Bank On China's Home Grown Consumers Rising

Mr. Li --

Thanks for checking in. That is exactly what happened in Japan, but Starbucks just the other day said it plans something like 10,000 stores in China. My own observations (limited though they are) tell me Starbucks is doing just fine in Qingdao and Dalian. What leads you to believe they are doing poorly in Guangzhou, Shenzhen and Chengdu?

Shenzhen and Guangzhou have higher level of income then Shanghai and Beijing. Shanghai has 62, Beijing 50. Guangzhou has 7 and Shenzhen 9. Starbucks entered all 4 markets at about the same time. A friend frequently go to Shenzhen told me that Shenzhen used to have more but they were closing down, similar to Guangzhou. I had dinner with the guy helping establish Starbucks in Chengdu about 2 years ago and they have opened like 8 stores back then. Currently, it's 4. I think number speaks for themselves.

I was in Sichun a while ago. If you ever go there, it's not difficult to understand why Starbucks are doing poorly in the region. Sichun are populated with tea houses where people often go in the afternoon to spend time with friends. The atmosphere is much more relaxed then Starbucks. I actually felt tense going into the Chinese domestic Starbucks knockoff called SPR. For Guangzhou and Shenzhen, there are long history of Dim Sum house serving tea and food.

Starbucks can say all they want about their ambition. Amazon used to claim to obsolete Wal-Mart and Netscape wanted to replace Microsoft.

Beijing and Shanghai often represent outliers in sampling business potential for foreigner products. Shanghai has long history of favoring foreign products. Well, the Bund was practically developed with the money of drug king pin (Eastern Indian Company). Beijing still have the relic of learn from foreigners.

Mr. Li --

Thanks for checking back in.

You make some good points regarding the numbers.

I see your point regarding the tea houses, but I disagree with you on that stopping Starbucks. Different experiences. McDonalds is fast but it thrives. SPR also seems to be thriving, particularly in Chinese airports.

I agree that ambition does not equal reality and that is why I virtually never do posts on such and such company's plans in China. However, Starbucks is an exceedingly responsible and measured company and when it says it plans to bring 10,000 stores into China, I believe it does intend to do so and I believe it has a basis for doing so. I knew for years from friends inside Starbucks that it had big plans for Russia but it kept that quiet until they had become more advanced.

I would expect Shanghai and Beijing to be in the vanguard of buying foreign products and I am fully aware that neither city is typical of China. Yet at the same time, just as New York and Los Angeles tend to lead the United States, I have to believe that as Shanghai and Beijing go, the rest of China eventually will follow.

I disagree the view of Shanghai and Beijing as vanguard as Chinese trend setting, especially the analog of them to Los Angeles and New York. New York has always been the culture center of the US and Los Angeles hit it big with rebellious film makers escaped to escape the conservative control of New York establishment.

However, in China, Beijing and Shanghai are both conservative establishment. They receive foreign trend well because the large numbers of international companies there and many worked for MNC. However, if we look at the actual trend setting, Shanghai and Beijing have not created any nationwide sensations. Few of Chinese brands are headquartered in either of the city. Shenzhen actually owns more then either cities. The recent national fad is the Super Girl and it was originated in Changsha, Hunan. The trend in China is actually in reverse. Shanghai and Beijing was the last to get bite by any national fever. Even for international brand, Crest created the tea favor Chinese toothpaste for rural areas and introduced them later into big cities like Beijing and Shanghai. For the fad on online games, only few of the domestic titles are created in Shanghai or Beijing.

In term of the power and freedom of expression of the media, Shanghai and Beijing actually lack behind the cities in the Western region because they remain under the close watching eye of the authority. While Changsha and Chengdu have much more creative freedom.

Mine is 22 months and has been fighting to get a taste of coffee since the first trip we took to Starbucks when she was 14 months. She already knows how to order "ice latte with non-fat" for daddy. :D Assuming caffeine doesn't go the way of nicotine, she may be ordering like yours or whatever cool-aid her MySpace peers will be drinking in 10 years.

The customized ordering seems to be more of an American phenomena. I get nasty look by Parisian waitress trying to replace item and outright refused by Japanese ones. I can get Chinese ones to go out and get me Coke while their restaurants only have Pepsi in Sichuan but not in Shanghai or Beijing. It's kind of hard to tell which way next generation Chinese are heading.

It's interesting to type this sitting in a trendy cafe in West L.A. I believed the trend of customized order was started in L.A. in early 90s and Starbucks only started to cash in to the trend in the late 90s. The first 10 was to educate people to accept the $3.45 for a couple of coffee. :D

My point would be it's hard to project trend for a decade. Starbucks didn't invent the customization but cash in when the trend gain enough momentum. There is no such base for Starbucks to cash in its customization magic with their targeted growth base of customers in China: the white collar 20s.

I often go to SBUX in Beijing, Shanghai, Guangzhou and HK. I have found all of them to be consistently busy (perhaps less so in BJ).

Why did The Street limit their recommendations to these companies. How about P&G? They have a huge share of the Chinese personal care market (e.g., 46% of shampoo market.)

Well if not P&G, how about Nestle (20% China sales growth and large share of infant formula and ice cream (30%) markets)? I know they had problems with iodine-tainted formula, but I believe they are recovering from that nicely.

Another option is L'Oreal Cosmetics. This article is a year old, but the message is clear, "Chinese Women Go 'Crazy' for Cosmetics"

Jeremy --

Thanks for checking in. You raise some good points. Yes, cosmetics in China are booming, but there is a lot of competition. Nestle makes sense to me, but that is not an American company. Not sure if that mattered for the list or not.