In the face of industry involution, what else can coffee brands do besides lowering prices?

Starbucks insists on taking the high-end route in the fierce Chinese coffee market and refuses to join the price war. Instead, it consolidates its market position and maintains business growth by improving membership services, innovating products and creating a unique third space experience. This strategy not only reflects Starbucks' long-term development perspective, but also shows how it maintains its brand value in the fierce market competition.

Competition in China's coffee market has become increasingly fierce, and brands are faced with the choice of road direction.

Competition is directly reflected in two dimensions. Brands of all sizes are frantically expanding stores to grab market share. According to data from Zhaimen Canyan, as of July, the total number of coffee shops in China reached 199,294, with 83,891 new stores opened in the past year, a net increase of 44,637.

But at the same time, nearly 40,000 coffee shops have closed down in the past year, which means more than a hundred stores disappear every day.

Many coffee brands are not doing well under the fierce competition. Some internet celebrity brands have seen their stores drop from more than 800 to 200 in just one year and have disappeared from many cities.

However, the price war is still going on. The current coffee market has reached a critical point of competition. How long can the low-price strategy and aggressive expansion of many brands continue? Who can hold on and enter a new cycle?

On July 31, Starbucks released its Q3 2024 results. Starbucks' three major performance indicators increased month-on-month, basically maintaining a steady growth in performance. More importantly, Starbucks' senior management reiterated its brand concept and proposition in a conference call, insisting on high-end positioning, and striving to achieve high-quality, profitable, and sustainable growth, not following the crowd, but taking a unique development path.

According to Starbucks' financial report, in the third quarter, Starbucks China's net revenue reached US$734 million, a 5% increase from the previous quarter. Starbucks said the growth was due to successful beverage innovation, localized holiday food and increased frequency of member consumption during breakfast hours.

Starbucks also achieved a steady increase in store transaction volume this quarter. The brand said that the increase in member consumption frequency during breakfast hours and the increase in purchases by occasional customers during the afternoon and evening hours led to a month-on-month increase in transaction volume and a quarter-on-quarter increase.

With the overall business remaining basically stable, Starbucks China achieved a quarter-on-quarter increase in overall operating profit margin for the second consecutive quarter, with an operating profit margin of 15.6% this quarter. Starbucks' store operating profit margin has always remained in double digits and continued to increase quarter-on-quarter.

In such an inward-looking market environment, such achievements are not easy to come by, and they reflect the strong brand resilience and determination.

Starbucks Global CEO Nathhan stated in a financial report conference call: "In the past year, the Chinese coffee market has seen unprecedented store expansion and large-scale price wars, even at the expense of same-store sales and profitability. This has caused significant and permanent changes to the market environment."

Facing China, the most complex and volatile market, Starbucks did not shy away from the difficulties. Liu Wenjuan, co-CEO of Starbucks China, said, "Compared with mass brands in the industry, Starbucks China is seeking a unique growth model.

We will continue to focus on the high-end coffee market pioneered and continued to lead by Starbucks, and seek high-quality, profitable and sustainable growth. We will continue to invest in China for the long term and are confident in the long-term development opportunities in the Chinese market and our ability to achieve success.”

We will focus on the present and continue to drive month-on-month growth in key business data without sacrificing operating profit margins in exchange for sales, expand stores in a rhythmic manner and ensure first-class returns and profitability.

It is not difficult to find that "this unique development path" is not easy, but it is the right and long-term thing to do. It is what Starbucks must do, and it seems that only it can do it.

Products priced at 9.9 yuan and 8.8 yuan have stirred up waves in the coffee market, but this practice of exhausting all resources is difficult to sustain, and it is also difficult to build a coffee market with healthy competition and continuously improving product and service levels.

Starbucks also once again emphasized that it would not participate in price wars. "In a competitive environment with frequent promotions, we maintain a high degree of restraint and avoid price wars. At the same time, we have adopted a targeted and precise pricing strategy to create new sales growth and cultivate customers' consumption habits, which is consistent with our high-end positioning."

