Global Expansion of Starbucks - Research Paper Example

Global Expansion of Starbucks Introduction The advent of computers has changed the world and has broken geographical barriers due to fast-paced communication. The world has become a global village in which people are well informed about the happenings taking place even at the other end of the world. It is due to this change that businesses started expanding their horizons to new regions and places. Computers provide exposure to things from across the world therefore the consumer is aware about international products and services. Expansion in newer regions requires extensive planning and strategies from competent individuals as it requires the analysis of the respective markets and challenges that might be faced in the process. Products and services may be modified to better suit the needs of the respective region. This whole concept is termed as ‘Internationalism’. Internationalism also proves to bear greater revenues for companies since they can sell their products to a wider range of customers. 2. Company Portfolio Starbucks started its operations as a coffee beans retailer in 1971 in Seattle. By 1981, they had opened around 5 stores along with a beans roasting establishment in Seattle. Around the mid 1980s, the company started selling espresso coffee in their shops and realized that they were earning lot more than just selling coffee beans. This was the start of their expansion which has now led them to have 15,000 stores in 50 countries around the world. The great number of international establishments proves the level of opportunities that exist for the company. They have become one of the market leaders in the field of roasting beans and retailers for special coffee. Starbucks Corporation (2010) stated on their website that their mission is unique- “one cup, one person and one neighborhood at a time”. This denotes their commitment to the quality of their service, products, coffee bar’s ambience etc. 3. International Expansion They have expanded their operations to all the major regions of the world like Asia, Middle Eastern countries, UK etc and have integrated into the lifestyles of individuals from multiple origins. They extended their business in China in 1999 and have witnessed great successes in the region since then. Howard Schultz, CEO of Starbucks, stated in 2006 that China is one of their strategic priorities for the long run and that the opportunities in China cannot be compared with any other in the world. Similarly, they expanded their operations in numerous different countries around that time. The following figure shows the number of stores in different countries till the year 2002 and 2003: Figure 1: Statistics of Starbucks till 2003 (Aguslemi 2007) Japan, UK, China and Taiwan are some of their major international regions. Khan (2010) stated the latest statistics in his presentation: Japan: More than 480 stores England: More than 370 stores China: Around 120 stores Taiwan: Around 120 stores 4. International Business Strategy Starbucks adapts the following strategies for expansion around the world: Licensed stores Joint ventures Wholly owned Most of the stores in America are company-owned; however, they follow a different approach in their international business. They have the opinion that the local investors of the respective countries are more experienced in terms of the challenges and opportunities in their local markets. Jung (2003) pointed out that the local management would be able to understand the needs of their market segments more than the original management of Starbucks. It is due to this reason that they usually perform joint ventures with local investors in different countries or give licenses to operate their stores. However, choosing a reliable and promising partner is a difficult task in itself that would bear them the desired revenues and continue the business with the same vision. They adapted the concept of “partnership first, county second’ as their rule of expansion. This idea led them to establish partnerships with local companies with the viewpoint of taking care of companies’ objectives before the country’s objectives. According to Kembell et al. (2002); after extensive planning in their headquarters in the US, they formulated a criterion to choose the most appropriate partner for their international stores. The criterion included the following aspects: The company should have same views and principles about corporate life. The company should already have some presence and expertise in the field of multi-product restaurant management. The partners should be financially sound such that they can carry out an elaborate launch of the brand in their region. They should be able to saturate the market to avoid any chance of imitations. Starbucks has a strategy of opening only in the highly populated and busy parts of big cities; this way they get the maximum exposure and traffic. The partners should have the ability and expertise to find the most appropriate locations for the coffee bars, where the establishment can cater to the most fruitful market segment. The company should possess commendable knowledge about the retail market. The company should have energetic, loyal and fully committed staff to implement the project of launching their brand in the region and thus maintaining it to the promised quality. The commitment level of the employees plays an important role in the success of the launch of the brand. It can be judged by analyzing the company’s past performances in the market. However, it was later realized by Starbucks that joint ventures and international licensing required lot of training, supervising and management guidelines to the new investors since they had the brand’s reputation in their hands. Joint ventures prove to be unsuccessful at times, therefore partners should be chosen after extensive analysis. 