1 4 Best Coffee China 1 4 example essay topic

STRATEGIC ANALYSIS FOR BEST COFFEE CHINA Linda Qin Bachelor of Economics, Guangdong University of Foreign Studies, 1996 PROJECT SUBMITTED IN PARTIAL FULFILLMENT OFTHE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In theFacultyofBusiness Administration Linda Qin 2004 SIMON FRASER UNIVERSITY Fall 2004 All rights reserved. This work may not be reproduced in whole or in part, by photocopy or other means, without permission of the author. APPROVAL Name: Linda Qin Degree: Master of Business Administration Title of Project: Strategic Analysis for Best Coffee China Examining Committee: Chair: Dr. Neil R. Abramson Senior Supervisor Associate Professor Dr. David C. Thomas Second Senior SupervisorProfessorDate DefendedIApproved: SIMON FRASER UNIVERSITY PARTIAL COPYRIGHT LICENCE The author, whose copyright is declared on the title page of this work, has granted to Simon Fraser University the right to lend this thesis, project or extended essay to users of the Simon Fraser University Library, and to make partial or single copies only for such users or in response to request from the library of any other university, or other educational institution, on its own behalf or for one of its users. The author has further granted permission to Simon Fraser University to keep or make a digital copy for use in its circulating collection. The author has further agreed that permission for multiple copying of this work for scholarly purposes may be granted by either the author or the Dean of Graduate Studies.

It is understood that copying or publication of this work for financial gain shall not be allowed without the author's written permission. Permission for public performance, or limited permission for private scholarly use, of any multimedia materials forming part of this work, may have been granted by the author. This information may be found on the separately catalogued multimedia material and in the signed Partial Copyright Licence. The original Partial Copyright Licence attesting to these terms, and signed by this author, may be found in the original bound copy of this work, retained in the Simon Fraser University Archive. W.A.C. Bennett Library Simon Fraser University Burnaby, BC, Canada SIMON FRASER UNIVERSITY Ethics Approval The author, whose name appears on the title page of this work, has obtained human research ethics approval from the Simon Fraser University Office of Research Ethics for the research described in this work, or has conducted the research as a co-investigator of a project, or member of a course, approved by the Ethics Office. A copy of the human research ethics approval letter has been filed at the Theses Office of the University Library at the time of submission of this thesis or project. The original application for ethics approval and letter of approval is filed with the Office of Research Ethics.

Inquiries may be directed to that Office. W.A.C. Bennett Library Simon Fraser UniversityBumaby, BC, CanadaABSTRACTBest Coffee Canada, a well-known coffee company founded in 1992, has been actively involved with international expansion. Best Coffee China ( ), the master franchisee for Best Coffee in China, started building corporate stores in four major cities in early 2003. Since then, is now experiencing aggressive expansion, which unavoidably requires strong resource management and effective corporate system development. However, is lacking a centralized decision-making team.

Furthermore, finds it difficult to maintain a pool of well-trained managers. This also explains why had to spend a higher cost on everything at the early stage. This graduation paper aims to examine the key successful factors for Best Coffee to thrive in China, and to provide the reasons that hinder Best Coffee's fast growth in China. By using Porter's five forces to analyse external and internal factors, this paper will provide several solutions to existing major problems for.

DEDICATION To my dear dad, mum and ziti, The most important people in my life. Also, to my dear God mother and God father, Lucia and Frank, together with two lovely god brothers, Johnson and Jackson. I love you all. ACKNOWLEDGEMENTS I would like to thank Professor Neil R. Abramson for his endless support and help. I would like to thank Professor David C. Thomas for his advise and support.

I would also like to thank Judy Render for her continuous encouragement and friendship. I would like to thank John Drumfires for his help and friendship. I would like to thank Bob Mackin for his help and friendship. TABLE OF CONTENTS... Approval...

11... Abstract... 111 Dedication... iv Acknowledgements... vTable of Contents... vi List of Tables... vl. l. l. 1 Background.

Best Coffee Company... 11. I Company History and Culture... 11.2 Founders... 21.2. 1 Jerry White...

21.2. 2 Martin Dunn... 21.2. 2 Lisa Evan...

21.3 Global Expansion... 31.4 Best Coffee China... 41.4. 1 Head office of Best Coffee China... 4.1. 4.2 President Dr. Wong... 41.4.

3 Expansion Strategy... 42 External Analysis. Five Forces Analysis... 62.1 Threat of New Entrants...

62.1. 1 Economies of Scale... 6.2. 1.2 Product Differentiation... 72.1.

3 Cap. i talk. R... 72.1. 4 Switching Cost... 82.1.

5 Sum~ar. y... 82.2 Power of Buyers... 92.2. 1 Consumer Groups... 92.3 Threat of Substitutes... 122.3.

1 Availability of Close Substitutes... 122.4 Power of Suppliers... 142.4. 1 Supplier Pattern...

142.5 Industry Competitors... 162.5. 1 Coffee and Specialty Coffee... 162.5. 2 Coffee in China... 172.5.

3 Franchising in the World... 182.5. 4 Franchising Development in China... 212.5. 5 Considerations for Franchising in China... 242.5.

6 Coffee Houses in China... 262.5. 7 Starbucks in China... 3.03 Key Successful Factors for Best Coffee China... 343.1 Secrets of Success for Starbucks in China... 3...

43.1. 1 Location... 3 43.1. 2 Operational System...

3... 63.1. 3 Finance... 3...

73.1. 4 Marketing Strategy... 3.73. 2 Key Successful Factors for Best Coffee in China...

3 83.2. 1 Location, Location, Location... 3 83.2. 2 Sales Solve Everything... 3 93.2. 3 Build Up Good Franchising System...

4.03. 2.4 Strong Logistics System is the Key... 4 13.2. 5 Guerrilla Marketing Works Best... 4.24 Internal Analysis... 444.1 Management Analysis...

