Starbucks’ Expansion in Central and Eastern Europe

Brief Overview

Starbucks Corporation is and has always been a place where you can find good coffee. Some customers visit starbucks chain stores to sip the best coffee in the world; others go to have a good time with friends, listen to popular music or even to be part of social events in the neighborhood. Starbucks chose to take its operations to Eastern and central Europe in order for it to capitalize the growing market for coffee in the region. The region has local and international rivals who are already established in the market and starbucks has set strategies that it hopes will be able to give it a competitive advantage over its competitors. Russia is one of the countries in Eastern Europe that Starbucks plans to target. This is because it has the fastest and largest economies in Europe. Bucharest is an ideal location for Starbucks to penetrate the Eastern and Central Europe because of its cosmopolitan nature (Ashkenazim, 2004).

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Starbucks coffee
Figure 1. Starbucks coffee

History of Starbucks

Starbucks is undoubtedly the largest coffee chain corporation world wide. Starbucks was founded in Seattle, Washington in 1971 by three business people. The three business people, Zev Siegl, Gordon Bowker, and Jerry Baldwin started the company because they had similar likes for coffee and tea and they wanted their hometown Seattle to be able to enjoy the very best of coffee and tea available. It was Baldwin who first came up with the idea of starting the company. During his schooling in Francisco, he discovered Peet’s coffee in Berkeley which he found irresistible. The rich, dark Arabica whole bean made him immediately fall in love with the Coffee. He then introduced his other two friends to the coffee and they continued to order for the coffee by mail even after moving from Francisco to Seattle. This made Bowker get the idea of establishing a coffee store in Seattle which would serve customers who liked taking quality coffee. He convinced Zev Siegl and Baldwin to join him and this is how the Company was born. Today, the following are the products served by Starbucks Corporation; Hot and cold drinks, drip brewed coffee, mugs and coffee beans, espresso coffee, and snacks. Howard Schultz was recruited in 1982 and he had the responsibility of leading the marketing and retail efforts of Starbucks.

Starbucks’ organizational Structure

The organization structure of a company provides a framework used to judge its organization’s trustworthiness. The vision, mission and core values define the foundations of the organization’s culture and they also define a company’s internal relationship as well as behavior. Starbucks has been able to catapult into a leadership position in the global, market due to the company’s command and control structure. The legal structure of starbucks is that of a corporation (Strickland, et al.2002).

The company has its headquarters in the USA Seattle Washington with Howard Schultz as the current chairman. The key people in the company are the president and the chief executive officer who are the main decision makers in the organization. It has 147,436 total numbers of employees working in the organizations chain stores that are located all over the world. The Starbucks Corporation staffs attitudes, beliefs and values are also key elements in determining the staffs’ individual’s behavior in the organization. They are important in relation to the vision of the organization. The organizational values are more than words, they are the moral ethical and the professional attributes of an individual’s character and they are central to any organization especially in the Starbucks Corporation. The company considers its employees as one of its most important assets. Therefore, it invests so much on the quality of its workforce. Starbucks’ employees are empowered by the Company’s management to make decisions without consulting with it. The Company does not have hierarchical organizational structure and a formal organizational chart. Its employees are required to report to both functional and product based divisions which the company has (Strickland, 2002).

Mission, Vision, and Values of Starbucks

The mission, vision, and core values of a company play a major role in the overall objectives that it seeks to achieve. These determine the morale and commitment on the part of the employees. The vision is what the organization wants to be recognized for. Starbucks’ vision is to ‘establish Starbucks as the most recognized and respected brand in the world. This vision was set by the company with the idea of expansion in mind. The company hopes that the vision and mission statement it has will enable it access entry into the Eastern and Central Europe market. The company’s vision is built on a foundation of the organizations core values. The mission statement rather than just a piece of writing is a philosophy that gives guidelines on how business is done daily in this corporation. As the pioneer of the best coffee brewed in the entire world, the following principles and core values guide its every day’s decisions.

  • Provision of a good working environment while treating other people respectfully and with dignity.
  • Have diversity as one of the essential elements in conducting business
  • Use high standards and distinction when buying, roasting and making fresh coffee deliveries
  • Maintain devotedly highly satisfied customers at all times
  • Have corporate social responsibility
  • Aim at profitability of the corporation for success in future

Starbucks’ mission statement is ‘To provide an uplifting experience that enriches people’s daily lives (Strickland, 2002).

