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Starbucks: Grinding away at China’s tea culture?

by CKGSB Knowledge

November 3, 2010

For thousands of years, the teahouse has served as the quintessential hangout for the people of China, starting from the Tang Dynasty and continuing through to the late 20th century. However, the younger generation has embraced coffee as the new tea and Starbucks is now the destination of choice. With China’s rapid rise and newfound love of the cosmopolitan lifestyle, why hasn’t China come up with a Starbucks of its own to take not only the country, but perhaps even the world, by storm?

If you walk into any Starbucks in China this holiday season, you will find them filled mostly with locals – not foreigners – and surrounded by imported Christmas decorations, Western music and coffee blends.

Starbucks first entered mainland China in 1999 and rapidly expanded their business to more than 500 outlets in the last 12 years. It found its place on busy street corners and gained the loyalty of tens of thousands of customers as an enduring symbol of status and trendiness in China.

Is coffee the main draw or are there other factors to consider? Many Chinese people are, in fact, not coffee aficionados, and it is rare to find any Starbucks customer who is over 40 years old.

“People go to Starbucks not just for the cup of coffee,” says marketing Professor Zhao Hao from the Cheung Kong Graduate School of Business (CKGSB). “In China, probably despite the cup of coffee, people still go to Starbucks to enjoy the experience and lifestyle.” It is the image, status and lifestyle associated with Starbucks that attracts consumers to their coffee shops and keeps them coming back for more.

According to Starbucks, each shop is a public space, “a haven, a break from the worries outside, a place where you can meet with friends”. One goes to Starbucks to see and to be seen. There, you can find people from all over the world holding the latest smartphones, using Apple laptops, and talking in different languages. To many, holding a Starbucks coffee cup signals that you are international, well-educated and successful.

Most Chinese teahouses, on the other hand, prefer private rooms over general public space. Customers spend their time out of sight, but in a culture of status, an image without an audience means nothing.

With no existing chains in China, individual privately owned teahouses are struggling to offer consistent service and a product of sufficient quality. While some may be rich in culture, they fail to put lifestyle, experience and fashion on the table, which is the key to attracting customers of the younger generation. Chinese people undoubtedly love their tea, but it will take much more than just a fine cup of pu’er tea for the traditional teahouse model to compete with Starbucks.

According to Zhao, the reality is that Chinese people trust foreign brands more than local ones when it comes to the guarantee of quality and safety. They also provide a taste of the West, conveying status and the image of a fashionable lifestyle for those Chinese consumers that are willing to pay for them.

Starbucks offers standardized products and service. Customers can expect the same beverage and a similar experience regardless of location in any area of China. This isn’t the case when it comes to teahouses. First-time customers won’t know what kind of price or service they will get before entering a tearoom. It is also possible that they will pay for a more expensive tea than what they will actually receive.

Because of the lack of standardization, the quality of tea and service varies wildly from one teahouse to another. Currently, there is no single brand or chain in China that can offer the same kind of consistency that Starbucks strives to maintain.

Branding does not come cheap, however, and any standardized chain in China needs a great deal of investment and expertise. According to Zhao, advertising on national TV costs a fortune and R&D can quickly eat into profit margins.

Zhao notes that Procter & Gamble lost money for seven years when it first entered the Chinese market, but few Chinese companies can survive without profit for even just a year.

“At this stage, a lot of Chinese companies are trying hard to improve product quality,” says Zhao. “It is not easy. But we need to go beyond that, to create image, experience and the whole package.”

Perhaps one day China will see the return of its teahouses to busy street corners, but for now, the Starbucks empire in the Middle Kingdom continues to prosper.

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