Marketing mix analysis for Starbucks Coffee

The aim of Starbucks was to give the customer more than just a cup of great coffee. They wanted it be a life experience, an experience that customers would like to continue and make it one of their routine functions. Upon this uniqueness they managed to capitalize as a brand and establish themselves as one of the world’s most recognized and respected brands.

Product

To be a premium product in the coffee trade, they aim at high standards, introduction of innovative products and providing excellent service combined with unforgettable experience. Its product-mix expanded from 8 main categories of drinks types and 7 food categories (Starbucks web) to keep up with the momentum and to satisfy more customer needs. They have been constantly introducing new products, such as four new “VIA flavored coffees” (Erin V, 2010), and trying to attract tea drinkers by introducing “Tazo Tea”. Identifying customer specific needs they introduce nonfat milk to their products. They have seasonal offerings such as strawberry, cream Frappuccino in the summer and gingerbread latte in Christmas (News, Starbucks web). Going little beyond, they also offers Starbucks coffee and cappuccino makers for customer who wish to purchase them (Starbucks store). To ensure brand richness, besides bringing the best ingredients and quality control, they assure that all company’s employees are constantly involved and aware of its overall mission and objectives.

Starbucks specialty is its “specialty” to address particular needs. China is known for its tea history and well routed traditions, which goes beyond thousand years. Starbucks needed to address this particular sensitive spot while introducing their lineup to China. Though they were late in introducing tea in their outlets, they adopted brand localization or “go Glocal” as Brand Source would like to state (May 2010) from inception. In China coffee alone would not do – it must go with food (Bolt, K. 2005). Launching its “ice zongzi” and planning to release local products such as Dragon Dumplings with 5 tastes and colors are aimed to ease Starbucks products to the customers along with a Chinese touch.

Price

Usually price and quality determines the value of the product. Starbucks always tried to deliver high value to the consumers by buying quality beans, assuring that their staff got effective & efficient training, and mostly, creating an environment to enjoy coffee. For this, Starbucks’s customer had to pay more; it was expensive.

To keep the competitive edge, the company also began to offer $1 bottomless cup of coffee, which can be refilled any number of times and 50 cents less than any other Starbucks products (Nico, H., 2008). As the Starbucks news site sates, the company is also trying to implement other value added services like, introducing $3.95 “breakfast pairings,” which includes breakfast items along with a coffee (2010). This is to target the price conscious customers.

In China, by local standards, Starbucks is a luxury. They never wanted to decrease their prices to China when they started. Coffee is not grown in China at large scales – at least not the Arabica beans. When comparing prices to USA, it varies between products depending from where the materials were obtained (locally or imported). For example, a “tall latte” sells for $4.50 in China where it is $3.50 in the US (Dan, 2010). A “grande latte” costs $3.75 in US and $4.10 in China (Rabinovitch, 2009). Rabinovitch continues saying that these price difference are also subjected to Yuan being undervalued and US$ fluctuating frequently (2009). All these justify Starbuck’s high pricing and show how such positioning supported their products to gain and maintain upscale image attached to its brand.

Place

Mostly Starbucks is in to direct supply channel (producer to consumer). With their line of vision such practice is important and it helps to keep a personal relationship with the customer. In US, particularly Starbucks can be found in any neighborhood where there is a potential high traffic for its stores – especially with “Coffee bar” concepts. Outlets can be found in various large chains. Their primary goal is to locate them in highly visible locations and opened them in clusters. It was the ideal place for the individuals who are on the go, who enjoy music or even looking for a break in a busy lifestyle.

By opening “stealth outlets” – street names instead of Starbucks, they attempt to carry out their “localize” projects further (McLaughlin, 2010). Along with the growing demand, they were able to manage the increased traffic and to keep their competitive edge. Starbucks invested heavily on training their staffs – ensuring and aiming high on customer satisfaction.

In China it was bit difficult task. Though the stores have the same characteristics as in US, China being a culture oriented and having negative reactions towards coffee, they had to place their stores in more exposed areas – such as Beijing, where local people would have being exposed to foreign elements compared to suburbs. As China opens up its economy, Starbucks strategically tries to expand its chain to suburbs as well.

Promotion

Their main strategy was not to spend money largely on advertising. In 2007 only 16.6 million compared to McDonald’s 727.7 Million (Brand Autopsy, 2007). Instead, they used the extra cash on acquiring the best spots. Before opening a new store, they organize big community events highlighting each locations personality (Community service, Starbucks web). Further such information was imprinted on mugs and t-shirts as promotion activities.

