Costa Coffee Is Entering China Where Starbucks Is Already Market Leader - Assignment Example

Costa Coffee is entering China where Starbucks is already market leader. Do first mover advantage and market leadership matter in a market as big and as young as China? Introduction As economic growth in China continues to spiral, the Chinese have discovered a long-repressed taste for all things Western. Whether in terms of Western fast food, Western cosmetics, or Western clothing, those Western companies that were smart enough to jump into the Chinese market have already begun to enjoy the incredible advantage of being early in the marketplace. Starbucks, an American coffee company, was such a first mover, making the name recognizable to many Chinese, in particular, the younger demographic set. In fact, Starbucks can even be found at the heart of Chinese heritage, the Forbidden City, raising the question as to whether another coffee company that seeks to make its mark in China really has a chance. Although there are definite advantages to being first in the market all is not lost for second movers, meaning that Costa Coffee, which seeks to make its own mark in China can benefit from the experience of Starbucks and perhaps avoid some of the mistakes that the first mover might have made while at the same time following other more successful moves by Starbucks. First mover advantage Quite apart from the companies that became first mover winners during the dotcom era, there are many other traditional companies that have been able to leverage their first mover position in a new market into lasting success. Royal DutchShell and BP are cited by Frynas et al as early entrants into the Nigerian crude oil market. Even now, these two companies continue to dominate in that market. Likewise, Volkswagen made an entry into the Chinese automobile industry in the early 1980s when it had not become fully clear that China was on a straight clear path towards spectacular economic success. And Lockheed Martin was also the first foreign company in the aerospace industry to collaborate with Russian companies in that field. Not surprisingly, Lockheed Martin continues to dominate in its field. What sets these companies apart, however, rather than just the first mover status, according to Frynas et al is their connections to the political establishment. “Experienced international managers know that political support can be critical in establishing an early market entry, especially in transition economies where free market competition did not exist until fairly recently” (Jedrzej et al 2006 321). In a country such as China, having the right political connections has also been seen as crucial to success. Starbucks’ ability to negotiate the political landscape in China to the point where it is able to establish a store in the Forbidden City, is nothing short of remarkable and perhaps speaks to the strength of the company’s connections with people in high places in China. Starbucks’ expansion into China was a big success from the beginning. This is because thanks to the Internet and the opportunity that Chinese have to travel in recent years, some had already had the benefit of trying Starbucks coffee and enjoying the ambience of sitting in a Starbucks shop. Regarding Starbucks success, Paul S. Biederman writes in “Commentary on Exporting a North American Concept to Asia: Starbucks in China,” that “Precise financial data are lacking because of the uniquely Chinese arrangement by which the local licensee owns controlling interest while Starbucks manages the operation. But analysts familiar with the situation have described financial performance as impressive, while claiming that Asia, and China in particular, is the place where the potential for financial success is greatest” (Biederman 2005 288). The company has more than 148 stores in China most of which are in the largest coastal cities and of course in Beijing and Shanghai, two of the leading cities in China. One of the challenges that Starbucks had to face at the beginning was that it has been customary for the Chinese to drink tea rather than coffee. Since Starbucks reputation preceded it in China, people might have wanted to try its coffee anyway. For the rising middle class in China, a chance to break away from some of the conventions of the country and to adopt some Western habits all help to enhance their status in the society as people who are at the cutting edge, in the know. The 250 million or so people who make up the middle class are the target of companies such as Starbucks (Biederman 2005 289). Also significant for Starbucks is that “direct competition by coffee purveyors was next to nonexistent when Starbucks arrived and even now is relatively insignificant due to the tea preference. Second, operating expenses, particularly for rent and labor, are rock-bottom compared to those elsewhere” (Biederman 2005 289). In