience in coffee service, in franchise and quality standard follow-up, significant financial resources and expert employees specialized in each domain.

The main weaknesses in an international market mainly consist in its American style of management that could not be implemented easily and successfully in another market such as China, and the other weak point consists in its high prices that would limit the number of clients in the poorer countries to just a small niche of the wealthier people in that area this problem can be seen also in Starbucks difficult development in Romania. By the VRIO framework Value: 15.700 retail stores and 20% increase in sales annually is strong enough to exploit all the opportunities and eventually neutralize threats. Rarity: In China coffee was rare at the time of Starbucks market entrance; it was hard to find good quality coffee. Young and rich couples, the so called petite bourgeoisie prefer good quality coffee and use Starbucks as a social platform. Imitation: Its easy to imitate, but the brand is so strong that the imitation will not have the strength of social belongingness. Starbucks sued a Chinese competitor for stealing the brand name, Xingbake, where xing stands for star and bake sounds like bucks. Organization: Starbucks is using a relationship based strategy by putting a lot of emphasis on its employees. They must be sociable people, capable of easily building relationships with customers. Also, in order to keep them loyal, the company is giving them above average wages and the opportunity to buy Starbucks shares.

2. General Environment China has become the second largest economy after the US in 2010 even though this was predicted in the reading to happen only around the year 2050. With over a billion people, this is a rapidly increasing market, with high potential for foreign investors. The country easily opens to the western culture, especially through its young people, young couples who have high purchasing power. Starbucks targets these people and invests in the richest regions of the country. The coffee market wasnt developed in 1999 when Starbucks decided to enter China. Chinese people were used to cultivating and drinking tea and due to the climatic conditions it wasnt worthy to cultivate coffee. However in the Yunnan province there appeared some coffee plantations and since they seem to grow rapidly, maybe in a few years China can become a second Jamaica. Coffee sales increased with 90% between 1997 and 2003 and they are still increasing. Competition is present, the Taiwanese company, Gourmet Master wants to increase their store number with 600%. Recently the 400th Starbucks bar was opened in the inland making the Chinese market the second largest Starbucks market after the USA.

3. Rivalry on the Chinese beverage market First of all, we find the Chinese beverage market extremely attractive for Starbucks given that in the past years people have shifted consumption towards coffee in the detriment of the icon Chinese beverage, the tea. Tea was for many years a means for social interaction, with well-known healing properties and having the advantage of being internally cultivated in China. On the other hand, coffee was difficult to produce, thus leading to high selling prices and need for importation. CHINESE BEVERAGE MARKET (1999 & 2007)

CSDs = Carbonated Soft Drinks

FVB = Fruit and Vegetable Beverages

In the graphs above it is easy to notice the changes that occurred on the Chinese beverage market from 1999 to 2007. There is clearly a huge potential for coffee merchandisers because Chinese people started to get bored with tea and began experimenting with the rest of the beverage options. Since coffee and tea can be substituted there is a fierce competition between the two and Starbucks may take advantage of this to seduce Chinese customers with its posh image backed by the uniquely blended flavors of premium quality coffee beans. The recent entry of multinationals on the Chinese market is providing potential customers for Starbucks by creating a new middle class of working people earning decent wages. In the same time, a new wealthy category of young people has emerged, called the petty bourgeoisie. They embrace Western products as a way of showing-off their social position and Starbucks managed to capture this not-so-exploited potential. Another reason for Starbucks success in the land of the rising sun is due to the lack of local coffee producers. There is only one potential local competitor, named Li Shen. Also, Starbucks well-established network of coffee suppliers gives the company a competitive advantage over the rest of the players. Starbucks even supplies itself coffee beans to local coffee houses. 4. Strategy for the future Howard Scultz, the Chairman of Starbucks, decided to expand internationaly by forming partnerships with local operators. This, in my oppinion, has been the best posibile solution because in 1999 when the company decided to enter China, the country was not even a member of the WTO yet. An investor-licence was needed in order to conduct business and most of the 3

times it required governmental bribes to be obtained. By entering in partnership with a local firm, Starbucks mitigated its risks and benefited from the experience of a successful chinese business man who also happened to be the man who brought McDonalds to Taiwan. Starbucks strategy went against the normal practices. Instead of concentrating on placing the stores based on demographics, traffic paterns, the location of competitors as well as the location of its own stores, Starbucks decided to saturate the market by basically creating a blanket of stores in the area in which it decided to enter. What makes Starbucks strategy all more amazing is the fact that the company spends less than 1% of its annual revenues on advertising, versus the typical 10% of most other retailers. Instead, Starbucks believes that if the customers are satisfied they will not only keep coming back for more but they will tell all their friends and family about it, too. The Starbucks strategy has always involved thinking outside the box. They always came up with new initiatives, such as the new line of bottled frappucinos, the new line of hot sandwiches and breakfast food or the alliance with Pepsi-Cola Co. They are also expanding online, allowing customers to pre-order and pre-pay for products via Internet. The most recent brand development inside Starbucks is the redesign of its logo. The words Starbucks and Coffee have been taken out thus expressing their intention to move beyond its core product. Starbucks revealed the logo Wednesday (06 January 2011) to a cheering crowd of employees in its Seattle offices and on a webcast and plans to bring it to stores in March to coincide with the company's 40th anniversary.

In our oppinion, in order to stay successful Starbucks must keep innovating. This is the only way to remain a cool company both in the eyes of the chinese customers and in the eyes of the rest of the world. In China, it will be a particularly difficult quest for increasing the market share, since the 5000 year old tradition of drinking tea wont be forgotten just because an American company offers Chinese people good coffee. The click is not in the product, but rather on what it stands for and drinking coffee has become an attitude, something trendy and western. In our opinion Starbucks must constantly keep its customers guessing and to do so, they should perform some marketing researches with the purpose of learning what the Asian customers are expecting from this brand in the future. Nevertheless, Starbucks success will depend a lot on whether or not the inequalities between Chinas classes will be reduced in the coming years. If the country will keep 4

developing at the pace of today, it will mean that more people will afford to pay 3-4$ for a cup of coffee and Starbucks overall market pie will increase consequently increasing its total sales. Also, when looking at the current economic context governed by the financial crisis, one cannot fail to notice that China is one of the less-affected countries. While Europe and the US are not capable of making their meets end, China seems to always have cash on hand when investment opportunities arise in the Western world. Not only do they own a significant percent of US treasury bills, by recently China announced its availability to help Europe in its strive to keep the common currency alive. To conclude, we think that China is the right place for Starbucks if their objective is to enhance sales. In a few years, this communist economy may surpass the American one, and there will be clearly room for some additional trendy coffee houses. However, if Starbucks is looking to make the Chinese leave behind their tea tradition in exchange for American coffee, they will be disappointed. The Chinese are proud of their customs and history and they will never let go completely of their traditional tea.

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