4.1 Benefits of the Chosen Strategy As stated earlier, Starbucks chose the strategy of international partnerships to ease the process and reduce the risks of international expansion. The three main benefits that were gained from the adoption of the respective strategy are as follows: Competitive advantage can be sustained by the help of the local investors. No financial risks are involved in this process since the chosen partner will be incurring the costs. For example; Kembell et al (2002) stated that when Starbucks expanded their business to Japan, they formed a 50/50 partnership with Sazaby, Inc. Sazaby, Inc. fulfilled the conditions in the selection criteria of Starbucks as it had numerous years of experience in the field of upscale retailing and had successfully opened many restaurants. Starbucks cut their financial risk into half when they made the partnership with the respective company. Local adaptation is one of the major benefits of joint ventures with the local investors. The new product might be different from the region’s culture but the local investors will understand the needs of the local customers. They will be able to launch the products in a fitting manner. However, the leverage for changes is given under certain boundaries and limitations since the true essence of the brand is to be kept constant. The international establishments proved to work better with the local essence of the region while maintaining the original US vision. 4.2 Drawbacks of the Chosen Strategy There seems to be a lack of control in terms of performance and activities when the establishment is licensed. Aguslemi (2007) pointed out that there tends to be a lesser degree of coordination with the global strategic aspects of the company when the establishment is a resultant of a joint venture with some local investors. 5. Global HR Strategy Starbucks is considered to be a good employer since they provide good benefits and a healthy workplace. Kembell et al. (20020 stated that they have been declared as one of the top 100 companies to work for, in the Fortune Magazine. According to OPpapers.com (2010); their mission statement is to provide the employees with a comfortable environment to work in where everyone treats each other with respect and dignity. OPpapers.com (2010) also stated that another aspect of their mission statement is to embrace diversity in every aspect of doing business. They offer great medical benefits and insurances to their employees. Their part-time employees even enjoy commendable benefits like health-care and free products. These kinds of benefits will prove to be hard to maintain after some time since the world has still not fully recovered from the global recession. 6. Global Marketing Strategy Starbucks follows hybrid marketing strategy i.e. different mediums are used to market and promote their products. Starbucks adapts different means of marketing since their distribution design is also multi-dimensional. They sell products through the company-owned establishments i.e. direct retailing and single party selling system in which some products are sold from grocery stores. They use direct marketing strategies via mail, email as well as other means of promotion including; TV advertisements, paper advertisements etc. The global marketing strategy is kept the same in all of their establishments; however, changes can be made in the strategy to suit the modifications that should be present for the local customers’ needs. The advertising campaigns are kept local to influence the people more since standardized advertisements do not tend to have a great impact. 7. Global Supply Chain Starbucks is known to buy the best quality of coffee for their beverages which is often bought at a high price. There is no substitute for coffee in their products so they need to buy the best possible ingredient at whichever rate it is available. Kembell et al. (2002) stated that Starbucks announced a set of guidelines which they called “Coffee Purchasing Guideline”. This guideline was an end-product of their collaboration with The Center for Environmental Leadership in Business. The vendors and suppliers who complied with the criteria in the guideline would be able to supply to the coffee serving giant of the world. As a motive for the suppliers, Starbucks promises to pay them an extra amount of money if they are able to provide them with coffee that falls up to the standards of Starbucks. These standards are followed in all of their local as well as international establishments since quality is the essence of a company’s growth. 8. Challenges in Expansion A common business approach is to perform SWOT analysis before the expansion of any business in another country or region. SWOT analysis bears the weaknesses and strengths of the company with respect to that region as well as the challenges and opportunities that might become apparent during the process. For example; China attracted Starbucks due to its rising economy and large urban population. Business Wire (2004) mentioned in one of their articles that the coffee consumption in China has increased over the passage of time which implied a fondness for coffee by their population. 8.1 Challenges in Japan The ambience and culture of a Starbucks coffee outlet is their trademark; casual atmosphere with comfortable seating arrangements. The culture that Japan has been accustomed to is termed as ‘kissaten’, which means a coffee-house with a formal seating arrangement. The opposite of kissaten is also very common in Japan; Doutor Coffee Company. Doutor offered limited seating arrangement for the customers as most of the people used to stand and have their drinks. The launch of Starbucks offered a system that was in the middle of these two extremes. It was feared that the Japanese would not accept this combined style. Another aspect that was feared at the launch of Starbucks in Japan was regarding its Italian style coffee. The Sunday Times (2008) stated in one of their articles that the taste of Starbucks coffee has been towards the Italian taste as the idea was inspired from that region. The American style brand was also feared to clash with their social norms like the no-smoking rule in their restaurants would be a put-off for the youth in the region and the people who were used to the kissaten culture would not approve of such a casual atmosphere. 