Starbucks Global Expansion

Introduction

Starbucks is a successful company that has more than 5000 stores across the United States. After saturating the domestic market, Starbucks aimed at entering the overseas market (Kotha and Glassman 6). Its first overseas venture was in Japan in 1996. At present, Starbucks has more than 1500 stores outside United States. However, these overseas stores have not met with as much success as the local stores.

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They are a net money loser. Starbucks was forced to close 6 stores in Israel and downsize its global expansion plan by 50 stores to 400 a year. The reasons behind the failure of Starbucks overseas are many. In Europe, many view Starbucks as an overpriced imitation of the real coffee house concept that originated there. Secondly Starbucks is a late entry to several overseas markets. Finally, the fact that Starbucks enters overseas market through affiliations with local partners reduces the profit margins (Peng 213).

History

Starbucks was begun in Seattle in the year 1971 (Starbucks 1) by three friends during who gathered for regular coffee and came up with the idea of roasting their own coffee beans. They decided to take their beans to the ultimate level and market them as “Gourmet Coffee Beans” and open the first Starbucks and marketed various other coffee related products along with the gourmet beans (Kotha and Glassman 2).

Within nine years, their business grew and developed into the largest coffee roaster in the state of Washington. During this growth period, one of their thermos suppliers, Howard Schultz, joined them in 1982, as their marketing manager. When Schultz visited an international house wares show in Italy, he was exposed to café latte but more importantly, he was exposed to the ambience of the European Coffee Shop. This experience was the inception point for Schultz’ vision of today’s Starbucks – a place for people to gather, sit, relax and enjoy a cup of coffee (Kotha and Glassman 2). Starbuck partners were quick to shoot the vision down.

They firmly reminded him that they were coffee roasters, not brewers. “Coffee was something to be enjoyed at home”. The rejection of his vision inspired Schultz to leave and startup his own coffee house in 1985 called, Il Giornale (Schultz 66). The store was an immediate success serving over more than 700 customers per day (Garza 1). In 1987, Schultz and a group of local investors bought Starbucks for $3.7 million dollars and changed Il Giornale’s name to Starbucks Coffee Company (Stanley 21). Merging his restaurant businesses with the Starbucks business was a perfect blend. In addition to well-situated stores.

Starbucks sold coffee, tea, food and entertainment products through its specialty operations (Starbucks 1). It was the right combination of ingredients: a well established gourmet coffee bean with a hugely successful coffee house. The business had an initial presence of 17 stores in the Seattle area in 1987 (Stanley 21). They expanded into various locations throughout the Pacific Northwest including Vancouver and Portland (Garza 1).

In 1991 Starbucks continued their expansion into California. In addition to the territorial expansions, Starbucks launched a mail order business and opened multiple coffee kiosks in airports. It continued to grow and in 1992, prior to the IPO, it operated 165 stores. In 1992 the company went public, and after the initial public offering, Starbucks continued to grow at a phenomenal pace that no one had ever seen in the coffee world before (Thompson and Gamble 1). By 1997 the number of Starbucks Coffee stores grew tenfold with locations in the United States, Japan, and Singapore. In 2004, Starbucks reached a record 1,344 stores worldwide (Business Wire 1). Today, Starbucks has over 9,000 locations in 34 countries and serves over 20 million customers per week (Starbucks 2).

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Global challenges

In its move to expand overseas, it faced several global challenges, each challenge being unique to the country it entered. Starbucks made its move into the Australian market by opening two stores in 2000 and rapidly expanding soon after. By September 30th of 2007, the company was reporting 87 stores in their Annual Report. But soon, due to heavy losses, Starbucks was forced to close its stores. Initially it closed 3 of its stores in Australia and by July 2008, Starbucks reported they were closing 61 of their stores in Australia (Robertson 1).