444.1. 1 What C Coffee Needs in the Management Level... 4.44. 1.2 Capabilities... 464.2 Organizational Analysis...

474.2. 1 What C Coffee Needs Organizationally... 4 74.3 Resources Analysis... 4 94.3. 1 Resources C Coffee Needs... 494.3.

2 Summary... 525 Recommendations... 535.1 Management Level... 535.1. 1 Dr. Wong...

535.2 Organizational Level... S 35.2. 1 System... 535.2. 2 Structure... 545.2.

3 Culture... 545.3 Resources... 545.3. 1 Human Resources... 5 45.3. 2 Financial...

54 References... 5 6 vii LIST OF TABLES Table 2- 1: Comparison table among different teahouses and Best Coffee... 14 Table 2-2: Comparison table among three types of coffee shops in China... 2 8 Table 2-3: Comparison table between Best Coffee and other franchising brands in China... 2... 9...

V l l l 1 BACKGROUND - BEST COFFEE COMPANY 1.1 Company History and Culture Best Coffee Company was founded in February 1992 by three Canadian entrepreneurs. The first Best Coffee store was opened at the same t~me n Queen Street West in Toronto, which is now one of the trendiest shopping areas in Toronto. After eleven years, Best Coffee has become the second largest specialty coffee chain in terms of special coffee consumption in the downtown core of Toronto. It has fifty-four Best Coffee stores located in Canada, Japan, China and the Middle East. Best Coffee Canada uses franchising as an effective way to expand its business locally and internationally.

The Best Coffee Canada philosophy is, 'Creating an atmosphere that will develop customer loyalty and growth by providing an environment of quality, service and consistency through the development of people, products and attitudes'. Best Coffee Canada's founders believe that coffee is only the excuse for people to hangout in the coffee stores, and Best Coffee Canada will provide a good excuse. It sells not only high-quality specialty coffee, but also exceptional quality service. In tern ls of sales philosophy, Best Coffee believes that sales resolve everything. Three major secrets of the success are: location, good training for store management, and a good store construction team.

At Best Coffee Canada, everyone is dedicated to the coffee shop idea in its entirety. Great coffee, warm smiles and fast, friendly service is what Best Coffee Canada is all about. Best Coffee Canada's slogan is, 'Never Burnt, Never Bitter', which shows the premium quality of coffee that Best Coffee Canada provides to each customer. 1.2 Founders The founders of Best Coffee Canada are fascinated by coffee retailing. They believe that with a more complicated world on the horizon and the consumption of alcohol on the decrease, people need a place to socialize that makes them feel special. Hence, Best Coffee Canada provides a premium, fresh product that makes its customers feel special in a warm, distinctive environment. 1.2.

1 Jerry White Mr. Jerry White is President of Best Coffee Canada. He completed his political science degree in Ontario and worked for another coffee company for over ten years before he decided to start his own company. He understands the coffee industry well and knows the secrets to achieve success for specialty coffee chain stores. 1.2. 2 Martin Dunn Mr. Martin Dunn, the Vice President of Real Estate and Finance, is also a founder of Best Coffee Canada. His education includes a bachelor of commerce degree with a major in international business.

He is the youngest and most energetic founder and works an average of sixty to seventy hours per week. He has abundant experience in seeking good locations and negotiating with landlords to get the best spots at the lowest prices. He also oversees the finance and legal department, and is good at calculating projected sales and returns on investments. 1.2. 2 Lisa Evan Mrs. Lisa Evan is the only female founder of Best Coffee Canada and is the Vice President of Human Resources. Administration and Franchisee Recruitment. She accumulated valuable business experience during her career.

She is friendly, open-minded and easy going, with over twenty years of local business experience. These three founders own equal shares in the company and work well together to maximize each other's advantages. It is an amazing combination - three partners working together successfully for over twelve years, and expanding the business globally. 1.3 Global Expansion In 1996, Best Coffee Canada started to expand to overseas markets, initially in Japan.

Afterwards, it ventured into China and the Middle East. By the end of 2003, there were a total of fifty-four Best Coffee stores all over the world: thirty in Canada, ten in Japan, eight in China and six in the Middle East. Overall, Best Coffee Canada is a comparatively conservative company, with a high standard of success in business. Its philosophy is to try to ensure every single store's success before it opens another new store by carefully selecting the right location, providing the best training to the franchisees, and strictly demanding a high standard store operation. Hence, in the first six years, it only opened one or two new stores every year. However in the latter six years, it expanded much more aggressively, eight to nine times faster than the original pace, especially after Best Coffee Canada signed a master franchisee agreement with Dr. Andy Wong, a very aggressive marketing talent who has wide connections in over twenty cities in China.

Dr. Wong has a very ambitious plan to challenge Starbucks in China. Dr. Wong's marketing tagline was featured in promotional campaigns to attract local attention and to help increase Best Coffee's awareness in a new market with a large population of tea-drinking customers and rising demand for coffee consumption. 1.4 Best Coffee China 1.4. 1 Head office of Best Coffee China Best Coffee China is based in Toronto and belongs to C Consulting Services, which has over twenty-eight subsidiaries located in twenty-three cities in both Canada and China.

Consulting Services covers major businesses in six different areas including business consulting, immigration services, education, travel agency, Chinese media and coffee retailing. It was founded by Dr. Wong in 1994 and has grown to employ two-hundred-and-fifty people worldwide. 1.4. 2 President Dr. Wong The president of Best Coffee China is Dr. Andy Wong. He came to Toronto from China in 1992, to complete his PhD degree in Economics.

Dr. Wong is a born entrepreneur, with nonstop creative thinking. He is also an outstanding marketer, with numerous new promotional ideas. 1.4. 3 Expansion Strategy Following Dr. Wong's aggressive marketing plan, Best Coffee China plans to open one hundred Best Coffee stores in China in a span of two years. Compared with 65 stores within four years in China for Starbucks, this plan demands strong real estate development support, highly efficient management, and excellent training resources.

