Starbucks Corporation is a Seattle, Washington-based coffee company. It buys roasts, and sells whole bean specialty coffees and coffee drinks through a global chain of retail outlets. The story of Starbucks Coffee begins in 1971, when three friends with a passion for coffee, Jerry Baldwin, Zev Siegl and Gordon Bowker, opened a small shop and began selling fresh-roasted, gourmet coffee beans and brewing and roasting accessories. Nowadays, Starbucks is credited with changing the way US people view and consume coffee, and its success has attracted international attention (Starbucks, n.d.).
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Nowadays, Starbucks Company has been one of the fastest growing companies in the US. Over a 17 year period starting in 1992, Starbucks’s net revenues increased at a compounded annual growth rate of 20%, to $3.3 billion US in 2002. Moreover, Starbucks began turning its name into a household word not through advertising but through word of mouth. In fiscal 2004, Starbucks opened a record 1,344 stores worldwide. The once small regional roaster, Starbucks Coffee Company, now has more than 9,000 locations in 34 countries serving over 20 million customers a week.
To continue this rapid pace of growth, the firm’s senior executives are seeking to expand it internationally. In details, the company interested in further expansion their market in Europe, Asia Pacific and Latin America. Expanding in these three continents represents not only a challenge but also an opportunity to Starbucks. While the opportunity of increased profit from further expansion is readily apparent to the company’s top management, the unclear point here is how to deal with growing of “anti-globalization” reflection around the world.
This report looks at issues that are arising as Starbucks looks to dominate specialty coffee markets around the world and explores what changes in strategy might be required.
Starbucks’s Model in Developing a Marketing Strategy
Howard Schultz’s goal for Starbucks is to: “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining uncompromising principles as we grow.” The company’s 25 year goal is to “become an enduring, great company with the most recognized and respected brand in the world, known for inspiring and nurturing the human spirit.” The company’s mission statement articulates several guiding principles to measure the appropriateness of the firm’s decisions (Schultz, H. & Yang, D. J., 1997). In describing Starbucks’ unique approach to competition, the strategy is simply to understand: Blanket an area completely, even if the stores cannibalize another’s business. A new store will often capture around 30% of the sales of a nearby Starbucks, but the company considers that a good thing: The Starbucks-everywhere approach cuts down on delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for all the stores within an area. Normally, around 20 million people bought a cup of coffee at a Starbucks a week. A typical customer stops by 18 times a month; no other American retailer has a higher frequency of customer visits. Sales have climbed an average of 20% a year since the company went public. Even in an economic crisis time, when other retailers have taken a beating, Starbucks store traffic has grown up between 6% and 8% a year (Starbucks Investor Relations, 2010). Perhaps even more notable is the fact that Starbucks has managed to generate those kinds of numbers with virtually no marketing, spending just 1% from its annual revenues on advertising.
In addition, Schultz observes that the company is still in its early days of growth global. “We are opening three or four stores every day,” he notes. “We feel strongly that the driver of the equity of the brand is directly linked to the retail experience we create in our stores. Our commitment to the growth of the company is significant and will continue to be based on the long-term growth potential of our retail format.” (Schultz, H. & Yang, D. J., 1997).
Securing the Finest Raw Materials
Starbucks’s coffee quality begins with the purchase of high-quality coffee beans from Arabica. Even many Americans were raised on a commodity-like coffee made from lower quality Robusta beans (or Arabica beans mixed with cheaper filler beans); Starbucks coffee is strictly Arabica, and ensures that only the highest quality beans can be used. Dave Olsen, (Starbucks’s senior vice president and chief coffee procurer) scoured mountain trails in Indonesia, Kenya, Guatemala and elsewhere in search of Starbucks’ premium bean. His standards were demanding, and he conducted exactly experiments in order to get the proper balance of flavor, body and acidity.
From the company’s inception, it has worked on developing relationships with the countries, which it buys coffee beans. Normally, Europeans and Japanese bought most of the premium coffee beans. Olsen sometimes had to convince coffee growers to sell to Starbucks, especially since American coffee buyers are unsightly purchasers of the “dregs” of the coffee beans. Furthermore, Starbucks set a new precedent by outbidding Europe and buyers for the exclusive Narino Supremo Bean crop in 1992. Starbucks collaborated with a mill in the tiny town of Pasto, located on the side of the Volcano Galero. They set up a special operation to single out the particular Narino Supremo bean, and Starbucks guaranteed to purchase the entire yield. This enabled Starbucks to be the exclusive purveyor of Narino Supremo, professedly one of the best coffees in the world.