This was due to two strong reasons: Starbucks did not fully understand the Australian coffee café culture and secondly, Starbucks had the image of being foreign interlopers. Australia already had an entrenched café culture and had franchise players like Gloria Jean, Coffee Club and other specialist coffee chains, who understood Australian preferences and hence had a competitive advantage. Australian preferences included a stronger flavored coffee served in a real cup that could be enjoyed on the premises.

Starbucks was viewed as an overpriced watered down version, served in a paper cup that was not conducive to remaining in the store to enjoy the experience (Robertson 1). The negative image of Starbucks Australia was because it was a wholly-owned subsidiary of Starbucks USA and did not have knowledge of the local market. When the economy in Australia began to turn down, local coffee drinkers preferred to support local, small business owners rather than a foreign conglomerate headquartered thousands of miles away.

In May 1998, Starbucks successfully entered the European market through its acquisition of 65 Seattle Coffee Company stores in the UK. Although the company has more than 500 stores with over 5,000 workers and continues to expand in the UK, management is growing nervous as negative publicity surrounding their unfair labor practices increases regionally.

In London, small groups spent the morning distributing informational leaflets to baristas at both Starbucks and Caffé Nero, another major UK coffee chain with working conditions that parallel those of Starbucks. The major accusation has been that Starbucks baristas are paid just above the minimum wage and are subject to excessive working hours and unpaid overtime. Additionally, baristas at Starbucks are forced to work at a relentless pace, resulting in repetitive strain injuries. In mid of 2007, the Industrial Workers of the World (IWW) and No Sweat held a successful National Day of Action against Starbucks, with demonstrations in ten cities across the UK, including Glasgow, Leeds, Edinburgh, Leicester and London.

As a result of the company’s focus on the overseas market, the domestic market has also started declining. Starbucks is closing 600 stores in United States which comes to 70% of stores opened in the year 2006. These changes cost the company to loose $100 million for a year and with workers being forced to be laid off or be placed in its remaining stores. Shares of Starbucks fell to 11 cents from 12 cents. (AP 1).

In Brazil, Starbucks opened the first two stores in Sao Paulo in 2006. Starbucks in Brazil is a limited company, 51 percent owned by Cafeo Sereias do Brasil and 49 percent by Starbucks International. Recently, falling prices of coffee has made the once profitable coffee farms to fail. Five years back, the coffee bean sold for 3 pounds and now it fetches only 50 to 60 cents per pound. It is expected that the coffee at Starbucks would cost less too. But Starbucks holds they cannot reduce prices much as most of the price of Starbucks coffee is for the experience and moreover, it uses premium Arabica coffee beans procured from Indonesia to Kenya.

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Whenever Starbucks enters a foreign market, there is bound to be local resentment as small companies are forced to compete with the multinational companies where pay is higher for employees.

Global Receipt for Success

Starbucks in UK/EU has been going through some rough weather as the management shuffle continues at Starbucks, with the Seattle-based company announcing recently that Darcy Willson-Rymer is its new managing director for the United Kingdom and Ireland. Starbucks has seen a “slight decline in traffic” in second quarter of 2008, but as per the company officials, they are on track to meet its target of 100 new stores by the end of the financial year. It had opened 78 so far, taking its total to 679. Recent developments include the opening of the company’s first roadside drive-to outlets, in Surrey, and Europe’s first drive-through store, in Cardiff. It is also expanding its franchised business, having signed deals with Center Parcs, Village Hotels and the University of Surrey.

Starbucks is not a significant political giver, but it has made political donations in recent years and does not have any policies prohibiting future political involvement. According to available records, Starbucks has contributed around $85,000 in corporate funds since the 2000 election cycle (CPA 1). However, a review by the CPA suggests that Starbucks’ political spending may be significantly understated as the figure does not include Starbucks payments to trade associations or other tax-exempt organizations that are used for political purposes.

