Coffee_in_China

分类号____________ 密级∶_____________ UDC _____________ Studemt ID: 20122712102 Guangdong University of Foreign Studies MBA Dissertation A Comparison Study of Gourmet Master and Major Coffee Competitors in Mainland China |Student Name: |David G. Hennessey | |Tutor: |Professor John Zhang | |Diploma: |Management | |Degree: |MBA | |Training Unit: |GSB | |University Awarding Unit: |GDUFS | 2013年05月11日 DEED OF DECLARATION I, __________________________________, hereby submit my research paper for oral defense, entitled _ Gourmet Masters Business Development Strategy for Mainland China and truthfully declare that the above-titled paper is a product of my original research investigation and compiled resources. I further declare that, should the school eventually discover that a substantial portion of my paper is lifted, in total, from original sources, using exactly the words of the author in more than 50% of the whole content, I reserve the right to Guangdong University of Foreign Studies to recall my MBA Diploma and cancel the degree granted to me. Signed this day of __________________________ at Guangdong University of Foreign Studies, Guangzhou, China. ___________________________ MBA Candidate APPROVAL SHEET Name: David George Hennessey Degree: Master of Business Administration Title of Project: A Comparison Study of Gourmet Master and Major Coffee Competitors in Mainland China Examining Committee Chair: Title: | | | | | | | | | | Date Defended/Approved: ___________________________________________ ABSTRACT This dissertation project presents a comparative study regarding coffee shops in mainland, China. Specifically, this study focuses the competitive relationship of the 85(C coffee company, also known as the Gourmet Master Co. Ltd., and Starbucks, a world renowned brand. Other coffee shop brands will be noted to add value to the study and are introduced where appropriate. An overview of the competitive environment and the growing market demand for coffee in China is assessed, and the author describes the criteria by which a new entry in the market can use to compete successfully. Gourmet Master is well established and is intended to be a continuing growth operation becoming a successful chain of coffee shops in China over the next few years. The author concludes that a relatively new entrant can penetrate the market based upon a focus on the newly affluent consumer as well as the business and student segments in whichever city it enters. These segments have a growing interest in westernized products and coffee drinking represents a certain affiliation with western ideas and cultural norms. The manner of application of this concept will differentiate between competitive brands on the basis of the brands’ food and beverage pairings, ambience, pricing, choice of location and service type/quality. Keywords: coffee, coffee shop, China, Starbucks, 85(C, Gourmet Master, SWOT, BRIC (Brazil, Russia, India, China), Pacific, Lavazza, Costa Subject Terms: coffee shop, competitive marketing, investing in China EXECUTIVE SUMMARY Gourmet Master is a coffee company from Taiwan competing with many other coffee shop chains in China. This includes Starbucks, Nestle, Costa, Pacific and Lavazza coffee shops. Gourmet Master’s brand includes a bakery that combined with their coffee products offers tea drinking customers an alternative product with high appeal. Since Gourmet Master is a relatively new player on the mainland China stage, one would expect them to be at a disadvantage. Yet in fact, they have a great advantage since they are an Asian company with western influences competing for Chinese consumers seeking a western style experience. Their knowledge of Chinese customs, cultures and guanxi allow them to move in circles that others cannot penetrate and open in areas that others might not consider. In addition, they also have knowledge of Chinese likes and dislikes, tastes and subtle reasoning for doing things or purchasing items those other western companies might not be privy to. This study explores the industry as a whole and examines a few of the major players in China. It also examines ways Gourmet Master might exploit other, competitive coffee vendor weaknesses and gain sales advantages over those major players in the industry. Their bakery items are varied with many western options, their coffees are low priced and yet tasty, and their growth rate has been substantial. If there is any weakness it might be in their decor and shop presentation, as they are mostly a buy and take-out shop whereas many of the other major players like Starbucks, Lavazza, Costa and Pacific are a sit in experience, which a vast majority of the new coffee consumers want to have. Gourmet Master has the ability to extend its’ market share and capture a large portion of the coffee customers. To accomplish this they need to make some minor changes. This paper will examine those options and offer a number of recommendations. DEDICATION To all those who never had the chance to try again........ ACKNOWLEDGMENTS It has been an exciting and challenging journey over the last year here at Guangdong University of Foreign Studies. I have gained many new friends, wonderful MBA colleagues and learned a great deal from the administration and professors. Thanks to Professor John Zhang (张武保) whose expertise and knowledge enlightened and guided me through this project. His unwavering encouragement and kind regards plus his availability contributed highly to my success. Thanks to Dr. Dounald Thomas whose background and expertise made him an invaluable source of information and guidance. His editing skills and observations contributed greatly to my paper. Thanks to the MBA Office staff that has put up with my “neediness” and urgencies, and has guided my every step towards fulfilling this goal. Thanks to the International Office staff and Administrators as well as those in the MBA Administration who pushed forward the idea of accepting my credits from the USA and gave me the chance to complete my studies. TABLE OF CONTENTS Deed of Declaration III Approval Sheet V Abstract VII Executive Summary IX Dedication XIII Acknowledgements XV Table of Contents XVII List of Figures XXV List of Tables XXIX Glossary XXXI 1. Introduction 1 1.1. Gourmet Master Introduction 1 1.2. Purpose 1 1.3. Background 2 1.4. Problem statement 3 1.5. Delimitations 4 1.6. Theoretical Background 4 1.7. Industry analysis 4 1.8. SWOT Analysis 5 1.9. Porters Five Forces Model 7 1.10. Methodology 10 1.10.1. Research Strategy 10 1.10.2. Literature analysis method 10 1.10.3. Comparative research method 10 1.10.4. Data collection 10 2. Literature Review 13 2.1 Basic Concepts 13 2.2 Key Competitive Factors 14 2.3 History of Coffee Industry 16 2.4. Coffee Industry Worldwide 17 2.5. The Essence of the Coffee Industry in Chine 18 3. Case Description 21 3.1. Gourmet Master in Taiwan 21 3.1.1. Gourmet Master Products and Brand 23 3.1.2. Gourmet Master Financials 26 3.1.3. Gourmet Master Value Chain - Shanghai 35 3.1.4. Gourmet Master Expansion 35 3.2. Tai Koo Mall Experience 41 3.3. Survey Response 44 3.4. Coffee Competitors 46 3.4.1. Starbucks Experience 46 3.4.2. Worldwide Expansion of Starbucks 47 3.4.3. Starbucks China 2012 49 3.4.4. Other competitors 53 3.4.5. Competitive Landscape 63 3.4.6. Bakery Competitors 68 3.5. Porters Five Force Model 69 3.5.1. Competition from Rivals 69 3.5.2. Competition from New Entrants 70 3.5.3. Competition from Substitutes 70 3.5.4. Supplier Bargaining Power 70 3.5.5. Buyer Bargaining Power 71 3.6 Competitive Strategies 73 3.6.1. Korean Example (Coupons) 73 3.6.2. Other Differentiation Strategies 74 3.6.3. Gourmet Master’s Strategies 75 4. Case Study Analysis 77 4.1. Power of Customers 77 4.2. Substitute products 77 4.3. Consumer Behavior in China 78 4.3.1. Economics 79 4.3.2. Politics and Legislature 80 4.3.3. Trends 81 4.3.4. Culture 84 4.4. SWOT Analysis 84 4.4.1. SWOT Comparisons 85 4.4.2. Summary of SWOT Analysis 95 4.5. Drivers of Change 99 4.5.1. Changes in the long-term industry growth rate 99 4.5.2. Future Outlook 100 5. Conclusions and Recommendations 105 References 109 Appendix 123 LIST OF FIGURES 1. SWOT Matrix 6 2. Porters Five Force Model 7 3. Consensus Recommendation 26 4. Share Price / Dividends 27 5. Earning History and Estimates 28 6. Revenue 29 7. Sale Breakdown by Product 32 8. Sales Breakdown by Region 32 9. Number of Stores vs. Sales - China 33 10. Income Statement 33 11. Balance Sheet 34 12. Shanghai Value Chain 35 13. Per-Capita Coffee Consumption Chart 82 14. Global Middle Class 103 15 Do you drink coffee' 128 16. Which factors affect your choice' 128 17. Which coffee shops do you visit' 129 18. How many times do you visit a coffee shop' 129 19. Why drink coffee rather than tea' 130 20. Do you prefer low price or good quality' 130 21. Do you prefer take-out or sit-in' 131 22. Do you prefer coffee or tea' 131 23. What is your gender' 132 24. What is your age' 132 25. FY12 Annual Report 133 LIST OF TABLES 1. Competitive Coffee Shop Product Pricing 25 2. Gourmet Master Sept. 2012 Balance Sheet 30 3. China/ Asia Pacific Segment Results 50 4. Channel Development Segment Results 51 5. SWOT Strengths 85 6. SWOT Weaknesses 88 7. SWOT Opportunities 90 8. SWOT Threats 94 9. Country Average Cups of Coffee 101 10. Gourmet Master Financials 134 GLOSSARY OF TERMS 85(C Bakery/coffee shop under the Gourmet Master Business umbrella FIE Foreign Investment Enterprises Guangzhou Southern China city with high concentration of international businesses Guanxi A unique term used in China indicating a relationship-based business practice ICO International Coffee Organization P. R. C. The People's Republic of China WTO World Trade Organization ¥ Yuan (symbol used for Chinese currency) 1. INTRODUCTION 1.1. Gourmet Master Introduction This thesis project is a comparative study examining a coffee shop chain with plans to expand throughout mainland China. The report analyzes the viability of this new entrant, 85(C (also known as Gourmet Master) to compete with other coffee shops such as the major brands Starbucks and Nestle, and others that are becoming well-established such as Costa, Lavazza and Pacific Coffee. Of particular interest in this paper are the factors that must be taken into account for Gourmet Master to succeed. This report may play a significant role since it will add to the already substantial marketing information regarding business competition in China. In addition, since Gourmet Master is a Taiwanese brand, this study will add valuable information regarding how a westernized Chinese consumer brand can compete with other western brands in a strictly Asian market with little history of use of the principal product. Because the company has already opened many coffee shops on the mainland, this report will focus on the strategic options open to Gourmet Master that can provide advantages needed to expand it further to other cities nationwide while competing with Starbucks and other competing brands. 1.2. Purpose Through this study the author analyzes the coffee shop industry in China and, in particular, how Gourmet Master from Taiwan can compete with Starbucks and the other brands in Guangzhou and other cities throughout mainland China. Porter's Five Forces and SWOT Analyses are employed to study the industry's attractiveness and to identify the Key Success Factors to be competitive in China's coffee shop industry. The study compares direct competitors (i.e. Starbucks, Costa, Pacific, others) to find opportunities where competitors do not take advantage of key success factors, and threats where competitors are strong and the company's new entry must be able to compensate with another key success factor. The study looks at differentiation and how Gourmet Master can use their differences to attract consumers. It will look at the challenges faced by all coffee companies in educating the Asian populace in regards to coffee and examines possible avenues of encouraging traditional Chinese tea drinkers to develop an appreciation/liking for coffee. In addition, the author proposes recommendations that will allow Gourmet Master to identify new opportunities and to take advantage of those emerging opportunities while reducing outside competitive threats. 1.3. Background Gourmet Master Co. Ltd., (henceforth known as Gourmet Master or 85(C) from Taiwan is competing with the Starbucks Coffee Company as well as a host of other western coffee companies in mainland China. The challenge, of course, is how a new entrant to the coffee shop category can compete with a world renowned brand in a country, China, which has typically drunk tea instead of coffee. Gourmet Master is also competing with many other coffee brands such as Nestle, Pacific and Costa which have large followings in home brewed coffees and other products. With the significant growth of the number of households enjoying increased income in China, many use their extra income to maintain lifestyles that include elements of western-style living standards and leisure activities that reflect western attitudes. Visiting coffee houses as part of the business or social scene is one of these representative activities. Since Starbucks has become world famous and has developed systems for jumping national boundaries and cultural barriers, others will naturally try to imitate this. Whatever the case, when doing so, new entrants may directly compete with Starbucks or may choose another route altogether. In either case, when doing so, they must develop a strategy and implement it successfully if they are to take their share of the market place and remain a viable option for the consumer. This thesis, then, shows how we examine the potential means that Gourmet Master can use to compete and what internal and external systems they may need to develop or change in order to, not only compete with the other brands in China, but survive in a country that traditionally drinks tea. The significance of this study is the survivability of coffee companies in a tea-rich country and culture and whether the exposure to coffee will influence the consumers to rethink their drinking habits. We also take a look at the structures Gourmet Master has implemented as well as their financial data and other data to determine whether the strategy they are now implementing is sustainable and if not, what changes they need to make. 1.4. Problem Statement How can Gourmet Master from Taiwan compete with the Starbucks Coffee Company and a host of other coffee shops in mainland China and capture a significant portion of the consumers who typically drink tea' 1.5. Delimitations Due to factors associated with Gourmet Masters single store in Guangzhou, most primary data representing Gourmet Master were obtained from this location. Most of the primary study took place locally in Guangzhou and involved subjects from or passing through the local area. Students, local residents and in particular shoppers represent most of those chosen for the study. Since Gourmet Master is located on the back side of an exclusive high-end shopping mall, those participating in the study did come from the surrounding area and those frequenting the mall. 1.6. Theoretical Background The theories that we consider are those that pertain to doing business such as business strategy, management, economies of scale and so on. 1.7. Industry Analysis According to one research organization, “companies in this industry sell coffee drinks and other foods and beverages for consumption on the premises or for takeout. Major companies include US-based Caribou Coffee, International Coffee & Tea (The Coffee Bean & Tea Leaf), Peet's Coffee, Starbucks, Caffè Nero and Costa from the UK” (First Research, 2012). In addition there are Pacific Coffee Shops as well as Lavazza, which are world famous and renowned. Many other smaller chains and single shops also exist throughout major cities in China. Particularly, foreign students may set up a small shop and offer English Corners or other amenities to attract students. One such cafe is the SPOT Cafe in Tianjin, next to Tianjin University. Its owner is from the USA and splits his time between running a coffee shop and acting. He uses his coffee shop as a way to meet people and to let students hold meetings, English Corners and other events that inspire a safe haven and give the students another place to “hang out”. He provides free wifi and free music via bands on Friday and Saturday nights. He encourages customers to purchase at least one item as a way to help pay for the music, but leaves it optional knowing that most will do so anyway. Again, according to First Research (2012), “The US coffee shop industry includes about 20,000 stores with combined annual revenues of about $10 billion. Moderate growth is forecast for the industry over the next two years, driven by consumer spending and preferences. Coffee shops are part of the specialty eatery industry, which also includes retail outlets specializing in products such as bagels, donuts, frozen yogurt, and ice cream”. These are also the main factors in those coffee shops entering China, particularly Starbucks, Nestle, Lavazza, etc. Coffee shops range from the all coffee style shops to those like 85(C which specialize in bakery items as well as serving coffee and tea. Many offer sandwiches and are maximizing their menus in order to maintain healthy growth, maintain customers by providing them a variety of products to choose from and by offering incentives to the repeat client. 1.8. SWOT Analysis According to wikipedia.com (2012), “SWOT analysis (alternately SWOT Matrix) is a structured planning method used to evaluate the Strengths, Weaknesses, Op-portunities and Threats involved in a project or in a business venture (figure 1). A SWOT analysis can be carried out for a product, place or person. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective. [pic] Figure 1 - SWOT Analysis tool Setting the objective should be done after the SWOT analysis has been performed. This would allow achievable goals or objectives to be set for the organization. • Strengths: characteristics of the business or project that give it an advantage over others. • Weaknesses: are characteristics that place the team at a disadvantage relative to others. • Opportunities: external elements that the project could exploit to its advantage. • Threats: external elements in the environment that could cause trouble for the business or project” (wikipedia.com, 2012). SWOT analysis is an important part of gauging the chances a new business will have in the market place. Also, existing businesses use it to make adjustments to their business strategies. Without this analysis many companies would falter in their strategy execution and lose revenues that otherwise might be gained. SWOT analysis guidelines are specific ways of measuring potential strengths, weaknesses, opportunities and threats to a given company or industry. This study will utilize the SWOT configuration to analyze and suggest areas of improvement. 1.9. Porter’s Five Forces Model According to Thompson (2012) and Value Based Management (n. d.), “the Five Forces model of Michael Porter is an outside-in business unit strategy tool that is used to make an analysis of the effectiveness or value of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces”. [pic] Figure 2 - Five Competitive Forces Model Porter found on www.valuebasedmanagement.net According to Porter these 5 forces are: • The entry of competitors (how easy or difficult is it for new entrants to start to compete, which barriers exist). • The threat of substitutes (how easy can our product or service be substituted, especially cheaper). • The bargaining power of buyers (how strong is the position of buyers, can they work together to order large volumes). • The bargaining power of suppliers (how strong is the position of sellers, is there many or only few potential suppliers, and is there a monopoly). • The rivalry among the existing players (is there a strong competition between the existing players, is one player very dominant or is all equal in strength/size). • As a sixth factor could be added government (valuebasedmanagement.net, n. d.). In addition, Cadle, Paul and Turner (2010) say that “this technique examines the business domain or industry within which an organization operates, and identifies the business pressures that may be brought to bear upon that organization. The analysis derived from using the five forces framework is usually applied to a suite of products or services delivered by an enterprise”. Cadle, Paul and Turner (2010) go on to say that potential sources of pressures within an industry are divided into five categories. These categories are: Industry: What is the level of competition for the products or services in competitors: this industry' Is the organization in a good competitive position or is it a minor player' Are there several competitors that hold the power in the industry' New entrants: Are there barriers to entry, such as the need for large amounts of money or expertise' Is it possible to start up an organization offering these products or services without much financial support' What is the likelihood of new entrants coming into the industry' Substitutes: What is the range of substitutes available' What is the position of the organization when compared to the suppliers of these substitutes' Buyers: How much choice do buyers have' Can they switch suppliers easily' Do they have the power in the relationship or are they locked in to the supplier' Suppliers: How many suppliers are available' Is this a competitive situation where the organization has a choice of suppliers' Do the suppliers have the power in the relationship because they operate in an area of limited supply' Cadle, Paul and Turner (2010) further state that answering these questions help to identify the potential impact created by these outside forces on the subject business. Again, in this case, we are talking about those in the coffee industry. Michael Porters Five Force Model looks at how companies and those they deal with interact. Basically he states that there are forces inside and outside a company that help drive and dictate how a company will act or react. How well a given company reacts to market changes and opportunities will determine how well they do in the given market. New entrants must determine before entering how they will act and what methods and opportunities they have. These opportunities include buyers, suppliers, competitors, substitutes and other new entrants. Knowing the bargaining power for each or the threats are most important in determining sound business strategies. 