They also established “smart partnerships” with already known local representatives who would act as local ‘ambassadors’ to promote their brand (Vote for us)

They introduced Starbucks Cards; aiming their valued customers to promote its products. While buying a gift card, the customer is not only shows brand loyalty, but it also provides free advertising, attracting new customers. They do deliver their services to offices without size restrictions (Starbucks web). Expanding their product mix, they ensure that they are appealing to a diverse customer base. Starbucks also contributes to non-profit organizations as a way to improve brand image and awareness in local communities.

Apart from the above, Starbucks strategy in China concentrated to capitalize on their localization methods, Xingbake – the Chinese name given for them (Loveland, G. 2010). Producing items with local influence, like dragon dumplings with 5 colors and taste signifying 5 blessings, and introducing Tea was in line with the said strategy. Internet promotion such as “Meet me at Starbucks” were also introduced (Loveland, G. 2010).

Additionally they tried to create a “third place” concept for Starbucks, a place between home & office for the customers (Harrison, J. ait al, 2005).

Kotler, P., Keller, K., Koshy, A., & Jha, M. (2009) Marketing Management. 13th ed. Delhi, Dorling (India) Pvt. Lt.d., Licensees of Pearson Education in South Asia.

Erin, V. (Oct 2010) ‘Perfect Your Starbucks VIA Flavored Coffee Experience’,

http://www.starbucks.com/menu [accessed 16 Oct 2010]

‘Super Automatic Gran Dama Espresso’, The ultimate home expresso machine,

http://www.starbucksstore.com/coffee-machines/ [accessed 16th Oct 2010]

‘Starbucks continues brand localization in China’ (May 2010), Brand Source,

http://www.labbrand.com/brand-source/starbucks-continues-brand-localization-china [accessed 16 Oct 2010]

‘What Chinese tea at Starbucks means for Western brands in China’ (April, 2010), Brand Sources, http://www.labbrand.com/brand-source/what-chinese-tea-starbucks-means-western-brands-china [accessed 16th Oct 2010]

Hines, N. (24 Jan 2008), ‘Starbucks attacks competition with the $1 bottomless coffee’ The Sunday Times.

http://www.timesonline.co.uk [accessed 16 Oct 2010]

‘Coffee and Breakfast Make a Great Pair’ (Mar 02, 2009), Fact Sheet: Breakfast Pairings for $3.95 http://news.starbucks.com/ [accessed 17 Oct 2010]

Starbucks Marketing Strategy Unconventionally Effective,

http://www.voteforus.com/starbucksmarketingstrategy.html [accessed 17 Oct 2010]

‘Starbucks Market Share and Media Spend’ (Jan 2007), Brand Autopsy Marketing Practice

http://brandautopsy.typepad.com [accessed 19 Oct 2010]

Lee, S. (Nov 2007) ‘Are Starbucks’ Prices Too High?’, Customer Think

http://www.customerthink.com [accessed 17th Oct 2010]

Dan (18 Mar 2010) ‘The China Price. Low, Lower, Lowest And Incredibly High’, China law blog

http://www.chinalawblog.com [accessed 16 Oct 2010]

Rabinovitch, S., (25 Sep 2009), ‘Starbucks and the overvalued Yuan, Changing China – giant on the move’ Reuter, http://blogs.reuters.com [accessed 17 Oct 2010]

McLaughlin, M., (28 July 2010) ‘American-style coffee houses: Out of steam?’ The Scotsman,

http://thescotsman.scotsman.com [accessed 16th Oct 2010]

Loveland, G., (2 Julm2009), ‘Starbucks China launches internet promotion to lure customers’,

http://www.examiner.com [accessed 16 Oct 2010]

Harriosn, J. ait Al (May 2005), Exporting a North American concept to Asia: Starbucks in China,

http://www.entrepreneur.com [accessed 18 Oct 2010]

Bolt, K., (16 Jun 2005) ‘Starbucks adjusts its formula in China’ Seattlepi Business, http://www.seattlepi.com [accessed 17 Oct 2010]

Lee, H., (29 Jul 2004) ‘Coffee brews a future in China?’ Euromonitor Archive,

http://www.euromonitor.com [accessed 16th Oct 2010]

Q2 – Segmentation

“Coffee is a Western concept to most Chinese consumers, who associate it with Western lifestyles” (Lee, H. 2004). Hence, it is understood why coffee consumption is highly concentrated in large cities where the consumers are most exposed to Western influences and trends.

Customer Segments:

Westernized Young Professionals (WYP) – Who are young, adventurous, open-minded, earns good salaries, urban consumers. I believe this is the main target for Starbucks. An article by Xinhua News Agency reveals that in the year 2007 Chinese college students were estimated to be 25 million where most of them would have started going to jobs by now. Even if you consider 5% of this to fall under WYP category, which results to 1.25 million, is a huge number. Members who fall into this segment admire western cultures and tries to apply the same to their lifestyles. Starbucks definitely provides a certain level of class linked to western cultures.

