Should Panera enter the China coffee market following Starbucks and Dunkin’?
As of 2019, there are 4,123 Starbucks stores (successfully grew from 185 since 2005) and 16 Dunkin’ Donuts (projected to open 1,600 since 2015 but failed) in China. As the third largest coffee chain in the United States, Panera (combining its JAB brands, has 4,739 units in the U.S. as of Oct 2019, following Starbucks’s 14,875 and Dunkin’s 9570) should take serious consideration before its China adventure.
I will segregate the topic into three parts: revenue opportunity, cost efficiency, and market environment.
First, let’s take a look at the revenue-related pros and cons of the potential market entry of Panera in China’s coffee market.
1. Market size
The coffee market is a fast-growing segment in China, the most populous country with over 17 billion people in the world. According to the data of Statista, the total revenue in the coffee segment amounts to US$14b in 2021, tripled the figure in 2012 ($4.4b), and expected to reach $20b in 2025.
While competition exists, the experience of Starbucks has proved the possibility of successful U.S. coffee brands. The failure of Dunkin’ was due largely to its centering on donuts, rather than coffee. Placing more focus on the coffee segment would help Panera take advantage of the huge China coffee market.
2. Product bundle to replicate — breakfast + coffee
Coffee program is a big deal, but Panera’s advantage also includes breakfast. Intense competition isn’t deterring Panera from sharpening its focus on breakfast, as it is keeping refreshing its breakfast menu with new items. The same model could easily be replicated in China. According to Mintel research on Chinese breakfast foods, while most consumers still turn to Chinese foods for breakfast, there may be potential for Western cereals to increase their market share in the country.
3. The pursuit of convenience
The demand for convenient breakfasts is growing with rapid urbanization in China. Panera is leading the race of digital ordering in the U.S. by offering convenience platforms such as Rapid Pickup, Apps ordering, and curbside delivery. Those methods would cater to Chinese customers who value convenience.
1. Timing — might be too late to take significant shares
The late market entry of Dunkin’ appears to be another reason of its failure in China. Admittedly, Starbucks and other coffee brands have already taken large shares of China’s coffee market, which left significant barriers to the newcomers, including Panera.
2. Pricing — unrealistic to copy the “free coffee” model
The growth of Panera in the U.S. coffee market relies heavily on its bundling model, which includes free coffee pairing and unlimited refills by subscriptions. However, as most of the coffeehouses in China are based on the developing demand for coffee among China’s growing urban middle class, a cup of coffee may cost over 20 yuan (US$3), more than the current most expansive coffee option of Panera in the U.S. ($1.99). Thus, a significant change in pricing strategy is required for Panera to fit the China coffee market.
In the first part of business analysis on the potential entry of Panera into China’s coffee market, we discuss the opportunities for generating revenues in China’s unique market. Now, let’s move to the cost part of Panera’s pros and cons in the China coffee market.
1. Cheap labor
China has a cheap labor market where many MNCs outsourcing there to cut their costs. This would apply to the coffee giants who open stores in the market, too. For Panera, labor constitutes a large share of the costs of operation. In 2015, labor expenses increased by 1.15% to 31.11% as a percentage of related sales from 2014. Entering the China market will have less burden in terms of labor costs as the average Waiter / Waitress in China earns only 53 CNY (~USD$7) for every worked hour.
2. Low-cost Infrastructure
According to the chief executive of Yum China, China’s largest publicly held restaurant operator, infrastructure is a reason why the company — which operates brands such as KFC and Pizza Hut — is aiming to open 600 new stores in 2017. Starbucks shared a similar pattern by opening thousands of stores in China. Likewise, Panera will enjoy the same infrastructure-friendly environment when expands its business in China’s coffee market.
Free Wi-Fi is available in most of Panera’s U.S. stores. However, there will be legal and practical hassles to provide wifi services in China as the country has one the strictest Internet censorship laws in the world. Be prepared to deal with the issues about obtaining relevant permits. The price of violating Chinese Internet laws will be immeasurable.
2. COVID-19 related costs
China has imposed mandatory temperature checks and QR code scanning in many public areas. That means coffee houses must purchase equipment, maintain and train personnel to comply with those health procedures. The increased costs on this part may counter-balance Panera’s savings on China’s cheap labor costs.
After examining the revenue and cost of Panera’s potential entry into China’s coffee market, let’s move to the market environment.
1. Growing customers
No doubt that China’s ~1.6 billion population offers enormous opportunities for a new market entry. Learning from Starbucks’ successful story, as well as the models of other food giants, there are so many lessons Panera can learn and so many tips it can follow to avoid caveats in the market.
2. A variety of inventory choice
Many coffeehouses in China not only serve coffee (including espresso, Americano, latte, mocha, macchiato, cappuccino, and black coffee), but also serve other foods and beverages options including tea (especially fruit tea and flowering tea), pastries (such as croissants, sandwiches, cheese cakes, and tiramisu), and even ice cream. Panera could tale advantage of its various inventories choice in the U.S. and design personalized menu options for the China stores.
1. Lack of coffee culture
Unlike in western countries, China has not much of coffee culture. Most people in China are tea drinkers. According to a report by China Highlights, “Aside from non-Chinese, most of café-goers consist of four general categories: businessmen holding meetings, young couples dating, middle-aged women chatting over coffee and pastries, and the young gathering for some leisurely games like playing cards and board games.” That is to say, the target café-goers would be significantly different from the usual Panera customers, such as working professionals and seniors, in the U.S. market. It requires in-depth analyses of marketing strategy to attract potential customers and to compete with competitors in China’s coffee market.
2. Urban only
While there are huge demands for coffeehouse in the urban areas, most people in China’s rural areas are still unfamiliar with coffee. That means many of Panera’s successful rural/suburban models in the U.S. including drive-through will not be applicable in China. In addition, the focus on the breakfast, bread, and the values of “Good food for the whole family” will not fit China’s urban only coffee market.