1.10. Methodology 1.10.1. Research Strategy The research strategies used in this paper are comparative studies; Gourmet Master is compared to their rivals, namely Starbucks, Nestle, Costa Coffee, Lavazza and Pacific Coffee. Porters Five Force Model and SWOT were also used to examine and draw conclusions regarding options and opportunities Gourmet Master may have. 1.10.2. Literature Analysis Method Analyses were applied using journals, online resources, academic and scholarly books, reviews, media and published financial reports. 1.10.3. Comparative Research Method Comparative research is the act of comparing two or more things with a view to discovering something about one or all of the things being compared (Wikipedia.com, 2012). 1.10.4. Data Collection Data collection was accomplished by observation, surveys and visits to various coffee shops in Guangzhou, China. The survey used was a 10 question email to students, faculty, business personnel and some friends in Guangzhou. The strategy was simply based on relative ease and efficiency of contacting the respondents since time was short due to the Spring Festival holiday period. The rate of response was nearly 80 percent. The biases of course were high since the sample population was very selective due to time and other constraints. Analysis was accomplished via application to SPSS and comparisons of key percentages. 2. LITERATURE REVIEW 2.1. Basic Concepts According to Jones (1926) “the law of business springs from ancient sources.” It involves the use of competition to get gain and to produce positive results. Thompson et al (2012) states that to compete one must strategize and answer three basic questions. • What is our present position' • Where do we want to go from here' • How are we going to get there' They go on to say that “a companies’ strategy is management’s action plan for competing successfully and operating profitably”. With the opening up of China more and more western companies are positioning themselves to take advantage of the great numbers of people and their desire for commercial goods. Indeed, companies have been rushing to China in order to establish their foothold in a country that is both foreign and exploding. They all want their piece of the market pie. Coffee is one of those pies. According to Dickson (1996) consumer tastes, preferences and behavior are always changing. This means that there are always avenues for people to jump in and build a successful operating company if enough foundational work is done first. This is evident by how the Chinese have been switching over to foreign brands. Food is among those areas where the Chinese are making changes. The basic business theories that are relevant to China and the coffee industry dictate that since there is a demand then the supply must follow. As the Chinese grow in prosperity, their demand for more and more western goods dictate that those demands be met, either by western businesses or their equivalent. Dong and Tian (2009) go so far as to say that the Chinese, by adopting western brands, are asserting themselves in such a way as to differentiate themselves in their respective Chinese identities. In a way, the more western you are the more you are a “different” Chinese national. Brand positioning has always been a huge marketing concept. The coffee industry is no different than a myriad of other industries. Like Nike® in shoes, Microsoft® in computer software or Apple® in the IPhones, different coffee brands compete head-to-head for a piece of the Chinese market, with millions of potential customers at stake. 2.2. Key Competitive Success Factors According to Peter Baskerville (2012), “there is no one secret to a successful coffee shop; in fact, most secrets in business boil down to hard work, extensive experience, or luck or a combination of all three”. He goes on to say that “I have established and managed more than fifteen coffee shops with varying degrees of success. While there may be hundreds of reasons why a coffee shop might succeed (including luck), here are the ones that I pursued in Australia that lead to successful outcomes for me” (Baskerville, 2012). These success factors which, he discovered through years or practice are listed below. 1. Consistently serving the finest espresso  2. Ergonomics is vital  3. Use loyalty cards  4. Promote multiple sales  5. Limit the assortment  6. Merchandise your margins  7. Get your beachhead strategies right  8. Counter service 9. Pre-make as much as possible  10. Understand what you are really selling  11. Target takeaways  12. Serve on the front line  Baskerville goes on to mention why high traffic locations are not on his list. “The reason is that it doesn’t necessarily work for coffee. Sure, you have to be located in the area where there are a sufficient number of people, but you don’t need the high traffic location in that area. For a start, it will carry the most expensive rent, secondly you will be competing for that space with A1 tenants (Banks, telcos, fashion houses, franchise chains), making it near impossible to get as a standalone coffee shop business and thirdly, high traffic does not always translate into high turnover for coffee. I made that mistake once, failing to realize that coffee is a destination rather than an impulse purchase and too much traffic can mean that people are more focused on getting somewhere else rather than stopping to enjoy your offer. Believe me, my #1 will overcome the need to get that high traffic location, and the lower rent will make your coffee shop far more financially sustainable and successful” (Baskerville, 2012). Other success factors include building a rich and diversified team, developing staff and offering quality incentives, expanding the product line and market to challenge the consumer demand, and, perhaps the most important, remember that customers come first. 2.3. History of Coffee Industry According to Chin (2012), Zhuo Weimin (2009) pointed out that the first coffeehouse appeared in Mecca, which is generally believed was established in about later 15th century and had quickly spread by the 1550's. These coffee shops could be traced into the capital of Constantinople and Damascus in the Ottoman Empire. The exquisite product and luxury of coffee shops in Constantinople set a good example for the later European coffee shops. Then, in about 1650, the Venetian brought coffee into Italy and the first coffee shop opened in Italy. In 1720, Florian Fancessari opened Florian Cafe at St. Marco’s Square (Piazza San Marco) in Venice. For over three hundred years, this cafe has been running continuously and the business is still booming, and it is a must-go place for people who like to drink coffee. Chin (2012) also states that in the recent years in Taiwan, coffee shops have become popular. For business needs, coffee is usually combined with meals; at the time, coffee plays a supporting role and few people care about the quality. Later on, the introduction of coffeehouse chains there was a reform of coffee shops in Taiwan, and they were positioned as specialty coffee shops providing high quality coffee. To those consumers who like to drink good coffee and do not want to make it themselves, coffeehouse chains undoubtedly provide a good place to both enjoy their favorite beverage and to socialize. This inevitably was transferred over to the mainland, in various forms. According to the ico.org website, “coffee is the world’s most widely traded tropical agricultural commodity, accounting for exports worth an estimated US$ 15.4 billion in 2009/10, when some 93.4 million bags were shipped. Some 70 countries produce coffee, of which the Exporting Members of the International Coffee Organization are responsible for over 97 percent of world output.  In 2010 total coffee sector employment was estimated at about 26 million people in 52 producing countries (see ICC 105-5)”. “Global consumption in coffee year 2009/10 totalled around 133.9 million bags, of which 72 million bags were consumed in Importing Member countries, 21.2 million in non-member countries and 40.7 million in producing countries” (coffeeguide.org, 2012 ico.org, 2012). In addition, “consumption has increased on average by around 1.2 percent annually since the early 1980s, rising to more than 2 percent in recent years” (coffeeguide.org, 2012, ico.org, 2012). 2.4. Coffee Industry Worldwide Roby (2011) states that “the coffee industry is continuing to grow despite the increasing costs for coffee from January of 2009’s 108.39 U.S. cents per lb. to December of 2010’s 184.26 U.S. cents per lb. ("International Coffee Organization Prices," 2010). She states that with the nearly 200% increase in the price of the coffee bean over the last two years the growing profits of all coffee industry players have been affected. With the financial crisis of 2008 and economic challenges since, “the supply chain and the current economic situation around the world have caused the prices to rise. According to Roby, last year Starbucks had to raise prices all over the world. This included the United States and China, due to rising prices for coffee and other ingredients.” “Apparently though, this year they are taking the hit from the rising coffee prices for the consumers” (Baertlein, 2011). This is good for consumers and the coffee companies can take these financial hardships since despite this challenge the industry still seems to be young enough in China to survive. Lingle (2007) states that “although the prices of coffee had to be raised globally due to the high demand of the product and the cost of producing it, there is still a strong outlook for the coffee industry because of the large consumer base of the industry. The coffee industry is expected to continue growing through at least the year 2015 and even longer in other emerging markets around the world”. 2.5. The Essence of the Coffee Industry in China Coffee is relatively new to China. Tea has been the staple drink for many thousands of years, yet today while “tea accounts for 70 percent of the hot drink market, coffee consumption is growing by 25 percent a year” (red-luxuery.com, 2011). “Coffee in China used to be tarred with the same brush as capitalism. But as capitalism has caught on in China, so has coffee: the mainland market for retail packaged coffee has grown at a compound rate of 18 per cent a year since 2007, and could rise another 75 per cent to Rmb16bn ($2.5bn) by 2017, according to research firm Mintel” (Waldmeir, 2012). Coffee was looked at much the same way many negative things were treated during the Cultural Revolution. “However, over the last ten years or so there has also been an explosion in the number of new American-style coffee bars opening up in all the major cities. Starbucks alone has opened more than 400 new shops in different cities throughout China since 1999 and other similar companies have also been expanding at the same rate. As a result coffee is acquiring a more modern image and is becoming a very popular beverage with the young’ (thecoffeeguide.org, 2009).  According to Biederman (2005), “the most formidable obstacle in opening a coffee shop in China is that the Chinese are predominantly tea drinkers and are unfamiliar with coffee, while Japanese and Europeans are among the world’s heaviest consumers of coffee. Moreover, based on survey data, the price of a tall latte amounts to the equivalent of $3.14 in China compared to $2.88 in Japan, or 9 percent higher”. Of course with time and the economy, and the economic growth of household incomes, those prices have also risen. But people still seem to want that coffee experience which gives reason for major chains to desire a foothold in China. According to Holstein (2012), “the trend has been gathering momentum for more than a decade, and now Chinese consumers in more than 50 cities--not just Beijing and Shanghai--can get a jolt of Joe at coffee houses, often with Western brand names. U.S. companies such as McDonald's and KFC, a unit of Yum Brands, Inc., have vast presences in China, and also sell coffee”. In conclusion, this study will seek to discover and describe what factors are influencing Gourmet Master and the rest of the coffee industry. In addition, we will suggest ways that Gourmet Master can utilize this information to further promote and expand their opportunities in mainland China. Although this study is limited to a relatively small area (Guangzhou and the surrounding area), still these conclusions ought to be applicable to most places in China, if not all of Asia. 3. CASE DESCRIPTION 3.1. Gourmet Master in Taiwan According to Wikipedia.com and the Gourmet Master website, Gourmet Master, or “85°C Bakery Cafe (85度C), the brand is a Taiwanese chain of coffee shops run by Gourmet Master Co., Ltd. The company, with estimated yearly revenues of $200 million, was founded in 2004 by tea shop owner Wu Cheng-Hsueh and currently has over 325 branches located with-in Taiwan and Australia. Known as the "Starbucks of Taiwan", in 2008, the company opened its first US location in Irvine, California” (Wikipedia.com, 2012). From the beginning in Taiwan, the company was a success. “Serving over 2000 people per day and 2000 cups of coffee” in the first store gave the owner the confidence to launch a second store.  “Following the success of the two stores, a third store was opened in Goun Yi, in Taichung City, which marked the beginning of the franchising name 85 °C in November 2004. The name "85C" refers to Wu's belief that 85 °C (185 °F) is the optimal temperature to serve coffee” (Wikipedia.com, 2012). Delfeld (2011) states that “the company’s competitive edge is three-fold: It has a coffee pricing advantage of 30 percent to 50 percent below rival Starbucks; Its absolute focus on growth in mainland China; And its Taiwan base gives it the political and cultural savvy to run the thicket of regulations put up by China’s mandarins”. In addition, from reading scores of comments online, it seems that 85C’s major pull is its bakery generating waiting lines like Disneyland. Of special note are its coffee mochi bread, taro bread, half moon cakes and squid ink buns. Mr. Wu states that of all the businesses he has invested in, “the 85C chain is, however, his greatest success by far. It expanded quickly, thanks to aggressive recruitment of franchisees, and within two years it had achieved its goal of overtaking Starbucks as the biggest coffee chain in Taiwan. Mr. Wu covered all bets even making sure he sourced his beans from the same premium Guatemalan supplier as the US chain” (Starbucks) (ftchinese.com, 2011). Delfeld (2011) states that “Starbucks is a great global coffee player, but a purer player on China’s potential to grow exponentially as a coffee market is Taiwan’s 85C Café Bakery operated by Gourmet Master”. Company History Timeline follows (taken from http://www.85cafe.com). 2004 － Opened the 1st store in Taiwan. 2005/02 － Established a company in Taiwan. 2005/12 － Established the central kitchen and R&D center in central Taiwan. 2006/09 － Established Golden 85 Investments, Inc. (US company). 2006 － Opened the 1st store in Sydney. 2007/12 － Opened the 1st store in Shanghai. 2008/09 － Opened the 1st store in Irvine, Los Angeles, California, USA. 2010/11 － Listed on TWSE. 2012/07 － Opened the 1st store in Hong Kong. 3.1.1. Gourmet Master Products and Brand Every company develops a brand and 85°C is branding itself based upon a dream. Since the Chinese explanation of its concept may not translate totally into English in some instances it is difficult to explain the concepts, but their brand is that of a dream state and one that shows that dreams can come true. Each day a person can experience a small part of that dream through eating or drinking, with friends or even alone. Living for that dream and experiencing that state of mind is a goal of Gourmet Master and 85°C.  To help the consumer along their way 85(C offers a variety of products besides the standard types you’d expect in a coffee shop. The following items were taken from their website as well as a menu obtained from the Guangzhou Tai Koo Mall store. In addition to coffee, the company specializes in breads, cakes, desserts and other products that make shopping at the chain a delight. For instance, they have birthday cakes such as the Black Forest, Fruit Story, Double Peach Pudding, Strawberry, SAP Chocolate Milk with seasonal fruit and Coffee Sweet Words, amongst others. In addition, they also have Rum Shanti, Napoleon, Chocolate Napoleon, Earl Cheese and Milk Chiffon cakes. They also serve a Mousse series with Rasberry Movement, Anglas Chocolate, Clever Hear Mousse Cup, Chestnut Mousse, Passion for Chocolate, Fruit pulling, Chocolate Hazelnut Mousse, White Love Song, Matcha Pulling, Fruit Parkway, Clever Berry Love, Chocolate Cheese Mousse, Strawberry Tower, Classic Chocolate and Mango Lovers included. In the Cheese series, they offer Flavor of Cheese, a Crisp biscuit Chocolate Cheese with Cherry sauce, Tiramisu, Snow Cheese, Parmesan Cheese, Strawberry Cheese and Blueberry Yogurt. Prices for 85(C products are well below Starbucks and most of the other competitors, as can be seen in the chart below. In this sense they are not competing for the same customers although they do have some overlapping clientele. Figure 24 at the end of this study provides a detailed breakdown of the age groups that drink coffee. The 18-23 year old group far outranks all others in coffee consumption, which shows the younger generations desire to experience the product and to have an ‘experience’. |Company |Gourmet Master |Starbucks |Nestle |Pacific |Lavazza |Costa | |Product | | | | | | | |Coffees |¥8.5 |¥17+ |Take Home |¥17 |¥35 |¥31 | |Teas |¥6.5-8 |¥20 |Take Home |¥19 |¥35 |¥23-33 | |Cappuccinos |¥13 |¥27 |Take Home |¥27-30 |¥35+ |¥28 | |Lattes |¥13 |¥27 |Take Home |¥27-30 |¥35 |¥28 | |Lemon Tea |¥8 |¥20 |Take Home |¥19 |¥35 |¥23 | |Smoothies |¥12-13 |¥30+ |Minimal |¥30 |¥30 |¥29 | |Breads |Variety |Minimal |Take Home |Few - ¥22 |¥30+ |None listed | |Desserts |Variety |Few |Take Home |Variety |¥30+ |None listed | |Sandwiches |Variety |Few |Minimal |¥25 |¥30-35 |None listed | Table 1 - Competitive product pricing. Compiled by author 25 February 2013 3.1.2. Gourmet Master Financials The following data was taken from the Financial Times website (http://markets.ft.com). [pic] Figure 3 - Concensus Recommendation Financial Times - http://markets.ft.com According to analysts, Gourmet Mastrer will out-perform the market, indicating sound financial and management decisions. Gourmet Master is in a solid position to gorw their brand and diversify their products while building new outlets across China. [pic] Figure 4 - Share Price / Dividends Financial Times - http://markets.ft.com Dividends and shares for Gourmet Master have grown, indicating a strong company base with sound management and a strong marketing strategy. During the three previous years dividends have grown, with a projection for increases in 2013. Again, this indicates sound marketability and wise management. [pic] Figure 5 - Earning History and Estimates Financial Times - http://markets.ft.com Though Gourmet Master under-performed in earnings during 2012, growth rate for the companygrew and is predicted to grow during 2013 with the launch of more outlets. Some of the costs associated with the low earnings are explained with the restructuring and re-outfitting older stores in Taiwan and elsewhere [pic] Figure 6 - Revenue Financial Times - http://markets.ft.com Revenues have steadily grown through the 2012 four quarter period, though in some cases modestly. Again, rebuilding older stores and expanding into new markets accounts for this. Even so, revenues have grown 37.25% for 2012 over 2011. Gourmet Master September 2012 Balance Sheet. |Fiscal data as of Sep 30 2012 |Sep 30 2012 |Jun 30 |Mar 31 2012 | | | |2012 | | |ASSETS | |Cash And Short Term Investments |3,475 |3,361 |4,105 | |Total Receivables, Net |319 |181 |177 | |Total Inventory |426 |312 |325 | |Prepaid expenses |228 |300 |205 | |Other current assets, total |55 |47 |40 | |Total current assets |4,502 |4,200 |4,852 | |Property, plant & equipment, net |2,758 |2,563 |2,236 | |Goodwill, net |0.75 |0.75 |0.75 | |Intangibles, net |25 |25 |25 | |Long term investments |101 |112 |0 | |Note receivable - long term |-- |-- |-- | |Other long term assets |343 |338 |301 | |Total assets |8,449 |7,916 |8,046 | |LIABILITIES | |Accounts payable |824 |689 |649 | |Accrued expenses |498 |690 |417 | |Notes payable/short-term debt |0 |0.01 |0.46 | |Current portion long-term debt/capital leases |0.36 |0.36 |0.36 | |Other current liabilities, total |1,031 |663 |797 | |Total current liabilities |2,353 |2,042 |1,864 | |Total long term debt |0.44 |0.53 |0.63 | |Total debt |0.79 |0.89 |1.45 | |Deferred income tax |-- |-- |-- | |Minority interest |88 |83 |110 | |Other liabilities, total |52 |54 |54 | |Total liabilities |2,494 |2,180 |2,028 | |SHAREHOLDERS EQUITY | |Common stock |1,411 |1,411 |1,344 | |Additional paid-in capital |2,696 |2,720 |2,778 | |Retained earnings (accumulated deficit) |1,881 |1,641 |1,934 | |Treasury stock - common |-- |-- |-- | |Unrealized gain (loss) |-- |-- |-- | |Other equity, total |-34 |-36 |-38 | |Total equity |5,955 |5,737 |6,018 | |Total liabilities & shareholders' equity |8,449 |7,916 |8,046 | |Total common shares outstanding |141 |141 |141 | |Treasury shares - common primary issue |0 |0 |0 | Table 2 - Sept. 2012 Balance sheet for Gourmet Master. Taken from http://markets.ft.com. As of September 2012, the above indicates the figures for each category on Gourmet Masters’ balance sheet. [pic] Figure 7 - Sales Breakdown by Product taken from http://www.85cafe.com Sales have steadily grown for Gourmet Master despite refurbishing older stores and expanding into new cities. [pic] Figure 8 - Sales Breakdown by Region taken from http://www.85cafe.com China market has grown tremendously with 2013 looking bright for Gourmet Master. [pic] Figure 9 - Number of Stores vs. Sale in China - taken from http://www.85cafe.com Sales and the number of stores have steadily grown in China. Gourmet Master is taking an aggressive expansion stance to compete directly with the other chains. [pic] Figure 10 - Income Statement - taken from http://www.85cafe.com Again, Gourmet Master is on track to improve their bottom line and build their brand. [pic] Figure 11 - Balance Sheet - taken from http://www.85cafe.com Gourmet Master has expanded their assets and grown their brand. With this expansion cash equivalents have lowered but overall performance of the company has grown. 