Starbucks Coffee Company - Product and Services, Foreign Entry - Example

Table of Contents Introduction 2 Company profile 2 Executive Summary 2 Methodology 3 Product and Services 4 Competitive Analysis 6 Financial Performance 9 Foreign Entry 10 Conclusion, Critique and Recommendations 13 References: 14 Introduction Company profile Starbucks coffee company was founded in 1971 by three coffee aficionados at a time when selling coffee drinks and fresh roasted whole beans in a specialty store was revolutionary. In 1981, Howard Shultz noticed their success and wanted to transmit that coffee passion by working with Starbucks enterprise to expand outside Seattle. His mission took him to Italy where he saw the need for Starbucks to recreate the Italian coffee bar in the United States and position itself as a third haven for friends to meet between work and home. Mr. Schultz parted ways with Starbucks in 1985 and began his own business and later purchased Starbucks in 1987. In 1985 it started its expansion into different cities in the US and Canada. When Starbucks reached saturation point in North America, it set its sights on overseas expansion and two strategies were used to navigate country specific issues and manage risk. 1. For markets with perceived economic, political or cultural challenges, it would partner with a reputable local company to develop and operate new stores. 2. In markets with perceived lower risk and less cultural distance it would invest directly using Starbucks Coffee International, which was a subsidiary. In 1995 it entered the Japanese market through a joint venture. In 1998, the company went into New Zealand through a licensing deal and in that year it bought sixty five stores in the United Kingdom. Today it has over twenty four thousand stores in seventy countries. Their mission statement is “to inspire and nurture the human spirit- one person, one cup and one neighborhood at a time.” Their brand portfolio includes brand names such as Starbucks Coffee, Seattle Best Coffee, Teavana, Tavo, Evolution Fresh, La Boulange, Ethos Water and Torrefazione Italia Coffee (Starbucks). Executive Summary Starbucks is a global marketing phenomenon due to its ability to reinvent its operations to suit its growth ambitions while still remaining true to its passion of serving coffee in a friendly atmosphere (Essays, 2013). From the product-price-place-promotion marketing mix, to the adoption of loyalty cards and encouragement of customers to post Starbucks moments on social media, the company continuously seeks the views of their customers through crowd sourcing and creating a sense of a community among them. (Misener, 2014) Due to their ability to form a cult following and build success without the use of traditional advertising, it is necessary to analyze their product/ service mix and the differences in branding and marketing when they cross the United Stated borders. I also documented the ways the company standardizes its products based on the market they are entering and cited specific case studies for the factors that contributed to the standardization. Next, I performed a competitive analysis by giving a profile of Starbucks’ two main competitors and outlining the type of enterprises that constitute competition for them. Starbucks is currently have the biggest market share therefore I cited the possible factors that have led to their success despite having inflated prices in a monopolistically competitive market. The paper also classifies Starbucks’ products into a BCG matrix based on their potential market growth and their current market share. The next section is a financial analysis of the company using five financial ratios. The financial ratios used are profitability and liquidity ratios that help measure how much the company is earning and how well it is utilizing its resources to create shareholder value. The financial analysis is for a five year period. I also analyzed their foreign entry methods and the factors taken into consideration when choosing an entry method. Starbucks has successfully used four methods of entry in different regions making it a good case study for the matter. I detailed their geographical expansion so far, their decision making process, their entry methods for each region and the factors considered in choosing an entry method. I also detailed specific case studies for every entry method. Finally, I will summarize and critique the factors identified, characteristics distinguished, and the perceived financial strength of the company and give a recommendation for any improvements that can be made for further success of the company. Methodology In my research I used two qualitative methods. The first is documentary research that come from journals, document files and reports. Starbucks has been the target of study on subject such as policy and strategy therefore there were many sources from which to obtain relevant information. However, this method of research poses the risk of data being possibly unreliable. I overcame these limitations though through a comparative analysis of information obtained The other