Returnees from West (RFW) – People who are returning from western countries (workers, students). They could be coming for a vacation or even on permanent basis. According to Lam, out of the 270,000 students expected to go for foreign education this year 25% is expected to come back. Nationalmaster reveals that 0.294% immigrants as a percentage of total population to China (2010). These people are accustomed to drinking coffee and even Starbucks. They (would) like to continue with the same experience even they have returned to China.

Foreign Ex-pats (FEX) – China’s high growing economy attracts many investors (especially from west) who will be in China on a long or short term basis. According to a study by Sirva in 2006, about (estimated) half a million expatriate population exists in China – which is expected to increase 50 percent in the following year. Most of these expats are also familiar with drinking coffee in cozy environments. Going to a Starbucks in China would give them the homely feeling though they are far from it.

Lam, W., (10 Aug 2010) ‘China’s thinkers pack and go’ China Business

http://www.atimes.com [accessed 18 Oct 2010]

Bolt, K., (16 Jun 2005) ‘Starbucks adjusts its formula in China’ Seattlepi Business,

http://www.seattlepi.com [accessed 17 Oct 2010]

Greater China, Starbucks News room,

http://news.starbucks.com/about+starbucks/starbucks+coffee+international/greater+china/ [accessed 17 Oct 2010]

‘A report on Western Expatriate Livability’ The China Urban Index,

http://chinaindex.sirva.com [accessed 18 Oct 2010]

Lee, H., (29 Jul 2004) ‘Coffee brews a future in China?’ Euromonitor Archive,

http://www.euromonitor.com/Coffee_brews_a_future_in_China [accessed 16th Oct 2010]

Immigration, China,

http://www.nationmaster.com/red/country/ch-china/imm-immigration&all=1 [accessed 16 Oct 2010]

‘Expatriates in China’ Chinese Society,

http://cero11.cise.ufl.edu/~webmaster/Learning_Modules/SOC/content/SOC_expats.html [accessed 17 Oct 2010]

Kotler, P., Keller, K., Koshy, A., & Jha, M. (2009) Marketing Management. 13th ed. Delhi, Dorling (India) Pvt. Lt.d., Licensees of Pearson Education in South Asia.

‘China has 25 mln college students’ (18 Oct 2007) Xinhua News Agency,

http://www.china.org.cn/english/China/228657.htm [accessed 18 Oct 2010]

Q3 – Product position map

For this particular exercise I would like to consider a cozy, relaxed environment factor with price.

Starbucks (¯) : Is becoming the most dominant coffee chain in China. Average cost per person: CNY 35 (Cafes in Beijing, 2010). But held the 11th place in market share by Mintel (2010)

Competitors

Coffee Bean & Tea Leaf (¢) : Average cost per person: CNY 40 (Cafes in Beijing, 2010). It was place 3rd by Mintel when market share is considered (2010).

U.B.C. Coffee (±) : Mintel placed this Taiwanese chain at 12th position when it comes to market share. Average cost per person: CNY 55 (Cafes in Beijing, 2010)

Perceptual Map

China being Tea country (Still), coffee companies have to provide something special to capture the market. It is clear when you look at the above map that most of the companies have to offer specialty service to gain customers.

Tea is cheap compared to coffee. It is impossible to compete with tea with specialty coffee. That’s why instant coffees take a major place (market share) in China. They serves majority of the population where the target is low price and with somewhat quality to compete with tea.

The earning of the FEX (Foreign expats) is high and they are looking for quality lifestyle. Outlets that represent something from west – a homely touch would definitely attract them. Hence they are prepared to pay extra, thought the quality of the coffee could be same. It justifies why they are placed at both high ends.

Though the young professionals who prefer western trends, they are not equally well off with salaries when compared to expats in same range. Hence, price factor plays a bit of a role here – though they seek same status and position. China’s governmental legislation promotes only one child per couple, this allows couple with high purchasing power.

Returnees of course are price conscious, they are aware that they will not abide to the same luxuries they are used to while they were in the west. But they are accustomed to such luxuries. While trying to balance between re-adjusting themselves to live in China, they won’t mind opportunities to re-familiarize their cozy experiences once in a while.

CRE, ‘China’s Biggest Supermarket Chain Operator, Purchased 80% Stake in Pacific Coffee for $42 Million (29 June 2010) Can Pacific Coffee Out-Brew Starbucks In China?,

http://www.jingdaily.com [accessed 18 Oct 2010]

Kotler, P., Keller, K., Koshy, A., & Jha, M. (2009) Marketing Management. 13th ed. Delhi, Dorling (India) Pvt. Lt.d., Licensees of Pearson Education in South Asia.