On political spending, a CPA review found that the company does not have best practices for political disclosure and accountability. Starbucks has some disclosure of its political giving but the company does not disclose the specific amounts and recipients of its political contributions. These gaps in disclosure and oversight put shareholder value at risk (CPA 1)

Product diversification and marketing strategy

Starbucks uses a number of strategies to promote its product, chief among them being product diversification and providing free items along with purchased items. The chain is now offering a complimentary cup of filter coffee to all customers who buy a hot drink in the UK and Ireland in a bid to stem the exodus of customers during the credit crisis. To improve its sales in US, Starbucks is expected to roll out more promotions such as free product coupons, hold off on wide price cuts, include discounts during certain days or seasons and limited offers for free food and drink when new products roll out (Baertlein 1).

Starbucks employees handed out free product coupons when the new Vivanno smoothies were launched in July. The company’s current “Treat Receipt” promotion offers $2 cold drinks in the afternoon to people who bring in the receipt from the purchase of their morning coffee. The chain is beefing up its Starbucks Card Reward program. Starbucks Card users enjoy freebies such as two hours of daily Wi-Fi, special discounts and limited-time free products during introduction periods (Baertlien 2).

In the realm of product diversification, Starbucks features a variety of hand-crafted beverages, Tazo® teas, Ethos™ water, pastries and, in some markets, a selection of sandwiches and salads. Starbucks merchandise includes exclusive espresso machines and coffee brewers, unique confections and other coffee- and tea-related items (Starbucks 1).

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Starbucks Entertainment selects the finest in music, books and film to offer Starbucks customers the opportunity to discover quality entertainment in a fun and convenient way as part of their daily coffee routines (Starbucks 1). Starbucks Hear Music™ Coffeehouses in Santa Monica, San Antonio, Miami and Bellevue, Washington are innovative endeavors. Starbucks Entertainment has also teamed with Apple to create a Starbucks Entertainment area on the iTunes store in the U.S., and to offer the exclusive “Now Playing” feature on the iTunes® Wi-Fi Music Store at select Starbucks coffeehouses in the U.S.

Starbucks does adapt its food to local tastes. In Britain, it won an award for its mince pie. In Asia, Starbucks offers curry puffs and meat buns. The company also fits its interior décor to the local architecture, especially in historic buildings.

The competitiveness of Starbucks in a changing world is reflected in its logo changes. The original logo, conceived in 1971, was based on the image of a mythical two-tailed mermaid siren and had a coffee brown color scheme (GCZ 1). The symbolism of the mermaid siren was to represent the seductive quality of the coffee itself. Over the last thirty five years, the logo has undergone several significant changes, while still adhering to the original theme.

Recently, with the April 2008 introduction of the new Pike Place Roast blend, Starbucks has re-introduced a version of the original logo with a few differences. The marketing objective in bringing back this version of the original logo compliments the campaign slogan “Roasting coffee since 1971. The best cup then. The best cup now” (GCZ 1). But this logo change is meeting with protests in Brazil who consider the image of the mermaid to be sexually offensive.

Several months ago, a Starbucks store in Insadong, a traditional Korean Street met with a lot of protests. Starbucks decided to change the atmosphere of the store into a traditional Korean one and they changed the logo which consisted of nine letters “S, T, A, R, B, U, C, K, S” into Korean characters and created a Korean ambience to the store (Ha 1).

The marketing strategy of Starbucks in Brazil is built around high quality coffee, and in the year 2006, Starbucks paid a premium of $1.42 pound of 37% to the New York commodity price. Starbucks pays an average of 23% above the market price for the coffee beans. This social responsibility of the company is a commitment to its sincerity towards its suppliers.

Global Joint Ventures

According to Kathy Lindemann, SVP of Operations for Starbucks International, the approach of Starbucks to international expansion is to “focus on the partnership first, country second” (Kotha and Glassman 7). The form joint ventures with local partners and negotiate local regulations and other issues through them. Starbucks looks for partners who share its values, culture, and goals about community development, have multi-unit restaurant experience, financial resources to expand the Starbucks concept rapidly to prevent imitators, strong real-estate experience with knowledge about how to pick prime real estate locations knowledge of the retail market, and the availability of the people to commit to the project.