Using franchising to penetrate the Chinese market will lessen Dr. Wong's need to have a ready cash flow and will strengthen the supporting functions to franchisees, in order to build up standardized high quality specialty coffee stores in China. In 2003, Best Coffee China opened four flagship stores in four major Chinese cities: Beijing, Shanghai, Guangzhou and Nanjing. These were located primarily in high-end office towers or within a high-end shopping mall. The concept is to promote a trendy American lifestyle and coffee culture to Chinese working professionals with stable disposable incomes. Due to the unexpected disaster of SARS, the original four stores were delayed in opening until the end of July and the beginning of August.

Many local and media celebrities, even Canadian Embassy officers, provided their support by attending the opening ceremony. With an effective public relations campaign, Best Coffee China achieved great attention among the local community. Furthermore, in two consecutive years, Best Coffee China participated in the International Franchising Exhibition held in three cities - Beijing, Shanghai and Guangzhou -which brought additional attention to this special Canadian coffee brand. Moreover, Best Coffee China also makes good use of its local Chinese media tool, a Chinese newspaper called China Update, distributed widely in the Greater Toronto Area, to promote its brand awareness among the Chinese immigrants and international student community. Results were fantastic for the company and Best Coffee China managed to organize a couple of franchising seminars to provide more detailed information on franchising development in China. The existing situation in China is that numerous potential franchisees have shown interest and made efforts to join Best Coffee's family; however, sufficient support has not been found to push forward further franchisee development.

Thus, a good and consistent management system has to be built up immediately in order to ensure a proper franchising system can be put in place to Best Coffee's satisfaction. 2 EXTERNAL ANALYSIS - FIVE FORCES ANALYSIS 2.1 Threat of New Entrants As Michael E. Porter described in his book, Competitive Strategy (Porter 1980), new entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. As a result, prices could be bid down or incumbents' costs inflated, hence reduce profitability. Moreover, the threat of entry into an industry depends on the barriers to entry. If barriers are high and / or the new comer can expect sharp retaliation from entrenched competitors, the threat of entry is low. Nowadays in China, there are three major types of coffee houses; Taiwanese style, specialty coffee houses and North American style specialty coffee chain stores.

Best Coffee belongs to the third category. This differentiates itself from the other two categories on many prospects such as economies of scale, product differentiation, capital requirement and so on. For new entry, we mainly analyse the ones falling into the same category as Best Coffee and competing head to head with Best Coffee. 2.1. 1 Economies of Scale In order to have the economies of scale, companies in the specialty coffee industry must expand their stores' quantity rapidly in a short period. However, the fastest way to achieve this goal is to expand through franchising system. Any company utilizing single-store strategy couldn't be able to enjoy the advantage of economy of scale.

If a company wants to gain high margin in China, in order to be able to compete with Starbucks or Best Coffee, it has to gain greater economy of scale. 2.1. 2 Product Differentiation Both Best Coffee and Starbucks position themselves to their clients as the third space to relax, other than work and home. Therefore, customers could indulge themselves into the third place. They both focus on providing a relaxing and special atmosphere to clients. The selling point is not only the specialty product they are selling, more importantly, the setting of the store, the background music, the atmosphere and the environment, all of which differentiate Starbucks or Best Coffee from its local competitors. Therefore, the copycat of Starbucks or Best Coffee could copy the products, the operational style and the decoration, but it is difficult to copy the atmosphere and the service, which represent the core of western lifestyle.

These are the key successful factors and competitive advantages for Starbucks and Best Coffee. 2.1. 3 Capital Requirement The initial investment for a Best Coffee store is estimated at about eight- one million RMB Yuan (the equivalent of Cdn$200,000), for the store area of sixty to one hundred square meters. This amount of initial investment is not a big figure for many Chinese investors. Hence, the entry barrier for opening a single specialty coffee store in China is low. However, looking at the challenges after the store opening, there are many capital requirements affecting a store's success. For instance, there will be no economy scale advantage for a single store to obtain better margin and lower cost.

Besides, without investment on strong advertising and PR, with low brand awareness, a new coffee store could hardly gain satisfying sales volume. 2.1. 4 Switching Cost In China, specialty coffee chain stores with a brand name, such as Starbucks and Best Coffee, represent the western lifestyle and fashion; plus, drinking coffee hasn't yet become a daily routine behaviour for most of the consumers. Therefore, visiting the well-known specialty coffee chain store is more like a symbol of strong consumption power for fashion followers to pamper themselves, while consumers couldn't enjoy the same atmosphere in a no rn~aln o-name coffee store. In other words, the switching cost from a brand name specialty coffee store to a nona me single coffee store is high. Furthermore, as Starbucks is utilizing area partners to expand its business China, there are only three major local partners of Starbucks are able to open Starbucks coffee stores in China.

Plus, the initial investment for other famous western chain store, such as Pizza Hut, KFC andMacDonald's, are so high that not small to medium size investors could afford. Therefore, the switching cost between Best Coffee and Starbucks or other western franchising stores are high. 2.1. 5 Summary In sum, new entrants have to have the economics scale to be competitive, while providing North American-style specialty coffee, unique atmosphere, and high quality client services. In order to compete with Best Coffee, they require an initial investment that is not too expensive but a high switching cost. Hence, the barriers to entrants are medium to high. The barrier to entry is comparatively low for a company, like Best Coffee or Starbucks, that satisfies most of the above requirements upon entry.

2.2 Power of Buyers In a tea drinking country, coffee stands for the western culture. Even though at this stage coffee is accepted by certain clients in China, it becomes more and more popular among young generation, especially those who get education overseas. Because of demographic background and consumption power differences, Chinese drinkers have different perception, understanding and expectations on different coffee houses. Due to the differences, as the representative of new concept of North American stylish coffee store, Best Coffee will target to following consumer groups in China. 2.2. 1 Consumer GroupsOccupationThe target audience in China usually has decent jobs, stable disposable incomes, and understands or tries to understand western cultures and lifestyles. Many of them are working in the joint ventures or multinational companies' China branches, which provide more exposure to the coffee drinking culture by their foreign colleagues.