its earlier days, Starbucks provided educational sessions on the value of coffee and dairy products and was thus able to attract young people to sit in its cozy shops. Clearly, being the first mover was advantageous for Starbucks as the name Starbucks has become synonymous with coffee among the young and fashionable set. But in a country of more than one billion, does the first mover advantage hold? This is a question of great importance to Costa Coffee, which comes from the United Kingdom rather than America and hopes to cream off its own profits from the Chinese market. Indeed, Costa Coffee has already inked a deal with a local partner, Yueda Group, and aims to open 300 stores over the next few years. In fact, being a second mover seems advantageous for Costa Coffee because unlike Starbucks the company does not have to educate Chinese to the virtues of coffee drinking from scratch. As Costa Coffee Chief Executive Alan Parker notes, “China is a very attractive market, making this a major deal for Costa. There is an established coffee culture and increasing interest in drinking coffee out of the home, so there is consumer demand for the product” (Costa Coffee breaks into China 2006 5). In the era of the dotcom boom it became conventional wisdom that first movers were the ones who would win for all time. The success of companies such as Yahoo, Amazon and eBay helped to fuel this belief. In recent years, however, marketing professors from Andorra to Zimbabwe are beginning to consider the superior virtues of being a second mover. As Ritson (2006) writes, “Second movers can avoid heavy investment in research and development by replicating the first mover’s approach…Second movers also enjoy the advantage of positioning….Best of all, it can learn from its forerunner’s mistakes” (Ritson 2006 23). In other words, Costa Coffee does not have to go through a steep learning curve as Starbucks might have. Especially in terms of relationships with Chinese joint venture partners, in the past there were cases of abuse on the part of the Chinese. With the success of Starbucks relationship with its local partner, Costa Coffee can go into the market with relatively low risk knowing that its interests are not likely to be trampled. Those companies that can play the second mover game well can succeed spectacularly. As an example, in the United States, Home Depot came up with the idea of home-improvement superstores and took advantage of its incredible scale to offer lower prices. Another company, Lowe’s, came after Home Depot an, instead of challenging Home Depot on price, decided to position itself as the friendlier of the two. Lowe’s has wider aisles and brighter stores and salespeople that are available and eager and willing to help where Home Depot’s salespeople are not easily found. “For Lowe’s the advantage has been substantial – and profitable. In late February, Lowe’s reported that in the fourth quarter of 2005 its earnings surged 37% - compared with 23% at Home Depot. The stock market has taken notice: Shares of Lowe’s returned 18% over the past year, to Home Depot’s 7%” (Birger 2006 20). But it not only Lowe’s that is pushing the number in its category to the wall. “Target has been thumping WalMart, PepsiCo is outfizzing CocaCola, and Advanced Micro Devices is chipping away at Intel, which lowered its sales guidance in early March. In fact, FORTUNE analyzed the stock returns of major U.S. companies in ten industries and found that the industry leaders by revenue returned a mere 2% over the past 12 months, vs 21% for their second bananas. The gap in earnings growth – 8% vs 24 % - was almost as great” (Birger 2006 20). This is not to suggest that Costa Coffee is going to grind Starbucks in the Chinese market. But it demonstrates amply that there is life for the second mover and a second mover who learns really well from the errors of the first mover and makes some clever new moves of its own can easily come to dominate. In the case of the Chinese market, however, domination is a long way away even for Starbucks. In a country of 1 billion people a company would have to establish thousands, perhaps tens of thousands of outlets, to really dominate. Currently, Starbucks is operating in the bigger cities and in coastal cities that are well known for their economic success. This is not to say that second-tier cities do not have people that would want to enjoy the coffee experience. In fact, even in the major cities, Costa Coffee can position itself differently. It can set itself apart from the American experience and offer an European one. Just as Chinese are willing to wear jeans but at the same time appreciate their Burberrys and Louis Vuittons and Pradas, there is no reason why another coffee experience of European origin cannot find a strong foothold in the Chinese market. Already, there are indications that because of its sheer size, with the company