3.1.3. Gourmet Master Value Chain - Shanghai [pic] Figure 12 - Shanghai Value Chain - taken from http://www.85cafe.com The previous chart represents Gourmet Masters Value Chain in Shanghai. Sound channels of distribution and manufacturing provide a look at the structure of Gourmet Masters’ operations in China. 3.1.4. Gourmet Master Expansion With expansion of 20 outlets within 5 years planned for the US due to signs of a strong momentum (Su, 2012), growth elsewhere has leveled down somewhat. According to Chris Lee (李翰霖), Vice President of Investor Relations at Gourmet Master, “Gourmet Master may open outlets in Taiwan and China at a slower pace next year, while focusing more on increasing sales at its existing stores. However, the China market would remain the major source of both the company’s total sales and sales growth in the near future. Under a preliminary plan, the company — which has 360 85°C outlets in China — may launch 50 to 100 outlets in China next year, down from 110 new outlets expected to open this year. Lee said most of next year’s new Chinese stores would be located in cities that have existing 85°C outlets, as the company has more experience of boosting sales in those areas. Meanwhile, Gourmet Master may launch more outlets in second-tier and third-tier cities in China in the long term, as it is eyeing stronger growth in private consumption in these regions, Lee added” (Su, 2012). WhatsonXIamen editors (2011) state that Gourmet Master has continued to expand, seeking many of the same places to sell as has Starbucks and the other major players. Nestle, which has a huge take home coffee following, may not be taking this route. Following the steps of Starbucks' high-profile entry into the Xiamen Market, Taiwanese bakery and coffee chain 85C officially opened its first outlet at Taiwan Street, Jiangtou in Huli district, and three more will be opened within this month. Gourmet Master continues to expand to popular areas and is not afraid to go head-to-head with Starbucks or any other major or small coffee shop. According to Whatsonxiamen.com news (2011), Gourmet Master opened three more stores in Xiamen following the success of the first one. The news reported that “as a specialty and creative store of coffee, cakes, and breads, 85C claims that they have chefs who have worked in five-star hotels and provide products with affordable prices. 85(C is very popular among cities across the Taiwan Strait since its first store opened in 2003. As of now it has more than 300 stores and surpasses Starbucks as the biggest chained brand of Coffee and Bread in Taiwan. According to Mr. Wang, the Market Chief of the Fujian area, at 85C, the cheapest coffee is only 8 yuan and a Cappuccino is available at 12 yuan, which is about one-third the price for a comparable product at Starbucks. Also, their breads are about 30% cheaper than Starbucks and, what’s more, many of new items will be developed every month.85C will open 4 outlets in Xiamen this month, according to Mr. Wang, who also said the market of coffee and bread in Xiamen is fully developed and many brands have achieved success in the market” (Whatsonxiamen.com, 2011). Also, on the 85(C website, Gourmet Master lists Management and Assistant Managerial positions that are open. They specify an “unlimited” number of jobs are available. In addition, they have opened a number of new stores since January 1st in Suqian, Chengdu Qinghua, Nanchang, and Tin Chak Estate in Chongqing. 85 ° C has 324 outlets in the Mainland and is still growing (85° C.com, 2013). When asked what the next phase for the brand was, “Xie Jiannan stressed that they must move forward and become an international brand. When asked what that meant, he replied that the company “must be an international brand across 10 countries, with more than 2 thousand shops, and products in all countries” (85°C.com, 2013). As of 2011 Gourmet Master had the following stores in place. • [pic] Taiwan 478 stores • 225 Regular stores • 74 Bakery • 179 24-hr stores • [pic] China 366 stores (63 in Shanghai) • [pic] Australia 4 stores • [pic] United States 2 stores (Irvine and Hacienda Heights) (Wikipedia.com, 2012). Gourmet Master developed fast in Taiwan, soon outstripping even Starbucks. According to Qiu (2010), “85(C opened its first outlet in mainland China in December 2007 after vanquishing Starbucks to conquer its home market. Upon arrival, the company expanded rapidly in Shanghai and fought for the best sites by offering higher rents than competitors. Seemingly overnight, 85C became a feature on every Shanghai street corner, with Chinese consumers forming long lines outside”. But there have been developments which have created a slowdown in their expansion. In Shanghai, as with other areas of mainland China, growth for Gourmet Master has followed the trend, slowing down to a fraction of what it was doing previously. This can be attributed to the financial crisis which affected all industries and also to worries on the part of consumers over the slowing growth trend in China’s GDP. “With slowing growth in China and the uncertain outlook for its new businesses in Taiwan, Gourmet Master Co (美食達人), which owns cafe and bakery chain 85°C (85度C), is likely to see net profits grow by just 2 percent over last year, 2011, Fubon Securities Co (富邦證券) said” (Chen, 2013). Chen further reports that “while the company, which has one office in Greater Taichung and two in Shanghai, has initiated several new businesses since October, its new ventures will not be large enough to reverse the slowing growth in its Chinese bakery business, the local brokerage said in a report on Thursday”. Tan (2011) further states that “the company aims to set up 85°C stores in most provinces, distancing itself from rivals that can only focus on certain provinces because of the difficulty in standardizing production”. Our observations in Guangzhou when visiting the 85(C store, was that they had a solid stream of customers and a steady stream of clients for bakery items purchased for carry out. Though our observations were limited to several visits at key visiting hours, there seemed plenty of traffic passing through the shop to provide a solid base of clients. Chen states that Gourmet Master is forecast to report NT$1.16 billion (US$39.8 million) in net profits last year”. This can hardly be negative. The earnings are per share of NT$8.23. In 2011, Gourmet Master posted net profits of NT$1.14 billion, or NT$8.06 per share. Revenues may possibly increase by 16.98 percent to NT$13.4 billion for last year (2012), with an operating margin of 10.57 percent, compared with revenues of NT$11.46 billion and operating margins of 12.26 percent in 2011. This according to Fubon’s estimates. For this year, net profits are predicted to reach NT$1.25 billion (NT$8.87 per share), while revenues may increase by 8.53 percent to NT$14.54 billion, with an operating margin of 10.44 percent, Chu said in the report” (Chen, 2013). Qui (2010) says that “as a result of 85C’s influence on the Shanghai market, many local bakeries have started to sell drinks — including coffee — and others are considering improving freshness or adding a kitchen to their outlets.” The competitive changes in these other shops will directly impact Gourmet Master and the other chains and will create the need for more innovation and product development on the part of the brand. “The core consumers of Starbucks and similar outlets will remain loyal because they value the atmosphere of Starbucks and in the Starbucks-like coffeehouses. But many Chinese chose Starbucks and similar coffeehouses because they were often the only convenient place to get good coffee. With 85C covering the Shanghai business district, many consumers may make the switch for cheaper coffee and better food” (Qiu, 2010). Qiu continues by saying that “85C has shifted its focus to mainland China and will continue its rapid expansion in the next few years. However, 85C’s managerial skills have not been tested over a large store network or across a vast country. Also, its ability to deliver freshness depends on the company’s supply chain management, and a shortage of talented management personnel has already hindered its expansion. In speaking of the bakery part of the company, Tan (2011) says “the dough used in the stores’ bakery is hard to standardize as its taste changes depending on a region’s temperature and humidity. Gourmet Master has “central kitchens,” where production is standardized. The kitchens supply ingredients to outlets within a certain geographic proximity. In addition to the multi-city expansion, Gourmet Master said it was planning to sell more moon cake products in China, a lucrative market estimated to be worth 20 billion yuan (US$3.12 billion) a year”. This ability to use dough locally and adapt to local needs, immediately, has proven to be a great asset to Gourmet Master. The company’s success so far has been attributable to its innovative business model. This proves that even though the Chinese market has been open to international companies for a long time and the coffee sector has been growing rapidly, there is still room for new companies — as long as their products or business models are suited to the market” (Qiu, 2010). 3.2. TaiKoo Mall Experience In-order to gain a full experience and understanding with the present study the author and a friend made visiting the various coffee shops a priority. Tai Koo Mall in Guangzhou, China was chosen since there are many coffee shops located within a very short distance and it is also where Gourmet Master has one of their stores. Some of the things the author experienced follow: Upon entering the 85(C coffee shop the very first observation was that it is a bakery and not a coffee shop. Rather, it has a large bakery and is not just a coffee bar. Looking around we could easily see the items for sale, which were presented in such a style that the customers could pick and choose their bakery items and then take them to the counter to pay for them. The variety was astounding since we expected to see very little in way of baked goods. French rolls, croissants, French Brioche, cookies, Russian breads, Sesame Walnut, Garlic French Breads, Desserts, Mousse and various European options were quite available and looked affordable. The store provides lots of items and lots of space for the customer to walk and shop. In addition, customers could order from a side counter items freshly baked, definitely an appealing aspect. Business hours are from 7am to 12:30pm, a positive since the Chinese are out at all hours of the evening and many are up early to grab a coffee or to be first in line at a shop. The coffee shop itself is located about 100 meters from Tiaque Hui, a major street in Guangzhou. It’s on the back left corner of the building, under a sports mall that gets a substantial amount of traffic and near a side street that has a fair amount of pedestrian traffic, but certainly not the most highly trafficked street in the area. In fact rival Costa Coffee has a storefront corner shop in the mall that fronts the street and was jam packed with wireless users and customers. And they too, like Costa Coffee, had plenty of traffic. A downside for 85(C was they had no wifi. Glancing around was also apparent that the tables in the shop were full of customers, all drinking some type of beverage and a couple students were buying and photographing many desserts. When asked what they were doing they responded with just taking pictures of all the foods they were trying. They had a table full of various desserts and a couple drinks. The actual coffee-shop visiting experience was not very appealing. The shop was extremely clean and well lit but the tables were few, with only 2-4 chairs per table. In all there were 6 tables inside with a total of 16 seats and another 6 larger ones outside under covered awnings totaling 25 seats. Again, the facilities were adequate but more like a fast food place rather than an experience you might associate with Starbucks or Italian coffee houses. The appeal or inviting one to linger with the food and coffee was very much missing, so the look suggested this was more of a buy and take-out rather than an eat-in experience. There were no plush seats or wifi for the student or business person to sit and sip to. One item I liked very much were the posters of the various chefs or bakers in the establishment. Each was highlighted and given a nice place on the walls in the shop. One downside to the shop was the fact that no outside food could be brought into the shop. This is a normal rule for most restaurants but certainly will turn away a few people who buy something someplace else but want to come and grab a cup of coffee or a slice of bread to eat together. Competition in the mall and surrounding area comes from a couple of Starbucks, a new Lavazza Coffee shop, Pacific Coffee and a Costa Coffee as well as a McDonalds McCafe in the area which serves coffee. All of these are inside the mall and, with the exception of Costa Coffee which has a corner position much like 85(C’s but is on the far opposite corner facing the major street. In addition there are many restaurants in the mall that also serve coffee and other beverages, as well as food. One favorable distinction for Gourmet Master is, of course the large bakery side of their shop. Most people, including the Chinese, seem to flock to bakeries for their traditional items. In addition, with the influence of the west, the Chinese are also buying up the western style breads and other items as a sign of their ability to use their disposable income for things that lend prestige to their lives. In this way, they are having a small western style experience either at the bakery/coffee shop or taking them home where they bring that influence into their homes. Either way they are gaining the experience sought after. As for the competitors, Lavazza was the first one we entered. Though new, they had a ground floor-store front near the principal entry of the mall but, even so, there were few people within. The 50’s looking shop immediately took me back to a “Happy Days” memory featuring soda shops and skating waitresses. They did have wifi and those in the shop were making use of that medium. All in all it was rather plain and a bit uninviting. Starbucks, on the other hand, was just the opposite. Most readers will understand first- hand the Starbucks experience and so, few items will need to be mentioned here. Suffice it to say that the entire inner shop was packed as well as the many tables and benches outside as well. This particular shop was located in an upper deck and away from the mainstream traffic. It looked like a perfect hideaway for the daily shopper and offered a respite from the mad shoppers dashing about. Pacific Coffee also has a good location, off the beaten path. Though not as crowded as Starbucks it was full and the people there seemed quite content with their surroundings. It, too, was comfortable and offered rest for the weary. They also offered wifi. The final visit for the day was Costa Coffee. Approximately the same size as Lavazza, it is situated near a corner off the principal street entrance. It had the air of a small Starbucks, with cushy seats and wifi. The shop was full of customers but held nowhere near the capacity of Starbucks. In all of these shops the customers came and drank and sat. Pacific, Costa and Starbucks offered the best seating while 85(C had the largest assortment of breaded goods. Most of the coffee shops had some food, snacks or take-home items like mugs and coffee beans. The one item to take into account is that there were no onsite restrooms. For a sit-down customer, access to restrooms is nearly essential, but in some cases this might be a marketing strategy for the company, - ‘get them in and get them out’. Make room for more. But of course for the cushy establishments they want the customers to stay so providing toilets is a necessity. 3.3. Survey Response The survey was sent to students, teachers, friends and business colleagues in China. Though perhaps comparatively short in nature, it did confirm some concepts already understood. People are drinking coffee and it is becoming more fashionable and acceptable to do so. The results of the survey found at the end of this study in the Appendix (figures 15-24). Price, location, service, quality, all of these played a huge role in what respondents were looking for. When asked what they prefer, quality or low price, most responded both. They want both great quality and low price. Since the survey was sent out only asking about coffee no bakery questions/data are included. If there is a weakness in the survey this surely is one of them. Never-the-less, the information regarding attitudes and habits related to coffee drinking in China is valuable by itself. Of the coffee shops presented, nearly 87 percent of the respondents said they went to Starbucks. Starbucks has done their marketing and branding well, which is interesting since Nestle has been in China longer. In this case the take home coffee market did not appeal to most of this sample of the market and the fact that many wanted another place to go to “hang out” seemed to be significant. Since most of the respondents were students or of that age range (18-23) their monthly visits of 1-2 times is understandable. The nearest Starbucks to the campus of Guangdong University of Foreign Studies is a couple miles/one kilometer distance. Campus coffee bars and some small local shops that cater to students do provide some of their leisure needs, but when they want a real western experience they go to a major coffee shop, like Starbucks. Having one closer to campus might change these figures significantly. Most of those surveyed confessed that they drink coffee but also still drink tea. Most prefer tea but also are interested in developing new experiences and drinking coffee is part of that fashionable experience cycle. In some ways it’s similar to buying a new pair of Nikes or a Louis Vuitton (fake or not) handbag. It’s a symbol of their increased spending power and represents their ability to a certain class. Many cultures take this to the extreme. Of those polled, most like the taste and drink coffee to refresh themselves. The refreshing part we knew from past studies since everyone knows caffeine stimulates the body. But we did not realize that many actually prefer the taste to that of tea and drink for that reason alone. Having many options to choose from does allow coffee shops the ability to meet the needs of most consumers. For those who don’t drink coffee many offer a chocolate substitute such as mint hot chocolate or teas. 3.4. Competitors Some of the major coffee companies in China are Nestle, Pacific, Starbucks, Costa, and Lavazza. All of these and many smaller chains and individual shops are competing for what may very well be the greatest land grab or consumer grab in history. 