In addition, western educational backgrounds make the working professionals familiar with the American style coffee shop concept. Gender According to local research by Best Coffee Company, females comprise of at least 60 percent of total clientele base for the coffee business, because women are more easily fashion trends and are more likely to enjoy the coffee shop atmosphere by themselves or with friends. A similar scenario exists in China. Chinese women are more sensitive to fashion trends and are always willing to try new things. They treat coffee shops as a special occasion for indulgence and relaxation. While Chinese males mainly discuss business and meet with clients or colleagues in the coffee shops, they are not price-sensitive because in most occasions, companies will pay for the business expense, or Chinese males do not usually care about high costs in front of their female friends.

Thus, Chinese females should be studied and targeted in China. Age The target age group falls into the range of 18 to 35. Elderly people feel more comfortable drinking tea due to the deep influence of Chinese traditional culture. On the other hand, youth under 18 have great curiosity about coffee or anything related to western cultures, but they do not have sufficient or stable income to support their regular coffee drinking habit. Therefore, the majority of junior clientele may become first-time drinkers while not necessarily becoming regular visitors to the coffee shops.

The main clientele between the ages of 18 to 35, possess comparatively more stable disposable income and are willing to spend their money on something that can make them feel better and improve the quality of their lives. Lifestyle Among Chinese people, coffee stands for western culture and ideology. Sipping a cup of coffee, with a strange foreign name, on a relaxing afternoon represents a higher standard of life in China. In addition, discussing business in a warm and nicely designed coffee shop becomes more popular in China, because of the comfortable environment and casual atmosphere.

China has a huge population of working professionals who completed their graduate education abroad. Therefore, coffee is becoming a normal part of daily life. Many of them drink coffee known by different names. Drinking coffee in a western style coffee shop reminds them of their lives in foreign countries. Whenever they want to get away from work or reality, or if they want to share something with a good friend, the first choice will be to go to the coffee shop that they always visit. China's open-door policy of economic and social reforms is fostering increased mob ll~ty for citizens.

Therefore, greater numbers of Chinese people, especially the young, are eager to improve their English proficiency. They want to land a good job with a multinational company, immigrate to a foreign country or be accepted in a foreign university. Thus, visiting coffee shops and talking to foreigners who are regular customers of the coffee shops is becoming a very effective way to practice English and to learn more about western culture. Because of the Chinese government's one-child policy, a teenager is usually the only child in a family, spoiled by as many as six adults (two parents and four grandparents). Hence, teenagers are finding more independence and gaining higher consumption power. This generation grew up with McDonald's, KFC, Nike, Disney, Michael Jordan, and many other western names.

These teenagers easily accept western food; they prefer western clothing, follow western pop stars, and appreciate western lifestyle. In sum, they are trendy fashion followers. To this generation, coffee is another western concept that can set it apart from its parents' generation. This younger generation likes to talk about fashion and trends, including the new coffee brand and a new coffee shop in town. On top of that, Chinese teenagers also like to choose shops as one of their favourite gathering places, together with karaoke houses, McDonald's. KFC and so on.

2.3 Threat of Substitutes 2.3. 1 Availability of Close SubstitutesTeahouseChina is a tea country with a long history of daily tea-drinking, especially for the elders generation, which prefers to drink tea on different occasions and during different time periods throughout the day. There are generally two types of teahouses in China. One mainly serves typical Chinese tea for the middle-age group to elderly people. It is a common place for gathering and meeting friends.

This category can be divided into two kinds of pricing: the economic type for the public, and the high-end luxury teahouse for the wealthy class. However, as Best Coffee mainly targets younger generation and working professionals, who usually are not the major clientele of traditional Chinese teahouse. Another type of teahouse is the bubble teahouse, frequented by the younger generation. It is greatly affected by the Taiwanese tea drinking habit of drinking bubble tea, a special tea with different favours and containing gelatin e balls or bubbles.

It became a common, fashionable drinking style in the middle of the 1990's. In bubble teahouses, people not only drink bubble tea, but also eat Chinese delicacies such as snacks or Taiwanese noodles. Customers can either order take-out, or sit down with friends to enjoy tea and food. This kind of bubble tea store is usually decorated in Taiwanese or Hong Kong style, with a more relaxing and youthful appearance. It might also have a simple kitchen. The prices charged to clients are usually moderate, in order to attract more students and the younger generation.

Therefore, customers visiting bubble teahouses are more likely to indulge in Taiwanese or Hong Kong-style culture instead of typical we stem-style culture. If they want to taste western culture and atmosphere they have to visit a western-style coffee store, namely Starbucks or Best Coffee. The teahouse is a very popular social venue for Chinese people. It is part of the food culture, with a history spanning many centuries. It is still an important part of people's social life. Since China promoted the open-door strategy to embrace more western culture and, the teahouse's domination has been challenged by the foreign coffee house.

Coffee houses have gained popularity in China especially in the big cities and seashore communities. Therefore, teahouses, especially bubble teahouses, are a threat to coffee in terms of consumers' familiarity with tea and the long history of tea culture. However, with the development of a policy of openness and embracement of western culture, specialty coffee chain stores have great potential to compete with teahouses in China. Given great power of substitutes, and the small position of coffee as part of total market, coffee is still positioned as a luxury trendy consumer product mainly targeting to young, professional white-collar level of people and entrepreneurs, who are western culture followers. They have stable disposal income and like to explore western culture. Table 2-1: Comparison table among different teahouses and Best CoffeeregularteahouseTaiwanesestylebubbleteahouseBestCoffeeCategoryEconomicLuxuryEconomicModerateTargetClientPublicMiddlewealthyclassYoungergenerationYounggeneration, Working Professional, AndBusinessmenAgeGroup 25 +30 +I 5-3018-45 i q c r mediumServeMeal 7 usually High -PriceRange 1 mediumpastryKitchenusuallynousuallynoYessimplekitchenNoArea (square meters) 1 oo+DrinkMenumainlyChineseteamainlyChineseteabubbleteaItalianStyle, SpecialtyCoffeeSelfServeNoNoNoYes 2.4 Power of Suppliers 2.4.