opening seven stores a day, Starbucks is beginning to fall down in some areas. Howard Schultz, Starbucks founder, has raised concern about whether some practices at Starbucks are damaging “the intimacy of the experience” for Starbucks customers (Credeur 2007 16). In addition to Schultz’s worry that the practice of using automatic espresso machines rather than having baristas draw shots by hand could lead to a watering down of the coffee for customers Schultz has is “rightfully questioning things like whether the restrooms are clear, and how long the liens are” (Credeur 2006 16). The founder of Starbucks, fortunately, recognizes that success is not an entitlement and he is willing to push his team as much as possible so that they can maintain the quality that has come to be associated with the brand. Starbucks has defined what makes it successful. This includes, in the company’s own words “brewing the best cut of coffee in the world.” The company “acquires its own coffee beans, roasts and grinds them, and has strict controls on temperatures at which each specialty drink is mixed and served. It also enjoys tremendous publicity of the way it treats employees, backing up its idea that happy employees treat customers well. It offers stock options to full-time employees and medical benefits even to part-timers. It ranks third on the Fortune 2005 list of one hundred best companies to work for” (Plog 2005 285). Costa Coffee needs to have a clear idea of how it wants to appear to the Chinese public. Is it going to position itself as coffee from the cultured classes of Europe or is it going to focus on the quality of its coffee? In addition, like Starbucks, will Costa Coffee emphasize the lifestyle element for its customers? These and other questions need to be carefully considered by the company as it makes inroads into the Chinese market. Earlier on, Starbucks’ possible connections with government officials was highlighted. As advantageous as this may be, there is no indication that Chinese authorities would accord less hospitality to other companies that seek to do business in China. In fact, it seems that the country is laying out the red carpet for any company that wants to invest in the country because it means more money in the pockets of Chinese citizens. If the Chinese government is willing to play fair with Costa Coffee and give them the necessary support then Starbucks’ advantage is minimal. If there were indications that Starbucks could use its clout to stifle competition then Costa Coffee would have had reason to worry. In fact, though Starbucks dominates in the world with more than 11,000 locations, other coffee companies have been able to secure profitable niches by carefully positioning themselves in the marketplace. For example, BE GREEN MOUNTAIN COFFEE ROASTERS, which was founded in 1981 now rings in sales of upward of $162 million. This company highlights its roots as serving organic coffees and the company continues to grow as it gains new adherents. Another company, Coffee Bean, has created a reputation for itself as an innovator and has been able to fill in various niches left open by Starbucks. Costa Coffee, indeed has had success making inroads into the Indian market, experience that will likely serve the company well in the Chinese market. “The company cracked the subcontinent by teaming up with a local businessman and adapting its menu to Indian tastes” (Flight 2006 62). With such a record of success in another market beyond its London roots, Costa Coffee can more than challenge Starbucks in China. In fact, it is not going to be a challenge at all because there is more than enough room for both coffee shops and perhaps others to exist in the Chinese marketplace. Bibliography Biederman, Paul S. May 2005. Commentary on “Exporting a North American Concept to Asia: Starbucks in China.” Cornell Hotel and Restaurant Administration Quarterly, 46(2):288. Costa coffee breaks into China. Jun 21, 2006, 5. Costa coffee costlier but cachet in café culture. Jun 24, 2006, South China Morning Post:2. Costa counts beans in China. Jun 21, 2006. Journal, 47. Credeur, Mary Jane. Apr 6, 2007. Starbucks vows to preserve ‘intimacy.’ China Daily, 16. Flight, Georgia. Oct 2006. Grinding out success next to Starbucks, Business 2.0, 7(9):62-63. Godsell, Melanie. 8/16/2006. Costa overhauls food range, Marketing, 8. Frynas et al. 2006. First mover advantages in International Business and Firm-Specific Political Resources. Strategic Management Journal, 27:321-345. Henkel, Joachim. Spring 2002. The 1.5th mover advantage. The Rand Journal of Economics, 33(1):156. Plog, Stanley C. May 2005. Starbucks: More than a cup of coffee. Cornell Hotel and Restaurant Quarterly, 46(2):284-287. Walsh, Dominic. Jun 21, 2006. Coffee chain brews plan to percolate into China (Jun 21, 2006):46. Wang, Lan. Jan 9, 2007. Costa takes on coffee giants. China Daily, 13. Read More