Starbucks... Tofu?

Published: 2009-03-24

From issue no. 410 March 16 2009
Translated by Tang Tang
Original article

Beleaguered coffee chain Starbucks is hoping new, locally-inspired products at lower prices will entice Chinese customers to consume despite the economic slowdown.

Shan Shan is an example of one consumer they've turned around to the new offerings. A white-collar worker in Beijing's central business district who frequents Starbucks for lunch, Shan told the EO she has switched from their tuna fish sandwiches to their Chinese-style pepper mushroom ones.

A hidden, lower price
The Chinese-style mushroom and pepper sandwiches, which were rolled out in Beijing, Guangdong, and some other cities, come on the heels of Starbucks' new vegetable tofu rolls.

Though rare for the company, the infusion of Chinese-style food into the Starbucks menu seemed to be gaining momentum. "We plan to cater to local customers in southwestern China, such as Chengdu, by offering products with local characteristics," said Li Jing, public relations manager at the Starbucks Greater China office. He said the details were currently being discussed with local suppliers.

Li Jing stressed that Starbucks was developing western food with Chinese elements, and not straight Chinese dishes. "We want to develop diversified cuisine, which can serve different kinds of customers."

Starbucks Greater China did not deny that it meant to attract more local customers. But others in the industry said that the economy weighed heavily in the adoption of the strategy.

Zhang Gang, who was starting a new coffee chain, thought that it was better for the industry to unveil new, cheaper products instead of simply lowering current prices, which could undermine brand image.

Banilla Coffee, a US franchise, was also considering such a strategy. Zhu Jianhua, head of Banilla Beijing, told the EO that Banilla China has been researching new products since February 2009, including beverage and food products. "The details are still being worked out, but we cannot exclude some Chinese-style, semi-finished goods. The company will squeeze profit with lower prices on the basis of guaranteed quality. The idea is to make it so most people can afford to go into stores and consume," he said, adding that it would take around two months for the new products to come out.

A down market
Starbucks was hit hard by the global economic slowdown--profits in the fourth quarter of 2008 declined by 95% quarter-on-quarter, from almost 160 million USD to 5.4 million. Net profit for 2008 was 315.5 million USD, a decline of 53% from 2007. And Starbucks recently announced that it would close 600 locations in America in 2009 alone.

Zhang Gang told the EO that the economy was greatly impacting the coffee chain industry in China, with sales volume down and the growth rate of new stores slowing, trends uncommon in emerging markets.

Zhang estimated that both "business" and "fashion" consumption shrank by about 40% over previous years' amounts. And some coffee shops of smaller brands have closed. "If the economy does not improve, more coffee shops will close," said Zhang.

But the recession may not be all bad news for Starbucks. Zhang pointed out that all prices were falling, including rent, which would lower costs. And an industry shakeup could also eliminate smaller competition.

Li Jing was also optimistic, adding that there were over 10,000 Starbucks coffee shops in the US, and around 700 or 800 in Japan. Yet China only had 700, leaving much space for expansion.