Starbucks in China – I Got It Wrong Too

February 13, 2012

Shaun Rein has a feature on Starbucks’ China success for CNBC. For regular China watchers, the lessons here should be familiar (hint, the reason is localization), but for folks who are not yet in China or are looking to expand operations, the article might give you a few things to think about and perhaps emulate.

Two things struck me when I read the article. First, Shaun and I somehow had the same reaction to Starbucks market entry back in the day:

About 14 years ago, I met an entrepreneur who wanted to open up coffee shops around China. I never thought the coffee business would work there. The Chinese would not easily give up their tea-drinking culture for a bitter, overpriced drink, I told him.

Me too. When I first started working in Beijing in early ’99, Starbucks had already arrived, and it’s first unit was a stone’s throw away from my office. I remember thinking at the time that there was no way coffee was going to go mainstream in China.

One of the reasons for this was that my office had coffee that was free to staff, and aside from the expat lawyers, no one else drank it. Back then, the coffee drinkers were foreigners, while Chinese staff for the most part drank tea. Very few exceptions, and those were limited to young Chinese who had studied overseas and developed a taste for coffee.

Moreover, Starbucks prices were, and remain, really high. Five bucks for a medium cappuccino doesn’t work for me. I should disclose at this point that I’m personally not a big fan of Starbucks coffee. I brew my own at home these days, and when I lived in the U.S., my commuter coffee of choice was Dunkin’ Donuts.

The second aspect of Shaun’s article that jumped out at me was the absence of any discussion about the product itself. I don’t mean to say that the focus on localization is incorrect. Indeed, I agree with Shaun’s points regarding Starbucks’ pricing strategy, physical environment of its units, etc. This is all true. Starbucks occupies a high end of the market, is generally a convenient and comfortable place for meeting business associates, and is a pleasant place to spend time.

But if he had additional space for the article, it would have been interesting to include something about the product itself. When I think about the overall success of coffee in China, I often wonder if there is more to the story, an issue that doesn’t really have a place in a typical business strategy discussion. Starbucks has made a lot of good decisions here, but I think that if they were pushing another product, things might not have gone so well. Hard to prove a negative of course, but bear with me for a moment.

Coffee has taken the country by storm in a relatively short period of time. It’s also been welcomed across the globe (as did tea, hundreds of years ago), with some exceptions. Is this all just good marketing and business strategy?

I think you have to factor in caffeine. I think human beings crave stimulants like caffeine, and only having one choice of hot caffeine (tea) isn’t enough in some countries. Moreover, we also like to drink our caffeine cold/room temperature (e.g. cola). Cola is a weird beverage taste-wise; why has it done so well?

As a longtime addict, I believe this part of the coffee story needs to be mentioned.

But I think there’s even more here to talk about than an addictive substance. Think about the relative success of KFC vs. burger chains in China. Yes, lots of kids here eat burgers these days, but fried chicken seemingly appeals to Chinese palates much more than sandwiches. I don’t think that has anything to do with addictive chemicals, and yet I’m not sure that just saying “it’s cultural” is a sufficient explanation.

Perhaps sometimes we, as biological organisms, are just attracted to certain kinds of foods. We obviously have a predilection for caffeine. We also love our alcohol, which has been around since the Agrarian Revolution thousands of years ago. As soon as we started cultivating crops, we turned some of the harvest into goofy juice. That’s just the way we roll.

We also love our processed sugar and fat. In fact, research seems to indicate that this is hard-wired into us. That’s one reason why we love us some fried chicken. Part of it is cultural, and some of it may very well be biological.

I suppose we shouldn’t be surprised either that milk chocolate, which contains both caffeine and a lot of fat, seems to be another one of those universal foods that has taken the world by storm over the past four hundred years or so. (I’m also addicted to chocolate, by the way.)

As time goes on, I’m beginning to wonder whether pizza belongs on the list of universal foods as well, but I think that’s a tougher argument. The whole dairy food story is complicated (consumption of dairy is on the rise here as well) and fascinating in its own right. Apparently the evolutionary origins of human consumption of such foods is also linked to the rise of agrarian societies.

To sum up, I’m not trying to take anything away from Starbucks and its smart China strategy. Shaun’s observations are well noted, and the lessons listed there should be taken into consideration by other foreign investors. Others have tried to peddle coffee here and failed miserably.

On the other hand, Starbucks came into the China market with no real competition and introduced a product that was an alternative means of ingesting a chemical substance that Chinese already consumed in great quantities. Although I didn’t think about it in those terms at the time, that sounds like a nice business opportunity even before we get to issues like localization.

This also suggests that the competition in the early years (I know that Dunkin’ Donuts had at least one unit here in Beijing for a time, in a really bad location) missed a terrific opportunity.

So I misjudged the whole coffee thing at the time. What’s next?