method of qualitative research used was information sources on the internet. There were multiple resources on the internet that served a variety of investigations on Starbucks. Some of the resources were catalogues, e-journals, and the company homepage. The limitations incurred were similar to those of the documentary research. While the financial analysis an aspect of qualitative analysis, the data was provided to us through the company’s financial statements located on their website therefore further collection was not necessary. Product and Services Their product and service mix includes hot beverages, coffee related accessories and equipment, complimentary food items, tea and non-food products as illustrated below: Store sold   Coffee More than thirty blends Hand Crafted Beverages Espressos, Frappuccino’s, non-coffee blended beverages, smoothies and tea Merchandise Brewing equipment, mugs, accessories, packed goods, books and gifts Fresh Food Pastries, sandwiches, salads, grain bowls, oatmeal, yoghurt parfaits & fruit bowls Consumer Products   Coffee and Tea Whole bean and ground coffee, tea filter bags, tea latte concentrates Ready to drink bottled Frappuccino’s, coffee drinks, iced coffees, espressos, bottles, iced and juiced tea The company’s marketing strategy does not involve the use of traditional media such as television, radio and print advertisement instead opting to rely on brand recognition. They develop this brand through the use of Facebook, Twitter, Instagram and Pinterest for competitions and promotional offers for their customers. Starbucks also involves its consumers in product development. It prides itself in creating a sense of community amongst individuals from distinct countries. The company rewards its customers through ‘My Starbucks Rewards’ and uses polls to maximize crowd sourcing. The company is therefore geared toward cultivating loyalty to its existing customers rather than investing time and money in gaining a larger share of new customers. Standardization of a marketing program needs to have a positive impact on the performance of the organization and Starbucks marketing strategy requires a degree of standardization when it moves across the US border. Studies suggest that multinationals need to take into account cultural aspects of a foreign country irrespective of general marketing traits used for brand recognition. However, the cultural difference between different geographical regions makes it difficult to evaluate the profitability and impact of a standardized marketing plan. Starbucks adapts its strategy by changing their menu offering and the ambience of the stores to suit different locations. Their food and beverage alterations are illustrated below: Region Product Asia Coffee jelly Frappuccino   Asian Dolce Latte   Red bean Frappuccino UK and Scandinavia American style Pancakes UK , Australia and New Zealand Flat White UK and Greece Yoghurt Frappuccino Germany Lox on a bagel Argentina Maringue Brownie Thailand Coconut Pandan roll   Charcoal Walnut-Raisin Bun India Lemon Jazz Cheesecake Indonesia Peanut butter Panini Japan Iced Coffee with Summer Jelly   Pumpkin pie Peru Algarrobina Frappuccino   Lucuma Frappuccino Turkey Mystical Sandwich Ireland Chocolate Start cake Philippines Spam bagel Various VIA cake Adapted from Misener, 2014 In China for example, Starbucks has adapted its product offering in order to sway a market with a long lasting tradition of consuming tea. While there were concerns about the potential success of an American coffee chain in a country where other multi-national food and beverage brands have failed, Starbucks went ahead to open 500 stores and licensed its brand name to Mei Da Coffee Co and entered a joint venture with Shanghai President Coffee Co. Instead of forcing products that appealed to Americans, they introduced green tea flavored coffee and relied less on takeaway orders due to their low popularity in China. Additionally, Starbucks cups have become a status symbol in Beijing and Shanghai because they charge premium prices for their beverages as opposed to their general strategy of underpricing in the Asian market (Essays, 2013). Although Starbucks has been successful in markets with an immature coffee culture, it has experienced difficulty in strengthening its market position in areas such as France and Britain where the coffeehouse culture is strong. In these regions, Starbucks is up against coffee houses that offer a unique and tailored cultural experience to its customers. Their marketing strategy in these region therefore requires more creativity which has led to expansion plans such as the inauguration of a coffee shop in Amsterdam with avant-garde architecture and a stage for poetry reading. Competitive Analysis Starbucks operates and competes primarily in the retail coffee and snacks store industry. Despite their inflated prices, it has been able to maintain their position is a monopolistically competitive market structure by creating a standard of their coffee that makes it seem more luxurious. Their other Product/ service strategies include: Creating high quality