Entry Strategies of Starbucks in China and UK - Case Study Example

Compare how Starbucks internationalises in China and the United Kingdom and evaluate why it chooses to use such entry strategies Introduction: When a firm seeks to enter a foreign market, the company must choose the most appropriate entry mode for that specific market. The decision of entry mode strategy has an important implication in company’s international expansion. The choice of international strategy has long-term implication for MNCs. There are six international entry mode strategies: exporting, licensing, a turnkey project, franchising, joint ventures and wholly-owned subsidiaries. There are different influential factors that determine a company’s international strategy in each situation. The effect of these factors may differ considerably with respect to different countries. Starbucks uses three different entry modes to internationally establish their business such as joint ventures, licensing and wholly owned subsidiaries. Purpose: Our purpose is to find out the entry strategies adopted by Starbucks in both China and U.K. and understand why that entry strategy was used in those markets. Specialty Coffee Industry: Demand:- Each day nearly 2.5 billion cups of coffee are consumed. It is the 5th most widely traded commodity in the world and millions of people depend directly or indirectly on the production and sale of coffee for their income. The US coffee shop industry includes about 20,000 stores with combined annual revenue of about $11 billion. The industry is highly concentrated: the top 50 companies generate more than 70 percent of industry sales. Competitive Setting:- The profitability of companies in the industry depends on the ability to obtain prime locations, create innovative promotion methods to increase customers, and deliver high-quality products. Big sized firms have advantages beginning from sourcing the beans to marketing their specialty coffee products owing to their easy availability of capital. Small companies can offer competition only by bringing in the local flavor to their restaurants based on their familiarity about the surroundings and also adding that personal touch to customer service. Coffee shops compete with businesses such as convenience stores, fast food restaurants, gourmet restaurants, and donut shops. Target Segment:- When specialty coffee was first being produced, its target consumer segment was the upper income class. This specific customer segment has been nearly fully penetrated. Any additional growth will come from those consumers with middle or lower incomes. These two segments are generally more motivated by discount products over branded products. Buyers are more aware and knowledgeable about specialty coffee and they are also demanding superior quality in the recent times. This results in further consumption of the product based on better information. PEST analysis: Political/Legal:- Rise in tensions between U.S. and rest of the world often results in negative impact on business activities of American brands like Starbucks in Middle East. Starbucks CEO Schultz was assumed to be close to Jewish society and was alleged to be funding their activities. Due to threats following this accusation Starbucks was forced to close down six stores in Israel. Starbucks imports all their coffee beans. So changes in import laws could affect production which can result in price variations of the product and in turn consumption too. Economic:- Starbucks has faced problems due to economic recession in countries such as Switzerland, Germany, and Japan in the early 2000s, where it caused declining sales and revenues for the company. Moreover, huge recession due to the global financial crisis also impacts the company’s results badly. Social:- Starbucks is committed to a role of positive impact on environment in all of their business activities. They understand the environmental issues and share information with their partners and encourage them to participate in this mission. This only adds on to the positive image of the company. Technological:- Starbucks continuously strive to improve customer experience. For example the introduction of Starbucks card has helped them to serve customers in a faster and efficient manner. They also provide Wi-Fi connectivity across its stores to add on to the customer experience at their stores. Company Background Information: Starbucks’ history began in Seattle in 1971, when three students named Jerry Baldwin, Zev Siegel and Gordon Bowker decided to be partners and opened a little shop in Pike Place Market to sell high-quality coffee beans and equipment. In 1987, Howard Schultz, a former employee of Starbucks purchased and undertook its operations with the support of local investors. He wanted Starbucks to become the most respected brand name in coffee and to be admired for its corporate social responsibility, its values and its guiding principles. (Starbucks CSR Report 2007). Starbucks decided to internationalize its business outside of North America in 1995. At the moment, Starbucks is considered the largest specialty coffee provider in the world with 16000 stores in more than 50 countries. (Starbucks 2009) Starbucks’ international strategy. Starbucks adapts its international strategy in order to satisfy the needs and requirements of every market, seeking to respect its cultures and traditions. At present, the company uses three different strategies: joint venture, licenses and wholly–owned subsidiaries. Before entering a new country Starbucks conducts rigorous quantitative market studies. Starbucks have realized that it cannot meet the demand of the entire target market by playing alone. The company selects local partners who are local business leaders. Then, Starbucks together with its partner try to adapt its business traditions to suit the local market. They have chosen right strategic partners in sharing their financial risk, to keep pace with the technological advancement and thereby achieving enhanced competitiveness in the market place. Starbucks in U.K.: In May 1998, Starbucks entered into the UK