In an article entitled "Why Starbucks succeeds in China and others haven't"
by CNBC.com contributor Shaun Rein we read the following: About 14 years ago, I met an entrepreneur who wanted to open up coffee shops around China. I never thought the coffee business would work there. The Chinese would not easily give up their tea-drinking culture for a bitter, overpriced drink, I told him.
Starbucks has proven me wrong. Howard Schultz, the CEO of Starbucks (SBUX), announced that China will soon become its largest market outside the United States. It has opened over 500 outlets in the country, which are more profitable per outlet than in the U.S.
even though sales per outlet lags its U.S. counterparts considerably,
according to the chain's chief financial officer, Troy Alstead.
What did Starbucks do to succeed in a market where so many other Western food and beverage brands such as Dunkin Donuts, Krispy Kreme, and Burger King
have failed to live up to their own expectations? What Starbucks did
right in China is a textbook case study in how food brands can succeed
despite rising labor and real estate costs and increased competition on
the Mainland.
Instead of trying to force onto the market the
same products that work in the U.S., such as whip cream-covered frozen
coffee concoctions, Starbucks developed flavors, such as green
tea-flavored coffee drinks, that appeal to local tastes. Rather than
pushing take-out orders, which account for the majority of American
sales, Starbucks adapted to local consumer wants and promoted dine-in
service.
By offering comfortable environments
in a market where few restaurants had air conditioning in the late
1990s, Starbucks become a defacto meeting place for executives as well
as for the gathering of friends. In other words, Starbucks adapted its
business model specifically for the Chinese, rather than trying to
transplant everything that worked in America into China, as so many
brands such as Best Buy and Home Depot have done. Such approaches often proved shortsighted and ill-fated.
The
challenge with pushing dine-in service in large, comfortable outlets
rather than take out is that revenue per square meter is less than in
the U.S. The average revenue per outlet in China is one third to two
thirds of what it is in the U.S., according to Alstead, the CFO.
Starbucks
offset the relative lack of revenue in China's outlets by positioning
the company and its products as aspirational purchases. The average
coffee sold in China is far more expensive than in the U.S. Carrying a
Starbucks cup is seen as a status symbol, a way to demonstrate
sophistication and the capability to afford a personal luxury for the
up-and-coming middle class in China.
Starbuck's
high pricing strategy of specialty drinks allows it to have its Chinese
outlets be more profitable per store in China despite the lower sales
volume. Overall in Asia, its operating margins are 34.6% in 2011 versus
21.8% in the United States. Too many brands are willing to push for
market share by cutting prices in China. In reality, they should aim for
fatter margins.
Not only does Starbuck's
premium pricing strategy fit market demands but it also allows it to
regularly roll out higher-margin specialty products, such as gift sets
that offset rising commodity costs. If you think Starbucks is pricey
here, imagine what you'd pay in Shanghai. Still, it will be an ongoing
juggling act for Starbucks. As China's urbanization rate nears 52%,
Starbucks and other companies there need to implement strategies to
offset the impact of rising commodity costs.
Meantime,
Starbucks has done an amazing job at recruiting, retaining, and
training employees. Annual turnover rates 30% or higher are common in
China, according to data compiled by my firm. Yet, Starbucks has far
lower turnover than the industry average by offering good compensation
packages, work environments, and career paths.
One
barista who has been working at Starbucks for five years told me, "I
feel taken care of by management. I enjoy my job and I enjoy working
here so I expect to stay longer." That is a rare comment in a country
where job hopping is the norm among younger workers.
Starbucks'
service is on par if not higher than many five-star hotels. In
interviews with several hundred consumers in Shanghai, the majority of
them told my firm they actually preferred the taste of products from
competitors but continued to go to Starbucks because of the service.
Far
too many multinational companies treat their Chinese employees as
second-class citizens with little career development. Their senior
management ranks are full of foreigners, Taiwanese or Hong Kongers without any mainland Chinese representation.
Starbucks
understood that the value proposition it was offering Chinese was
different than in the U.S. They were able to adapt their business model
to fit China while keeping their core values. So far, it's working
pretty well.
Copyright 2012 CNBC.com.