1 Supplier Pattern The basic coffee supply for Best Coffee China includes coffee beans, cups and lids, dairy products, pastries, straws, napkins, sugar and many other customer service items with the Best Coffee logo. Hence, there are two major types of products that need to be purchased: fixed assets purchased before the store opening, and operational items which are continuously purchased on a daily basis. For the first category, the fixed assets required such as coffee makers and store furniture, Best Coffee China basically purchases locally. However, Best Coffee China had to get Best Coffee's prior approval. For instance, Best Coffee China would send the list of different coffeemakers - made by foreign companies selling through distributors in China - including brands, model and origin of production to Best Coffee. Then Best Coffee would choose the most qualified and suitable ones for Best Coffee China.

For each new store, Best Coffee China would pick the most appropriate supplier based on its production scale and sales volume. There are many international branded coffee makers competing in China. Therefore Best Coffee China has sufficient options. As Best Coffee China only has less than ten coffee stores nationwide, its bargaining power is still not strong. When it reaches its target of fifty stores by the end of 2004, it will have better economy of scale, hence stronger purchasing power over suppliers. For the second category, operational products, Best Coffee China had to import the key components from Best Coffee Canada.

For instance: coffee beans, cups, lids, ingredients for special drinks, and gift items like coffee grinders and makers are purchased from Best Coffee Canada. Another reason for Best Coffee Canada to sell raw materials to Best Coffee China is that the profit margin of selling coffee supplies is attractive. Therefore Best Coffee will not easily hand over this important function to Best Coffee China. Nevertheless, Best Coffee China and Best Coffee Canada have reached an agreement that, in the long run, Best Coffee China will realize procurement localization step-by-step.

As China is a global production base, companies can find all kinds of suppliers who have high standards and qualifications locally and a very competitive price range. It is more reasonable and efficient to locally source suppliers, and even sell them back to the North American market. Until the Chinese operation starts to catch up with western standards, and when the Chinese management team starts to better understand coffee culture and Best Coffee philosophy, Best Coffee will feel more comfortable and confident in outsourcing its production orders on coffee supplies in China. At present, there is no national dairy or pastry supplier for Best Coffee China, and each store is using its own local brand name supplier. Best Coffee China plans to seek a qualified supplier for different products with brand name nationwide, and draw up a partnership agreement. One of the most important operational challenges for Best Coffee China is negotiating a good partnership agreement with a supplier so it can decrease costs while maintaining the same quality.

Therefore, at this moment, pastry suppliers in different cities in China have more bargaining power than they should possess. In terms of currency exchange, there is not be any problem or risk for Best Coffee Company Canada because the Best Coffee Company (China) head office in Toronto pays Canadian dollars to Best Coffee Company Canada for the raw materials purchased in Canada. 2.5 Industry Competitors 2.5. 1 Coffee and Specialty Coffee As the coffee industry faces mostly stagnant and somewhat declining numbers globally, the increased popularity of niche coffee drinks, combined with the new demographics of coffee drinkers, offers more diverse product and marketing opportunities. In addition to classic coffee products (e.g. whole bean coffee, ground coffee and instant varieties), coffee manufacturers have looked to expand offerings with other coffee alternatives such as cappuccino, latte, iced coffee and chai tea. Liquid concentrate coffee is another innovation.

According to Beverage Industry (October, 2001), whole bean coffee sales have experienced an overall growth of 4.7 percent. 'In terms of trends, the coffee menu continues to expand,' says National Coffee Association Spokesman Gary Goldstein. 'That started more than a decade ago at the beginning of the gourmet coffee boom. ' Goldstein says iced coffee emerged asa prepared drink in the summer of 1997 and has grown to create a popular trend in ready-to-drink beverage products. The specialty coffee category has been credited with luring younger consumers into the coffee category and thus creating an increase in the size of the 'new drinkers' market (Jill Brass, April, 2002). Although the gulf between Starbucks and smaller rival chains continues to widen, the specialty coffee segment presents a wide range of promising channels through which companies can leverage and differentiate their brands.

For instance, several prominent operators are brewing new prototypes and broadening their product offerings by adding dessert-type coffee beverages. These include an emphasis on lunch items or other avenues, such as drive-through windows, that Starbucks has mapped out as prime grounds for growth. Meanwhile, similar to Starbucks, the smaller coffeehouse brand contenders are eyeing expansion into other distribution channels such as grocery stores and international licensing. In sum, coffee producers are actively seeking international expansion. In order to penetrate an under-developing market on the retailing level, the most effective method to expand is to develop the franchising business. 2.5. 2 Coffee in China China is one of the world's smallest coffee markets.

Although it has one quarter of the world's population, China accounts for only 1 percent of world coffee consumption (web February 2003). Annual coffee production in China reaches a mere one thousand tonnes, compared with the 15 billion tonnes churned out by Brazil each year. Before the entrance of instant-coffee brands such as Nescafe and Maxwell House into China in 1995, consumption of coffee was virtually unknown (Business China, May 2002). However, this is slowly changing. Total coffee imports rose by seventy-five percent in 2001, to some 9,500 tonnes. According to market research firm AC Nielsen, instant-coffee sales in China increased by forty-two percent in 2001 (Business China, May 2002).

In China, it is not surprising that most coffee drinkers are based in cities. Coffee is considerably pricier than other hot beverages, and retail sales in general are concentrated in China's urban centres. Since 1995, retail sales of hot drinks (mainly coffee) have grown in the cities. Despite the marked disparity, hot drinks (mainly coffee) sales exhibit strong growth in China. This is due to the increasing disposable incomes, the introduction of new products and brands, and the migration of sales into food-service outlets including teahouses, coffee shops and fast-food restaurants (Business China, May 2002).

