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BirdsEye View

Many SuperCommunity banks struggle with the concept of being local. They question how far you need to go to achieve that competitive advantage, and how to strike a healthy balance between the efficiencies of standardization and centralization vs. local delivery.

I recently came across two shining examples of using localness for a winning strategy.

The first, and most notable, example is how Starbucks won the coffee market in China. Coffee market, you ask? Chinese people drink tea, not coffee, and are unlikely to pay $5 per cup to boot. It was especially surprising, then, to hear Starbucks CEO announce that China will soon become the company's largest market outside the US. The Chinese Starbucks outlets are more profitable than their US counterparts, even though the US sales per outlet are far higher. This is particularly striking since Burger King, Dunkin Donuts, Best Buy, Home Depot, and other US retailers could not crack the Chinese market.

Here is how Starbucks did it: instead of copying its product line and delivery model from the US, it adapted both to local tastes. Instead of transplanting the US product line, highlighted by Frapuccinos and whipped cream, Starbucks developed flavors that built on the local culture and appealed to local palates, such as green tea flavored coffee (!!). Further, it modified the delivery model to better suit local tastes as well. Rather than pushing take-out orders, the majority of US sales, it adapted to the Chinese preference for dine-in service.

The service has been augmented by an effective recruiting and retention strategy. The company offers good pay packages and career paths, which makes it an employer of choice in many markets. They get the cream of the crop and have lower turnover rates than competitors, yielding better service and overall lower employment costs, in addition to improved customer satisfaction. A barista says: "I feel taken care of my management. I enjoy my job and I enjoy working here, therefore I expect to stay longer. Some say the service at Starbucks is on par or better than many five-star hotels. Many customers say they prefer products from competitors but continue to go to Starbucks because of the service.

Starbucks differentiated itself in China by offering inviting, comfortable, air-conditioned facilities, a rarity in China, and quickly became the meeting place for business people and friends. This is an expensive delivery strategy since revenue per square foot drops relative to take-out models (only 1/3 takeout in China vs. 2/3 in the US). Starbucks offset this lower revenue by positioning the product as a status item. Carrying a Starbucks cup is a status symbol thereby justifying far higher price per cup in China than in the US. The higher price (and resultant profit margin  34.6% vs. 21.8% in 2011) make the Chinese outlets more profitable than the US ones, despite lower sales.

Starbucks' premium pricing strategy not only fits the market needs, but also opens the door to new, higher-margin specialty products such as gift sets. Buying a Starbucks item is like getting a $100 grapefruit in Japan  a sign of sophistication and esteem.

Another example of localness is McDonald's. In France they offer the McBaguette, burgers served on a baguette and topped with French cheese and mustard. Initial reactions were positive; the French believe the product is healthier than the bun-based burger. The company has been successful globally by updating it is outlets to appeal to a broader range of clientele and localizing the menu and store look and feel. In Italy, for example, McDonald's teamed up with the country's only three star chef to create three new recipes reflecting local flavors, with names like Adagio and Vivace. They are moving in the same direction in Germany and Austria.

Marry the concepts described here and the ones I outlined in my recent article about Commerce Bank, and you get a secret to success, a competitive advantage that can be implemented in any retailing business. Find the critical success factors in the communities you serve and cater to them. Commerce did it, Umpqua did it, Frost did it  why not you?