coffee Customer Satisfaction Become the ideal employer Creating a Starbucks community Strategic Partnerships Innovation in their products and services Brand Marketing Starbucks main competition comes from quick service restaurants and coffee shops. In 2013, it dominated the industry with a market share of 36.7%, followed by Dunkin brands with 24.6%, and McDonalds, Costa Coffee and Tim Horton’s following suit (Geereddy, 2013). The types of food choices, pricing and restaurant ambience creates diversity among competitors, but customer preference has a large stake as well. A fast food chain for example provides an ambience for fast service delivery while a coffee house is slow paced and relaxed. Product differentiation is at the core of Starbucks’ strategy to gain a sustained competitive advantage. It offers differentiation through its services such as an excellent customer experience achieved through well designed stores with good ambience and well trained staff. Starbucks’ two largest competitors are Dunkin’ Donuts and McDonalds. Dunkin Donuts was first opened in 1950 and in the late 1990s, it began to put more emphasis on being a coffee outlet. In early 2000s it introduced its first specialty coffees and drinks and slowly became a destination coffee shop. By 2009, it had 13,000 stores in 50 countries worldwide. While it is known for its donuts and coffee, the company has continued to expand its product line with substantial food items. While Starbucks has a more upscale feel and relies on word of mouth to spread its name, Dunkin’ donuts uses traditional media and positions itself as an all American consumer choice. McDonalds on the other hand, has traditionally been known as a fast food restaurant and not for its coffee. However, in the mid-2000s, it introduced flavored and iced coffees and is fast becoming a Starbucks competitor after it upgraded its coffees in 2006. McDonalds also has a larger demographic compared to Starbucks because it caters to the average American. Despite, seemingly more favorable choices, Starbucks has been able to stay ahead of the pack. One of the factors contributing to its success is that it is located in extremely busy and accessible locations in order to serve a wider range of customers and promote brand awareness. Starbucks also employs a great deal of information technology in its operations allowing its customers to buy their goods online and using social media to drive their brand promotion. Starbucks is one of the worlds most recognized brands which gives it a competitive advantage in its expansion into international markets as well as in its domestic growth. Over the years it has achieved significant economies of scale with superior distribution channels and supplier relationships. Another of its core competencies is its human resource management value based approach for building very strong internal and external relationships with suppliers (Geereddy, 2013). Unlike its competitors, Starbucks invests in providing benefits and training for its staff. The company is one of the few to extend their full health policy to their part time workers. This philosophy applies even to its overseas stores. Even through licensing and joint ventures, Starbucks ensures the contentment of all employees under the Starbucks brand. Below is Starbucks’ BCG matrix that classifies their product offering into four categories based on market growth and market share relative to the largest competitor. Stars Coffee, lattes and Frappuccino are Starbucks’ cash cow and are therefore located at nearly every location. They represent a product that operates in high growth markets and has a high market share. They generate high amounts of cash for Starbucks meaning the company tends to spend money in developing and promoting them. Question marks Tea is the question mark of Starbucks’ product. It is a product that operates in a high market growth sector but has a low market share since Starbucks is famous for their coffee. Since the tea market has high growth potential as well, Starbucks could benefit from analyzing why they have a low market share and adopt strategies to gain market share in it. It has responded to this by opening up Teavana stores that focus on the sale of tea and its products. Cash cows Mugs, gift cards and other Starbucks merchandize represent the cash cows. Starbucks has a high market share compared to their competitors however it operates in a low growth market since these products are not in their core business. The products are well established and are therefore generating great net cash flows. Dog Packages coffee beans represent the dog in Starbucks’ portfolio. The product has a low market share as well as a low growth potential. Their packaged coffee beans do not generate much cash for Starbucks since most consumers go there for a quick and good service of coffee and packed foods. Financial Performance The ratios selected for the financial analysis are gross margin, net margin, Earnings per share, current ratio and Debt/Equity ratio. Gross margin represents the percentage of revenue retained after paying off the