The foreign companies that now dominate China's coffee market may be further encouraged by the fact that retail sales of coffee are predicted to grow more than twenty-five percent in the next five years. Coffee accounts for just 1.6 percent of all hot-drink (including tea) sales in China (Business China, May 2002). 2.5. 3 Franchising in the World Franchising is a method of doing business. It is a method of marketing a product which has been adopted and used in a wide variety of industries and businesses. In some sense, it is a strategy for market entry. The word 'franchise' literally means to be free.

In this sense, franchising offers people the freedom to own, manage and direct their own business (web). However in reality, franchising is hardly free. By paying a certain amount of money as the french~single e, franchisees can have the authority and privilege to operate under certain business models and be able to share the goodwill of certain brands. As with any freedom, there are responsibilities.

In franchising, these responsibilities have to do with the franchisee's commitments and obligations -usually spelled out in a franchise system. The franchise system, sometimes called the franchisor, is the one who owns the right to the name or trademark of the business. The franchisee is the one who purchases the right to use the trademark and system of business. According to the International Franchise Association (web), there are two different types of franchise arrangements: o Product distribution arrangements in which the dealer is, to some degree, but not entirely, identified with the manufacturer / supplier; o Business format franchises in which there is complete identification of the dealer with the buyer.

Best Coffee Company Canada and Best Coffee (China) fall into the second type of franchising model. The business format for franchising offers the franchisee not only a trademark and logo but a complete system of doing business. Indeed, the word 'system' is the key concept to franchising. A franchisee receives assistance with site selection of the business, personnel training, business set-up, advertising, and product supply. For these services the franchisee pays an up-front franchise fee and an on-going royalty, which enables the franchisor to provide training, research and development, and support for the entire business.

In a nutshell, the franchisee purchases someone else's expertise, experience and method of doing business. Meanwhile, the franchisee agrees and promises to follow the system to ensure proper operation. In its infancy merely two decades ago, international franchising has become a major force in the world economy today. Franchising is gaining popularity throughout the world, and is emerging as an effective way to conduct and grow successful businesses. Yet the global marketplace is far from saturated. In fact, the growth potential for franchising worldwide is exponential.

The growth of franchising has been well-documented in strong market economies, including the United States and Western Europe. In the U.S., franchising generates $1 trillion worth of business In growth sales and represents 50 percent of retail trade (Swartz, November / December 2000). More recently, success stories are emerging from less obvious comers of the world, including Eastern Europe, the Middle East, and South Africa. Going global, however, still requires extensive research. While franchising has proven beneficial for countless companies in various countries, it is not foolproof. Each country has different customs, cultures, languages and laws, making cross-border expansion a challenging and unique option.

Companies considering new territories must first determine if their products and services are acceptable in the new country. Second, they must identify a well-known partner that is socially and economically appropriate. Finally, they must have the ability to transfer knowledge and to provide support and necessary systems to franchisees. Companies from near and far are flocking to Asia's ripe market and receiving a warm handshake from natives ready to do business.

Although Japan and Australia have taken advantage of franchising for quite some time, many Asian countries are just beginning to discover that franchising is an attractive way to grow their economies. Asia's mom-and-pop stores are fading fast as franchisors set up shop. Asia is attractive to foreign franchisors for many reasons. First of all, Asia is bursting with consumers.

More than half of the world's population lives in the region. A soaring middle class and robust economic growth rates are also attractive to foreign investors. China alone comprises nearly one-quarter of the world's population and is considered the most under-retailed country in the world (Swartz, NovemberIDecember 2000). Furthermore, many nations are roll~no ut the red carpet for foreign investors. Several governments, including those of Malaysia and Singapore, encourage franchising and foreign investment by introducing franchise-friendly laws, establishing organizations, and developing programs to support the effort. In Indonesia, foreign investment approvals have skyrocketed nearly 300 percent since government restrictions were lifted in 1994 (Swartz, MarchI April 1997).

The number of high-level franchise conferences and exhibitions that have been held or are being planned throughout the region is another strong indication of Asia's growing interest in franchising. 2.5. 4 Franchising Development in China About China Since 1978, when Chinese leader Deng Xiaoping began to introduce market-oriented reforms and decentralized economic planning, output has more than quadrupled and China now has the world's second largest gross domestic product. Indications are that this growth will continue. The coastal areas and cities support standards of living two to three times higher than the countryside. This leads to a dramatic increase in the urban population. Currently, forty cities have populations in excess of one million.

Furthermore, a strong middle class has arisen that is capable of purchasing non-essential goods. According to the Economist Intelligence Unit (May 2002), retail sales of consumer goods were expected to grow a year-on-year five percent in 2002 in U.S. dollar terms, before accelerating steadily over the next five years. Reflecting rapid growth in household income, the value of consumer spending on food, beverages and tobacco was expected to rise, from US$214.5 billion in 2002 to US$295.5 billion in 2006 - or 37 percent over four years. China's Major Cities In China, the word 'franchise' did not exist until eight or nine years ago. Many foreign companies that have started franchises elsewhere have been waiting for years for China to have the trinity of requirements needed to set up successful franchises: higher incomes, a more developed market and appropriate legislation.

According to the China Commercial Information Centre ( ), the sales volume of chain store and franchising corporations in 1999 exceeded RMB 100 billion (US$12 billion), up 70 percent from 1997. But this is still a rather paltry sum. Franchises accounted for only 1 percent of the country's retail sales in 1999 (Business China, April 2000). Franchisers are being too cautious.

Since late 1997, China has had a franchising law, albeit a rather loosely worded one. There is now consumer demand for the types of products offered by franchises. And there is a pool of entrepreneurs that wants the opportunity to invest in franchise outlets. The Chinese government is working hard to establish favourable regulations for franchisors. Investors should not underestimate the challenges presented by the Chinese market. By the same token, they should not be discouraged.

