Starbucks Hires Y&R Ahead of Major Expansion Plans

China Will Become Coffee Chain's Largest Market Outside the U.S. Says CEO Howard Schultz

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The Starbucks on Beijing's historic Qianmen Street
The Starbucks on Beijing's historic Qianmen Street
SHANGHAI ( -- Amid plans to expand its business in China's tier-one and tier-two cities, Starbucks Corp. has tapped Y&R to handle strategy, creative and in-store activation for several upcoming campaigns.

The appointment comes at a pivotal moment for Starbucks, as the company strives to expand into a mass-market chain in China.

China "holds the potential for thousands" of stores and "will ultimately be our largest market outside of the U.S.," said Starbucks CEO Howard Schultz during a call with investors last week. The country "has continued to deliver positive same-store sales growth and improved profitability throughout this difficult economic period."

Carrying a cup of Starbucks down the street provides status in China
Carrying a cup of Starbucks down the street provides status in China
There was no formal pitch. Starbucks was introduced to the WPP Group agency through a subsidiary, Guangzhou-based Dawson Integrated Marketing Communications.

In 2007, Y&R acquired a 51% stake in the Guangzhou-based retail and merchandising agency, which has worked with Starbucks for several years, forming a joint venture called Y&R Approach.

Y&R is "now one of our agencies," confirmed Shantel Wong, chief marketing officer for Starbucks in Greater China. The former McDonald's marketing executive joined Starbucks in Shanghai in early 2006.

"They had a relationship with us already. So we asked their suggestions about our brand and some of their views and insights were pretty relevant," she added.

The U.S. coffee retailer will continue to work with Saatchi & Saatchi on creative programs for ready-to-drink products like bottled frappuccino drinks. The Publicis Groupe agency's relationship with Starbucks is unaffected by Y&R's appointment. Zenith Media continues to handle media planning and buying for Starbucks in China.

Starbucks raises 2010 forecast
Starbucks said fourth-quarter profits exceeded expectations and the company raised its profit forecast for 2010, largely due to international expansion. The company's improved performance reflects the closure of hundreds of unprofitable stores in the U.S. over the past year.

"China will ultimately be our largest market outside of the U.S."
But in China, the focus is on new stores. Starbucks opened its first outlet in mainland China in January 1999 at the China World Trade Center in Beijing.

Today, it has around 360 stores in 26 cities in mainland China. All together, Starbucks operates over 700 stores across Greater China, including the mainland, Hong Kong, Macau and Taiwan.

Starbucks' business in China has grown along with the country's rapid economic and urban development.

Even in first tier cities like Shanghai and Beijing, many Chinese visitors flock to outlets for a Starbucks experience and the opportunity to establish personal status, not for the coffee.

In a country where $3 easily buys lunch for a group of coworkers, spending that much on a cup of coffee reflects affordable luxury for white-collar office workers, and aspirations of future success for students.

"Carrying a cup of Starbucks down the street is quite a status symbol in China, unlike in the U.S. That's partly about price but also because the brand has status. It's quite a statement in China to drink Starbucks and is consciously done. It's a statement of modernity, and saying you're a westernized, discerning person," said Stephen Drummond, Y&R's national planning director for China based in Shanghai.

While preserving the value of the Starbucks experience, the American retailer is also working hard to turn Chinese, who have been tea drinkers for the past 5,000 years, into coffee fans by localizing its menu.

"China is the future so they're really getting behind it. Like other foreign chains, they're looking at the balance of how local vs international they should be," Mr. Drummond said. "Starbucks needs to maintain the right balance between having premium appeal and building accessibility."

Starbucks has experimented with coffee drinks blended with Tazo green tea from China, concocted black tea lattes, and serves snacks like Cantonese-style pancakes and zongzi (glutinous rice wrapped in a bamboo), a traditional dish served during dragon boat festivals.

Unlike mass-market fast food chains such as KFC and McDonald's, where adhering to local taste preferences is essential, Starbucks should be careful about localizing too much, cautioned John Solomon, Beijing-based director of youth marketing consultancy Enovate.

The store at the OCT-Loft community park in Shenzhen reflects the importance of the Starbucks Experience in China
The store at the OCT-Loft community park in Shenzhen reflects the importance of the Starbucks Experience in China
"Any success Starbucks has had in China is not due to localization [of food and beverage products]. The source of their appeal lies in the idea of being xiao zi, a cultural term for chasing a modern, western lifestyle with high standards, and Starbucks encapsulates this," Mr. Solomon said.

"To further entice the youth market, we believe a Chinese version of the recently revealed Starbucks' concept stores in London and New York would function well. Social space is a keen focus on youth whose hobbies can often be described as shopping and eating."

China's growth potential prompted Mr. Schultz, like many global chief executives, to travel to China this year, an experience that left him confident about the company's prospects there.

"I saw firsthand the ongoing emotional connection we've already created with customers. I visited Shanghai, Shenzhen and Hangzhou and was reminded of our early days of growth and development in the US. In each of these very diverse major cities, Starbucks has become part of the daily Chinese ritual," he told investors last week.

Well, not really.

"That's a far-fetched comment, as I've yet to meet a local Chinese professional who drinks coffee, let alone Starbucks, on a daily basis. [Starbucks] is still considered a high-end luxury establishment and most only go to treat themselves. Starbucks in China may be a daily ritual for expats, but not locals," observed Shanghai resident Kristin Graham, business development and strategic analysis analyst at eChinaChem.

But there's no doubt Starbucks will expand further in China, both in sales and the number of stores, as the spending power, cultural curiosity and taste buds of local consumers continue to evolve.

Starbucks at Yuyuan Garden in Shanghai
Starbucks at Yuyuan Garden in Shanghai
The chain's success is more about the Starbucks Experience than coffee
The chain's success is more about the Starbucks Experience than coffee

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