Starbucks launches massive China expansion as Google and McDonald’s struggle

Google does very little business there. McDonald’s has agreed to sell its business and license its name there. Coca-Cola, after investing heavily, sold its bottling unit there. Where is “there”? China, of course.

At a time when many US companies have been beating a path away from China, worried about censorship as well as political and economic volatility, one company has been quietly going the other direction: Starbucks.

Amid last week’s busy news cycle – filled with company earnings reports and chaos in Washington – Starbucks made a momentous deal that was largely overshadowed. It bought out its longtime partner in its Chinese operation (making it the sole owner) and detailed its huge expansion plans for China.

Consider this mind-boggling statistic that I culled from the company’s statement last week about its Chinese ambitions: Starbucks is opening more than 500 stores a year there – which amounts to more than one new store a day. Starbucks is creating some 10,000 jobs in China annually. In Shanghai alone, there are already 600 stores.

To put that in perspective, New York City has about half as many stores as Shanghai.

“When people ask me how much can you really grow in China, I don’t really know what the answer is, but I do believe it’s going be larger than the US,” Howard Schultz, Starbucks’ chairman, says.

Schultz was headed to China that afternoon, preparing for a series of meetings in Shanghai. That’s where the company is planning to open a 30,000sq-ft coffee emporium in December, one that Schultz believes “will have a larger consumer impact than the opening of Shanghai Disney”.

The story of Starbucks in China is a nearly 20-year journey that may be a case study for US companies that have struggled to do business there.

Starbucks has found a way into the culture of China – as well as the good graces of the Chinese government – by investing heavily there, paying significantly higher wages than competitors, and extending its employee ownership benefits to Chinese workers. The company has also been offering housing allowances and healthcare benefits and, unusually, offering critical illness insurance for the parents of employees and inviting those parents to an annual meeting of the company’s Chinese staff. Today, Starbucks China is run by a female executive, Belinda Wong.

All these efforts have built up an extraordinary level of trust. But they took time and money – too much money, some shareholders complained in the early days of the endeavour.

“The years of losses built pressure from both within and from the street to leave and abandon the China market,” Schultz says. Part of the company’s challenge, he adds, was the need to teach an entire country known for its tea about the culture of coffee drinking.

Starbucks faced many of the same pressures in China as Yum Brands, the owner of KFC, Pizza Hut and Taco Bell. Last year, Yum Brands spun off its China unit under pressure from shareholders who were concerned about the costs and volatility of trying to expand a business there.

Even Schultz acknowledges that his early foray was a teachable moment for him. At first, he was desperate to import the Starbucks philosophy to employees and customers in China.

“The natural answer was to move senior tenured Starbucks managers to China to run the business and to imprint the Starbucks culture with our Chinese employees,” he says. But as it turned out, “it was a mistake”.

Schultz and his team realised that to gain the trust of Chinese customers, employees and government officials, they needed to show that they trusted them, too.

“The unlock was when we realised it had to be a combination of both US and Chinese leaders, and over time a totally dedicated Chinese leadership team led by a Chinese CEO,” Schultz says.

Today, he explained, “they are the most self-contained autonomous business unit within the company.” Letting that dynamic develop, he said, involved “trusting them to know what’s best for our partners, our customers, and how to build an enduring relationship with all constituencies on the basis of trust.”

That’s not to say it always worked. Starbucks faced protests in 2013 in China when a newscaster for CCTV (now known as CGTV, for China Global Television Network) reported that the company charged a third more for a latte in China than it did in the United States. (It was true, and Starbucks did not change the price.)

The company was also forced to abandon its store in the Forbidden City – the former Chinese imperial palace, in Beijing – after a sustained campaign to evict it by protesters who contended its presence was undermining Chinese culture.

But over time, Starbucks has continued to invest more deeply in the vast nation. Recently that involved growing coffee in Yunnan province – which lies in China’s southwest and abuts Myanmar, Laos and Vietnam – and creating a new high-end Arabica coffee and hundreds of jobs in the process.

The company has discussed the prospect of ultimately creating a global brand of Yunnan coffee with the Chinese government, which would be similar to what Starbucks has done in promoting its coffee from Colombia, Ethiopia and Sumatra.

So why did China work for Starbucks, but prove a stubborn challenge for so many others, like Yum and McDonald’s?

“It’s not for me to criticise them, but I think both those companies franchised their system early on and were in the fast-food business,” Schultz says. “I think they approached it very, very differently than we did.”

(It’s worth noting that companies like Apple and Disney have enjoyed great success in China.)

Of course, one of the questions that Schultz is often asked is about the politics of the Starbucks brand abroad, given how closely the name is associated with the United States. Schultz himself has been an outspoken Democrat.

“The Chinese have consistently over the years had an affinity for Western brands,” particularly Western luxury brands, he says. “And I think perhaps we have benefited from that.”

But there’s more to it than that, as Schultz tells it. “The story and the success we have enjoyed is clearly based on the experience that takes place in our stores,” he says. “It’s not the halo of America.”

© New York Times