As of July 2013, Starbucks owned 878 company-operated and license stores in China. This US-based coffee chain operator aims open another 700 stores by 2015. Starbucks success in a country with a strong tea culture can mainly be attributed to the company’s effort to remain localized. For example, Starbucks offers its Chinese customers Biluochun green tea and Mudan White Tea. During traditional Chinese festivals, Starbucks will promote special-edition products, such as moon cakes and glutinous rice dumplings. This localization strategy has been working well in China.
Potential challenges that might slow growth
Although China is a tea-drinking country, tea houses find it difficult to formalize a well-organized chain. In general, tea houses are regarded as places for the elderly to spend time chatting and playing cards. Starbucks’ real competition comes from Costa, a UK-based company, which is expanding rapidly in China. Costa’s strategy is quite aggressive: the company opens new stores close to Starbucks, or occupy the stores where Starbucks just ended the contract. It entered into China’s market in 2006 hoping to open 2500 stores in total in 2015.
Will higher rent costs hurt Starbucks as they try to expand?
According to the latest earning release by Starbucks, the Chinese market witnessed the largest increase of total net revenues. The figure was $661.4 million, a 26.4% increase compared to quarter 3 last year. However, if the total net revenues is divided by the number of stores, the increase in revenues is not as impressive. In the first three quarters of fiscal year 2013, stores in America and EMEA earned $0.63 million and $0.45 million on average, but stores in China only earned $0.18 million.
Why do stores in China have such a relative low profitability? The cost of sales including occupancy costs in the financial report, takes up nearly 60% of total operating expense in China. Starbucks recently closed its first store in Beijing due to the high rent costs. Savills reveals its latest research report concerning retail shops in Beijing, showing that the average rent of ground floors of middle- and high-end shopping malls increases 0.8% in Q2 2013 from Q1, reaching 882.7 RMB/month/square meter. The amount of increase in business districts, such as Xidan, Dongzhimen, Sanlitun and CBD, go up to 5.6%, 5.4%, 2.7% and 2.6% respectively. The vacancy rate of several business districts saw a slight increase, around 2~3%.
Starbucks has experienced similar difficulties in other first-tier cities in China. Starbucks must face this problem while implementing its expanding strategy. Opening new stores in second-tier or third-tier cities, especially in travelling sites, is not as costly, but Starbucks must also consider whether these locations are suitable for building its brand.
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