Harvard Case - Starbucks China: Facing Luckin, The Local Disruptor
"Starbucks China: Facing Luckin, The Local Disruptor" Harvard business case study is written by Nirmalya Kumar, Sheetal Mittal, Stephen Eryung Chu. It deals with the challenges in the field of Marketing. The case study is 28 page(s) long and it was first published on : Oct 21, 2019
At Fern Fort University, we recommend Starbucks China implement a multi-pronged strategy to combat the threat posed by Luckin Coffee. This strategy involves leveraging Starbucks' existing strengths in brand equity, customer loyalty, and global expertise while adapting to the unique Chinese market dynamics. We propose a combination of brand repositioning, product innovation, digital marketing, and operational efficiency to regain market share and maintain a leadership position in the Chinese coffee market.
2. Background
The case study examines Starbucks' struggle to maintain its market dominance in China as Luckin Coffee, a local disruptor, rapidly gains traction. Luckin's aggressive pricing strategy, digital-first approach, and focus on convenience and speed have resonated with Chinese consumers, particularly younger generations. Starbucks, despite its established brand and loyal customer base, faces challenges in adapting to the evolving preferences of Chinese consumers and the competitive landscape.
The main protagonists of the case study are:
- Starbucks: A global coffee giant with a strong brand presence and loyal customer base.
- Luckin Coffee: A rapidly growing Chinese coffee chain known for its aggressive pricing, digital-first approach, and focus on convenience.
- Kevin Johnson: CEO of Starbucks, tasked with navigating the company's response to Luckin's challenge.
3. Analysis of the Case Study
This case study presents a complex scenario that necessitates a comprehensive analysis using various frameworks:
a) SWOT Analysis:
- Strengths: Strong brand recognition, loyal customer base, global expertise, established supply chain, extensive store network.
- Weaknesses: High prices, limited digital presence, slower service compared to Luckin, potential for brand fatigue.
- Opportunities: Growing Chinese coffee market, potential for product innovation, leveraging digital marketing, expanding into smaller cities.
- Threats: Luckin's aggressive expansion, changing consumer preferences, rising competition from other local brands.
b) Porter's Five Forces:
- Threat of new entrants: High, due to the low barriers to entry in the coffee industry.
- Bargaining power of buyers: Moderate, as consumers have various options available.
- Bargaining power of suppliers: Low, due to the availability of coffee beans and other supplies.
- Threat of substitutes: Moderate, as consumers can choose other beverages like tea or juice.
- Rivalry among existing competitors: High, with the emergence of Luckin and other local players.
c) Consumer Behavior Analysis:
- Target market: Young, tech-savvy, price-conscious Chinese consumers who value convenience and speed.
- Motivations: Seeking affordable and convenient coffee options, influenced by social media trends, desire for a modern and trendy experience.
- Decision-making process: Influenced by online reviews, social media recommendations, and price comparisons.
d) Competitive Analysis:
- Luckin Coffee: Aggressive pricing, digital-first approach, focus on convenience and speed, strong social media presence.
- Other local coffee chains: Emerging local brands with unique offerings and competitive pricing.
4. Recommendations
To address the challenges posed by Luckin Coffee, Starbucks China should implement the following recommendations:
a) Brand Repositioning:
- Focus on premium experience: Emphasize Starbucks' unique brand heritage, high-quality coffee, and comfortable in-store experience.
- Target a more affluent segment: Shift focus towards higher-income consumers who value quality and brand prestige.
- Enhance brand storytelling: Communicate Starbucks' commitment to ethical sourcing, sustainability, and community engagement.
b) Product Innovation:
- Develop new product offerings: Introduce innovative coffee blends, unique beverages, and food items tailored to Chinese tastes.
- Focus on customization: Offer personalized options and customization tools to cater to individual preferences.
- Expand into new categories: Explore opportunities in tea, desserts, and other complementary products.
c) Digital Marketing:
- Enhance online presence: Improve website and mobile app functionality, offer digital ordering and payment options.
- Leverage social media: Create engaging content, run targeted advertising campaigns, and collaborate with influencers.