For example, Starbucks in Brazil is a limited company, 51 percent owned by Cafeo Sereias do Brasil, and 49 percent by Starbucks International. Alsea S.A. de C.V., a leading operator of recognized global brands in Latin America is an equity holder in Cafés Sereia do Brasil. Together with Starbucks Coffee International, Alsea began offering the Starbucks Experience to customers in Mexico in September, 2002.

As of January 2007, Starbucks had planned to enter the India market through a franchise partnership with Kishore Biyani, founder of Pantaloon Retail India, India’s largest publicly traded retailer, and V.P. Sharma, director of Starbuck’s Indonesian franchise. Sharma owns 51 percent of the venture, with the balance owned by Biyani (Chatterjee & Ghosh 1). However the Indian government is yet to allow Starbucks to open stores in India.

Starbucks plans to ultimately open 1,000 stores in India (Chatterjee & Ghosh 1).Starbucks submitted an application for the venture to open retail stores in India, and withdrew that application in July 2008 after an unsuccessful attempt to gain approval from the Foreign Investment Promotion Board (PTI – The Press Trust of India Ltd.). Sharma is a non-resident India, and his holding together with the coffee chain’s holding crossed the 51 percent that the Indian government allows single-brand foreign retailers to take in a venture with an Indian partner, the paper said. Hence there are problems in getting government approval.

Starbucks continues to evaluate options for entering into the India market and reached a distribution partnership agreement with PVR Ltd., India’s largest movie theater (multiplexes) operator. PVR introduced Starbucks products on a trial basis at three of its premier locations in Mumbai and Delhi, with plans to expand this launch into up to 25 movie theaters in large metropolitan areas. The Starbucks products that are being sourced by PVR include bottled products such as mineral water and coffee drinks (PTI – The Press Trust of India Ltd., 2007).

Recommendations for Expansion in India

The Indian Coffee Board has estimated that by 2005, India would be home to 5000 coffee houses. The key players in this market are Barista, Cafe Coffee day adn Quiky’s. Fast food retailers like McDonald’s have also started offering coffee (Pradhan 444). In their official website, Starbucks says that in the context of India they are looking for potential joint-venture partners and licensees who meet criteria such as: having compatible values and group culture, store design and construction expertise, access to real estate, public relations experience, market contacts, information regarding local culture and consumer and having key functional areas of experience in related services.

To have a strong joint venture it is important to find the right partner. The right venture partner will help Starbucks have a steady flow of business at no cost while enabling Starbucks to offer value added services. The problem with Starbucks entering the Indian market is that it tried to enter India through an NRI franchisee instead of the government’s preferred FDI route (Rajghatta 1). Moreover, Starbucks is forced to compete with smaller Indian coffee chains such as New Delhi’s upstart Barista and Bangalore’s Coffee Day who have first mover advantage with scores of outlets already running. Evidently, Starbucks wanted to buy out one of them but found they were too pricey (Rajghatta 1). At the same time, Starbucks is lately leery of the direct entry, preferring the franchisee method.

A good business concept to expand in India is to tap into the educated youngsters who have exciting career opportunities, excellent pay, and the confidence to spend more money. Time magazine reports that these new consumers command $10.5 billion in cash to burn (Paunikar 3). This is an ideal time for the Starbucks Coffee Company to open its shops in the exotic land of India. It can do it though joint ventures with a domestic company.

Starbucks has proposals to open its stores at Delhi and Mumbai initially. However, in thinking out of the box, it can reach out to Southern centers that are now buzzing with outsourcing activities and having a growing segment of young westernized population. Centers such as Hyderabad and Bangalore are likely to be good testing grounds

To create a unique experience in India, Starbucks India stores must customize their menu to meet the tastes of their new target market. This includes the addition of more tea items taking in accordance that Indians are known to be more a “tea-drinking” population, as well as adding some new flavors in their coffee selection. They can also provide Indian snacks in their food menu and include Indian music to Starbucks Entertainment..