3.4.1. Starbucks Experience Speaking about China, Waldmeir (2012) stated that “Starbucks is a dine-in, not a take-out destination. Customers are invited to linger, log into the free WiFi and use its coffee houses the same way that earlier generations used tea houses: to socialize and do business”. “Xu Lu, general manager of the Cocoa & Coffee Division of China Tea Co, says she felt “drunk” when she tasted her first cup of coffee. Now she thinks more people are ‘enjoying the coffee in Starbucks, as well as the culture’” (Waldmeir, 2012). And Plog (2005) states that “the public explanation as to why Starbucks is so successful, as suggested by Howard Shultz, who with David Olsen acquired Starbucks in 1987 from its founders, is that the company is absolutely dedicated to brewing the best cup of coffee in the world. It 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 for 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”. Qiu (2010) says that “although the popularity of coffee is growing in China, Starbucks’ coffee is considered quite expensive (around $3 to $4.50 a cup); 85C’s coffee sells for half, or as little one-third the price. Consequently, Chinese consumers see a visit to Starbucks more as an event, either for a cozy social experience with friends or for business meetings in pleasant surroundings, whereas 85C is seen as a cheaper alternative for the more common pleasing snack”. He continues by stating that “placing more emphasis on the quality of food rather than the in-store experience also means 85C can profit from fast-moving consumers who don’t have time to eat in. In Shanghai, one outlet serves between 2,000-3,000 customers every day, 70 percent of whom take away their food. Fast-moving customers generate higher sales per square meter, so 85C can compete in locations with higher rents”. 3.4.2. Worldwide Expansion of Starbucks Gasparro states that “Starbucks says it still sees potential for thousands of cafes in China, and will reach 1,500 there in 2015” (Gasparro, 2012). They seem to be on mark for achieving that goal. And Qiaowei Shen states that “the goal of tripling the number of stores in China within three or four years indicates that Starbucks is not only going to add new stores in the first-tier and second-tier cities, but is also expanding to third-tier or even smaller cities….. For large cities, the concern with proliferating store numbers is within-the-chain cannibalization - that is when the expansion rate exceeds the rate of growth of the overall pie. For the new markets – third-tier or smaller cities — the concern is whether premium pricing is sustainable in these less Westernized and economically less developed places. On the other hand, the aggressive expansion plan could potentially fend off some competitors and strengthen Starbucks’ foothold in the Chinese market” (Hrebiniak, Shen,  Zhang, 2012). They “currently have about 700 outlets in China, compared to the 11,000 it has in the U.S., its largest market. The company expects China to become its largest market outside the U.S. in 2014” (Gasparro, 2012). According to a WARC report regarding 2012 data for Starbucks, reported in January 2013, Starbucks “sales in China and Asia Pacific, which are reported together, rose by 11% on a like-for-like basis in the last three months, constituting a 12th successive quarter of double-digit growth. "We feel very good about what's happening with the consumer as it relates to the Starbucks brand," John Culver, Starbucks' president for China and Asia Pacific, told analysts. "There's no doubt that you've seen some shift with other businesses and other companies in China." According to Belinda Wong, President of Starbucks China, “Starbucks isn’t worried about consumer spending in China, even if other U.S. food and beverage companies might be. Reason: The chain’s established cafes in the region have maintained double-digit sales growth over the past couple of months” (Gasparro, 2012). Starbucks entered China with the intention of not only selling coffee, but to give the Chinese an experience. This quality of that experience has proven to be a major reason they get their repeat customers. It seems to be working. Gasparro writes “from a regional perspective, we have seen the momentum of our same-store sales in the fourth quarter sustained in the first two months of the current quarter,” said Starbucks’s president of China and Asia-Pacific, John Culver, at an investor conference Wednesday. In the fourth quarter, which ended Sept. 30, 2012, Starbucks’s same-store sales, including those at cafes open at least 13 months, rose 10% in the China and Asia-Pacific region. Starbucks stores in China now average $886,000 in annual sales, up from $507,000 in 2008. The company expects China to become its largest market outside the U.S. in 2014” (Gasparro, 2012). Culver continued by saying “we continue to see very healthy growth coming out of China”. “We are very aware of the economic environment there, but there is clearly a pent-up demand that is in the very nascent stage of us achieving saturation” (Gasparro, 2012). 3.4.3. Starbucks China 2012-2013 The following information was taken from the Starbucks website. Specifically this information regards how Starbucks is currently doing in China and other Asian countries. [pic] Table 3 - China Asia Pacific Segment Results - taken from http://www.Starbucks.com Net revenues for the China/Asia Pacific segment were $214.1 million in Q1 FY13, an increase of 28% over Q1 FY12. The increase was primarily due to incremental revenues from 166 net new company-operated store openings over the past 12 months and an 11% increase in comparable store sales. Additionally, licensed store revenue growth of 14% contributed to the revenue growth for the region. Operating income increased 26% to $72.1 million in Q1 FY13, compared to $57.3 million for the same period a year ago. Operating margin decreased 60 basis points to 33.7% in Q1 FY13 compared to 34.3% in the prior-year period. The margin contraction was primarily due to investment spending to support continued growth in China and a shift in the composition of our store portfolio from licensed to company-operated stores. The margin contraction was partially offset by lower performance-based compensation compared to the same period in the prior year when the region significantly outperformed its operating plan. [pic] Table 4 - China Asia Pacific Segment Results - taken from http://www.Starbucks.com Channel Development net revenues were $379.8 million in Q1 FY13, an increase of 13% over Q1 FY12, primarily driven by sales of Starbucks- and Tazo-branded K-Cup® packs. Also contributing to the revenue growth were incremental sales related to the launch of the Verismo system. Channel Development operating income grew 24% to $96.8 million in Q1 FY13 compared to $77.9 million for the same period a year ago. Operating margin increased 230 basis points to 25.5% in Q1 FY13 compared to 23.2% in the prior-year period. The margin expansion was mainly due to lower coffee-related costs, partially offset by Verismo launch costs (Starbucks.com, 2012). . Fiscal 2013 Targets Starbucks reaffirms its fiscal 2013 targets as follows: • The opening of approximately 1,300 net new stores globally, represents 22% growth over fiscal 2012. • Approximately 600 net new stores in the Americas, with the majority of those in the U.S. Of the approximately 600 stores, approximately half of the additions were licensed stores. • Approximately 600 net new stores in China/Asia Pacific, with licensed stores comprising approximately half of the new additions. Of the approximately 600 stores, slightly more than half will be in China. • Approximately 100 net new stores in EMEA (Europe, Middle East, Russia and Africa), with licensed stores comprising more than two thirds of the new stores. • Revenue growth of approximately 10% - 13%, driven by mid-single-digit comparable store sales growth, approximately 1,300 net new store openings, and continued strong growth in the Channel Development business. • Full-year consolidated operating margin improvement of approximately 100 basis points over FY12 results. • Slight operating margin improvement in the Americas and EMEA segments. • Some operating margin contraction in China/Asia Pacific, driven by the shift in equity mix towards company-operated stores as well as costs associated with accelerated store growth in China. • 100 to 150 basis points of operating margin improvement in Channel Develop-ment. • Earnings per share of $2.06 to $2.15, representing growth in the range of 15% - 20%. • Capital expenditures of approximately $1.2 billion for the full year, reflecting the increase in new store growth and an increase in production capacity to support recently-announced initiatives (Starbucks.com, 2012). 3.4.4. Other Competitors Nestle Nestle is a well known company that has been around for more than 100 years. It has been in China many years and has a strong following, especially in the take-home coffee venue. “Nestle is a Swiss multinational company which was founded in 1866 and took final form in 1905 by merging two companies, now being the largest food company in the world. Its’ products include breakfast cereals, pet care, ice cream, bottled water, dairy products, baby foods, chocolate and confectionery, sports nutrition, weight management, food service, culinary, chilled and frozen food, healthcare nutrition, drinks as well as coffee, and it has a presence in almost every country in the world. Too, it aims to provide high quality foods and beverages to customers in order to enhance their lives” (tzetungszeman, 2012).  “Nestlé, the food group, already sells two out of three cups of soluble coffee on the mainland” (Waldmeir, 2012). Recently, “the Swiss company chose China to release its nine-month global sales – announcing organic growth in emerging markets of 11.7 per cent for the first nine months year on year, compared with 2.4 per cent in developed markets and a full-year global forecast of 5-6 per cent. Nestlé China’s food and beverage sales have risen by a 16 per cent compound annual growth rate since 2008, and coffee sales have grown faster than that, says Roland Decorvet, head of Nestlé China. With China’s per capita coffee consumption only four cups per year compared with 400 in Japan, the potential is obvious, he says” (Waldmeir, 2012). According to thecoffeguide.org, “Nestlé, which is the market leader and accounts for around 68% of the retail value of the coffee market in China, has been active in promoting internal production and obtains as much of its raw material requirements from local sources as it can. It has achieved very good market penetration and its Nescafé brand, including ready to serve coffee mixes, is widely available throughout China” (thecoffeeguide.org, 2009).  Nestle introduced Nescafe many years ago and it has become a household name in many places in the world, including China. “Nescafé’s dominance of China’s coffee market cannot be underestimated.  For nearly a decade and more, it has defined Chinese habits of consumption, and continues to do so with new brand ambassadors like Han Han, a popular blogger, writer, and racecar driver.  In the “Live Out Your Boldness” campaign, targeted at young adults, coffee (with milk and sugar, of course) is portrayed as the fuel that drives the post-80s and post-90s generations as they explore their ambitions, pursue their dreams and live life to the fullest. Today, while urban Chinese with enough disposable income flock to Starbucks and Costa for $4 Americanos, Nescafé – with its iconic red mug and its 2+1 signage– remains the byword for coffee for the majority of the population” (Sun, 2012 ). The following bullet points show facts and figures taken from the Nestle website concerning China. Employees • Mainland China, Hong Kong, Macau, Taiwan. • More than 47,000 (includes all partnerships and globally managed businesses such as Nestlé Professional, Nespresso, Nestlé Waters) Sales (2011). Nestle has a huge presence in China, with wide diversification and a long history. Presently they are the coffee market leaders with their take-home style coffees. Gourmet Master must expand their brand in-order to meet this leader. The following bullet points indicate products sold, monies earned and facilities operated by Nestle in China. Nestlé sites in China- • CHF 2.5 billion. • 35 million products sold every day. • More than 90% of products sold in China are locally manufactured. • 1 corporate headquarters (Beijing). • 31 factories. • 4 research and development centres (Beijing, Shanghai, Xiamen and Dongguan). • 3 Nespresso boutiques (Beijing, Hong Kong and Shanghai). Nestle also has diversified in many regions. The following indicate cities and areas where Nestle has made significant market developments. They have built relation-ships over time with remarkable ability to adapt to Chinese customary change and development. Partnerships / products / % / development held by Nestlé • Hsu Fu Chi / confectionery, cereal-based snacks, packaged cakes and Traditional Chinese snack ‘sachima’ / 60%. • Yinlu / ready-to-eat rice congee and ready-to-drink peanut milk / 60%. • Totole / bouillons, recipe mixes, sauces / 80%. • Haoji / bouillons, spicy pastes / 80%. • Dashan / bottled water / 70%. • R&D Beijing: provides specialised support in packaging and analytical science and in development of dairy, nutrition, cereal, beverage mix, and pet care products with strong focus on food safety and quality and consumer insights. Strong basic research in health science. • R&D Shanghai: specialises in development of culinary products for retail, ‘out-of-home’ products for Nestlé Professional, and ice cream. Drives systems innovation in China, including beverage brands such as Nescafé Dolce Gusto. • R&D Xiamen: due to open in 2013. Specialised work in ready-to-drink beverages will relocate from R&D Beijing to Xiamen to support partnership with Yinlu. • R&D Dongguan: due to open in 2013. Will have expertise in baked products and will work closely with Hsu Fu Chi. • 17,000 dairy farmers trained by Nestlé agronomists (2011). • 700,000 tonnes of milk bought from dairy farmers (2011). • 10,400 tonnes of coffee bought from coffee farmers (2011/2012 season). • Construction begins on world-class dairy farming institute in Shuangcheng, Heilongjiang Province to help farmers source high quality milk more sustainably (2012). • 1,000 milking machines distributed free of charge to dairy farmers in Shuang cheng (2012) • Global: Nescafé coffee, Nan infant formula, Maggi culinary products, KitKat Confectionery. • Local: Haoji chicken boullion and Sichaun-style spicy pastes, Totole chicken boullion,Yinlu ready-to eat congee and ready-to-drink peanut milk, Hsu Fu Chi confectionery. The following is a timeline for the growth of Nestle in China. Nestle has developed factories and a National Headquarters in Beijing. Gourmet Master might consider doing likewise since it shows the China mainland the commitment to their country as well as the partnerships developed. In doing so Gourmet Master can build international ties of Taiwan, long considered part of China. • 1874 Started trading activities in Hong Kong • 1908 Nestlé sales office opens in Shanghai • 1920 Nestlé Products Ltd. established in Hong Kong • 1990 Opened first factory, for dairy products, in Shuangcheng, Heilongjiang Province • 1993-2006 16 factories built to meet growing consumer demand • 1996 Nestlé headquarters established in Beijing • 1999 Partnership with Totole Foods • 2001 Opened first R&D centre in China, in Shanghai • 2002 Partnership with Haoji • 2008 Opened R&D centre in Beijing • 2010 Partnership with Dashan • 2011 Partnership with Yinlu Foods, partnership with Hsu Fu Chi (Nestle.com, 2012). Nestle is a strong international company with strong ties to China over more than 130 years. Throughout this historical period Nestle has remained a viable producer of quality goods and services to the Chinese people. Even so, they do not have a monopoly on the coffee industry and are in fact losing market share to newer rivals such as Starbucks and Gourmet Master. Costa According to the Costa website “Costa coffee first poured on to British shores in 1971 at 9 Newport Street, London, by Sergio and Bruno Costa. Today, just a few meters away from where they first set up, the Costa Roastery produces the same unique Mocha Italia blend that the Costa brothers worked so hard to create. Costa Coffee first went International in 1998, opening its first store in Dubai. In the years since, Costa Coffee has opened more than 1800 stores spanning 25 countries” (Costa.com, 2012).  Costa Coffee is expanding at a tremendous rate. According to one source from the Financial Times Corporation, “Most of our expansion, outside the UK, is being driven by China,” says Christopher Rogers, Costa’s chief executive, adding that the company has also even introduced a green tea latte to suit local tastes. “Customers order it in takeaway cups even if they stay in the store, so they can walk round with it afterwards,” explains Mr. Rogers, Costa’s China push is part of a broader offensive by coffee companies to capture market share in the largely tea-drinking nation” (Thompson, 2012). In addition, Thompson states that “Costa’s five-year plan – which it is midway through implementing – is to double its presence to 3,500 stores by mid-2016. Of these, 2,000 will be in the UK. It also plans to install another 3,000 Costa Express coffee machines by mid-2015. Last year, Costa paid £59.5m for Coffee Nation, which had 900 coffee vending machines, boosting its presence in places such as petrol stations and travel hubs. Last year, Costa reported a 24 per cent increase in sales to £819.3m – compared with single-digit revenue increases for Whitbread’s hotels and restaurants divisions – buoyed by 332 new openings, more than half of which were in the UK. It overtook Starbucks as the biggest coffee chain in the UK by number of stores two years ago. However, it is international growth – and a strong presence in Asia – that has made it the crown jewel of Whitbread, analysts say” (Thompson, 2012). According to the Whitbread (2012) website, the parent company of Costa Coffee, “Costa entered the Chinese market in 2007 and is quickly becoming one of the fastest growing Western brands in China. In April 2011 Whitbread announced new five year milestones, to double the size of the Costa network to 3,500 stores and double global system sales to £1.3bn. Our expansion in China will be a key factor in achieving these targets. Andy Harrison, Chief Executive of Whitbread commented: “We are delighted with the excellent progress made by Costa in China in collaboration with our two joint venture partners. Costa is the UK's favourite coffee shop and it is very exciting to see so many Chinese people enjoying the Costa experience. Opening our 100th Costa store in Beijing International Airport is a tremendous milestone for the brand in this crucial international market." Luo Zhiwei, GM for BHG Group, commented: “Costa continues to perform well in the Chinese market with year on year sales rising at a rapid rate. The Chinese market has adapted well and Costa Coffee is now a firm favourite in China” (whitbread.co.uk, 2011). As of the 29th of November of 2012, “Costa Coffee had 223 coffee stores in China with a total growth goal of 3500 worldwide. The total Coffee Shops internationally now is 898 stores in 27 countries” (Whitbread.co.uk, 2012). “Costas return on capital is up from 28.3% to 32.4% (Whitbread, 2012). Costa Coffee is growing, but mostly in the UK. They have over 200 stores in China but many thousands in the UK, where the population is very low. Even so, since Europeans drink so much coffee it makes sense to continue growth in their home country. Despite this, Costa Coffee has great potential in China. With the population income rising more and more Chinese will expand their horizons and taste coffee products. Many will be repeat customers. Since China has 1.35 billion possible customers it only makes sense that Costa Coffee continue their plans to expand in mainland China. Pacific Coffee According to the Pacific Coffee website, “the Pacific Coffee concept was inspired by the coffee culture of Seattle, where coffeehouses were community hubs, serving great Italian espresso-based coffee in generous American sizes, with informality and a friendly attitude. Since its inception in 1992, Pacific Coffee Company has provided world-class coffee to satisfy Hong Kong's growing demand for specialty coffee beverages. In 2005, this home-grown brand was acquired by Chevalier Pacific (Holdings) Limited. Since that time Pacific Coffee has grown rapidly, not only locally but with expansion to the Chinese Mainland, Macau, Singapore and Malaysia. In June 2010, China Resources Enterprise, Limited(CRE) and Chevalier forged a partnership to further expand the brand in the Mainland, with CRE a major shareholder in developing Pacific Coffee under the umbrella of China Resources Vanguard's retail business unit” (Pacificcoffee.com, n. d.). In addition, “the Pacific Coffee brand is recognized as serving the best coffee in Hong Kong, having won numerous consumer awards organized by major magazines and websites. At the 2012 inaugural Smart Card Awards Asia in Singapore, we received the Best Retail Technology Implementation award for our Perfect Cup Card membership programme. Also this year, Pacific Coffee was honored with two awards for our iPhone app – Best Technology Innovation and Best Integrative e-Commerce Strategy – at the Excellence of SME e-Commerce Awards organized by PayPal. At Pacific Coffee, we have a passion for coffee and are committed to making our coffeehouses an urban oasis that promotes a slower pace of life. We strive to provide customers with great quality coffee and beverages, a really comfortable place to hang out and plenty of complementary food choices. To make every customer's visit to our coffeehouse a pleasant one, we are particular in every little detail from quality of our food and beverage offerings, welcoming decoration, soothing music selection to a wide choice of publication. We strive to make our customer experience an affordable luxury” (Pacificcoffee.com, n. d.). Further they state that “coffee is our passion. Since our inception in 1992 in Hong Kong, we have always served the perfect cup to customers from our hearts. Today our success in Asia has created an international clientele and a loyal following of coffee connoisseurs. While we are committed to developing our own brand in Hong Kong and the Chinese Mainland, we now offer entrepreneurs from the rest of the world the opportunities to operate our brand on the global platform” (Pacificcoffee.com, n. d.). They continue by stating that “our passion for assisting the local community has played an important role in defining who we are as a company. Our participation levels are varied and numerous but in most cases our fund raising efforts are dedicated to the disabled or less fortunate children in our community and supporting the environmental causes. And finally, “Pacific Coffee is also well known for its commitment for the sustainability of the environment. Many of our products come from sustainable materials, including organic and fair trade coffee beans. All Pacific Coffee promotional pamphlets are made of environmental friendly paper. To support our ongoing efforts to preserve the earth's natural resources by minimizing waste generated through our operations, we encourage our customers to send us e-mail for comments; We urge our customers to bring their own mugs or tumblers for beverage purchase and in return, we deduct HK$3, RMB 2, SG$0.50 or RM2 off their bills as an appreciation gesture for their support of the environment conservation” (Pacificcoffee.com, n. d.). Lavazza According to the Lavazza website and Wikipedia (2012), Luigi Lavazza S.p.A. (Italian pronunciation: [laˈvattsa]) is an Italian manufacturer of coffee products. Founded in Turin in 1895 by Luigi Lavazza, it was initially run from a small grocery store at Via San Tommaso 10. The business of Lavazza S.p.A. is currently administered by the third and fourth generation of the Lavazza family. Branded as "Italy's Favourite Coffee," the company claims that 16 million out of the 20 million coffee purchasing families in Italy choose Lavazza. According to Bertoldi (2012), Lavazza makes coffee for home use, institutional customers and restaurants. The company primarily operates in Italy, is headquartered in Turin, and employs about 2,000 people. Lavazza's vision is to bring the aroma, quality and culture of Italian espresso worldwide. The core values of Lavazza are based on four fundamental concepts: 1. “Research” that expresses the passion and the intuitiveness to explore new alternatives. 