Swot Analysis

Starbucks is one of the first companies to realize that a lot of money can be made in beverage retailing. The Company is well-known for selling the highest quality coffee beans and best tasting coffee products. The Company has started to expand to deal in packaged and prepared tea due to the public growing demand to this product. It has a recognized brand image and is the only competitor in the coffee bar market that has this kind of image. The image will help the company attract customers in cities such as Romania, and Bucharest where image is everything. The company concentrated so much on building a business instead of trying to be a brand. Because the company was so busy trying to work on the business it had created, the result was the creation of a strong brand. Starbucks had the knowledge that its brand could create the business it so much desired to have. Starbucks had recently emphasized on expanding internationally. Although the Company is in the quest of being recognized in central and Eastern Europe, the Company will not be a leader in the European’s market as it has been in the United States (Strickland, 2002).

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Starbucks has a well developed corporate strategy. Its corporate strategy has been to develop itself as the producer of finest coffee in the world, at the same time maintaining its uncompromised principles. The company encourages its products diversity and it promises of highest standards for its products. In doing this the Company is able to meet the needs of its customers making sure that they are satisfied. The company also insists that it has to continue making profits and it has done so. The company ensures that it completely dominates the local market before setting out to look for more opportunities abroad. The other strength that the company has is having the largest market share in the industry. The company is already well established and it has enough resources for expansion. Being the first company to exploit the coffee business industry, it has the many advantages that befall industries that have an access of an early entry in to any market. Good marketing skills have also worked well for the company. It has been able to create public awareness of the high quality products that the company produces. These marketing skills have been able to attract more customers for the company. Advertising strategies used by Starbucks has really been a key success. Starbucks has found more success advertising on a local level rather than to the nation as a whole. The Company advertises a lot through print mediums, as Starbucks’ target market tends to be educated people who do more reading than the average person Starbucks has the ability to satisfy the need of each of its customers. It has introduced gourmet flavored decaffeinated coffees. For the faithful coffee drinkers, it has specialty flavors and whole bean coffees. The Company has also incorporated light lunch fare in its menu. The Company has very high qualified staff that offers quality services to its customers. The Company’s roasters are extensively trained for one year. It also has been credited for being the public’s educator on Expresso. These strengths will enable the company establish itself in the Eastern and Central Europe.

Although the company boasts of internal strengths that have been able to make the company what it is today, it also has some weaknesses which have continually tried to bring the company down. One of them is that the aggressive expansion that the company participates in, could lead to managerial and financial problems. The Company previous expansions have always led to formation of chains in various locations such as Romania, which require resources and management in order for their operations to run smoothly. The company’s chains and branches are found all over the world and it recently expanded into the Central and Eastern Europe market. Starbucks also deals in a narrow product line. It only deals with beverages and this posses a risk if the products don’t do well in the market. To a consumer, the company only manages to satisfy limited amount of their needs. Hence, the consumers would rather take time researching on a company that has a wide range of products (Strickland, et al. 2002).

Starbucks Company has the opportunity of expanding into foreign markets. The company is really big and it has branches all over the world. Thus the company has the experience in penetrating new markets. The possibilities of creating mergers with other companies are also there. The Company will benefit from the possible joint ventures with other corporations to design new products. This will enable it posses a wide range of products which will minimize the risks associated with dealing with a narrow range of products. Earlier on, the company extended its cooperation with its Greek joint venture partner, Marinopoulos Holding to come up with Marinopoulos coffee Company III SRL which will be responsible for the Company’s business day to day operation in Romania.

Aside from the numerous successes that the company has enjoyed in the previous years, it faces some threats it has to address. Bucharest and Romania cities are planning to issue laws and regulations on coffee houses due to the complaints of late night patrons which have become insistent. The regulations are very likely to affect the Company’s profits. The margin on coffee merchants is expected to tighten in future due to the expected increase in the costs of coffee beans. This is likely to increase the cost of operation of the Company and in turn lowering its profits. In the Europe, there is the growth of health consciousness programs and many people have started cutting down on their caffeine consumption. This is also likely to affect the overall sales of the Company. The Company is faced by regional competitors and this has served as a source of confusion to many customers who do not know the coffee brands available in the market. In Russia, McDonalds is one of the competitors that Starbuck should be prepared for. It has started to offer high quality coffee and has established for itself a brand name (Strickland, 2002).

Pestle Analysis

P.E.S.T.L.E analysis has been used to analyze their external business environment. The simple analysis involves understanding the organization’s political, economic, social and technological environments with reference to those who do business with the coffee house industry. Political factors have had a direct and indirect effect on the performance of Starbucks Company. The factors have affected the relationship between coffee producing countries, the U.S. government and local government controls. Economic factors have also played a role in the operation of the company. The constant demand for food and beverages has enabled the company to sell its products at a fast rate. The changes in disposable income could influence consumers’ purchase level in the coffee industry which could affect the Company’s performance. In Romania, people prefer coffee to tea which is to the advantage of the company’s expansion to the region.