Franchising is clearly making progress in China. Beijing hosted its first international franchise exhibition in 1998. There are now several annual international franchising exhibitions held in three major cities, Beijing, Shanghai and Guangzhou. In 2001, an annual franchise convention run by the China Chain Store and Franchise Association (CCF A) and the China International Franchise Association (CIF A) attracted more than 1,000 people from around China. Nor is there a lack of money to buy franchises (Young, 2002). In 2003, there were more than three important franchising exhibitions in the province of Guangdong, which attracted over thirty franchisors from all over the world.

Over fifty thousand potential franchisees attended this event. It was estimated that the output value of franchising will account for more than thirty-five percent of the country's gross domestic product, and the number of people employed in this field will soon reach two hundred million (Swartz, NovI Dec 2000). The conditions for franchising are improving in China as more and more companies a retaking the leap. The very visible success of Starbucks, KFC or McDonalds franchises have attracted hundreds of willing Chinese entrepreneurs. According to William Wright, Senior Attorney at the law firm Lehman, Lee and Xu, an advisor to franchise chains in China, almost every well-known fast-food chain from the U.S. is either already in China, or is in the process setting up a venture (Young, 2002). It is not only the fast-food industries that have set up franchises, but also photo film companies such as Kodak and Fuji, which operate thousands of branded outlets across China through a form of franchising agreement.

However, traditional franchise corporations that have set up shop in China have mostly stuck to joint-venture structures while testing the viability of their products and building their brands. Therefore, at the early stage of franchising development in China, resources were consumed by the requirements of establishing joint ventures and supervising daily operational details instead of being focused on expanding the business through franchising. Reluctance is also felt from the investor side. Establishing a franchise is not a get-.

Funding a franchise outlet requires a considerable outlay of time and energy and promises a relatively low rate of return. There are also the basic conceptual difficulties. Many potential investors in China are unfamiliar with the concept of franchising and are not willing to invest in something abstract. The KFC Company and the Subway Company are using two different franchising strategies to penetrate the Chinese market, each of which has its own advantages.

KFC Case American fast-food chain KFC has found a way to get around the conceptual problem. The company builds the restaurants itself and works to get them operational. Only then does it sell the working outlet to a franchisee. Because Chinese people like to look at what they are buying, it becomes a comfort to them, and reduces their sense of risk. The franchisor can tell franchisees how the business is going. KFC signs an inflexible ten-year contract with the franchisee.

It helps to train staff and procure supplies as well as offer the support of its restaurant service centre. The franchisee pays five percent of revenue for marketing and six percent for operations training, plus annual royalties. Obviously, buying an operational store is considerably more expensive than simply buying the rights to the brand. In 2000, the average price of a KFC franchise in China was RMB 8 million (US$970,000). This eliminates the presence of small-time entrepreneurs for whom franchising in China was generally targeted, and limits the speed at which new outlets can be opened (Business China, April 2000). According to KFC, franchising is still in its educational phase.

The company hopes to show potential franchisees how KFC functions, and if all goes as planned, word will spread about the benefits of franchising. Meanwhile, China remains KFC's largest corporate-owned market outside the U.S. Until 2000, only five percent out of more than three hundred outlets in China were franchises. Subway Case On the other hand, a major sandwich chain has taken a more conventional approach to franchising in China. All of Subway's stores in China are franchises.

The American company claims to be the only corporation doing genuine franchising in China. Subway charges investors an initial fee of RMB 82,800 (US$10,000). Franchisees then set up the stores, buy equipment and supplies from Subway, and hire and train staff - all done with Subway's guidance, in order to ensure the consistency of the outlook and the operation system. The franchisees pay 3.5 percent of revenues to an advertising fund and 8 percent in royalties. Subway establishes twenty-year contracts, but allows franchisees to sell their restaurants if they lose interest in running the outlets. The company has expanded slowly since entering China in 1995.

In 2000, it only opened five stores in Beijing and one in Tianjin. 2.5. 5 Considerations for Franchising in China China's vast population and low labour and land costs are certainly attractive to potential foreign investors. However, there are a number of issues one should be prepared for, such as inconsistent government policies, inadequate protection of trademarks and intellectual property, old fashioned Chinese management style, lack of training, high wastage, and numerous hidden costs (Chow, MayIJune 1994). Some examples of the above problems are as follows.

The franchising law in China is still under revision, which can easily cause confusion to foreign franchising companies. Since franchising is such a new business model in China, it has taken the central government's legal department a long time to complete the laws on franchising to ensure the best practices in China. Secondly, the violation of intellectual property has been a big problem for foreign investors in the past decade. Though the situation has improved, enforcement of intellectual rights needs to be strengthened. Thirdly, as a legacy of the old-style planned economy system, Chinese management are not accustomed to focusing on improving efficiency, providing high quality service, enhancing effectiveness and increasing profits.

All of the above are key issues for the success of any franchising company. Fourthly, poor human resources management is a big obstacle for any traditional Chinese company to expand aggressively. Qualified management recruiting, training and ongoing skills development is essential for growth. Another issue to bear in mind is the complicated taxation system. In 1994, China had a tax reform, which aimed to rationalize the distribution of tax revenues between central and local authorities. Under the reform plan the old system was changed into a two-tier tax system at the central and local levels to clearly define their respective tax-collecting powers.

The type of taxes included tariffs, consumption tax, value-added tax, personal and corporate income taxes, business tax, and tax on turnover at railways, banks, and insurance departments (Chow, MayIJune 1994). While local entrepreneurs were quick to spot franchising opportunities, most of them still failed to understand the nuts and bolts of running a franchise. Franchisees need to be humble enough to listen and learn. In China, the entrepreneurs who can put together the money for a franchise are often used to having their own way. They are naturally determined and creative. However, individual innovation by franchisees can be the death of a brand (Young, 2002).