2. “Experiment”, meaning the discovery of new flavors in order to preserve the purity of the coffee aroma. 3. “Evolution”, that represents the continuous transformation process that leads to the creation of a better future. 4. “Innovation”, which is the willingness to break ground to build new paths for further development. According to Lavazza.com, “Lavazza has recently opened fifteen Espression coffee shops in China, with a view to expanding the brand's presence over the next few years in order to offer Chinese consumers the chance to discover an authentically Italian style and flavour experience. With this objective, the company has appointed Guangdong HongCheng Chao Coffee Catering Investment as Area Developer with exclusive responsibility for development of the Lavazza Espression chain in China. The new coffee shops, the latest in a series of successful international launches, are located in Central districts and shopping centres in Shanghai, Beijing and Guangzhou.” Lavazza Coffee, like the other coffee shops, has great potential in China. Since they have only a few coffee shops in a few major cities there’s a large segment of the Chinese population that they can target. At the present they do not pose a great threat to Gourmet Master but they could by deciding to expand more. They should consider it. 3.4.5. Competitive Landscape Competition is the name of the game. Being a first responder has its privileges, but followers can also reap huge financial rewards if they play the game correctly and develop sound business strategies. According to First Research (2012), “consumer taste and personal income drive demand. The Coffee Guide states that “in countries that have a history of drinking coffee, there seems to be a direct correlation between the level of income and the level of consumption. For example, high per capita consumption is found in Scandinavia (by far the highest in fact), and other European countries as Germany, Switzerland, the Netherlands and Austria. All these countries have a history of drinking coffee and also enjoy relatively high personal incomes. Clearly habit and tradition play a significant role in determining the overall level of consumption in a country, but it is noticeable that countries that also have a tradition of drinking coffee but have lower personal incomes, such as Spain, Portugal and Greece, have a considerably lower rate of consumption. First Research (2012) says that “the profitability of individual companies depends on the ability to secure prime locations, drive store traffic, and deliver high-quality products. Large companies have advantages in purchasing, finance, and marketing. Small companies can compete effectively by offering specialized products, serving a local market, or providing superior customer service. The US industry is concentrated: the top 50 companies generate more than 70 percent of sales”. Coffee shops compete with businesses such as convenience stores, gas stations, quick service and fast food restaurants, gourmet food shops, and donut shops”. In addition, Hung, Gu and Yim (2007) state that “a conceptual understanding of how consumers behave in different cultures represents the first step in designing effective international marketing strategies (Johansson and Thorelli, 1985). Such understanding is crucial, because it enables managers to interpret what they observe in foreign markets and postulate how consumers might respond to firm strategies (Zou and Cavusgil, 2002; Walters and Samiee, 2003). Because today’s market is increasingly characterized by hyper competition and well-defined brand positioning, the identification of distinctive target segments offers a fundamental challenge to international marketing (Zou and Cavusgil, 2002; Batra and Tse, 2003). According to one report, “Starbucks is facing fierce competition from international and domestic counterparts.UK-based Costa Coffee, with more than 100 cafes across the country, aims to increase its share of the mainland market to 35 percent by 2015 from the current level. China Resources Enterprise also plans to increase the number of its Pacific Coffee chain in the Chinese mainland fivefold to 50 cafes by the end of this year” (Global Times, 2011). Competition is also coming from within China. As an example of the changing economic abilities of the Chinese, Williamson and Zheng (2004) state that “a decade ago, the possibility that Chinese companies would pose a serious competitive challenge to multinationals looked improbable. It wasn’t surprising, therefore, that, in 1995, just a few years after China’s personal-computer market opened up to foreigners, The Economist predicted that by 2000, multinationals would have captured an 80% market share from their hapless Chinese competitors. And it appeared that this prediction would be on target, as multinationals like IBM, Hewlett-Packard and Compaq quickly won more than 50% of the market. But the 80% figure was never reached — in fact, the numbers went in the opposite direction. Just one year after The Economist’s confident pronouncement, the Chinese company Legend Group Ltd. (known as Lenovo Group Ltd. outside China) became the No. 1 PC supplier in China. By 2000, Legend had 29% of the desktop PC market, and two other local players were at No. 2 and No. 3 with a combined 14% of the market.” With these figures in play is it any wonder that Gourmet Master has opened so many coffee shops in China and plans even more' Competition constraints have changed. For example, “multinationals generally start off with clear advantages in two areas: They have better specific technology, know-how and capabilities, and they have higher level of managerial competence in such functions as marketing and brand building, financial management and IT” (Williamson and Zheng, 2004). On the other hand, according to Williamson and Zheng (2004), they also have four very real handicaps. First, they have poor supporting infrastructure, such as poorly supplied market research which is hard to get in China. In addition, the strong distribution channels market leaders in western countries need are not readily available in China. Also, educating customers as to why they should shop a certain brand is difficult given the lack of efficient logistics and distribution options. “A second handicap for multinationals is the lack of flexibility and higher costs imposed by the need to integrate operations in China with global organizations. Multinationals also have to implement international corporate standards that can put them at a competitive disadvantage in comparison with local rivals that are content to match Chinese norms. And the slower decision making that can result from having to involve a corporate headquarters and sister subsidiaries can be a fatal handicap in a fast moving market” (Williamson and Zheng, 2004). “Third, multinationals’ ability to reap economies of scale and spread high fixed costs is checked by the fragmentation of the market, provincial trade barriers and the protection of local enterprises. Until recently, multinationals wishing to build their coverage across China had little option but to enter joint ventures with different partners, sometimes in tens of provinces. The resulting fragmentation of their operations makes seamless integration virtually impossible. These difficulties in exploiting scale economies reduce the gap between multinationals operating in China and Chinese enterprises that typically start from a strong base in a geographically limited provincial or local market (Williamson and Zheng, 2004). “A fourth handicap is the fact that many markets in China are in an early stage of development. Despite the impression given by sophisticated consumers in central Shanghai or Beijing, more than one billion of China’s consumers can still only afford products that serve their basic needs. Thus the superior quality, functionality or service offered by multinationals cannot be translated into premium prices or higher market share. The same is true for business and industrial buyers that are struggling to finance ever increasing demands for new investment (Williamson and Zheng, 2004). In addition, “coffee shops depend greatly on customer traffic and are most often located in areas with convenient access for pedestrians or drivers. Typical locations include downtown or suburban retail centers, shopping malls, office buildings, and university campuses. Store format and size vary by site, as some locations offer more space than others. Between 1,200 and 1,600 square feet is typical. Some chains offer a kiosk format, without seating, for small spaces like airports and grocery stores. A drive-thru window offers customers convenience and increases off premise consumption. Since many customers consume beverages on the premises, a comfortable environment is important to provide a positive customer experience and increase store traffic” (First Research, 2012). According to Lam (2011) Pacific Coffees, “since state-owned China Resources Enterprise, maker of Chinese wines Huadiao and Er Wotou, acquired 80 per cent of Pacific Coffee from Chevalier Pacific 18 months ago, the chain's presence on the mainland has grown from five shops to 33 and is slated to go up to 50 in the next two months. The group's general manager for strategic planning and investor relations, Vincent Tse Tan-hon, said: 'To expand our network, we will explore alternative markets that others have not yet developed.' Tse said coffee consumption on the mainland will see explosive growth in the coming decade. According to Japanese trading company Marubeni, the market is set for a 20 per cent expansion every year in the near future.” 3.4.6. Bakery Competitors Coffee service is the business we’ve examined so far but we also need to take into account that Gourmet Master is also a bakery specialist. In fact, many of the stores, including the one in Guangzhou, have a bakery shelf space allocation that far surpasses the coffee counter space. Bakeries of all kinds will impact Gourmet Master in ways they won’t impact other coffee shops. But this difference can also play to their advantage, since they will be drawing on customers that the other coffee shops may not include as clientele. Christine is one such bakery with a huge presence in China. According to Flannery (2012), “plans for brisk expansion in China at Christine International Holding, the Shanghai-based bakery group controlled by Taiwan businessman Lo Tien-An, are on track”. Flannery goes on to say that “Christine, which is about 17% owned by Lo and 12% by Marubeni of Japan, competes in bakery sales with Gourmet Master, which runs the 85 degree coffee chain in Taiwan, the mainland, and elsewhere”. He states that “Christine had about 898 stores at the end of 2011 and expects to increase that to 1.200 by the end of 2013”. Another bakery chain store is Breadtalk, a chain from Singapore. According to Yu (2012) of China Daily, “Breadtalk has plans to increase its number of mainland outlets from 300 to 550 in the next couple of years”. “George Quek, the company's founder and chairman, told China Daily he expects its mainland revenue to grow at least 30 percent a year, as Chinese consumers opt for a lunchtime sandwich, roll or baguette instead of more traditional fare”. In addition, Yu (2012) states that many bakeries face stiff competition. “Wang Chunrong, the marketing director at Jing An Bakery, a legendary local bakery brand from Shanghai, admitted his firm is "under great pressure nowadays to compete. “In its early days, people would queue for hours to get a taste of its bread, said Wang, but as more foreign brands arrived, one by one since 2000, local bakeries have been losing market share. We used to have over 50 percent of the market share in Shanghai. But nowadays, I doubt if we have 2 percent," added Hunter Pan, Jing An's general manager” (Yu, 2012). Korean bakery chains are also expanding fast in China says Im (2012). “Paris Baguette recently opened two new outlets in the heart of Beijing while it’s archival, Tous les Jours, just opened a new store in Tianjin. Both chains offer affordable pastry and hot drinks, and enjoy a strong financial backing from their parent companies in Korea. Following their initial success, both brands now plan to open more stores in China’s 2nd tier cities”.  Gaining a competitive edge over these rivals will prove challenging to Gourmet Master and may make profitable survival dependent upon research, application and specialization, as well as continued analyzation and implementation of new trends, strategies and options. 3.5. Porters Five Force Model 3.5.1. Competition from Rivals Rivalry is high since nearly all major coffee companies are trying to get into China. Pacific Coffee, now backed by the Chinese State has a great advantage as they push to get into universities, banks and other shops. Starbucks is already in China and expanding as fast as they can. And since Gourmet Master is also in the mainland they too are pressing to expand. The other players are doing what they can to be included in this new opportunities for expansion and other smaller mom and pop shops as well as entrepreneuring students and businessmen add to the real estate and coffee customer grab. 3.5.2. Competition from New Entrants The threat of new entrants is moderate to high since many are catching the coffee buzz and wanting to ride the wave of the future. Setting up coffee outlets or stores is easy. Costs are relatively low, overhead low and paperwork minimal. 3.5.3. Competition from Substitutes Competition is moderate to high since there are many substitutes in China. Tea is the biggest challenge of course and many other new coffee products and companies are entering the market. “The threat of substitute products and services for Starbucks is substantial. Specifically, substitutes for Starbucks Coffee include tea, juices, soft drinks, water and energy drinks, whereas pubs and bars can also be highlighted as substitute places for customers to meet someone and spend their times outside of home and work environments” (Sinkovics, 2009). 3.5.4. Supplier Bargaining Power According to Sinkovics (2009), “Starbucks suppliers have high bargaining power due to the fact that the demand for coffee is high in global level and coffee beans can be produced only in certain geographical areas. Moreover, the issues associated with African coffee producers being treated unfairly by multinational companies are being resolved with the efforts of various non-government organizations, and this is contributing to the increasing bargaining power of suppliers”. Gourmet Master sources beans from Guatemala so those suppliers also realize they have power. Developing other avenues of bean sources could loosen this grip and provide Gourmet Master more flexibility. Pacific and Lavazza source their beans from multiple places so the buyers in these cases have little power. 3.5.5. Buyer Bargaining Power According to Goss (2012), “buyer bargaining power refers to the pressure consumers can place on the industry, influencing companies to provide better products, service, and lower prices. One determinant of bargaining power is the number of buyers available. Another key driver that gives buyers leverage is if they can do without the product for long durations. If so, the seller incurs losses when customers discontinue use of the product over long periods. However, coffee drinkers are high frequency buyers, purchasing the drink multiple times throughout the week, if not more often. To these people, coffee has become an integral part of their everyday lives. Because they cannot do without coffee, coffee shops can depend on repeat customers. Switching costs are another element to consider when gauging buyer bargaining. If switching costs are high, buyers are least likely to change over to a competing product. Similarly, no cost is incurring when switching to another company. Thus, this makes coffee shops by having to constantly improve their product lines, drive down costs, improve service, and other aspects of their offerings to keep customers loyal their shops versus trying another brand. The buyer’s per-capita consumption also plays a role in determining attractiveness of an industry. During recessions, disposable income becomes lower and consumption is cut. When consumer spending is lower, people are less likely to spend on snacks and coffee”. Sinkovics (2009) state that Starbucks customers possess large amounts of bargaining power because there is no minimal switching cost for customers, and there is an abundance of offers available for them. According to the 85(C website they use beans specific to Guatemala. The beans are expensive and so the company must take care in their pricing strategy which again gives a lot of power to the customers. Pacific Coffee, according to their website, sources their Arabica beans from around the world - Africa, Central and South America, Hawaii and Asia. In some ways if they can get them in Asia they can reduce their prices and give customers more of a choice and a lower price. In this way the customers lose a bit of their power even though there are many substitutes, but for which, by switching, they must pay a premium price. Lavazza buys its coffee beans from over 50 countries so in this particular case they have a great deal of leeway on pricing, quality, taste and a variety of other factors. Costa Coffee also obtains beans as far away as Central and South America, Africa and the Far East which gives it an advantage over others. In this way consumers also have a bit of power to control purchase cost and make choices. 3.6. Competitive Strategies The purpose of business is to make money and grow. Competition can be fierce and winning strategies are key to developing and keeping a positive growth margin. No company can long sustain itself if it is not continually revamping its strategies, analyzing its competition and developing new ways to attract and keep customers. Following are some ways being used or that can be used to increase sales and stifle competition. 