Brewing More Than Just Coffee for the Middle Class in China

Western brands in China

In Thomas Helbig's paper on rapid growth of western brands in China, the named brands have built their strong positions in the market by promoting attributes like ''high-quality'', ''premium products'', and ''modern and innovative''. These attributes cater to a historically rooted positive perception of the West and the rising Chinese middle class. According to a study by Center for Asian Studies, the Chinese middle class are seeking to show their new class status through their living standards and consumption. This group of people is mainly located in first-tier cities. International exposure is one of the ways of claiming their belongingness. 

What makes Starbucks a strong case study?

Starbucks serves as a textbook example of a brand that effectively uses these trends. In a country with a deep-rooted tradition of tea drinking, coffee consumption is considered foreign, making Starbucks an embodiment of the "high-quality," "premium," and "innovative" attributes that appeal to Chinese consumers. Starbucks has adeptly positioned itself to resonate with the modern Chinese middle class, offering more than just coffee but a symbol of a luxurious lifestyle.

As a result, China has become Starbucks' largest market outside of its home country, both in terms of store numbers and revenue share. As of October 2022, the Chinese market alone generated approximately $3 billion in revenue, accounting for nearly half of the total revenue contributed by the rest of the world outside the United States, which stood at around $6 billion.

How did Starbucks reposition itself a higher-end brand?

1. Focus on consumers whose characteristics meet brand positioning. Starbucks' huge investments in first-tier regions contributed significantly to their 'premium', 'high-quality' brand attributes. Four first-tier cities in China accounted for more than 30% of total stores in 2021. But around 50% of stores were located in 30 second-tier cities, whilst the remaining 15% were in the remaining 300 cities (see graph 1).

2. These supercities enjoyed impressive economic growth and are among the first places to see the rise of the Chinese middle class. First-tier cities usually generate over $300 billion GDP and accommodate over 15 million citizens. Shanghai, for example, generated $680.31 billion GDP in 2021, comparable to GDP of Sweden ($660.92 billion) and Poland ($720.35 billion). In the same year, GDP per capita in Shanghai ($26,946) was more than twice the national average ($12,618). These metrics indicate strong purchasing power of people living there.

• Graph 1. Data derived from 1) China: breakdown of Starbucks stores by city tier, Statista, 2021. 2) Starbucks store numbers in China by city, Tecent News, 2023

Utilising market influence to broaden brand impact.

Starbucks strategically focused on major metropolitan areas, not only for their substantial economic advantages but also for their influential diffusion effects. Many brands, both domestic and international, choose to launch their first stores in these prominent cities. While the commercial potential is a significant factor, the key motivation lies in the ability to disseminate trends, which, in these cities, easily and quickly spread across the nation. These first-tier cities serve as cultural and economic hubs, where trends and innovations quickly gain traction due to their high visibility and dynamic population flows.

In 2018, on average over a third of residents in these top-tier cities were from other regions, reflecting the cities' large and diverse population base. The widespread exposure and subsequent word-of-mouth from these residents, amplified the impact of branding efforts, as they shared their experiences with friends and family back home, extending the reach of marketing activities.

• Graph 2. Data derived from 1) Composition of China population, People.cn, 2019. 2) GDP per capita by city in China, CEIC Data, 2022.

A competitive pricing strategy that aligns with brand positioning.

The price Starbucks charges in China exceeds prices in Japan, some European countries and the United States. According to SavingSpot research, the price of a Starbucks Tall Latte in China is not the highest among top countries with most stores, but still around 30% higher than in United States, 20% higher than in Japan.

When spending power of consumers is taken into account, the premium pricing in China becomes particularly apparent (refer to Graph 3). Singaporean consumers pay 15% more for coffee compared to their Chinese counterparts, despite having over six times the wealth. In contrast, consumers in the United States enjoy the most affordable coffee prices while possessing one of the highest levels of purchasing power. For Chinese consumers, who have less than one-fifth of the wealth of their American counterparts, Starbucks coffee effectively becomes a luxury item.

• Graph 3. Data derived from 1) Price of Starbucks Tall Latte in selected countries, SavingSpot, February 2022. 2) GDP per capita by all countries and economies, The World Bank, 2022.

An even more straightforward way of understanding Starbucks' pricing strategy is to compare it with prices of mainstream goods. McDonald's is a good subject for this comparison because of their affordability across the globe. As a fast food chain, they seek to satisfy the needs of the majority of the population in the market. The pricing of their products represents the income level of the average consumer.

In Western countries, the amount spent on a Starbucks Tall Latte is more than enough to buy six pieces of McDonald's Chicken Nuggets. In Korea and Japan, the cost of a Starbucks coffee is comparable to the price of slightly more than a serving of chicken nuggets. Thus, Starbucks is positioned similarly to fast food chains in these markets. However, in China, the cost of a Starbucks coffee is equivalent to the price of a dozen McDonald's Chicken Nuggets (see Graph 4), making Starbucks a luxury item in comparison.

What are key learnings that we can take from the Starbucks case?

Establishing and reinforcing brand positioning is a collaborative effort, where every consumer touchpoint like locations, pricing, product design, packaging, and store environments—contributes to the overall brand perception. The synergy of these elements and consistency in the brand message, is crucial to Starbucks' success. 

Starbucks exemplified this approach by selecting strategic locations and enhancing the coffee experience. For instance, the Shanghai Starbucks Reserve Roastery is located on Nanjing Road, one of the world's busiest shopping streets surrounded by premium retailers. The store integrates online and offline experiences, allowing customers to view coffee brewing, learn about the bean-to-cup process, and use AR technology to order custom drinks and food. Each aspect, from location and interior design to customer service and technology, reinforces Starbucks' unique brand positioning.

Furthermore, successful branding depends on resonating with the target audience's values. Starbucks' success in China is a result of its deep understanding of the demographic dynamics and the potential of the emerging middle class. By positioning its modern, upscale coffee culture to meet the social aspirations of these consumers, Starbucks effectively aligns its branding strategy with its needs.