Cafes in Beijing (2010), Travel China Guide,

http://www.travelchinaguide.com/cityguides/beijing/dinning/cafe.htm

[accessed 17th Oct 2010]

Coffee Shops in China (2010) Mintel, http://gmn.mintel.com [accessed 18th Oct 2010]

Q4 – Strategy

Officially China became a member of World trade Organization in 2000. It opened China to foreign investments. Having said so, investors – especially from west faced many obstacles – particularly cultural barriers. China being a communist country prevented people from embracing western cultures and ethics with open hands. Since China represents one fifth of the world population, and with double digit GDP rate, investors foresee immense opportunities in China (Trading Economics, 2010). This is the key factor for Starbucks as well. How you convert a Tea nation bind with long history, is another question.

Is China for Starbucks? Yes, I believe so. Considering my immediate target segments above, one can imagine the potential market size.

Ratio

Population

Total Polulation (Jul 2010 est.)

1,338,612,968

Age 15-64

72.10%

965,139,950

Net migration rate

0.00039

522,059

Urban Population (2008)

43%

575,603,576

Literacy

91.60%

1,226,169,479

* Source – World Fact book: China

Whilst providing new strategies, it is important to understand and enhance their current strategies also; whether Starbucks is currently doing things correctly or not in China.

They locate themselves in the correct places attracting the target markets, which is the unique feature of Starbucks. But they have to be careful; it is not the place most people would be hanging around. Their outlet in Forbidden City was closed due to huge protests from Chinese as they believed it was “trampling on Chinese culture” (BBC, 2007). The same resources reveal that it attracted 9 million visitors a year – and Starbucks could have continued if they were willing to sell other stuff as well. From my point of view this could have been a strategic move – though Starbucks refused. In China you are looking at the volumes and cash flow. Starbucks could have adopted a name to suite Chinese culture and accompany other stuffs within their outlets. This could have reduced any direct impact or rejection on their brand name.

Localization. I’m 100% with this idea. When we are rejected or hardly accepted due to cultural barriers, the best thing to do is to add local flavors and set the tone to ease in. Besides offering localized food, they could host cultural events in an active way.

Maintaining the quality of service. This helps any company regardless of the country you are in. Courtesy is one of the key features in Chinese culture – which can be adapted to Starbucks’s as well. We could train the staff within these lines as well.

Serving Tea. This is another great move by them – but they were bit late to introduce tea in their outlets (Yang, C. 2010). According to the same source, only few varieties are introduced. Since China is used to tea, I believe it will be easy to experiment with various varieties of tea than coffee. There are many known, quality teas (besides Chinese) they can introduce. For example, Sri Lanka offers one of the world’s finest teas with many varieties and blends. Sri Lanka & China having similar cultures, the Chinese would accept such products much more easily than western products. Additionally they could enhance the products mix by introducing fresh herbal drinks – linked with Ayurvedic health benefits.

In China Starbucks is not the largest chain (yet). China, having the world’s largest population, is more focused on doing things fast. If we can address this audience, it could be very beneficial for the overall turnover. Instead of large and cozy coffee bars, they can introduce smaller take-way type outlets in strategic locations; for the people who want, but don’t have the time stop and enjoy.

No direct advertising. In China a survey reveals that 48% relay on word of mouth when it comes to selecting and purchasing (Jamsa, P. 2010). Hence the best way is to involve your customers to do the advertising. As they do in the US, they could easily link themselves to cultural events; contribute to local and welfare projects. Chinese are known for their artistic and creativity, we could use the same to host competitions linked with Starbucks specialties and service.

China GDP Growth Rate (17 Oct 2010), Trading Economics,

http://www.tradingeconomics.com [accessed 17 Oct 2010]

China and World Trade Organization (WTO (15 Nov 2000), Ministry of Foreign Affairs of the Republic of China, http://www.mfa.gov.cn [accessed 20 Oct 2010]

‘Forbidden City Starbucks closes’ (14 July 2007), BBC News,

http://news.bbc.co.uk/2/hi/6898629.stm [accessed 18 Oct 2010]

Yang, C. (10 Mar 2010), ‘Starbucks pours on Chinese tea, McDonald’s goes coffee chic’ Global Times http://business.globaltimes.cn [accessed 20 Oct 2010]

Kotler, P., Keller, K., Koshy, A., & Jha, M. (2009) Marketing Management. 13th ed. Delhi, Dorling (India) Pvt. Lt.d., Licensees of Pearson Education in South Asia.

Jamsa, P. (19 May 2010). ‘Word of Mouth bigger than advertising in China and the US’, When digital marketing goes international,

http://digitalgoesinternational.wordpress.com [accessed 20 Oct 2010]

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