8.1.1 Steps taken for local adaptation The Sunday Times (2008) further stated that Starbucks slightly changed its menu to cater to the Japanese culture for example; introduced a green tea frappuccino, reduced the size of their drinks and started keeping small, sweet, local eatables. The ambience of Starbucks remained the same but included Japanese ornaments and decorations to make the customers feel comfortable in their traditional setting. After strategic steps from the management of Starbucks and Sazaby Inc., Japanese grew accustomed to the Italian-style coffee and accepted the American brand with open arms. 8.2 Challenges in UK The coffee that UK was accustomed to was only instant coffee. UK had no coffee culture until a couple from Seattle opened the successful coffee bars in 1995 with the name of ‘Seattle Coffee Company”. The couple started this chain as a source of personal fulfillment for coffee since there was no coffee culture in UK. Their venture started getting famous and earned them great revenues. Then, Starbucks realized that they needed to emerge in UK before Seattle Coffee Company conquered the whole region. Starbucks decided to buy out the stores of Seattle Coffee Company so they could flourish their business in the respective region. The Britons were surprised to see the unexpected emergence of Starbucks in the region when they acquired a total of 65 outlets of Seattle Coffee Company. Starbucks opened as many as 200 stores in the region by the year 1998. The invasion was shocking for the Britons since there was no extensive coffee culture in the region. The Britons did not accept the sudden emergence and exponential expansion in their homeland. This resistance resulted in a loss of around of £50m in just four years, from 1998 to 2002. According to The Sunday Times (2008); Britons were used to a different taste in coffee drinks. They never preferred so much of milk in their coffee. Some people did not like the milky consistency of the drinks and hence repelled the brand. 8.2.1 Steps taken for local adaptation Starbucks continued their operations with consistence in UK. Even after facing great losses, they continued to provide their Briton customers with quality service and products. It was after number of years that Britons started liking the taste that Starbucks had to offer its customers and profits started generating from the respective region. One World.net (2008) provided the information; Starbucks announced their future plans of using fair-trade coffee in UK and Ireland in 2008 that made the public accept the product in a better manner. The agreement to use fair-trade coffee was a continuation of the company’s commitment for the welfare of small scale farmers. This led to an eventual increase in the profits in the region. However, the business in UK has known to be comparatively lower than the other regions and occasional losses are suffered. Bowers (2010) explained that there was a strong presence of other competitors in the region like Costa Coffee, Café Nero. It is due to this reason that Starbucks invested great amount of £24m in the process of refurbishment of their stores in 2009. They introduced Wi-Fi in their establishments to attract the customers at a greater degree. Starbucks has started offering instant coffee brand in their stores to cater to the taste of Britons. 8.3 Challenges in Saudi Arabia Saudi Arabia is considered to be one the conservative countries of the world due to their religious values. The social norms of that region do not allow public meetings of men and woman. This region is considered to be a profitable one since there are many rich people there and have a culture of caffeinated drinks. When Starbucks approached the concerned management in Saudi Arabia to expand their business in the region, the authorities did not approve of the launch unless some conditions were met. 8.3.1 Steps taken for local adaptation Kembell et al (2002) stated that Starbucks agreed to have segregated lounges for men and women to respect the religious values that are commonly followed in Saudi Arabia. Posters and billboards of women are also not allowed to be publicly displayed in restaurants or streets therefore Starbucks removed all pictures of women from their restaurants. 8.4 Challenges in other Middle Eastern countries Starbucks, along with other American brands have faced great difficulty in being accepted and generating profits, after the declaration of war against Afghanistan and Iraq in the early 2000s. US attacks on these countries developed an anti-American vibe among the Middle Eastern countries like Lebanon, Saudi Arabia etc. According to Jung (2003); Starbucks faced great protests in Lebanon due to the attacks on Iraq, although the stores in that region were owned by local Arab investors. 9. Future Challenges Starbucks has been experiencing decrease in their profits since the last few years, for example Lomax (2008) stated that the first quarter earnings of 2008 did not bear good revenues for the company. The following figure also shows a consistent decrease in their profits in four consecutive years: Figure 2: Sales records of Starbucks from 2004-2007 (Higbee and Liaw 2007) There are several reasons for this downfall; increased commodity prices, reduction in their beverage sizes, emergence of strong competitors. There is not much profit margin in the production of coffee therefore the companies usually earn by the volume of sales. The road that is leading to further reduction of profits will get tougher if some measures are not taken immediately to bring about a transformation and change in the company. 