Perhaps most well-known for its love of tea, China’s tea culture has been meticulously cultivated for thousands of years. Millions of Chinese drink tea daily; yet, in recent decades, coffee has surged in popularity. China’s domestic coffee industry has enjoyed 15% year-over-year growth over the past thirty years to reach a valuation of over US$8 billion in 2019. Driving the charge are Starbucks and Luckin Coffee, with the most recent reports showing that, as of 2019, the former operated more than 4,700 shops in China, while in 2020, the latter had more than 6,500 locations.
Starbucks and Luckin are excellent examples of how businesses have adapted an American coffee culture to fit the Chinese market. However, both giants have employed vastly different approaches to win market share. Starbucks has localized its coffee shop experience to Chinese consumer sentiments and cultural values, while Luckin Coffee, a later entrant, has instead harnessed technology to improve upon the consumer experience. Though the approaches may vary, one lesson is clear: China is not a “one size fits all market.” Regardless, these companies offer excellent models as to how to adapt a foreign product to the Chinese market.
Starbucks Rethinks Its Market Strategy
Starbucks’ journey in China began with the opening of its first store at Beijing’s China World Trade Building in January 1999. The Seattle-based chain saw an opportunity to capture the hearts and wallets of an emerging Chinese middle class that had a growing appetite for coffee.
While it has held the same guiding value – an acute focus on the coffee shop experience – throughout the years, Starbucks has still adjusted its market strategy over the course of its Chinese operations. At the beginning, Starbucks kept its marketing efforts low-key, instead focusing on store locations with heavier foot traffic that would organically increase brand visibility. However, over subsequent years, the chain broadened its scope and embraced a highly localized marketing strategy, which in turn has paid hefty dividends.
Reviving Tea House Culture
The Starbucks product has never been coffee. Instead, the company has obsessively focused on nurturing a high-end coffee shop experience for its customers; its market strategy in China was no different.
In fact, the giant had a vision of reviving a fading “tea house culture” that had already existed in China for thousands of years. Historically, the tea house in China was a gathering place in which people could relax and chat with families and friends; with this in mind, Starbucks’ Chinese stores were designed with large tables and sufficient space for group gatherings, despite higher rent and location costs. The goal was to foster “inside circles,” a concept that reflects how Chinese culture values the community and group-based social activities, effectively elevating Starbucks to a customer’s third most important location following the home and office by becoming a place that customers could rely on as a preferred social space. Poignantly, though Starbucks is oftentimes a meeting place for small group gatherings in the US, the tea house approach starkly differs from that of the company’s American image which focuses on the coffee shop as a quiet workspace where customers can sip on coffee while getting work done.
Fitting Family-Based Values
In addition to its social focus within the community, Starbucks was also able to resonate with the traditional Chinese cultural value associated with a tight-knit family unit. The company identified the strong focus that Chinese families place on the child (an interesting runoff effect of the harsh One-Child Policy implemented in 1980) and has since planned company events around the whole family as opposed to just the employee. Starbucks’ “Partner Family Forum” is a prime example, during which the company hosts discussions on its future plans for China in an event geared towards the entire family. The forum has had unbelievable success in China, with former Starbucks CEO Howard Shultz admonishing the first event in 2012, saying, “…we had about 90% participation. We did not know who or how many would come. In most cases, there were whole families.” While this strategy was able to capitalize on familial values in China to improve employee satisfaction, it also gained the foreign brand the respect of the local Chinese market by showing respect to traditional Chinese views.
At the cornerstone of any successful food or beverage business is its menu. As a finishing touch on its localization plan, Starbucks catered its menu in many ways to the local palate. Not only did the company add green tea matcha flavors across a variety of products, but the frappuccino, a favorite for many customers in the United States, was also tailored to Chinese customers through the creation of a Red Bean Green Tea flavor as an alternate offering. Starbucks also offers special products for Chinese holidays, such as mooncakes with unique flavors like mocha lava and green tea key lime during the Mid-Autumn Festival. While largely adhering to its brand name products, Starbucks’ innovative yet localized flavors eased the transition for many new coffee drinkers.