by the acquisition of sixty-five Seattle Coffee Company stores (Starbucks UK Home Page).Holmes (1998) as cited in Santamaria and Ni (2008) states that Starbucks acquired Seattle Coffee Company in exchange for about 1.8 million shares of common Starbucks stock, or about £50.8 million. Seattle coffee company retained its name for a year after its acquisition before it was re-branded to Starbucks. The company was managed by two Americans, Scott and Ally Svenson who were allowed to continue with UK operations of the company. The decision to enter U.K. was critical to Starbucks as it was the first European country to which the entry was made. The top management considered it as a convenient way of entering a new foreign market and to establish its long term plans. In 1999,Holmes (1998) as cited in Santamaria and Ni (2008) states that Starbucks formed an alliance with Sainsbury’s in 1999 followed by acquisition of London coffee shops from Madisons Coffee for £1.4 million in 2001.The growth of Starbucks was steady in UK and now it is considered the market leader of branded coffee shops in U.K. According to Hickman (2008) as cited in Santamaria and Ni (2008), the company has a 16.7 per cent market share, one per cent ahead of Costa Coffee which is a coffee chain based in U.K. Reasons for the choice of entry:- Starbucks adopted the wholly-owned subsidiary form of internationalization in Britain where it owns 100% of the stock. Starbucks being a large firm, it could make resource commitment and also had capability of absorbing the risk involved in entering a foreign market. They had to tackle the cultural distance between U.S and the host country. This was eased by the fact that the chain acquired was managed by Americans and they could quickly adapt themselves to the British coffee culture. Moreover the re-branding was done a year after acquisition. They could afford the acquisition of 65 stores, had necessary experience and management skills to choose any method of entry. Since they had the capital available at their disposition, they chose this method. They gained competitiveness in the market using their capital to acquire prime locations which were unaffordable to independent competitors Entry to U.K. was their first step towards penetrate the yet to mature European market and to do it in shortest possible time was using this method of internationalization. Starbucks has been always interested to create joint venture arrangement where both join owners are able to invest in the venture. When Starbucks could not find partners in Britain with enough resources for opening sufficient number of Starbucks coffee stores, it decided to acquire a firm which can share its values and mission. Star bucks in China: The first Starbucks store in mainland China became a reality with the opening of the store in Beijing in January 1999 through a licensing agreement with Mei Da Coffee Co. Ltd. The company has partnered with different business groups for its China operations. In Shanghai and Hangzhou, Starbucks has partnered with the president group who supports Starbucks presence in Taiwan. In North China, the company has partnered with Beijing Mei Da Coffee. China was predominantly a tea consuming market. Therefore there were a large number of potential consumers for coffee and this naturally added on to accelerating the sale of Starbucks products. As regards to advertising for the Chinese market, Starbucks depends less on domestic advertising and more on promotion through coupons and visits, which draw first time consumers. Although China accounted for less than 10% of Starbucks' US$6.4 billion global sales in 2005, Schultz says the country will soon become the firm's largest market outside of North America. (Asia Times Online 2006). "The Starbucks proposition in China is huge. But people don't go there for the coffee. They go there to present themselves as modern Chinese in a public setting," says Tom Doctoroff, the North Asia managing director of ad firm J. Walter Thompson. (Global Policy forum, 2003) Reasons for the choice of entry:- Starbucks used licensing as the entry mode in China. Licensing is an arrangement where a licensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee. First of all, the characteristic of China’s business environment was unfamiliar. Starbucks was unaware of the nature of the market in China. To form the licensing agreement with an experienced firm, Restaurant Mei Da Coffee Co. Ltd. was a way to gain knowledge from its local partner. Starbucks needed its partner to commit more managerial resources. Starbucks had already acquired 60 stores to enter Britain and also its aggressive internationalization policies earlier in other markets limited the quantity of capital for china internationalization. This decision is also influenced by management’s policies to minimize the quantity of invested capital for the process of china internationalization. Conclusion: In short, Starbucks carried out different entry modes in China and the United Kingdom because it wanted to adapt to the specific circumstances of each country. As Starbucks wanted to avoid difficulties during its expansion and was aware of the long-implications of entry mode decision, the company preferred to seek the most suitable entry mode in each case. References:- Anglia Ruskin University., 2009. Harvard System of Referencing Guide [Online] (26 May 2009) Available at: http://libweb.anglia.ac.uk/referencing/harvard.htm?harvard_id=66#66 [Accessed 18 April 2010]. Anon., 200- Starbucks Coffee: Expansion in Asia [Online] s.n. Available at: http://www.scribd.com/doc/20688358/Starbucks-Expansion-in-Asia [Accessed 17 April 2008]. Asia Times Online., 2006. Starbucks Soars in China [Online] (15 June 2006).Asia Times Online. Available at: http://www.atimes.com/atimes/China_Business/HF15Cb06.html [Accessed 18 April 2010]. Butod, M. 2008.Internationalisation process of firms [Online] (24 November 2008).Available at: http://ivythesis.typepad.com/term_paper_topics/2008/11/internationaliz.html [Accessed 18 April 2010]. Fowler, G.A., 2003. 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