According to further information from Doujiao, Starbucks' promotional activities are more strategic and targeted, and its core goal is to cultivate Chinese consumers' coffee consumption habits, especially after 4 pm every day.

Avoiding price wars, Starbucks insists on providing a better experience, launching different initiatives, and maintaining its unique brand barriers.

The first is the continuous improvement and upgrading of the membership system.

In June this year, Starbucks China upgraded its Starbucks Rewards membership system, including linking up with Hilton Hotels Group to provide users with unique experiences, adding a Diamond Star membership level for the first time, and adding new star redemption mechanisms and gameplay.

Member services have always been the focus of Starbucks' business. According to the financial report, the number of active members of Starbucks Rewards Club reached a record high of 22 million within 90 days, an increase of 1 million from the previous quarter, and the total number of members exceeded 132 million. Among them, the consumption frequency of the most loyal Gold Star and Diamond Star members has increased. The proportion of member sales continued to maintain a historical high of 75%.

Second, Starbucks continues to innovate in its products, driving growth in performance.

Data shows that in the third quarter of 2024, Starbucks launched a total of 17 new drinks, among which the Belgian Dark Chocolate Frappuccino became the best-selling drink of the summer; the new draft coffee series of drinks are particularly popular among Generation Z, especially in the afternoon.

Obviously, Starbucks is improving its "Chinese" level. You should know that in the field of freshly brewed tea drinks, high-frequency new products are a common means of brand marketing and attracting new customers. According to the sampling data of the "Research Report on Innovation Trends of Freshly Brewed Beverages 2024", in the first half of 2024, coffee drink brands launched a total of 353 new freshly brewed beverages, with an average of about 8 new freshly brewed beverages per sample coffee drink brand. According to the data released by Cha Baidao and Nayuki's Tea, Cha Baidao will launch 43 new products throughout 2022, and Nayuki's Tea will launch 91 new products.

New products are an effective way to boost sales. Starbucks has kept up with the pace of the Chinese market and achieved good results.

Third, Starbucks continues to create a distinctive third space to consolidate its barriers at the experience level.

In June 2024, the Suzhou Intangible Cultural Heritage concept store opened. This is Starbucks’ third intangible cultural heritage concept store in China after Beijing and Shanghai.

The store takes garden-seeking and dream-seeking as its design inspiration, displays art installations and creates an intangible cultural heritage art corridor. The store's spatial layout borrows the landscape conception of Su-style garden pavilions, bringing consumers a unique experience.

Also in June, the Aranya Art Center store opened on the seaside. The entire space of the store is covered with earth tones, as smooth and delicate as the beach, with log-colored furniture and blue seats, using the colors of the sky and the sea. Starbucks integrates art and natural landscapes.

There is also the Wuhan Baoyuanli store, which is located in the century-old building Baoyuanli in Wuhan and perfectly combines coffee and pop art.

In addition to conveying culture and aesthetics, Starbucks also practices its social responsibility and commitment through sign language stores. In June this year, the first Starbucks sign language store in Central China was unveiled in Wuhan, which is also the 18th sign language store in Starbucks China.

In Starbucks sign language stores, hearing loss is no longer a communication barrier. The store uses a special ordering system to help Angel partners communicate smoothly with customers.

Starbucks integrates intangible cultural heritage, unique urban features, natural landscapes and artistic creativity into its stores. In an environment where most brands pursue store standardization, Starbucks has made some different attempts. By deeply exploring the concept of the third space, Starbucks has not only found a window to increase sales, but also a place to demonstrate the brand's attitude and tone.

Opening new stores in a rhythmic and high-quality manner is the store expansion strategy that Starbucks has always adhered to.

According to the financial report, Starbucks added 213 stores in the third quarter, a year-on-year increase of about 13%. The good news is that Starbucks' new stores have made a good contribution to its performance, and the financial report shows that the new stores have shown first-class returns and profitability.

The return on investment for a new Starbucks store is less than two years, which is an outstanding figure among all offline chain industries.