9.1 Competitor’s Strong Presence Competitors have also learned the art of serving coffee and Starbucks no longer possesses that edge over the other providers in the market. For instance, the global fast food chain, Mc Donald’s has been serving coffee to their customers since numerous years. People consider this as a cheaper option and might shift their brands if Mc Donald’s also develops their coffee menu in a lavish manner. Mc Donald’s has a wider global presence than Starbucks in many regions of the world therefore will be able to conquer the markets even before Starbucks has emerged in those areas. Starbucks is one of the pioneers in the world of serving good quality coffee that changed the culture in many areas and began the coffee culture. But many competitors have come in the market since the inception of the idea by Howard Schultz for example Costa Coffee, Dunkin Donuts etc. Dunkin Donuts is basically a doughnuts producing company but they offer a wide range of caffeinated beverages. Dunkin Donuts also covers a wide area of the international business with presence in some countries where Starbucks has still not emerged like Pakistan, Bangladesh etc. Dunkin Donuts is also one of the major competitors for Starbucks since beverages are also amongst its main products. 9.1.1 Steps to Overcome the Challenge Starbucks must take extensive measure to be the first mover among the competitors. They should monitor the current and future endeavors of their competitors so that they are well aware of what new products or ventures are expected in the future. Constant innovations should be brought about in the service and products of Starbucks, to keep the consumer interested in the products. Starbucks has gained advantage from product differentiation since numerous years, but the need of the hour compels them to concentrate on product development. 9.2 Continuing Expansion Starbucks continues to grow and expand their business in the world. Even though they have faced great losses over the past years and have shut down numerous stores in US, as well as other countries of the world. Every organization faces a challenge in the process of their large expansion; maintenance of quality. One of the challenges that await Starbucks in the future is the loss of quality in their licensed stores around the world. With the passage of time, the growth will get too enormous for the company to handle. Starbucks has expanded at exponential rates due to which they have suffered losses and shut down hundreds of outlets in several countries. These losses will continue unless corrective measures are taken by the company. The growth of the company has been nothing less than phenomenal but the quality of the products and service will continue to be degraded if the growth is not planned effectively. The following figure shows a real example of ill planning from Starbucks since two stores are opposite to each other in Japan: Figure 3: Two Starbucks outlets opposite to each other (Aguslemi, 2007) The red circles indicate the level of growth and ill planning from Starbucks since two stores are only a few meters away from each other. Along with this growth of the company, many new things have been started by the company, including selling of in-house music CDs, teddy bears etc. All of these peripherals will prove to divide the attention of the company from their most important product- coffee. 9.2.1 Steps to Overcome the Challenge Good coffee is available at many places but Starbucks has been known to offer more than just good coffee. It gives the consumer a valuable experience- Starbucks’ experience. The experience at Starbucks comes from the good quality service and the ambience that is filled with the coffee aroma. Starbucks should ensure that their licensed stores are keeping the true essence alive of Starbucks’ standards. More training sessions should be conducted for their joint venture investors and the investors who possess the license of running their stores. The frequency of outlets should not be done with the viewpoint of invading the market, instead only to capture the markets that have not been explored. The invasion tactics are usually done to reduce the probability of penetration from some other competitor. But the exponential growth of any company risks the maintenance of their quality and standards. Efficient planning is needed from the management of Starbucks to revive the legacy for which they have been famous for. Invasion strategy should not be used in the future since it might result in the shutdown of more stores. Shutting down of any store or outlet hurts the reputation of the company because it makes the consumer sense the decline or low profits of the company. 10. Conclusion Starbucks is one of the pioneers in the field of serving and selling coffee in casual yet comfortable outlets. They have been retailing coffee in their own outlets as well as grocery stores. This coffee giant has a major presence and preference level across the globe. Their major regions of expansion are China, UK, Japan and Taiwan. Their international business strategy has been to open stores under a joint venture with the local investors in the region or issue them licenses to run the business. Both of these strategies require the selection of a reliable and competent investor who possesses the required experience. Starbucks has faced several challenges in global expansion which differentiated with respect to different areas. Products, services and ambience of the outlets are modified according to the demands of the locals. Starbucks has grown to be one of the top most coffee brands of the world who have quality suppliers to keep their business successful. However, their quality of service and products has reduced since few years. It is due to this decline in quality and lack of monopoly that Starbucks is losing the highest market share. Further challenges shall be waiting for the company if corrective measures, regarding planning and growth, are not taken in a timely manner. 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