3.6.1. Korean Example (Coupons) One example of how to generate sales and keep customers loyal is the practice of couponing being applied by coffee shops in Korea. Coupons are not a new concept, but the use of this type of coupon and how it is implemented as in this as a strategy can be a crucial factor in maintaining a competitive edge in an otherwise very competitive industry. “Amid the tremendous popularity of takeout coffee shops among young Korean, foreign coffee franchises and domestic coffee firms are rushing to increase the number of branches nationwide (Hong, 2001). By way of example, Starbucks opened its first Korean branch shop in front of Ewha Womans University in 1999, and its sales have increased dramatically from 8.6 billion Won in 1999 to 171 billion Won by 2008. New coffee shops have been opening at a steady pace across the country, resulting in a consistent double-digit growth (Dong-A Ilbo, 2009). Getting customers in and keeping them in a particular coffee shop can be a tricky combination of skill, effort and luck. “Until the mid-2000s, foreign brands had dominated the market. However, taking advantage of the long-term global economic recession, local brands have been rapidly expanding their market share by luring customers with lower prices (Korea Economic Daily, 2009). Thus, although Korea’s coffee shop market is expected to maintain its rapid pace of growth, the market is also expected to become increasingly competitive. In this environment, coffee shops have resorted to coupon marketing strategies to lure repeat customers. Many shops have been issuing stamp coupons with which customers can get a free drink when they collect 10 stamps (Seoul Economy, 2009)” (Lee, Yeu, 2010). According to the article, using coupons has been something the Koreans have practiced for years and the population is very comfortable redeeming them. In addition, “the results of this study suggest that Korean consumers exhibit strong intentions to redeem coupons when the expiration date is near. This expiration date affected coupon value, which in turn influenced the consumer’s intention to redeem the coupon. Although brand loyalty did not have a direct and significant effect on redemption intention, it indirectly influenced redemption intention via coupon value. Therefore, providing coupons with shorter expiration periods may increase the coupon redemption rate and encourage consumers to revisit” (Lee, Yeu, 2010). In this case, and in this culture, it seems that using coupons is an excellent strategy for increasing market sales and developing or keeping customers. Might the Chinese respond as favorably' That may need to be researched further. 3.6.2. Other Differentiation Strategies Gourmet Master has one concept going well for it; bakeries. Most other coffee shops do not include a wide variety of baked goods, though some have a few items. This concept may bode well for the chain in Taiwan and could possibly do so in mainland China as well. They have shown so far that they can be successful in the bakery category and thus are a viable competitor. But Gourmet Master has competition on the bakery front as well as that of the coffee consumers. Developing a game plan against two different opponents has its own challenges and opportunities. A change in atmosphere could help the chain compete and make 85(C a destination rather than a take-out establishment. Providing comfortable seats and wifi could go a long way to enhance their appeal to those who seek out those qualities. A larger coffee selection and the introduction of more western foods could also be a suggestion. 3.6.3. Gourmet Master Strategies Gourmet Master has some advantages that other coffee shops entering China do not possess. First, they are a Chinese company and therefore speak the language, can understand the nuisances of the culture and can develop the guanxi required in China (Qiu, 2010). Second, they also know that coffee is not a necessity for most Chinese people, but that cakes are a part of various traditional celebrations and festivities so are very important (Qiu, 2010). Cakes are part of most important occasions and therefore developing and promoting products the Chinese must have enhances their coffee sales. These products have been tailored specifically to meet the needs and the tastes of the Chinese populace. For instance, most coffee shops make their coffee fresh but their baked goods are made elsewhere and delivered to the shops. Gourmet Master has in-house bakeries in each of its stores with windows so the customers can watch the process in real time. Freshness on a daily basis is a key factor in their sales strategy (Qiu, 2010). Third, (and this could be a place they might consider changes) Qiu stated that they focus on the food itself rather than the ambiance. They focus on quality and meeting the needs of the local people, and make changes according to what the Chinese people want. “It is actually part of 85(C’s strategy to be present on high-traffic street corners, with scant cafe seating areas that lack much in terms of ambiance. In contrast, Starbucks boasts leather armchairs and are generally located on quieter pedestrian streets or inside of shopping malls or plazas” (themalaysianinsider, 2013). In addition, Gourmet Masters’ prices range lower than most of the others. In the survey taken comparing Gourmet Masters’ espresso to the other coffee shop chains mentioned in this comparison, Gourmet Masters’ was significantly lower with not much difference in taste. According to Main (2012) Gourmet Master’s 85C outlets offer a 16-ounce serving of latte at NT$65 ($2.15) compared with NT$110 at Starbucks. There will always be differences among consumer segment preferences and, since a person’s taste varies, these results/observations may be skewed and not scientific, but to those interviewed during several visits, the quality of the espresso did not seem to lose much with the reduction in price. “Most people know 85(C as a bakery not a coffee house, but that is all part of their marketing strategy along with an ever-evolving menu featuring such oddities as Taro Milk Tea, Sea Cliffs Coffee and Snow Rabbit Cake” (Main, 2012). The company also uses Chefs from 5 star hotels complete their branding strategy. Hiring the best insures the quality and reliability of the product. 4. CASE STUDY ANALYSIS 4.1. Power of Customers Customers are the power behind their growth in China and Gourmet Master must watch what Starbucks and others are doing if they wish to succeed. “One factor helping Starbucks in China is its loyalty program, with three times the penetration of members per store than in the U.S., the company says. The Chinese consumer has embraced this concept,” And according to John Culver, President of China and Asia-Pacific Starbucks, “Our most loyal customers are coming to our stores four, five or six times a month, so we have a lot of room to drive frequency there” (Gasparro, 2012). Finding ways to meet the Chinese consumers’ needs during this transition period in Starbucks history will play a vital role in securing market share and sustaining value. According to the survey done in Guangzhou, Starbucks is the destination of choice. They have the momentum and the name recognition and the coffee shops to support their branding campaign. Customers repeat because their friends also repeat and they identify with the brand. Giving the customers something to identify with is one way of insuring brand loyalty. 4.2. Substitute Products Substitute products in this category are teas of all kinds, sports drinks, soft drinks and of course plain water. The offering of other coffee shops are also a large factor in this category. Starbucks, for example, serves mint hot chocolate because many Chinese do not like the bitter taste of coffee. “The company is catering to non-coffee drinkers like Cheng Xiaochen, a 27-year-old English teacher who hates coffee but occasionally meets his students and business partners at Starbucks in the afternoon.”It's a good place to meet people," said Mr. Cheng, "but coffee is so bitter it tastes like Chinese medicine." Mr. Cheng said he sticks to mint hot chocolate and looks for other sweeter flavors” (Burkitt, n. d.). 4.3. Consumer Behavior in China According to Hung, Gu and Yim (2007), “among the pioneering attempts to understand how the 1.3 billion Chinese consumers behave Schmitt (1997) highlights age group differences as a fundamental characteristic of the Chinese market. Whereas some age group differences can be attributed to intergenerational gaps, which constitute an integral part of social development, others point to drastic changes in China’s social institutions. Belk and Zhou (2002) explore the onset of China’s revolutions and political campaigns during the past 50 years, and postulate that these events help explain how some Chinese consumers behave today. Fong (2004) notes that major changes in the country’s institutions have indoctrinated parents and their children with conflicting ideologies and present them with different opportunities and constraints. Egri and Ralston (2004) examine the values among managers and professionals in China and the United States, and find that the Chinese/US cohorts who grew up during China’s closed-door policy evidence the least similar value sets. These observations suggest that China’s recent eventful past, at the societal level, has mapped its people’s life experiences at the individual level, a relationship that deserves further investigation. China has undergone multiple distinct and momentous revolutions and political campaigns during the past 50 years. Few countries have undertaken such rapid social experiments for involving successive age groups in the way China has (Rosen, 2000; Belk and Zhou, 2002). “Therefore consumer demand in China, a socialist market economy, may be more strongly affected by institutional decree than it would be in a full market economy. Moreover, China is the largest developing economy, and attracts many MNCs that could benefit from the findings of our research. In summary, this research outlines and tests a segmentation approach that may enable MNCs to use readily available information (e.g., census data about country demographics) to postulate information that is usually difficult to collect in transitional economies (e.g., motivations to consume). A comparison with US consumers in the latter part of this research highlights the effects of changing institutions on consumers in China, and contributes to our understanding of international segmentation” (Hung, Gu, Yim, 2007). 4.3.1. Economics “Detailed statistics on the internal consumption of coffee are not readily available but all the indicators suggest that it has grown very rapidly over the past ten years or so. Gross imports into China (including Hong Kong and Macau) in 2009 reported by the ICO totalled 617,000 bags, although the true figure is probably much higher as not all the imports of coffee from neighbouring countries such as Viet Nam are always recorded. Of the gross import total, 34% comprised processed coffee. Exports and re-exports totalled 568,000 bags, (536,000 bags green, 26,000 bags soluble and 6,000 bags roasted). Internal production, primarily in the Yunnan Province, is thought to have been around 550,000 bags in 2009.  This suggests that consumption might be somewhere in the region around 600,000 bags in 2009” (Coffeguide.org, 2012). 4.3.2. Politics and Legislature Politics are always a hard issue to judge and, and because of the complexities involving regional and central governments, are especially so to foreigners looking at China. But since Deng Xiao Ping’s opening up, western companies have been running to get on the China bandwagon. As long as the policies remain open enough for companies to compete, they will continue to do so. So far no new policies have put into effect by the new government (2013) that radically alters the situation. According to the American Chamber of Commerce in China (AmCham) 2012 China Business Climate Survey Report, some policies and structures are not advancing as fast as they ought to or as fast as some entities would like. “Amid these broader macroeconomic pressures, there are indications that in some key areas, business regulations have failed to keep pace with China’s increasingly sophisticated and globalized economy. Based on survey results, there are growing concerns about government policies that require foreign invested enterprises to transfer technology in order to be able to sell their products and services, as well as a licensing process that discriminates against non-Chinese firms. Members indicate a lack of confidence in China’s cyber security environment. Also, at the time of the survey (2011), respondents reported seeing little progress on intellectual property rights protection, though new government initiatives announced last year may yield improvements” (AmCham china.org, 2012). 4.3.3. Trends According to First Research (2012), the trend for coffee consumption is up. They say their is “moderate Growth Forecast for Industry - Output for coffee shops and other limited-service eateries is expected to rise by 4 percent in 2013 compared to 2012, according to the latest industry forecast provided to First Research by INFORUM. Demand for coffee shop products and services continue to be driven by consumers' desire for affordable luxuries. Large chains can market their products, such as Starbuck’s pumpkin spiced latte, on a national level, according to The Wall Street Journal. Single-store companies establish themselves as community spaces for the arts and socializing, offering loyalty programs and coupons to boost repeat business, and also providing free Wi-Fi and other amenities to attract customers. Industry Impact - Even as their popularity grows, coffee shops face competition from other specialty eateries, such as donut shops that also serve coffee beverages” (First Research, 2012). This trend also applies to China as can be seen by the many coffee shops and chains that are popping up all over the more westernized Chinese cities. Nearly every coffee chain is planning on expanding and not by just a few outlets. Starbucks plans to add 800 new stores (Burkitt, n. d.), Gourmet Master is adding more and Lavazza, Costa and Pacific are also adding to their already existing stores. According to Doherty (2012), “Nestle, due to present results from a Chinese location for the first time tomorrow, has prepared for rising demand in the country with Nespresso machines celebrating the year of the dragon (2012) decorated by Hong Kong-based luxury brand Shanghai Tang. Starbucks Corp. (SBUX) said in April it plans to introduce its Verismo single-serve system in the country in 2013”. “China’s coffee shop market is forecast to surge 55 percent to 4.5 billion yuan ($720 million) in 2015 from 2.9 billion yuan last year (2012), according to data from research company Euromonitor International” (Bloomberg.com, 2012). According to Delfeld (2011), as of 2011 “Japan’s per capita coffee consumption was 75 percent of that in America and still trending upwards. As you can see from the chart below, this is pretty much the pattern South Korea followed. China will also follow this trend”. [pic] Figure 13 Per Capita Coffee Consumption Japan/Korea - Delfield, Investment U, 2011 According to Bloomberg Businessweek (2102), “Whitbread Plc, reported first-half profits rose 11 percent led by gains at its Costa coffee chain in China”. Also, according to some journalist accounts, “the symbol of the "social trend" of Shanghai in the 1990s was Paris Spring, a department store on Huaihai Road that is known for its imported goods and latest fashions. Indeed Huaihai Road, formerly Avenue Joffre in the French Concession, has long been a symbol of Shanghai's European lifestyle. A so-called coffee culture has recently arisen on this street indicative of the pro-Western nature of the Shanghai nostalgia” (Lu, 2002). “Coffee, unlike tea, has always been regarded in China as exotic or as a sign of a Western lifestyle. Whether one drinks coffee or drinks tea has been seen not only as a difference in personal preferences but also as a reflection of the division between progressiveness and conservativeness as relates to lifestyle. Lu Xun once mentioned that he preferred green tea to coffee and tended to think of coffee as the beverage of "foreign mandarins" (yang daren). He said his tea-drinking habit was "perhaps a time error of mine." In this statement Lu Xun was not being apologetic but cynical - he was commenting on the social mood at the time that saw coffee drinking as trendy and sophisticated and tea drinking as somehow countrified. Cao Juren (1900-1972), a noted journalist who lived in Shanghai from 1921 to 1950, made a similar observation. Under the penname "Old Country Rustic" (To Lao Er), Cao published a series of essays on pre-1949 Shanghai. "Coffee is not my favorite - this is all too obvious since I am a country rustic," Cao satirized as he was commenting on coffee drinking and coffeehouses in old Shanghai. The latter, according to Cao, were mainly for foreigners and "Westernized" Chinese. Interestingly, one may observe a similar sentiment in the 1930s in the Arabian world, where tea, because of its non-Arabic origins, was depicted variously as an "intruder from Iran," "a Persian impostor" and "a son of the Reds (i.e., the Russians)." The point that tea is an outsider echoes the Chinese perception of coffee being alien and Western” (Lu, 2002). This trend to drink coffee, as shown in figure 24 at the end of this paper, provides the significant age group (18-23 years old) that consumes the products. By this trend we can see that the younger generation wants to experience new ideas and opportunities. The other age groups combine do not equal the consumption by the younger customers. 4.3.4. Culture Of course culture plays a role in the consumption of coffee and its’ purchase. This study cannot go into all the ways culture and society at large can play a role in the purchasing habits of an individual, country or world. We therefore will refrain on making any deep observations related to the category other than to point out the fact that China is a tea drinking culture in a modern world where coffee drinking is a sign of status. 4.4. SWOT Analysis (Strengths, Weaknesses, Opportunities and Threats) The following comparisons expand the SWOT Analyses for the specified coffee companies (Gourmet Master, Starbucks, Nestle, Pacific Coffee, Lavazza and Costa Coffee). 4.4.1. SWOT Comparisons Strengths |Gourmet Master |Starbucks |Nestle |Pacific |Lavazza |Costa | |-Taiwan Company |-Well known |-Established brand in |-Partly State Owned |-Italian |-40 years experience | | | |China | | | | |-Surpassed Starbucks in|-Western | |-Highly Profitable |-Well known brand |-In 25 countries | |Taiwan | |-Take home coffee | | | | | |-Visionary leader | |-100+ shops in China |-Built on quality |-Largest British chain | |-Bakery (4th largest in| |-Building China dairy | | | | |China) |-Well established |farms |-Strong brand image |-Strong worldwide |-Brand well known | | | | | |presence | | |-Centralized kitchens |-Financially strong |-31 Factories |-Sociably responsible | |-Staff highly trained | | | | | |-New to China, wide | | |-New leadership |-Fun workplace |-Four China R & D |-Free WiFi |opportunities |-Customers consider it | | | |Centers | | |high level. | |-Stable margins |-Family centered | |-90 shops owned by |-Home brewing machines | | | | |-Highly diversified |company, others | |-Good value | |-Strong HR |-Destination | |franchised |-Edible coffee cups | | | | |-3 dedicated boutiques | | | | |-Imported style bakery |-WiFi | |-Focused HR and MGT | | | |items | |-Nespresso machines | | | | | |-Comfort-able | |-Diversified into wines| | | | | |-Using China suppliers | | | | | |-World expansion | |-50 store expansion | | | | | |-Training Chinese dairy| | | | | |-Great benefits |farmers |-Shops in Ole, banks, | | | | | | |universities, companies| | | | |-Home brewing machines |-Chinese corp. HQ | | | | | | | |-Street vendors | | | Table 5 - SWOT Strengths Gourmet Master faces extremely strong competition, but comparatively they also maintain a strong marketing position. Compared with other coffee shops, Gourmet Master is the only ‘Chinese (Taiwan) company’ competing in mainland China. The others are western brands. This combined ‘Western/Chinese’ understanding provides Gourmet Master with strong insights into the market that others do not have. Gourmet Master has the advantage of leadership that not only speaks the language and understands the customs of China, and, being Taiwanese, can comprehend the subtle nuances that take place in the lives and desires of their Chinese consumers. These factors give the Gourmet Master team the advantage in terms of building guanxi and understanding. The bakery is another great strength for Gourmet Master, though others may soon follow. The items are extremely tasty, and the variety is plentiful. European and other country breads, pastries and sandwiches are well represented. Customers flock to these items, and the in-house kitchens are a definite added feature since they can provide freshness and quality products that are displayed conveniently. In comparison, Starbucks has a strong brand and an expanding presence in China. They represent western ideals and experiences and provide a ‘comfort zone’ that many Chinese seek. Their stores are comfortable and warm, providing a home-away-from-home atmosphere. These appeal to the Chinese, who seek a neutral/safe haven away from home and from work that lends prestige to their activities. Starbucks is also a ‘family’ business. They are concerned about their people, which extend to family members and close friends. They make it a point to provide strong training strong making the Starbucks working experience fun and rewarding. Developing personnel is key to employee loyalty which reflects in employee service representation. This service then is extended to the customers, who feel it and enjoy the ‘Starbucks experience’. Pacific Coffee, in some ways, is similar to Starbucks but has the distinct advantage of being the only State-Owned coffee shop. “China Resources Enterprise Ltd., the State-backed company that’s China’s largest brewer, has bought control of Hong Kong’s second-largest coffee chain, aiming to expand and surpass Starbucks Corp. on the mainland” (Leung, Liu, 2010). This gives them a strong advantage and makes them a major contender. The other coffee shops have strengths that give them