Next up is Aldi's business model.Spooked by the gravest economic crisis in decades, Americans are curtailing their spending. They're making fewer trips to supermarkets and migrating from grocers like Albertson's and Whole Foods to deep-discounters like Aldi and Save-a-Lot. And it's not just retirees like Chernova. These spartan bastions of private-label goods are looking a lot better to a broad range of shoppers. "Prior to the economic slowdown, we were prospering. But now we're seeing customers looking to save money, and our foot traffic has increased," says Jason Hart, president of Aldi US, based in Batavia, Ill. "There seems to be more demand for our stores, and people don't want to sacrifice quality." Aldi arrived in the U.S. in 1976, hoping to replicate a business model that proved successful in Europe. With U.S. food inflation then in the double digits, the company's timing couldn't have been better. Aldi was one of the first so-called box or no-frills stores, grocers that featured rock-bottom pricing by offering a limited inventory and squeezing out all unnecessary costs, from coupons to butcher shops to fancy displays.
For starters, Aldi stores are typically just 10,000 sq. ft., far smaller than the 80,000-sq.-ft. stores grocers like Whole Foods have recently opened. The relatively small size has helped Aldi penetrate urban markets, where real estate is generally more expensive than in suburban locales, and also allowed the company to carve a niche in neighborhoods that supermarket chains neglect. Operating costs are as spare as the rest of the place. At any given time, there are fewer than five staffers inside an Aldi store. On a recent afternoon at a location on Chicago's North Side, for instance, there were just two cashiers, an employee replenishing milk shelves and a security guard greeting customers. Customers are encouraged to bring their own shopping bags, reducing the need for plastic bags, which are sold at 10 cents apiece.
More fundamentally, Aldi concentrates on selling core, high-volume grocery products, like ketchup, cereal and coffee. Want a choice? Forget it. By offering a single brand, usually a private label in a single size, Aldi executives say they can substantially undercut conventional retailers on 90% of the products the store sells. Nor do customers have to make any trade-offs in buying private labels. Consider the sleek, dark 16.9-oz. bottle of Ariel Extra Virgin Olive Oil ($4.29). Or the 13-oz. box of Fruit Rice cereal ($1.69). "You wouldn't be embarrassed to have that on your counter," says Bill Bishop, a retail consultant.
The time appears ripe for deep-discounters, and Aldi is on an expansion tear. Last year, Aldi generated some $5.8 billion in U.S. sales, up from $5.3 billion in 2006, according to Supermarket News, an industry journal. It now has about 950 stores in 29 states and plans to open more than 100 stores in the next two years in Connecticut, Missouri and Texas. The company will have opened 100 new stores by the end of the year, double the number opened last year. Aldi is also making a big push into central Florida, including cities like Sanford. The city's economic development director, Robert Tunis, tried for years to lure grocers to his city, about a half-hour's drive north of Orlando. Sanford's demographics are attractive: its population grew 27%, to about 50,000, between 2000 and 2006. Within a few miles of downtown, Tunis says, are households boasting annual incomes of $30,000 to $250,000. That's partly what has attracted retailers like Target, Wal-Mart and Lowe's. "You name the retailers, we've got them," Tunis says. "But we've been underserved by grocers."
Aldi has solved at least part of that problem. Tunis was among the first to arrive at the grand opening of an Aldi store in downtown Sanford, next to one of Seminole County's largest shopping centers. Now he's hoping other grocers will follow Aldi's lead. "There's really no equivalent at the moment," he says. Deep discounters like Aldi can challenge both conventional supermarket chains as well as Wal-Mart, America's largest grocer. Indeed, Wal-Mart ultimately found it too hard to compete in Germany, where deep-discounters are firmly entrenched, and left. "Both Aldi and Save-a-Lot are winning big-time," Bishop says, "because they have an extreme value proposition — which is appealing at a time like this."
What I noticed about Aldi is that they do not get caught up into products which spend millions on advertising. Therefor they can charge very little for most of their products and they can afford to offer more as starting pay ($12.10 in NYC) to their employees. Most chains in New York start their workers off between 7 and 8 dollars. The bottom line is that here there is a lack of greed. The company makes profits but not by dogging the common person which are the consumer and their employees.
An Aldi recently opened in the Northeast Bronx and by word of mouth they are doing great. Quality and taste are not compromised. Their products are exactly the same as their so-called name brand counterparts.
...Still under construction...
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