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Growth in Foodservice Amidst Slowdown in China: The Starbucks Approach

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February 12th, 2017

For years, China’s double-digit economic growth attracted global operators in all industries, including foodservice, looking to meet a seemingly insatiable demand for foreign goods and concepts. China’s economy is slowing, however, which means that the“anything wins” approach to foodservice, from the perspective of global foodservice operators, is no longer as effective. China’s slowing economy is a sign of market maturity, and as the market matures, so have consumer preferences. Things like healthy eating, foodservice quality and brand engagement are increasingly important to consumers that have more choices than ever, which begs the question of what it is Chinese consumers expect from a global foodservice chain, and how is that changing?

Source: Passport Consumer Foodservice; Passport Economies and Consumers

While some of the market’s legacy global foodservice companies, such as McDonald’s and YUM! Brands, have struggled to adapt, a point evidenced by sluggish sales and recent, massive operational restructuring, not all global operators have struggled. Starbucks, which first entered the market in 1999, has nearly single-handedly pioneered a new wave coffee shop culture in China and has managed to sustain double-digit growth by both outlets and value. In addition to the 1,957 outlets currently in the market, Starbucks is expected to open an additional 500 stores each year for the next five years to more than double its stores by 2021.

Source: Passport Consumer Foodservice

Starbucks’ rapid expansion is not reliant on a budding demand for coffee, but instead by a service that consumers in China increasingly want. Starbucks’ specialist coffee shop format offers reprieve from consumers’ increasingly urbanised lifestyles; its premium-oriented menu offerings are tailored to the subtle, but important, differences in regional taste preferences; and Starbucks has tapped into a complex, and wholly unique, digital landscape that can be difficult to penetrate for a non-Chinese operator, making the Starbucks brand more relevant. Starbucks’ unique package of global foodservice in China, and the company’s ability to find growth amidst greater economic slowdown, should serve as a model for global operators moving forward.

If not coffee, then…

The format:

Potentially Starbucks’ most attractive element is the brand’s “third-place” format which offers consumers a place they can feel comfortable spending time outside work and the home. Rampant urbanisation in China has caused increasingly crowded living arrangements, exacerbated traffic conditions, and paved the way for noisy urban blocks in a near constant state of construction. Having a reliable and familiar place to spend time, meet friends, and socialise is incredibly valuable for an increasing amount of consumers that need a place to unwind.

Starbucks outlets have also traditionally served as a place to hold business meetings or even go on dates because of the brand’s premium-orientation in China. Starbucks symbolised a certain refined luxury for higher-income consumers which was initially, and to a certain extent still is, a large part of the appeal, just as it offered an occasional indulgence for lower income earners. To emphasise the cost of a trip to Starbucks, the average spend per transaction in 2015 at Starbucks in China was USD8.87, compared to just USD3.86 for foodservice overall.

The market for luxury goods and brands is shifting, however, as the middle class expands. As the Chinese economy matures and average disposable income grows, more consumers are able to afford the cost of luxury, including the relative luxury of a cup of coffee at a specialist coffee shop like Starbucks. This means that Starbucks is becoming a more accessible level of the luxury that consumers want and can now afford, and for a potentially wider segment of consumers.

The menu:

Starbucks’ “third-place” format is relatively unique in China, and the novelty of the experience enhances the appeal. Starbucks’ menu offerings, however, offer a variety of products that include both the imported espresso-based beverages and baked goods that consumers expect, as well as products that are highly familiar and resonate well on a more local level. In China, Starbucks tailors the menu to not only offer greater appeal to Chinese consumers, but the company changes themenu to offer greater appeal across regions and even cities as well.

Taste preferences in China can change dramatically from region to region, and most cities boast unique dishes, ingredients, and cuisines, a fluid food culture that has a profound impact on taste preferences. Consumers in China’s southern provinces generally offer a preference for sweeter flavours and baked goods, while those in the north opt for more savoury flavours. Spicier dishes are favoured in the country’s west, where certain chili peppers are grown and incorporated in most local cuisines. In Chongqing, for example, a massive urban hub in China’s southwest, Starbucks offers a unique Chili Mocha beverage to tap into strong local preferences for these spicy flavours.

Tapping into regional taste preferences can have a profound impact on local consumers that are not only potentially more enticed by the products, but feel like they can better relate to the brand even though it isn’t Chinese. Likewise, Starbucks has embraced China’s strong festival culture which is so entwined with food and foodservice. The brand offers a familiar yet distinctly Starbucks’ version of mooncakes, for example, such as its Caffee Verona or Lychee and Raspberry Mooncakes, which are eaten en masse during the Mid-Autumn Festival, as well as Starbucks-inspired zongzi, which are sweet glutinous rice dumplings consumed during the Dragon Boat Festival each spring.