Starbucks Company is under the risk of incurring major losses due to social factors. There is a danger that consumer preferences could shift from coffee to other beverages. Since Starbucks deals with a narrow range of products, this could send it out of business. Technological factors can serve to improve on the operational efficiencies of the company. Customers could be placing their orders via net in order to save them the inconvenience of visiting coffee houses for bookings or placing orders. Technological factors are expected to have a profound impact on the marketing mix strategies of the company in Eastern and Central Europe. Starbucks card for example has created an opportunity to make customers’ lines shorter to make customers’ visits at Starbucks’ to be convenient and quicker. This has had positive impacts on the customer service provided by the company. Legal factors could both have a positive or a negative influence in Starbucks’ operations. Research shows that legal factors affect the Company’s operation because it has to adhere to the legal factors. For instance, there is a move by the government to regulate the operation of coffee houses and the duration in which they are opened. This was because it had formally received complaints about lots of noises that used to come from coffee joints (Ashkenazim, 2004).

Financial highlights

Starbucks has had solid earnings and return in terms of finances. The Company has continually made profits that has enabled it to expand its operations in different countries

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Starbucks’ Company reported revenues of $ 2.649 Billion during the fiscal year ending September, 2001. This was found to be $ 500 million more than the year 2000. The company reported an income of $ 252.5 million and Total Net income of $ 181.2 million in 2001 which was relatively higher than what it got in the previous year. In the same year, the P/E ratio (Profits /earnings) was 49.08 which were relatively higher when compared to the industry’s average of 27.58 which was reported in 2002. The industry’s EPS (Earning per Share) in 2002 was 12.75 which was five times lower than that of the company which was 81.79. Starbucks’ corporation has a quick ratio of 0.91 as compared to that of the industry which is 0.56. This indicates that the company is able to satisfy its current liabilities with its current assets and this is a financial strength. The company’s Return on Assets has been estimated to be 11.31, the Return on Investment as 14.52 while the Return on Equity as 14.06 (Starbucks Corporation, 2002).

The Return on Assets and the Return on Investment of the company are stronger than that of the industry’s average. However the Return on Equity is a bit weaker than the industry’s average which is 17.80. The Company’s corporation inventory is highly liquid with the inventory turnover ratio being 11.48. All these can be summarized to mean that the company has a strong financial performance.

International, Corporate and business level strategy

Starbucks’ has continued to demonstrate a major corporate growth strategy. It has maintained its values and ideals which has made it to be successful. The company is in the quest of ensuring its brand reputation and image by creating a stable atmosphere with high quality coffee products. The company intends to establish itself as the premier purveyor of the finest coffee in the world. Starbucks has been able to come up with international growth strategy in order for it to expand its operations into foreign markets. Starbucks plans on expanding its operations to forty countries in the Eastern and Central Europe by the end of 2008. Starbucks’ business-level strategy is related to the corporate level strategy. This is because the company deals with a single business involving retail stores and coffee-related products. The company plans to open new chain stores internationally at the same time continuing to expand its operations in the United States.

Recommendations for the company

The strategies employed by the company, has enabled it is become what it is today. However, for the company to grow further, it will need to take its operations to other areas in the United States and internationally. The company should invest more in forming mergers where it will be able to increase the diversity of the products it will deal in. Products that the company can deal in include: Bottled beverages and ice cream flavors. It can also form joint ventures where it can use coffee beans to produce beer in a brewery business. Starbucks should ensure that it has enough resources that will enable it to venture into foreign markets without fear of running into losses (Starbucks Corporation, 2002). Most of the people in Romania smoke. Therefore, it would be prudent for the company to put up smoking zones within coffee houses to attract all sorts of customers in the area.

Conclusion

Starbucks has been able to penetrate many foreign markets successfully due to the international strategies that it has set for itself. In an attempt to penetrate the Eastern and Central Europe markets, the company has extended its cooperation with its Greek joint venture partner, Marinopoulos Holding to come up with Marinopoulos coffee Company III SRL which will be responsible for the Company’s business day to day operation in Romania. Since the year 2002, the partnership has operated 7 retail stores in Cyrup, Fifty two in Greece, twenty six in Switzerland and eleven in Austria. According to reliable sources, the company intends to set for itself a target of opening ten Coffee shops per year not only in Bucharest but also in major cities located in Eastern and Central Europe. However, at the moment its competitors do not consider the company as a major threat in the market. In fact many people are still in doubts if the company’s products will sell in the foreign market. In conclusion, the entry of Starbucks in to the Eastern and Central Europe market will shape the taste of many customers regarding the way coffee is served and it will also stimulate competition (Ashkenazim, 2004).

References

  1. Ashkenazim, N. (2004): The Design of the coffee shop. The new frontiers in organizational research. Journal of Management Vol. 28, No. 3 pp. 307–336
  2. Starbucks Corporation (2002): Starbucks Corporation Annual Financials. Hoover’s Online.
  3. Thompson & Strickland (2002): Concepts and Cases. Starbucks Case Study. Web.
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