It is also possible for Starbucks to consider joint ventures with new indigenous food chains such as Reliance food world. Such joint ventures can be strong and result in value added services to the consumer and also help in generating multiple revenue streams through value added services such as serving on the road (at gas stations where reliance stores are positioned) and giving packed food and beverages for travel.

The major competition for Starbucks at the moment is the Barista Coffee Co. but Starbucks can overcome its limitation of being a late entrant through its superb marketing and reasonable prices. It is recommended that Starbucks uses penetration pricing to counter the competition with Barista which is already in the market.

Besides its stand-alone stores, Starbucks can set up multiple channels of distribution to increase the revenue stream. Such places include cafes and carts in hospitals, banks, office buildings, supermarkets and shopping centers, office coffee suppliers, hotels, and airlines. Starbucks can enter into alliances with premium hotels and launch its espresso bars at places such as Taj properties across India. It can have tie-ups with firms such as Planet M, PVR Cinemas, and various airlines and with large retail stores like Lifestyle, Ebony, etc.

Starbucks India must follow a state-wise expansive structure as India is made up of many states with different languages and culture. Among the coffee growing states, Karnataka accounts for 70 percent of country’s total coffee production followed by Kerala (22 percent) and Tamil Nadu (7 percent). It is best to have the roasting plant in either Kerala or Karnataka as they can avail of existing trained personnel in the area and local expertise.

There are many types of available media for marketing purposes in India are from newspaper advertising to television ads. Celebrity endorsement is very popular. Billboard advertising on the roads leading to the store locations, direct mail advertising with promotional coupons and sales brochures sent to local call centers and big companies are good promotional tools to be used in India.

Conclusion

Starbucks started out as a company with a philosophy to acquire and roast the highest quality coffee in the world and deliver it fresh to its customers. It has evolved to include the way in which it is delivered, the style, the elegance, the environment, the relationships its people have with customers and the trust staff have built with the customers. Starbuck’s strategy for expanding its retail business is to increase its market share in existing markets primarily by opening additional stores and to open stores in new markets such as Brazil and India where the opportunity exists to become the leading specialty coffee retailers.

Works Cited

AP (Associated Press) (2008). Starbucks closing 600 stores in the United States. The Grand Rapids Press. Web.

Baertlein, Lisa (2008). Starbucks says more discounts, promotions coming. Web.

Business Wire (2005). Starbucks Rewards Shareholders with Record Breaking Numbers for Fiscal 2004; Company’s Growth is Still in the Early Days. Business Wire. Web.

Chatterjee, Saikat and Ghosh, Arijit (2007). Starbucks to open in India. International Herald Tribune. Web.

CPA (Center for Political Accountability) (2007). Political Transparency and Accountability Profile – Starbucks Corporation. Web.

Garza, George (2007). The History of Starbucks. Info Guru, Catalogs. Web.

GCZ (Gourmet Coffee Zone) (2008). The Starbucks Logo – A Visual Twist of Starbucks History. Web.

Ha, Henryatta (2007). Korean Resistance to Starbucks. Web.

India’s Coffee Industry: Overview. 2007. Web.

Kotha, Suresh and Glassman, Debra (2002). Starbucks Corporation: Competing in a Global Market. University of Washington Publication. Web.

Paunikar, Vrushali (2004). International Business Plan – Starbucks India. Web.

Peng, W. Mike (2006). Global Strategy. Thomson South-Western.

Pradhan, Swapna (2007). Retailing Management 2e: Text and Cases. Tata McGraw-Hill.

Rajghatta, Chidanand (2007). Starbucks & India’s beverage bubble. The Times of India. Web.

Robertson, Josh (2008). Starbucks to close 61 coffee shops in Australia. Courier Mail. Web.

Stanley, Alison (2003). Starbucks and Global Exchange: A Socially Responsible Challenge. Arthur W. Page Society. Web.

Starbucks (2008). Official Website – Company Profile. Web.

Thompson, A. Arthur and Gamble, E. John (2008). Starbucks Corporation. Web.

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