Therefore, consistency is everything (Young, 2002). Franchising is always an attractive way to expand business and increase brand awareness. But franchisors should be very careful as they have to prepare a comprehensive contract that both sides must agree to and follow strictly. This agreement could include numerous details such as procedures on how to cook the food, how the cashiers should behave and how to clean the washrooms (Young 2002). More Chinese businesses are starting to understand the importance of brand value and some of the biggest Chinese brand owners are active in lobbying the government for stronger trademark protection (Young 2002). For instance, the domestic company Malan Noodles has built a US$40 million a year fast-food business from sales of one of China's most ubiquitous foodstuffs by branding, quality service and food. 2.5.

6 Coffee Houses in China There are typically three types of coffee stores in China. They are: Taiwanese-style western coffee shops mixed with Chinese eating habits, specialty coffee shops with unique personalized features (e.g. Internet coffee houses, E-business coffee houses, book and coffeehouses) and the typical North American-style coffee houses (e.g. Starbucks and Best Coffee). Best Coffee is positioned as the only competitor to Starbucks in China by promoting the image of an up-scale Italian espresso-based specialty coffee store. Best Coffee differentiates itself from other local or foreign brands by not confusing the clients with a wide variety of food supplies, such as Chinese-style steaks, bubble tea, or Chinese fast food. Instead, it provides high quality coffee beans occupies convenient locations and offers first-class customer service. In China, drinking coffee is becoming fashionable, yet it's not a regular part of daily life.

Therefore, it will take a couple of years to educate Chinese customers on drinking coffee over tea in their daily lives. Table 2-2 shows the major differences on store operation among three major types of coffee stores in China. Best Coffee, the typical North American-style coffee store, has a flexible requirement on store size which is usually smaller than the typical Taiwanese coffee store. Meanwhile, Best Coffee's theme is coffee, not food; therefore, it provides a lighter menu with less choices, hence no need for a kitchen. Whereas Taiwanese coffee stores act more like a restaurant or caf for meals or food. In other words, coffee and atmosphere are not the focus of their business.

In Table 2-3 some major differences between Best Coffee and five other major franchising brands in China are compared. Compared with other franchising brands, Best Coffee requires the lowest franchising fee and initial investment of only RMB 180,000 (approximately CDN$32,730) and RMB 800,000 (approximately CDN$145,455). Also, Best Coffee does not require any guarantee fee like other brands. However, there is a big difference between Best Coffee China's operation and its Canadian operation. Best Coffee China operates a flat fee royalty system, using a similar monthly royalty system as other brands. Best Coffee Canada firmly operates a royalty system by percentage of monthly gross sales, which greatly stimulates franchisees' motivation for improving sales and ensuring a higher profit margin as sales grow for Best Coffee.

The major reason why Best Coffee China has to implement a different royalty system is because of the greater pressure from its indirect competitors and from the unsatisfying franchising development progress. Because Best Coffee China does not have sufficient management resources and operational support, it is easier to operate the flat fee royalty system. However, in the long run, a flat fee royalty system will be a hurdle for further development and improved sales. Here is a comparison list for three types of coffee stores in China.

Table 2-2: Comparison table among three types of coffee shops in ChinaNameTaiwanese (HongKong) Style Coffee ShopSpecialCoffee Shop North-American Coffee Shop (e.g. Starbucks, and Best Coffee) KitchenYesDependsArea -- 139 or 186 squaremetersFrom 14 to 139 squaremetersVarious, From 1 to 186 SquaremetersServeMealsYesSometimespastriesSelfserveNoYes. DrinkMenuMainlyTaiwanorHongkongstylecoffee... highqualityItalianstylespecialtycoffee, tea. -- FoodMenuregularmealssnackspastriesTable 2-3: Comparison table between Best Coffee and other franchising brands in ChinaProductcategoryNorthAmericanCoffeeCoffee, Bakery, Cafe Bubble tea, snacks, lightmealsCoffee, cafe, meals Fast-foodchainRetailingBrandNameBestCoffeeJapaneseKohikanCoffeeRBTBubbleTea houseShangdaoCoffeeBlue andWhiteFreshFruitPlaceFranchiseeFee (RMB) 200,0001150 square meters 100,000 for three years 50,000 to 800,000 Equipment Deposit: 50,000 Initial Investment (RMB) 600,000 -Monthly Royalty~ e (eRM B) 4,000 - 6,000 Flat fee or 6 percent of gross sales (royalty) 2 percent of gross sales (ads) 450011 50 square meters 50001 120 above 3000 l month 2 percent to 5 percent of monthly gross sales 5 percent of monthly gro alesOthersNo quarante e-fee, no design Fee, nomanaqementfeeGuarantee fee: 100,0001150 square metersDesiqn fee: 50,000 Supervision fee: 100,000115040,000 to 5 O, desiqn fee: 1 0,000-50,000 Guarantee fee: 8,000 Cash flow: 10,000 Logistics fee: 3 percent of each month's sales 2.5. 7 Starbucks in China Starbucks is the major competitor to Best Coffee in China.

It has a similar product line, decoration style and atmosphere, and operational model as Best Coffee. Therefore, Starbucks China needs to be studied closely. Since it opened its first location at Seattle's Pike Place Market in 197 1, Starbucks Corporation, the largest specialty coffee store chain in the world now operates more than 7,500 retail locations in North America, Latin America, Europe, the Middle East and the Pacific Rim (web). In 2004, Starbucks plans to add 1,300 stores worldwide, including a boost of 950 stores to its U.S. base of about 5,475. Some outlets are found under the roofs of other retailers, such as retail bookstore chain Barnes and Noble Inc. Having already expanded to 34 countries, Starbucks expects to eventually operate 10,000 outlets in North America and 15,000 abroad (Gary 2004).

Starbucks is committed to offering high quality coffee and the 'Starbucks Experience " while conducting its business in ways that produce social, environmental and economic b.