GLM 5500 Module 3 Case Study: Starbucks and the Choice of Entry Mode in China Example

From Partner to Owner: How Starbucks Entered and Expanded in China

Student Name

M.S. in Management in Organizational Leadership, Thomas Edison State University

GLM-5500: Global Management

Mentor Name

Month Day, Year

From Partner to Owner: How Starbucks Entered and Expanded in China

Introduction

When Starbucks opened its first store in mainland China in 1999, the country drank very little coffee. Twenty-five years later China was the company's second-largest market. Starbucks did not enter by building company-owned stores. It began with licensees and joint ventures, and only as it learned the market did it take full ownership of most of its operations. The case illustrates the central decision of Module 3: how a company should enter a foreign market to capture an opportunity while controlling risk. This paper explains Starbucks' choices with three frameworks and assesses the strategy's current challenge.

Frameworks for the Entry Decision

Sweeney and McFarlin (2015) describe entry modes as a range from exporting and licensing, which require little investment and give little control, through joint ventures to wholly owned subsidiaries, which require the most commitment and give the most control. Kogut and Singh (1988) found that firms entering culturally distant countries more often chose joint ventures or new ventures over acquisitions, since partners supply local knowledge. Ghemawat (2001) broadened distance to four dimensions: cultural, administrative, geographic and economic. Johanson and Vahlne (1977) proposed that firms internationalize gradually, increasing commitment as they acquire knowledge of a market.

The frameworks also suggest when a firm should change its entry mode. Partners are most valuable when a firm lacks local knowledge and when regulation requires them. As the firm learns and as rules relax, the costs of sharing control and profit with a partner can exceed the value of the partner's knowledge. A company that never revisits its entry mode may leave value with partners long after it needs them; a company that buys out partners too early may lose knowledge it still needs.

Starbucks' Entry Through Partners

Every dimension of Ghemawat's framework was large for an American coffee chain entering China in 1999. Culturally, tea dominated and coffee was unfamiliar. Administratively, rules on foreign ownership in retail and food service were restrictive and varied by region. Geographically, supply chains for roasted coffee and dairy were thin. Economically, average incomes were a fraction of American levels, so a cup of coffee was a luxury. Starbucks responded as Kogut and Singh would predict. It licensed its brand to a partner in Beijing and formed joint ventures in other regions, including one in Shanghai and East China with the Taiwanese food group Uni-President and its retail affiliate President Chain Store. The partners knew real estate, labor and government relationships; Starbucks supplied the brand, the coffee and the store format.

The partner model also helped Starbucks avoid a common mistake of early entrants. Rather than open hundreds of stores quickly, it expanded slowly through its first decade in China, concentrating on high-visibility locations in large cities such as Beijing and Shanghai where international brands carried prestige. This approach built the brand among the customers most willing to pay its prices and gave Starbucks and its partners time to develop supply chains for coffee, milk and baked goods.

Learning and Taking Control

The internationalization process model predicts that commitment rises with knowledge, and Starbucks' path fits it. As China's rules on foreign ownership eased after its entry into the World Trade Organization and as Starbucks learned what Chinese customers wanted, it bought control of its partners' operations region by region. The largest step came in 2017, when it agreed to buy the remaining 50 percent of its East China joint venture from Uni-President and President Chain Store for about $1.3 billion, giving it full ownership of roughly 1,300 stores in Shanghai and nearby provinces (Starbucks Corporation, 2017). Full ownership let Starbucks control store standards, roll out mobile ordering and delivery nationally and capture all of the profit from what had become a large, profitable business.

Starbucks also adapted its offer. It designed stores as places to meet rather than to grab a cup on the way to work, matching a market where the store was a social destination, and it added drinks and food built around local tastes, including tea-based beverages and seasonal products tied to holidays such as the Mid-Autumn Festival.

Taking control also carried risks the partners had previously absorbed. Full ownership meant Starbucks bore the whole cost of leases, labor and expansion in a market where rents in prime locations were rising quickly. It also meant the company's reputation was directly exposed to local controversies. The decision made sense because Starbucks by then understood the market well enough to manage those risks, which is the logic of the internationalization process model.

The Challenge From Local Rivals

Full ownership brought full exposure to competition. Luckin Coffee, founded in 2017, grew by opening small pickup stores, selling through an app and pricing well below Starbucks. Despite an accounting scandal in 2020, Luckin recovered and passed Starbucks in number of stores and then in revenue in China, while other low-price chains followed. Starbucks' premium position, designed when coffee was a status symbol, now faces customers who drink coffee daily and compare prices. In this phase, the liability that matters is less cultural distance than the speed and cost structure of local competitors who learned the market from Starbucks' own success.

The competition also changed what customers expected. Local rivals introduced flavors, such as coconut lattes and cheese-topped teas, faster than Starbucks' global product process could respond, and they used apps and delivery platforms that Chinese consumers already relied on. Starbucks had adapted its stores and menu, but its product development and pricing still ran largely on a global schedule. The case suggests that adaptation is not a single decision at entry but a capability a company must keep building.

Assessment and Recommendations

Starbucks' entry sequence was sound. Partners reduced risk when distance was greatest, and ownership captured value once knowledge and regulation allowed it. The current problem is strategic rather than about entry mode. Three responses fit the module's frameworks. First, Starbucks should segment its formats, keeping social stores in prime locations while expanding smaller pickup formats in lower-tier cities where growth is fastest. Second, it should consider a local partner again, not for market knowledge but for capital and speed in smaller cities, a reversal that the process model allows when the opportunity changes. Third, it should keep the premium brand distinct rather than chase local rivals on price, since its advantage lies in experience and consistency rather than cost.

Conclusion

Starbucks entered China cautiously through licensees and joint ventures, then took control as it learned, culminating in the 2017 East China purchase. The case shows that entry mode is not a single decision but a sequence, and that the frameworks of distance and gradual commitment explain both the caution and the later boldness. The next decision for Starbucks is how to compete in the market it helped create.

References

Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. Harvard Business Review, 79(8), 137-147.

Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23-32. https://doi.org/10.1057/palgrave.jibs.8490676

Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3), 411-432. https://doi.org/10.1057/palgrave.jibs.8490394

Starbucks Corporation. (2017, July 27). Starbucks to acquire remaining 50% stake in East China JV [Press release].

Sweeney, P. D., & McFarlin, D. B. (2015). International management: Strategic opportunities and cultural challenges (5th ed.). Routledge.