The brand:

Starbucks offers a distinct format with menu offerings that an increasing amount of consumers in China want. Fuelling Starbucks’ popularity, however, is its widespread brand recognition. In addition to the benefit of having been in the market for decades, the company leverages the use of social media to get the brand in front of as many consumers as possible. China’s social media landscape is exceptionally unique, however, which can be a barrier for international operators. Given the market’s relatively isolated internet culture, which has prevented the most global social media services such as Facebook from entering, domestic services have cropped up instead. The market’s top ten services by active monthly users are all uniquely Chinese.

Leading social media sites in China by million active monthly users: 2014 vs 2015

Source: Passport Digital Consumer

Starbucks is active in WeChat, for example, in which consumers can interact with the brand and become aware of promotions, events, and new products. WeChat is a multi-faceted social networking service in which users can connect and chat with friends, post photos and share stories, and make online and in-store payments, among other things, and is one of China’s most important, and fastest growing, social media services. WeChat’s versatility means that users spend much of their digital activities within this single app.

As the technology evolves, so has Starbucks’ social media strategy. In December 2016, Starbucks partnered with Tencent, WeChat’s parent company, to offer consumers the ability to use WeChat to make in-store electronic payments. In addition to making the payment process and transaction experience more seamless for consumers, it also reinforces brand awareness. When consumers use WeChat to make in-store payments at chains like Starbucks, for example, they are automatically connected to that chain’s WeChat page, which initiates a virtuous circle of brand engagement.

Beyond social media, Starbucks promotes the brand through other important digital channels, such as ecommerce, to further engage consumers. In December 2015, Starbucks partnered with Alibaba’s Tmall.com, one of China’s most popular ecommerce sites. Dubbed the Starbucks Tmall e-Flagship store, this ecommerce platform serves as an extension of the in-store retail experience, as well as a launch pad for exclusive limited-time-only products, such as the Starbucks + Anna Sui collection of co-branded products exclusively offered in some Asian markets during the 2015/2016 holiday period. Consumers can also purchase Starbucks’ branded e-cards and digital gift cards for friends and family.

Source: Screenshots of Tmall.com

Starbucks even partners with some of China’s largest banks to promote brand awareness with special credit cards that provide exclusive and regular discounts or other incentives. Since interest rates are fixed in China, banks cannot compete with one another by offering lower rates on credit cards. Instead, banks will partner with local merchants to offer exclusive product discounts to lure potential consumers. According to Bloomberg, free upgrades on Starbucks beverages ranks among the available incentives. Starbucks’ use of social media and ecommerce, therefore, and by getting the brand out to as many consumers as possible, fuels its relevance amongst China’s increasingly connected consumers.

A potential roadmap for growth in China

China is indeed changing. China’s economy is slowing, as is foodservice, and yet China’s new economic reality still provides plenty of room for growth. Consumer foodservice in China is expected to grow by a 6.7% CAGR to 2020, which translates to an absolute USD235 billion in gains, while a growing middle class has greater access to disposable income. With that said, the needs of Chinese consumers are changing, and all aspects of the foodservice experience should be leveraged to better attend these needs. Western brands and western-style food may have been a novelty when they first entered the market, and attracted consumers in this way, but there are more global players now, and consumers are eager for a more complete foodservice experience that highlights other elements, such as an attractive format, atmosphere, and an accessible level of luxury that middle class consumers find worthwhile and can afford. Starbucks’ specialist coffee shop format and product offerings that are both novel and familiar achieve this.

Perhaps most importantly, however, is the ability to become more relevant to modern Chinese consumers. Arguably, Starbucks’ unique format and products may have been a hard-sell if it were not for the wide-spread brand recognition that the company continues to refine and promote. Effectively navigating China’s unique social media landscape, for example, may be difficult for non-Chinese operators, but being in popular platforms, such as WeChat, is so crucial in engaging the increasing amount of consumers that use these services for all aspects of daily behaviour. Maturing market conditions has had a deep impact on consumer preferences, and because Starbucks, as a global brand, has managed to become more relevant to the average Chinese consumer, the company continues to grow. Starbucks should serve as a model of other global operators moving forward.

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Stephen Dutton

Stephen Dutton is a Consumer Foodservice Associate in Euromonitor International’s Chicago office where he covers the global foodservice space. Stephen has a master’s degree in international affairs and has spent years working and traveling abroad. He enjoys exploring the world and writing about the way people dine.