some distinct advantages, but Starbucks and Pacific Coffee are to-date, the major players in China. Nestle is slightly behind the curve in their development of coffee shops, though they lead the country in overall coffee sales since they’ve distinguished themselves through the take-home coffee market. They also have a strong presence in China with their research facilities and their work with local farmers. They, too, are a major player, but somewhat slow on the brick and mortar side of the coffee shop business. Whether they can make the transition or not is yet to be seen. Lavazza is new also new to the China mainland, with only a few shops in a couple major cities. They have been slower to expand than the others but still have room for growth. Costa Coffee brings a genuine European flavor and culture to the China mainland. They plan to double their stores to 500 by 2016 and have built a third roasting facility (in Europe) in-order to supply its’ outlets with the needed products. The next category is the weaknesses for each coffee company. Weaknesses |Gourmet Master |Starbucks |Nestle |Pacific |Lavazza |Costa | |-Personnel |-Expensive products |-R&D lacking |-New to China |-Innovations may falter|-Small market share (35| |inexperienced | | | | |stores) | | |-Aggressive expansion |-Other product issues |-Chinese looking |-Country portfolio low | | |-No WiFi | | | | |-New to China | | |-Lack of diversity |-Mostly take- home |-Low brand loyalty |-New to China | | |-Quality control | | | | |-Older customers | | |-Competing Coffee shops|-Bad PR |-Bureau-cratic cost |-Few shops | | |-No comfy seats | | |structure | |-Pricy | | |-Qualified trainees |-Over diversified | | | | |-New to Mainland | | |-Weak senior staff | |-Weak brand name | | |-Brand awareness in | | | | | |-Not fully westernized |smaller cities | | | | | | | | | | | | |-New company | | | | | | | | | | | | | |-Atmosphere homogenized| | | | | | | | | | | | | Table 6 - SWOT Weaknesses Gourmet Master has some definite weak points. Most notable is the atmosphere of their shops. The interiors are rather bland and uninviting, though well-lit and comfortable. The atmosphere is very conducive to take-out customers, but not at all inviting to the sit-in crowd. No WiFi or comfortable chairs add to the list of weaknesses. Compared to Starbucks, Costa and Pacific coffee shops, Gourmet Master lags in these features. The definitely have room for improvement. Lavazza is similar to Gourmet Master in ambiance and not very appealing. Nestle, being mostly take-home, is not a contender in the category which may weaken the entire brand position for them in China. The lack of coffee shops by Nestle is a considerable factor in overall brand management and should be addressed by the company. Another point to consider is the coffee product line. Their coffee menu is average, with some variations, but offers no real ‘experiences’ that might draw a more diversified and sophisticated crowd. Compared to Starbucks and others, their menu list is short. More focus seems to be on the bakery. Starbucks is weak in opposite ways. They have few bakery items but a wide variety of coffees and other drinks. Costa, Lavazza and Pacific Coffee shops are similar. Nestle of course has few coffee shops so the entire coffee shop spectrum is weak. Pacific Coffee also has the distinction of being State-Owned, but this could prove fatal since running a coffee business is not something the State may have experience with/insights into. Gourmet Master is not in the take-home coffee business like Nestle or even some of the others. They could definitely examine this as an option. Lavazza, which is fairly new to China, has that fact itself as a weak point. Other coffee shops are far ahead in numbers and growing. Lavazza is lagging in this area. Pacific Coffee needs to enhance their senior staff in order to make investors comfortable, although it may not be much of a factor to the ordinary customer. Costa Coffee has a weak name in China where building brand awareness is key. Having weaknesses is not necessarily a bad thing. Identifying them so that the companies can build their brands in a successful manner is necessary. Each of the companies is in business in-order to make a profit and the best way to do so is to develop their brands strong and remove the barriers that prohibit their expansion. The next chart will show the opportunities each coffee company is developing in China. Opportunities |Gourmet Master |Starbucks |Nestle |Pacific |Lavazza |Costa | |-Opening 30 shops in 2013|-BRIC expansion |-Fast Track Leadership|-New alcoholic |-Expansion options, |-Expansion | | | |(NFLP) |products |only a few stores now |opportunities | |-Bake what clients want |-Acquired Evolution | | |in China | | |(remove low-sale items) |Fresh juices and La |-Take-home machines |-China state-owned | |-Advertise | | |Boulangene bakery | | |-World renown name | | |-Develop better eat-in | |-Wide name recognition|-Focusing on banks, | |-Common tea history | |atmosphere |-New products | |universities, |-Quality product |with China may enhance | | | |-China bean |companies | |future options | |-Offer an experience |-Training Chinese |investment, government| |-Take-home machines | | | |farmers to grow coffee|Favored |-Organically grown | | | |-Advertise on National | | |acceptance | | | |holidays, QQ, others | |-Offer more Healthy | | | | | | |products | | | | |-Rebrand as Western with | | | | | | |Chinese characteristics | |-Focused on chocolate | | | | | | |during financial | | | | |-Flag store | |crisis | | | | | | | | | | | |-Offer incentives to | |-Opening Nestle Cafes | | | | |lounge | | | | | | | | | | | | | |-Diversify drink | | | | | | |categories | | | | | | | | | | | | | |-Joint venture | | | | | | | | | | | | | |-Offer WiFi | | | | | | | | | | | | | |-Sponsorships parade | | | | | | Table 7 - SWOT Opportunities Opportunities for Gourmet Master abound. Having proven themselves in Taiwan against Starbucks and other shops, Gourmet Master has some tremendous options for the China mainland. Gourmet Master is welcome and expanding in China. They have a presence in many cities with the option to expand further. There are hundreds of cities where the company can flourish. Already they have a presence in a few of the major cities, with excellent success. The bakeries are a hit and the company is diversifying their product line to meet the Chinese demand and taste. Since bakeries are a favorite among the Chinese, extending their products into larger venues such as Metro, Wal-mart and other western companies that draw Chinese customers seeking western experiences is an option. Also maximizing their presence through advertising, which the Chinese do in big ways, is a solid option. Building a float for a parade, sponsoring a team or venue or using the internet and popular mediums like QQ and Taobao can add market value. Additionally, the Chinese like things big. It seems a potential advantage that Gourmet Master should build a large flag ship store with features such as a sit-down lounge, plenty of product space, comfortable seating, large screen TV and other amenities to enhance and help spread the experience. This would be both an image-building tool and spread the word about Gourmet Master. Perhaps even having a talent show which is broadcast to other areas highlighting local talent and sponsored by Gourmet Master could improve the brand and the awareness. Since other bakeries are beginning to flourish in China standing out is a must if Gourmet Master plans on capturing market share. Promoting bakery items needs to be enhanced through advertising and other means. Bus wraps, billboards, radio and TV spots, joint ventures and even State-Owned options are a consideration. Since the China State already has an investment in Pacific Coffee this option may not be viable but in China where the government has a strong control over many parts of the market system, working with them can be a strong point. They can also challenge Nestle with a new take-home product, either bakery items or coffee. They can market the mix as an extension to their regular bakery/coffee shop products. Having the ability to order online would also enhance this option. Since the other coffee shops will be expanding their presence in China, Gourmet Master needs to keep their expansion plans developing. Second and third tier cities as well as the major ones need to have their focus. As western influences trickle down to smaller areas Gourmet Master can also extend their presence. Remembering that most families have a child somewhere/sometime in a university setting and that most of these students will enhance their experience by at least visiting a coffee shop, marketing to smaller venues can also be quite productive. Starbucks might well be moving up as Gourmet Masters chief rival now that they’ve acquired a bakery and a juice company. Integrating these new features into their product lineup will definitely enhance their desirability and customer response. Offering these products will attract market segments that previously untapped by Starbucks. Nestle has more options now that they’ve introduced a take-home machine that customers can purchase. The old coffee pots used in previous years are now replaced by professional machines that dispense quality coffee mixes that customers prefer and enjoy. In addition, developing coffee shops is a definite option they can/should pursue in-order to complement the penetration of their take-home products. The Nestle name is already highly visible and having Nestle coffee shops would enhance their bottom line. Selling their chocolates and other items in these shops would also appeal to many customers. Pacific Coffee may be on the verge of a national brand explosion in China. Because they have been acquired by a State-Owned subsidiary, moving into new areas previously untapped is a very real possibility. Small shops in businesses, banks, universities and other venues is a very real option. The competition in China will not have this advantage. Another factor that Pacific Coffee has introduced is alcohol-based coffees. This seems to have great appeal to the Chinese and thus may quickly catch on. Using this to their advantage may well enhance their brand. Lavazza is at the beginning stages of their development in China. Most people don’t know the name despite it being world renown. Brand development is must as a first step in China. Building more shops is a highly desirable way to accomplish this goal. Costa Coffee is growing at a sustainable rate. Since many students and vacationers travel to Europe from China the Costa name is well known. Since the English and the Chinese share a rich history of tea, their common past may well enhance this new phenomenon in China. Costa should capitalize on it. The final category in the SWOT analysis tool is the threats each company must face. That chart follows on the next page. Threats |Gourmet Master |Starbucks |Nestle |Pacific |Lavazza |Costa | |-Other category brands |-Other Coffee Shops |-Other Coffee Shops |-Other Coffee Shops |-Other Coffee Shops |-Other Coffee Shops | | | | | | | | |-Other bakeries |-Real estate prices and|-Real estate prices and|-Real estate prices and|-Real estate prices and|-Real estate prices and| | |locations |locations |locations |locations |locations | |-Coffee shop/bakery | | | | | | |combos |-Import taxes |-Import taxes |-Import taxes |-Import taxes |-Import taxes | | | | | | | | |-Real estate prices and|-Fluctuating prices |-Others have more |-May not be considered |-Others ahead of them |-Fluctuating prices | |locations | |stores |“western” now | | | | |-Bad publicity from not| | |-Fluctuating prices | | |-Import taxes |paying taxes in UK |-Fluctuating prices |-Fluctuating prices | | | | | | | |-Competitors ahead in | | |-Fluctuating prices | | |-Bad publicity from not|China | | | | | |paying taxes in UK | | | | | | | | | | Table 8 - SWOT Threats Threats for Gourmet Master and other shops in this category are similar. Taxes, other coffee shops/category brands, real estate prices and locations, government rules and regulations, etc., all are factors that Gourmet Master and others must contend with. One factor that is growing is the number of bakeries or coffee/bakery combinations that are immerging in the market place. Either due to Gourmet Masters success or just because others see the opportunities in doing so, bakeries are finding their way into the market. Gourmet Masters’ ability to deal with these new entrants and capitalize on their weaknesses while capitalizing on their own strengths will insure Gourmet Masters’ market share and continued growth. Diversification with specialization in western brands will enhance their appeal to the growing middle class especially. Breads and pastries the Chinese demand is a driving force behind this influx of new entrants. Real estate prices are a big factor in China. Yet there are many prime locations not taken in Guangzhou and in other locations in China. Starbucks and larger companies vie for the best spots but even second or third best still provides excellent customer traffic. Another possible threat might be a resurgence of the tea industry in response to the coffee invasion. Possible government regulations or tea consortiums could impact the rising coffee consumption. With farmers switching from tea production to coffee planting tea representatives could fight this development. 4.4.2. Summary of SWOT Analysis A. Overall The coffee industry in China is growing rapidly and still there is room for expansion. Starbucks is the favorite at the moment but many factors are still in-play in the growing coffee culture. Nestle has the advantage in the in-home market but others could challenge this easily. Name recognition is high for Starbucks and Nestle, but the other coffee shops are growing terms of brand visibility and popularity and could easily gain in market share. Market strategy in all cases will be the key. Gourmet Master has the advantage of being a Chinese company. Having surpassed Starbucks in Taiwan, their confidence is high in terms of challenging Starbucks in mainland China. With their bakery/value advantage, Gourmet Master has an opportunity to challenge Starbucks and all other coffee shops for a larger portion of the growing Chinese market. The western bakery items are highly sought after by the Chinese consumer which provides Gourmet Master an opportunity to expand and capture market share. Though Starbucks has purchased a bakery company, their knowledge base may not be as deep as Gourmet Master. Since bakery items are a specialty of Gourmet Master they should continue to develop their brand and deepen their market penetration, especially to second and third tier cities. The Chinese want to have ‘Western Experience’ in a coffee shop and those companies that can provide this experience will grow in popularity and market value. Since the population in China is so large, coffee shops that can provide a ‘home-away-from-home’ will also grow in popularity and value as the consumer seeks out a place to rest and relax between home and work. Comfortable features in the coffee shop will enhance the ‘experience’. B. Top 2-3 brands relative to each other The top three contenders in the Chinese coffee market are Starbucks, Pacific Coffee and Nestle. Gourmet Master is in the next tier based on the number of stores and newness to the China mainland market. Starbucks has the advantage with name recognition/branding and the brands wide expansion while Pacific Coffee has Central Government backing with opportunities to enter schools, banks and business locations. Nestle, having been in China for many years, has the take-home coffee business advantage with widespread distribution channels and deep ties to coffee growers. Each of these coffee companies represents western ideals and experiences. Developing these experiences will enhance market share for each group. Developing deep ties to local coffee growers, suppliers, etc, will build the needed guanxi required for doing business in China and may help enhance their brands. C. Top 2-3 relative to the market In relation to the market and opportunities associated with the top three coffee businesses in China, Starbucks, Pacific and Gourmet Master top the list. Starbucks is again the leader in the market in terms of coffee shops while Pacific again has the Governmental backing with wide options for the future. Gourmet Master makes this list due to the fact that they are a Chinese company marketing in their home territory with a deep understanding of the culture, language and nuances. Having bested Starbucks in Taiwan it is only a matter of time before they present a strong and serious challenge in mainland China, with the understanding that Starbucks will not give up easily. Starbucks plans to open 1500 stores by 2015 while Gourmet Master and Pacific Coffee plan significantly smaller expansions. Starbucks will have the advantage for a time but slower growth and deeper dispersion may be a sound tactic. Market planning and strategy for all three companies will play a major role in their successful expansion. Gourmet Master has the advantage in the bakery category but Starbucks has already acquired a rival bakery and will pose a serious threat to Gourmet Masters market share. D. Summary of comments The growth of the coffee culture in China will continue. As more and more homes increase their income, western style experiences which include drinking coffee will continue to be sought. With many cities in China well over the million population mark, coffee shops will have fertile ground to grow and develop. Gourmet Master and its’ rivals have many years of growth ahead of them and the end is not in sight. Market strategy by each company will determine their future in China. At present, the coffee industry in China is small. More people in the west drink more cups of coffee in a week than most Chinese drink in a year. With that said the culture of China is still young in relation to coffee drinking and, thus, ripe for expansion. Gourmet Master has a great opportunity to develop strong ties to the mainland Chinese and reinforce itself as a local ‘Westernized” brand. This brand image, along with the western bakery items, may give Gourmet Master the needed edge to surpass Starbucks and other coffee shops in China. Diversifying into the take-home category may also allow Gourmet Master the chance to compete against Nestle. Building a strong brand image through market strategy with ties to Tencent, Taobao, Sports teams and other avenues of marketing may enhance their image and create a desire with the Chinese to experience the ‘Gourmet Master’ experience. 4.5. Drivers of Change Driving forces that shape the industry are a key element that every competitor in the specialty coffee industry has to take into account (Gasparro, 2012). . • The first and main driving force shaping the specialty coffee industry is the disposable income of the target consumer groups. • Another driving force for the coffee industry is industrialization and internalization. • Chinese tastes and wants are changing. • Competition is increasing in scale and breath. 4.5.1. Changes in the Long-term Industry Growth Rate “China has been a gold rush for U.S. companies and, the truth is, China will not be a lasting resource or success for many of them,” Chief Executive Howard Schultz said. The key, he said, is to make sure the brand stays locally relevant. That way, Starbucks won’t become a fleeting fad as might other American trends. Other major U.S. restaurant chains in China, such as Yum Brands Inc., the owner of KFC and Pizza Hut, and McDonald's Corp. have seen sales growth slow in the region recently. Higher food and labor costs have forced eateries to raise menu prices, but Chinese consumers are more cost-conscious due to economic uncertainty, preventing them from spending at the rate they once did” (Gasparro, 2012). 4.5.2. Future Outlook According to sprcoffee.com, China has great potential and is just at the beginning of its coffee phase. The following table (Table 4) and bullet points are indicative of common opinion. Analysis of the China Coffee Market People worldwide drink a total of 7.4 billion cups of coffee every year, and 20 million cups of coffee are consumed every day. Every coffee drinker drinks an average of 120 cups annually. Coffee beans with a retail value of US$80 billion are sold each year, which puts coffee second only to petroleum on a list of the top-selling commodities. Average coffee consumption in China is less than one cup per person per year, and consumption is still less than five cups per person per year in urban areas. Annual coffee sales are only approximately ¥4 billion. China's coffee market therefore offers boundless potential. The coffee market is growing by 30% annually. As a consequence, the coffee industry and coffee shop operation represent highly promising blue sea business areas. Doherty (2012) presents consumption differently. He states that “with Chinese consumers drinking only three cups of coffee per capita each year, compared with 604 for the French, the companies are wagering that there’s latent demand in cities such as Shanghai, where rising wealth is whetting appetites for western luxuries”.  |Country |Average cups of coffee per capita per | | |year | |Finland |1,459 | |Sweden |1,117 | |Netherlands |1,071 | |Norway |1,051 | |Denmark |982 | |Austria |850 | |France |735 | |Germany |731 | |USA |400 | |Japan |360 | |Korea |140 | |China |5 | Table 9 - Country Average Cups of Coffee - sprcoffee.com, retrieved 2013 The following are summary points out the major thoughts of the authors at sprcoffee.com: • Considering the above figures, the China coffee market has boundless potential. • China's consumer coffee market offers tremendous promise. • China will play a pivotal role in the world coffee industry's future strategies. • Overall Analysis of the China Market: According to statistics, the five million residents of Finland consume a million bags of coffee every year. In contrast, the 1.3 billion residents of China consume only 200-400,000 bags of coffee annually. As a result, China's consumer coffee market offers truly immense promise. There are approximately 200 million potential coffee consumers in China, which would potentially put China on a par with the United States, a major coffee consumer. • Growth Analysis: Coffee consumption in China is currently growing at a rate of 30% annually. In contrast, coffee consumption worldwide is growing at an annual rate of only 2%. In the future China has the potential to become a major coffee-consuming country. • Per Capita Consumption Analysis: The countries of Europe and North America have average per capita coffee consumption in excess of 400 cups annually. Japan's per capita coffee consumption is roughly 360 cups annually. In contrast, Chinese per capita coffee consumption is less than five cups per year. Average annual per capita consumption is only around 20 cups even in such large metropolitan areas as Beijing, Shanghai, and Guangzhou. We may therefore conclude that China's consumer coffee market has enormous room for future growth (sprcoffee.com. n. d.). “According to a report from Ogilvy & Mather, some 200m households in second, third and fourth tier cities currently fall into the "consuming class" in the world's most populous nation. While residents of the country's four urban centres in tier one – Beijing, Guangzhou, Shanghai and Shenzhen – have a disposable income of RMB1tr per year, this rises to RMB8tr across tiers two to four” (WARC, 2013). The following graph taken from the McKinsey and Company Report written by Chatterjee et al (2010) depicts where the middle class of the coming years will come from. The bulk, of course, is from Asia. With this growth, and as income spending power changes, will come changes in habit, attitude and philosophy. More of them will turn to drinking coffee as that drink becomes more fashionable and popular. [pic] Figure 14 Global Middle Class January 2010 According to Chi et al (2009), “China’s market has been skewed to value for some time, but consumers are steadily trading up. Success in China means advancing to a true design-to-value approach, and then continually innovating to follow consumers as they trade up to higher price tiers. Companies will need to improve their capabilities in generating and interpreting consumer insights, and then feed these insights back into their product-development teams to launch new products with the right positioning and at the right price points”. 5. CONCLUSION AND RECOMMENDATIONS The coffee industry in China is growing. Starbucks, Nestle, Pacific, Costa, Lavazza and Gourmet Master all have relevant marketing opportunities. Starbucks is on top with the name brand and image from the west. Nestle has the take-home market while Pacific has a governmental tie. Costa is well known in Europe as is Lavazza in Italy. All have great opportunities in China. Gourmet Master can compete and flourish in mainland China. It did so in Taiwan and surpassed Starbucks in sales. It has the advantage of being a Chinese Coffee shop with a bakery. Those bakery items seem to be an attractive differentiating factor for the Chinese and, as well, the coffee items they serve are competitively priced. Gourmet Master will continue to be profitable as the company develops new strategies in order to compete with the increase in new entrants and the competitive shifts of current rival brands. Gourmet Master should make some environmental changes to their stores in-order to make them more inviting. Wifi, these days, is a must because it encourages repeat and long-stay customers. Comfortable lounge chairs and lamps could also add to their ambiance attracting repeat business. Making Gourmet Master a destination and not just a shop-and-leave establishment would also add to the appeal attracting new consumers since most are looking for a place to relax, rest and do business. Homes are still small and businesses frown on using company assets for personal needs so having a third place for the consumer to “hang out” and relax has worked for other companies like Starbucks, Pacific and Costa Coffee. To attract some of those customers, Gourmet Master needs to offer similar services. Price is always a factor but the prices for Gourmet Master seem well below the upper end that other major players are selling at. Gourmet Master has no need to adjust their prices unless they wish to offer a high end product for those who think price means quality. If they decide to offer a high end product they must ensure that the quality is superior. Failure on this point would result in loss of many present consumers and a bad name for the company. Variety plays a major factor in their success, especially in the bakery segment. Another factor is eliminating low selling products. In addition, Gourmet Master could extend the bakery and take home coffee items into free-standing stores diversifying their format to take some of the sales away from Nestle and other take-home companies. Metro and Wal-mart stores and others like them could be a definite possibility. Placing a bakery inside these stores would enhance their profitability and extend their market visibility. Many Chinese know the 85(C brand and that is another way of extending the brand. Using local beans might help in this campaign as well since many customers are conscious of home-grown and feel that building in-house brands is highly important in order to compete globally. Smaller venues and machines can also be introduced. Again, getting the product into the hands of as many consumers as possible in order to build repoire and sales is an option. “The overall attractiveness of the industry and competitive environment is very strong. The growth rate for the industry is still increasing and does not look as though it will plateau any time soon. On examining the driving forces in the category as well as Porter’s Five Forces Model, with innovation, strong marketing, and global expansion the coffee industry is set to make significant and innovative breakthroughs in marketing in the Chinese marketplace. The driving forces of industrialization and disposable income will allow the coffee industry to flourish and will present new and challenging opportunities. The competition is stiff to overcome and will take a lot of work on the part of many members of the specialty coffee industry. The escalating prices of coffee will play a major role in the expansion of the coffee industry over the next decade. The specialty coffee industry, overall, is very strong and has the potential to grow and thrive” (Roby, 2011). With Gourmet Masters new CEO at the helm, the vision is changing even further. Expansion to other countries beyond the four they are now in will be a major factor for expanding the brand (Su, 2013). The company wants to build on their successes by getting rid of products that don’t sell, revamping/updating, the older outlets in Taiwan and China, and building new shops and joint ventures to expand their visibility and market share. CEO James Hsieh stated that “In my opinion, a world-class brand has to meet three criteria: It must well-known in at least 10 countries; It must own more than 2,000 outlets worldwide; and It must and enjoy popularity in interdisciplinary markets” (Su, 2013). Gourmet Master has high goals and a strong vision as well as a solid past. They have new ventures with incremental income streams and the ability to expand their market share. Strengthening what they have while adding sufficient outlets to keep the expansion going seems to be Hsieh’s main focus. Gourmet Master is growing and has great potential in China. According to the survey fielded for this study, respondents enjoyed drinking coffee and many were doing so out of a desire to experience a more western lifestyle. Most who were new to drinking coffee actually liked the taste. The rising generation (18-23 year olds) drank coffee 1-2 times per month, but this may not be what the age group itself prefers. Since the majority of the respondents were students from Chinese universities in Tianjin and Guangzhou, their answers are reflective of the availability of the coffee shops more than of a desire to drink coffee. Those numbers could significantly change if the students have the time and access to local coffee shops. Limitations of these data/results are likely due to locality constraints. Because the sample group also enjoyed drinking tea, we can surmise that coffee is not altogether replacing tea, but is an experiential substitute that, if readily available, will be taken advantage of. This is probably truer for the older, young professional generation. Recommendations for the top 2-3 companies are simple. Expand, deepen and diversify. With the needed capital available, all of the companies have a great chance to fulfill these objectives. China has 1.35 billion people and many of them will drink coffee. Providing them the ‘experience’ they seek will prove advantageous to the company that does so. First time shops will flourish in areas not previously inundated with coffee outlets, but even over-populated coffee streets will reap rewards due to the growing popularity. Building a brand name in China as Starbucks has is key. Advertising and expanding the brand awareness will encourage non-coffee drinkers to take their first sip. 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Customers will walk past ten other competitors to get the best espresso, which is why this factor alone means you don’t need the highly visible, most expensive location. So buy the best espresso coffee machine (3/4 group Italian made with e61 groupheads and set to the right pump and temperature levels), install it with a water purifier and demineralizer, use a conical grinder, and only buy top quality Arabica or Arabica 90%/Robusta 10% freshly roasted beans, and make sure every cup is made by a fully trained barista who is continually seeking the ‘god shot.’ 2. Ergonomics is vital – Make sure the coffee workstation and layout is such that the barista hardly moves their feet in performing all their coffee making duties, and they are not competing for the space with other staff members. High volume coffee sales are the foundation stone of every coffee shop, so make sure this workstation is perfectly laid out with easy access to underneath bins, bean storage, and bar fridge milk, having the right height bench-top with easy access to cups, grinder, accessories, and reachable overhead storage of supplies. The best setups also have a small inbuilt sink to allow for quick and easy ongoing cleaning. Also, place the cash register on the front counter in close proximity to the barista’s workstation. This allows the barista to hear the customer orders and get a head start on making them in the busy times, while allowing the barista to work alone in an efficient way in the very slow times. 3. Use loyalty cards – I resisted using these for a long time … but they really do work. Make sure it is a quality card that will last the wear and tear and look good in a customer’s wallet. Nothing better than seeing a new customer’s face light up when you give them a buy seven get the eighth one free loyalty card, but tick off six of them so that on their very next purchase they get a free one. Cheapest customer acquisition ever. 4. Promote multiple sales – A coffee shop will never make enough money to pay the bills from coffee sales alone. Coffee may be the prime motivator for customers coming to the business, but they must leave with multiple sales if you are going to be successful. As a target, coffee should be no more than 40% of your weekly sales and two item sales per customer transaction means you are getting it about right. So make sure the traditional coffee accompaniments (muffins, cookies, cakes) are close by at the point of sale, and the coffee shop offers cold food, cold drinks, and hot food to ensure the best chance of multiple sales. 5. Limit the assortment – Many newbies in the coffee shop game think that wide assortments and extensive product offers are a key competitive advantage. They forget that the customer is simply hungry or thirsty or both, and that a wide choice for most people creates anguish. So cover the necessary categories, but with limited and strategic offers. (e.g. three flavors are enough, three sizes are enough, three types of food/drink are enough). Every item you add to the assortment creates many multiples of management effort (costs) and mostly without adding anything to the revenue streams or customer experience. 6. Merchandise your margins – Price according to perceived customer value, not according to accounting determined markups. For some well known items you will need to be at (coffee) or even below market price (coke can), and this loss should be made up with high margins on other items that are exclusive to you or in the ‘don’t-care and addictive’ mindset of your customers. So don’t add a blanket markup to your entire assortment, but price line by line according to customer expectations and what the market will bear. 7. Get your beachhead strategies right – Getting traction in a competitive marketplace like coffee shops is vital, and you will need to have a clear understanding of how to get customers to initially give you a go and a plan for keeping them returning and referring you to their friends. This is a whole other topic that I have now written about here … What are some Biz Dev best practices for startups'. 8. Counter service – Counter service is the cheapest most efficient and effective service system for a coffee shop, and it is now fully accepted by customers, thanks to the global success of McDonalds. Counter service is hassle free for both you and your customer, and it significantly reduces your wages bill. So get the customers to order and pay upfront, give them a number on a stand with their drinks, and deliver the food or better still give them a buzzer that calls them up to the counter when the food is ready. Counter service means that you can handle the peak demands that occur in coffee shops at breakfast and lunch, and it is a lot less stressful on everyone. 9. Pre-make as much as possible – Custom-made assortments assume that the customers know precisely what they want. They don’t. Customers see you as the expert and are hoping that you will suggest to them what combination of food/drinks they should be trying. In a coffee shop context, I found it best to pre-make the food and leave the custom making to the coffee. Custom food is also a high cost option for you because you can’t get the economies of scale making-to-order, and it limits your turnover in those peak periods where you should be busy pumping out the sales as quickly as possible, not spending the time making custom orders. 10. Understand what you are really selling – Too many businesses, including coffee shop owners, don’t fully understand the need they are really satisfying for their customers, and so they often concentrate on the wrong parts of their offer. Customers frequent a coffee shop for many more reasons than just hunger and thirst. There is the escape from a stressful office, the chance to maintain or grow a relationship, a place to get away to do some reflective work, a chance to engage with familiar coffee shop staff at a particularly lonely time, or as a place to do business and reach an agreement. Understanding the needs you are really catering to will help you better construct your offer and make decisions that keep your customers returning and so maintaining the coffee shop’s success. 11. Target takeaways – I know all your friends will tell you to get comfortable lounges, free Wi-Fi, table service, and lots of in-house entertainment … but customers sitting on one cup of coffee for hours enjoying all these benefits won’t pay your rent. My most financially successful coffee shops had a limited number of not-so-comfortable bench & bar stools to make the coffee shop look lived in and loved, but I concentrated on building the takeaway business. Takeaway customers pay the same price as the sit-down customer, but without any of the occupancy costs, and you will serve ten of them by the time your sit down customer has finished sipping on their first cup of coffee as they enjoy a chat with their friends on Facebook using your free Wi-Fi. 12. Serve on the front line - Coffee shops, like restaurants, are much more a people/service business than they are a goods/transactional one. While a goods/transactional business can still succeed with a non-present owner, a coffee shop needs the owner’s care, attention, and engagement. Customers expect it, and staff is far more enlivened when the owner is on hand taking orders or making coffee or is generally hovering in active care of the business. Guangzhou students and city resident survey - January 2013 [pic] Figure 15: Do you drink coffee' [pic] Figure 16: Which factors affect your choice' [pic] Figure 17: Which coffee shops do you visit' [pic] Figure 18: How many times do you visit a coffee shop' [pic] Figure 19: Why drink coffee rather than tea' [pic] Figure 20: Do you prefer low price or good quality' [pic] Figure 21: Do you prefer to take out or sit in' [pic] Figure 22: Do you prefer coffee or tea' [pic] Figure 23: What is your gender' [pic] Figure 24: What is your age' [pic] Figure 25 FY12 Annual Report - retrieved 12 February 2013 Gourmet Master Financials |REVENUE | |EARNINGS PER SHARE | |CONSENSUS ESTIMATES ANALYSIS | | |# of |Mean |High |Low |1 Year Ago | | |Estimates | | | | | |SALES (in millions) | |Quarter Ending Mar-13 |7 |3,966.79 |4,266.00 |3,726.00 |-- | |Quarter Ending Jun-13 |7 |3,922.70 |4,340.00 |3,531.00 |-- | |Year Ending Dec-13 |14 |17,075.90 |21,177.00 |14,544.00 |17,376.70 | |EARNINGS (per share) | |Quarter Ending Mar-13 |7 |2.62 |2.97 |1.83 |-- | |Quarter Ending Jun-13 |7 |2.03 |2.36 |1.73 |-- | |Year Ending Dec-13 |14 |10.41 |12.67 |8.87 |11.71 | |LT Growth Rate (%) |4 |21.5 |26 |19 |26.5 | |Sales and Earnings Figures in | | | | | | |U.S. Dollars (USD) | | | | | | |VALUATION RATIOS | | | | | | | |Company |Industry |Sector | | | |P/E Ratio (TTM) |24.56 |32.12 |31.24 | | | |P/E High - Last 5 Yrs. |-- |56.89 |40.31 | | | |P/E Low - Last 5 Yrs. |-- |18.46 |15.42 | | | | | | |Beta |-- |0.49 |0.51 | | | | | | |Price to Sales (TTM) |2.15 |2.06 |3.36 | | | |Price to Book (MRQ) |4.74 |2.17 |1.62 | | | |Price to Tangible Book (MRQ) |4.76 |0.99 |3.64 | | | |Price to Cash Flow (TTM) |16.95 |15.6 |18.73 | | | |Price to Free Cash Flow (TTM) |50.39 |6.79 |7.65 | | | | | | |% Owned Institutions |-- |-- |-- | | | |DIVIDENDS | | | | | | | |Company |Industry |Sector | | | |Dividend Yield |1.9 |1.53 |1.7 | | | |Dividend Yield - 5 Year Avg. |-- |1.36 |1.44 | | | |Dividend 5 Year Growth Rate |-- |8.24 |10.55 | | | | | | |Payout Ratio(TTM) |46.78 |46.48 |34.23 | | | |GROWTH RATES | | | | | | | |Company |Industry |Sector | | | |Sales (MRQ) vs Qtr. 1 Yr. Ago |1.53 |5.52 |5.56 | | | |Sales (TTM) vs TTM 1 Yr. Ago |28.66 |7.73 |4.02 | | | |Sales - 5 Yr. Growth Rate |-- |10.02 |7.57 | | | | | | |EPS (MRQ) vs Qtr. 1 Yr. Ago |-19.41 |-6.13 |390.43 | | | |EPS (TTM) vs TTM 1 Yr. Ago |14.72 |-- |-- | | | |EPS - 5 Yr. Growth Rate |-- |9.2 |7.69 | | | | | | |Capital Spending - 5 Yr. Growth |-- |17.4 |7.39 | | | |Rate | | | | | | |FINANCIAL STRENGTH | | | | | | | |Company |Industry |Sector | | | |Quick Ratio (MRQ) |1.73 |0.83 |0.56 | | | |Current Ratio (MRQ) |1.91 |1.12 |0.78 | | | |LT Debt to Equity (MRQ) |0.01 |30.88 |18.94 | | | |Total Debt to Equity (MRQ) |0.01 |44.64 |26.73 | | | |Interest Coverage (TTM) |-- |144.76 |70.81 | | | |PROFITABILITY RATIOS | | | | | | | |Company |Industry |Sector | | | |Gross Margin (TTM) |55.1 |37.11 |36.75 | | | |Gross Margin - 5 Yr. Avg. |-- |34.55 |36.54 | | | | | | |EBITD Margin (TTM) |14.67 |-- |-- | | | |EBITD - 5 Yr. Avg |-- |12.07 |15.08 | | | | | | |Operating Margin (TTM) |11 |8.81 |9.82 | | | |Operating Margin - 5 Yr. Avg. |-- |8.77 |11.76 | | | | | | |Pre-Tax Margin (TTM) |12.36 |9.04 |9.95 | | | |Pre-Tax Margin - 5 Yr. Avg. |-- |9 |11.74 | | | | | | |Net Profit Margin (TTM) |8.98 |6.14 |7.28 | | | |Net Profit Margin - 5 Yr. Avg. |-- |6.22 |8.05 | | | | | | |Effective Tax Rate (TTM) |27.37 |32.78 |24.74 | | | |Effective Tax Rate - 5 Yr. Avg. |-- |31.85 |29.73 | | | |EFFICIENCY | | | | | | | |Company |Industry |Sector | | | |Revenue/Employee (TTM) |798,949 |######## |######## | | | |Net Income/Employee (TTM) |71,710 |1,201,902 |1,503,396 | | | | | | |Receivable Turnover (TTM) |55.81 |4.79 |51.03 | | | |Inventory Turnover (TTM) |16.28 |4.85 |4.82 | | | |Asset Turnover (TTM) |1.67 |0.74 |0.61 | | | |MANAGEMENT EFFECTIVENESS | | | | | | | |Company |Industry |Sector | | | |Return on Assets (TTM) |14.95 |2.76 |3.36 | | | |Return on Assets - 5 Yr. Avg. |-- |9.86 |9.2 | | | | | | |Return on Investment (TTM) |20.5 |3.99 |5.07 | | | |Return on Investment - 5 Yr. Avg.|-- |20.57 |15.42 | | | | | | |Return on Equity (TTM) |20.13 |5.6 |6.74 | | | |Return on Equity - 5 Yr. Avg. |-- |27.12 |20.19 | | | Table 10 - Reuters Financials - retrieved 12 February 2013 from http://www.reuters.com/finance