costs associated with making the product. Net profit is a measure of the proportion of net profit to the revenue earned and it indicates how well a company is managing its expenses relative to its revenues. Earnings per share (EPS) is a measure of profitability that shows the amount that each share would earn if net profit were divided between shareholders. Current ratio is a measure of liquidity that shows a company’s ability to pay its short term obligation which is calculated by comparing assets to liabilities. Debt/ Equity ratio also measures a company’s financial health by measuring how much debt is being used to finance the company relative to shareholder equity. The figure below illustrates all five ratios for the year of 2011 to 2015:   Gross Margin % Net Margin % Current Ratio Debt/Equity EPS 2011 57.7 10.7 1.83 0.13 1.62 2012 56.3 10.4 1.9 0.11 1.79 2013 57.1 0.06 1.02 0.29 0.01 2014 58.3 12.57 1.37 0.39 1.35 2015 59.36 14.39 1.19 0.4 1.82 Source: Derived from Starbucks financial statements for 2012, 2013, 2014 and 2015 Starbucks’ profitability ratios (Net margin, Gross margin and Earnings per share) have been increasing every year due to increased sales compared to operating costs. There is an outlier in 2013 because that year Starbucks settles a litigation case with one of its distributors, Kraft foods. The Debt/Equity ratio for the company is high because the company has been taking on debt in order to expand its stores. The current ratio shows that is well equipped to pay its obligations when they fall due. Foreign Entry Multinationals have an option of six international entry mode strategies i.e. exporting, licensing, turnkey projects, franchising, joint venture and wholly owned subsidiaries. Of these methods, Starbucks has used licensing, joint ventures, wholly owned subsidiaries and most recently it started franchising in Europe. The figure below illustrates the geographical expansion of Starbucks in the last decade: Year Store (Total) New Regions 2004 8,569 France and Northern Ireland 2005 10,241 Bahamas, Ireland and Jordan 2006 12,440 Brazil and Egypt 2007 15,011 Denmark, Netherlands, Romania and Russia 2008 16,680 Argentina, Belgium, Bulgaria, Czech Republic and Portugal 2009 16,635 Aruba and Poland 2010 16,858 El Salvador, Hungary & Sweden 2011 17,003 Guatemala, Curacao & Morocco 2012 18,066 Costa Rica, India, Finland & Norway 2013 19,676 Vietnam, Monaco 2014 20,519 Brunei & Colombia Before entering a market, Starbucks conducts rigorous quantitative market studies and develops extensive focus group interviews to understand the market place and it’s potential. Starbucks then adjusts its international strategy to satisfy the need of every market taking into consideration the culture and traditions of the area. Santamaria and Ni (2008) defined the mode of entry as a strategic decision in which a company’s products, technology, human skills and other resources are evaluated in relation to the destination country. In addition, the characteristics of the destination market are taken into account in order to select the most suitable mode of entry. They went on to divide the possible factors that influence the mode of entry into three categories: Firm specific factors, country specific factors and industry specific factors. The country specific factors include culture, policy, demographics, local competition and bargaining power of the supplier and customers. The firm specific factors vary depending on what the firm values most such as culture, values, customer or employee satisfaction and how adaptable the business model is. The industry specific factors include their position within the industry, competition, growth trends and barriers to entry. Starbucks has positioned itself in the industry as a company that offers a good environment to enjoy beverages and snacks as social products. Therefore, Starbucks must evaluate the marketability of this offering in the foreign country usually based on the culture of the region. The key to their success therefore lies in their ability to match their product offering with the demands of their foreign market without compromising the firm’s specific factors. An example wholly owned subsidiary entry is when Starbucks acquired 65 Seattle coffee company stores in Britain, where there was a similar coffee culture as America. Due, the cultural gap between the US and the UK attitude towards coffee and the resistance of British consumers to consume American products (Lee, 2008) Starbucks first allowed consumers to adapt to Starbucks products for a year before rebranding. While Starbucks had in the past avoided franchising because it wanted full control over its brand, it needed to do so to access the more remote areas of the United Kingdom (Jargon, 2013). Starbucks entered the Asia pacific market via New Zealand through licensing its concept to Restaurants Brand New Zealand which was an ideal partner because it was already an authorized licensee of KFC and Pizza Hut brands and was enthusiastic about bringing the Starbucks experience to their consumers. This decision was made because the popularity of