- Implement data-driven marketing: Utilize customer data to personalize offers, optimize marketing campaigns, and improve customer experience.
d) Operational Efficiency:
- Optimize store operations: Streamline service processes, implement technology to improve efficiency, and reduce wait times.
- Expand into new locations: Focus on high-traffic areas and smaller cities with untapped potential.
- Invest in employee training: Enhance barista skills, improve customer service, and promote a positive brand experience.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: Leverage Starbucks' existing strengths in brand equity, global expertise, and customer loyalty while adapting to the local market.
- External customers and internal clients: Cater to the evolving preferences of Chinese consumers, particularly younger generations, while maintaining a positive experience for existing customers and employees.
- Competitors: Address Luckin's competitive advantages by focusing on quality, experience, and brand differentiation.
- Attractiveness: Enhance Starbucks' value proposition and market appeal to attract and retain customers, ultimately driving revenue growth.
Assumptions:
- Chinese consumers are willing to pay a premium for quality and experience.
- Starbucks can effectively leverage its global resources and expertise to adapt to the Chinese market.
- Luckin's growth will eventually slow down due to its aggressive expansion strategy.
6. Conclusion
Starbucks China faces a significant challenge in maintaining its leadership position in the Chinese coffee market. By implementing a multi-pronged strategy that combines brand repositioning, product innovation, digital marketing, and operational efficiency, Starbucks can effectively address the threat posed by Luckin Coffee and regain its market share.
7. Discussion
Alternatives:
- Price matching: This could lead to a price war, potentially damaging Starbucks' brand image.
- Aggressive expansion: This could strain resources and potentially lead to oversaturation.
- Merging with Luckin: This could be a risky move, as it may not be feasible or beneficial in the long run.
Risks:
- Brand dilution: Shifting focus to a younger, price-sensitive segment could alienate existing customers.
- Lack of innovation: Failing to adapt to evolving consumer preferences could lead to further market share loss.
- Execution challenges: Implementing these recommendations effectively requires significant resources and expertise.
Key assumptions:
- The Chinese coffee market will continue to grow.
- Starbucks can successfully adapt its brand and offerings to the Chinese market.
- Luckin's growth will eventually slow down.
8. Next Steps
- Develop a detailed implementation plan: Outline specific actions, timelines, and resource allocation for each recommendation.
- Conduct market research: Gather insights into consumer preferences, competitive landscape, and market trends.
- Pilot test new products and services: Gather feedback from customers and refine offerings before full-scale launch.
- Monitor performance: Track key metrics such as sales, customer satisfaction, and brand perception to assess the effectiveness of the strategy.
By taking these steps, Starbucks China can navigate the competitive landscape and secure its future in the rapidly growing Chinese coffee market.
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Case Description
Set in 2019, the case describes the challenge Starbucks faces from Luckin coffee, a local start up in China. Having entered China in 1999, Starbucks was the undisputed leader with more than 70% market share and 3600 cafes by 2018. The brand's success was rooted in its core proposition of providing consumers a 'third place', an escape from both home and the work place, to relax and indulge themselves. While China/Asia Pacific was Starbucks' fastest growing market, the company faced a setback in the region in 2018. There was a decline in its third quarter sales, total number of transactions for the year, and the annual operating income. Starbucks' sudden downturn in the region could be attributed to the threat to its third place positioning by Luckin. Launched in November 2017, Luckin grew to more than 2,300 stores in just 17 months. Unlike Starbucks, it offered lower prices and the convenience of having coffee anywhere - at home, the work place or a cafe. Its mobile app-linked order and cashless payment platform, and a store pick-up and delivery model appealed to the country's digitally savvy millennials. Over 2018-2019, the company successfully raised US$550 million, and in May 2019, came out with its IPO. By the end of 2019, Luckin aimed to open a total of 4,850 stores to surpass Starbucks' planned network of 4,200 stores. The sudden rise of Luckin raises serious questions to engage students. What should Starbucks do in order to maintain its dominance in China? Should it emulate Luckin and work towards building a stronger and wider delivery channel, or should it continue to pursue its premium priced experiential retail strategy? And, would Luckin's cash burn business model that includes heavy discounting, aggressive advertising and a rapid store expansion fail or succeed eventually?
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