Moreover, beyond an appeal to a nationwide palate, Starbucks went a step beyond to also adapt to the diverse tastes of various regions. Cultural traits vary widely throughout China’s northern, southern, and eastern provinces, so Starbucks established three distinct partnerships to localize in each prevailing market: Beijing Mei Da coffee company in the north, Taiwanese company Uni-President in the East, and Hong Kong’s Maxim’s Caterers in the south. Through these partnerships, Starbucks was able to leverage local expertise and consumer insights to inform store operations within each region.
Starbucks success in China is apparent with a whopping 4,700 locations and growth rates in Shanghai that outpace those of New York City. Despite a challenging 2020 due to the pandemic, the company remains optimistic of its future performance. For the 2021 fiscal year, Starbucks projects comparable store growth of 27-32%, with store net unit growth rate in the low teens. Starbucks opened 259 stores in the fourth quarter of 2020 and expects to open 600 new stores in the region during the 2021 fiscal year. In the pre-pandemic times of 2018, Starbucks created approximately 10,000 job opportunities in China and welcomed 6.4 million customers per week. As the pandemic begins to subside, Starbucks’ growth is anticipated to exceed these pre-pandemic numbers.
The Rise of Luckin Coffee
Luckin Coffee launched in October 2017 and grew into the second-largest coffee company in China, following only Starbucks. Although Luckin became notorious in early 2020 for cooking its books through fabricated sales, the chain has still seen immense growth in its home market of China and domestic sales have continued unabated.
Tech Savvy Coffee
Luckin’s strategy is starkly different from that of Starbucks. By Luckin’s launch in 2017, coffee culture had already become far more commonplace than during the early days of Starbucks. As such, the company’s goal was simpler: make coffee convenient.
Technology is at the core of Luckin’s consumer experience. Orders for Luckin Coffee must be made through its mobile app, which is tailored towards younger, tech-savvy customers already accustomed to app-based purchases. After ordering, customers are directed to pay online and can then choose from either pick up or delivery for their orders. While this consumer experience would seem out of place in the US market, it has become the norm in China, with apps like Meituan, Ele.me, and Luckin aggregating over 355 million orders through this type of sales channel in 2018.
The use of technology also provides increased consumer data to the company. Within its app, Luckin can track customer preferences and order frequency, both of which better inform the company’s product campaigns while also unlocking the ability to tailor marketing to the individual consumer. Additionally, Luckin’s business model culminates in comparatively lower overhead costs within the consumer purchase cycle, which allows the company to compete with Starbucks on pricing. A cup of coffee at Luckin is only US$3.50, compared to Starbucks’ US$4.80 per cup.
A Different Approach
As Starbucks looks outwards to capitalize on the social experience, Luckin serves its coffee to customers on the go. For this, Luckin has developed three different coffee shop styles to maximize efficiency within each target segment: cafes offer a space for customers to socialize; stores provide a counter to pick up pre-orders; and kiosks cater solely to delivery service orders. In addition, Luckin maintains a cash-free operating environment due to its online mobile app-based ordering system, which not only increases the efficiency of the sales cycle but also relieves the overhead of store-by-store cash management.
Luckin has also been able to use an effective marketing strategy that focuses on urban office buildings and residential areas for advertising and brand exposure. At the forefront of many campaigns are well-known Chinese actors and actresses, including Tang Wei and Zhang Zhen, which has resonated with younger, whitecollar workers. Furthermore, promotions like a free cup of coffee for both downloading the Luckin app and for referring friends to download the app has allowed the company to grow its customer base quickly.
The Takeaway From the Tales of Luckin and Starbucks
Both Starbucks and Luckin’s strategies have achieved success in the Chinese market. It can perhaps be most aptly said that Starbucks preferred to focus on cultural values while Luckin capitalized on societal trends. Regardless, both chains have defined their niche within the Chinese consumer lifestyle and are evidence that, so long as Chinese market strategies are culturally aware and data-driven, there is more than one road to success in the Chinese market.