the coffee shop industry was relatively low in the region at the time and would have therefore deterred the success of a wholly owned market entry (Essays, 2013). Joint ventures are often necessary due to political reasons. Such is the case in some Middle Eastern countries that require part ownership of resident companies with foreign business (Santamaria & Ni, 2009). An example of a joint venture entry by Starbucks was when they entered the Spanish market. Starbucks entered a joint venture agreement with a leading European food service and retail operator as well as a leading retail operator of cafes and pastry shops in Barcelona. The figure below illustrated Starbucks entry mode type in various other regions: Region Entry mode Australia Majority Owned Austria Joint Ventures China (Beijing') License China (Shanghai) Joint Ventures France Joint Ventures Germany Joint Ventures Greece Joint Ventures Hong Kong Joint Ventures Indonesia License Israel Joint Ventures Japan Joint Ventures Malaysia License Mexico Joint Ventures Middle East License New Zealand License Philippines License Puerto Rico Joint Ventures Singapore License South Korea Joint Ventures Spain Joint Ventures Switzerland Joint Ventures Taiwan Joint Ventures Thailand Majority Owned United Kingdom Owned and Franchised Conclusion, Critique and Recommendations Starbucks has reinvented the way people enjoy coffee and conquered the globe in less than half a century. Some of the elements that contribute to its success and brand recognition is its foreign entry mode selection, marketing mix adaptability and promotional strategies. Starting with slight alterations to suit local consumer to the use of strategic licensing and joint ventures to penetrate a market, the company has shown unparalleled cultural awareness. Starbucks’ main philosophy revolves around the atmosphere created at the coffee shop and the value placed on employees as opposed prioritizing the product offering therefore allowing it to expand and adapt while staying true its core values. In my view, three factors have contributed to Starbucks success. First was their aggressive expansion plan in the formative years of the coffee industry which as a result captured strategic locations, loyal customers and created a brand image before their rivals. Starbucks tested the feasibility of their expansion plan by opening stores thousands of miles away from their headquarters and as a result they learnt how to develop the infrastructure necessary to coordinate international operations. This includes efficient distribution systems and the hiring of competent employees. The next factor contributing to Starbucks success is its employee satisfaction. By demonstrating their loyalty and concern for their employees through health benefits and stock options they inspire employees to new level of performance which is pivotal for marinating their brand and implementing their growth and marketing strategies. Last but not least is their consistency in providing high quality coffee and gaining customer loyalty by providing them with a Starbucks experience, a home away from home and a sense of community amongst strangers. The only criticism I would find with Starbucks is in their wide array of products. While it is clear that Starbucks prides itself in customer driven products, I think it needs to dial down on products such as coffee beans, filter bags and pods. As illustrated earlier in the BCG model, their choice of providing consumer products in supermarkets opens them up to direct competition in a whole new market. So far they have not been able to curve out significant market share for themselves. Therefore, perhaps they would be benefit from redirecting the resources used in this “dog” product to their to the “question mark” product which is tea. So far, Starbucks has begun rolling out specialty tea stores called Teavana. The redirection of the resources from tea filters and coffee beans will enable them to conduct the market research needed too fully develop tea products growth potentials and curve out a market share in that industry as well. References: Essays, UK. (November 2013). Starbucks International Entry Methods. Retrieved from https://www.ukessays.com Geereddy, N. (2013). Strategic Analysis of Starbucks Corporation. Retrieved from http://scholar.harvard.edu Jargon, J. (November 2013). Starbucks Tries Franchising to Perk up European business. Retrieved from http://www.wsj.com Jones, A. (December 2014). An Investor’s Guide to Starbucks Corporation. Retrieved from http://marketrealist.com Larson, R. (2008). Starbucks, a Strategic Analysis: Past Decisions and Future Options. Retrieved from http://www.biu.ac.il/soc/sb/stfhome/bijaoui/891/case/2009/starbuck08full.pdf Lee, K. (2008). Case Study: Starbucks Coffee. Retrieved from http://www.uhu.es Misener, J. (October 2014). 20 Starbucks Items You Can’t Get In The U.S. Retrieved from http://www.buzzfeed.com Santamaria, B., Ni, Shuang. (June, 2008). Entry Modes of Starbucks. Retrieved from http://www.diva-portal.org Starbucks Corporation (2016). Retrieved from http://www.starbucks.com Read More