The sinking market is obviously Starbucks' main focus. The financial report shows that Starbucks entered 38 new county-level markets this quarter, and now has 7,306 stores in more than 900 county-level markets.

China's vast county market is a new blue ocean for Starbucks and the entire coffee industry. The growth rate of Starbucks' membership in the sinking market exceeds that of high-tier cities, and the growth rate of membership sales is twice that of high-tier cities. Starbucks said: "We will continue to explore huge blue ocean opportunities. At the current pace of store openings, the number of new stores opened this fiscal year will break the record."

Starbucks once again differentiates itself from mass brands in the industry with its high-end positioning. The success of its stores in lower-tier markets stems from the brand’s unique trump card – the third space.

According to McKinsey data, China's personal consumption scale is expected to reach 65.3 trillion yuan in 2030, with more than 66% of the growth coming from the sinking market including third-tier and below cities, counties and township markets.

In the past year, there have been more and more reports about "small town ladies" and "small town youth". A number of expensive brands that started in first-tier cities, such as Arc'teryx and Lululemon, have entered county towns and become darlings. Consumers in the sinking market have increasingly higher demands for service, value, and experience.

Coffee is no exception. This imported product, regarded as a symbol of the middle-class lifestyle, has begun to be sought after by young people in small towns. The 2024 Coffee Market Insight Report shows that the number of coffee shops and orders in the fourth- and fifth-tier markets has increased significantly, and the number of takeaway orders in fourth- and fifth-tier cities and below has exceeded 100% year-on-year.

In the sinking market, young people in small towns who have money and free time regard coffee shops as places for leisure and dating. People prefer offline consumption, with the aim of providing a new interactive venue for socializing with acquaintances.

Although the pace of store expansion is not as aggressive as that of domestic brands, Starbucks' store type may be more in line with the needs of consumers in the sinking market. The "third space" is a place for business meetings in first-tier cities, but it is a trendy choice for social leisure in the sinking market.

According to public data, from April to June this year, Starbucks entered Jixi, Heilongjiang, Kangding, Sichuan, Sanmenxia, ​​Henan, Huludao, Liaoning and other cities. According to Doujiao, the performance of new stores in these new cities often exceeds expectations.

In store design, Starbucks will explore local cultural characteristics and make creative design extensions to the third space.

For example, in the Jixi store, the designer used the contrast of different coffee colors to create a warm and comfortable "coffee classroom" in the central area. On the background wall, a large floral pattern with a northeastern folk flavor was used to interpret the entire process of brewing a cup of coffee. The flowing lines in the space are just like the Ussuri River and Songacha River winding through Jixi, blending the coffee culture with Jixi's humanities.

In addition, coffee classroom activities with different themes are regularly held in all stores across the country, where customers can explore with baristas the wonderful journey of a coffee bean from planting, picking, processing to becoming the cup in hand, allowing customers to learn to taste coffee.

Obviously, whether in a metropolis or a small county, the experience of the "third space" remains the same - not only providing customers with a cup of good coffee, but also providing comfortable space services and professional coffee culture communication. This kind of service with humanistic care and emotional connection cannot be replaced by discounts, low prices, and hawking alone.

Even when entering the sinking market, Starbucks still adheres to the "high-end" route, and its pursuit of excellence in store design also makes Starbucks stand out from many offline businesses in county towns.

Most coffee brands expand in the form of small-scale stalls, which are the same in thousands of cities; some chain brands that focus on space also copy standardized templates. In addition, many local stores in county towns have storefronts close to each other, which are simple and lack design. They can only provide the most basic consumer needs, such as sitting down to eat a meal or have a drink, and that's it.

When everyone is staring at the price and trying hard to get the bargain, Starbucks' actions return to the level of brand value, focusing on the present and looking to the long term.

A senior figure in the coffee industry said in an interview with the media that after the coffee industry has reached its goal of speed, scale, and price, the market will accelerate the return of value.

Starbucks needs to be firm in itself, get through a difficult period, and enter a new cycle while continuously cultivating its internal strength.