Vertical Integration
Roasting the coffee bean at Starbucks is close to an art form. Currently, Starbucks operates multiple roasting and distribution facilities. Roasters are promoted from within the company and trained at least in 1 year, and it is considered honor to be chosen. The coffee is roasted in a powerful gas-fired smash roaster around 12 to 15 minutes while roasters use sight, smell, hearing and computers to judge when beans are completely done. The beans color is even tested in an Agtron blood-cell analyzer, with the whole batch being discarded if the sample is not deemed perfect.
The Starbucks Experience
According to Schultz, “We’re not just selling a cup of coffee, we are providing an experience.” In order to create American coffee passionately with the consecrate of their Italian counterparts, Starbucks provides a fascinating atmosphere in which to drink. Its stores are particularly and sleek, and also comfortable. Though the sizes of the stores and their formats vary, most are modeled after the Italian coffee bars where regulars sit and drink espresso with their friends.
Starbucks stores tend to be located in high-traffic locations such as malls, busy street corners, and grocery stores. They are well lighted and feature plenty from light cherry wood and artwork. The people who prepare the coffee are referred to be a baristas, Italian for bartender. Jazz or opera music plays softly in the background. The stores range from 200 to 4,000 square feet, with new units tending to range from 1,500 to 1,700 square feet. In 2003, the average cost of opening a new store (including all the equipment, inventory and leasehold improvements) is in the neighborhood $350,000 US; a “flagship” store costs much more.
Building a Unique Culture
The policy at Starbucks towards employees is laid-back and supportive while the company enforces almost fanatical standards about coffee quality and service. They are encouraged to think of themselves as partners in the business. Schultz believes that happy employees are the key to competitiveness and growth. We can’t achieve our strategic objectives without a work force of people who are committing in the same commitment as management. Our only sustainable advantage is the quality of our work force. We’re building a national retail company by creating pride in and stake in the outcome of our labor (Benefits of Strategic Management, 2009).
Currently, Starbucks promotes an empowered employee culture through broad benefits programs, an employee stock ownership plan, and exhaustive employee training, each employee will have at least 24 hours of training. Classes cover everything from coffee history to a 7 hour workshop named “Brewing the Perfect Cup at Home.” This workshop is one of five classes that all employees must complete during their first 6 weeks with the company. According to Fortune, it’s silly, soft-headed stuff, though basically, of course, it’s true. Maybe some of it sinks in. Starbucks is a smashing success, thanks in large part to the people who come out these therapies such as training programs. Annual barista turnover at the company is 60% compared with 140% for hourly workers in the fast-food business (McDougall, W., 2002).
Starbucks offers its benefits package to both part-time and full-time employees. The package including medical, short-term disability insurance, dental, vision, and as well as paid vacation, paid holidays, mental health or chemical dependency benefits, an employee assistance program, a 401k savings plan and a stock option plan. They also offer dependent coverage that includes same-sex partners (Jung, H., 2003). Schultz believes that without these benefits, people will not feel financially or ambitiously tied to their jobs. He proved that stock options and the complete benefits package increase employee loyalty and encourage attentive service to the customer.
Employee turnover is also dispirited by Starbucks’ stock option plan known as the “Bean Stock Plan”. From August 1991, the plan made Starbucks the only private company to offer stock options unilaterally to all employees.
The company concern for their employee welfare extends beyond its retail outlets to coffee producers. The company’s guidelines call for overseas suppliers to pay wages and benefits that address the basic needs of workers and their families and to allow child labor only when it does not interrupt required education. This move has set a precedent for other importers of agricultural commodities.
Leveraging the Brand
Multiple Channels of Distribution
Besides its stand-alone stores, Starbucks also set up cafes and carts in hospitals, banks, office buildings, supermarkets and shopping centers. Other distribution agreements included office coffee suppliers, hotels, and airlines. Office coffee is a huge segment of the coffee market. Associated Services provides Starbucks coffee exclusively to thousands of businesses round the United States. Moreover, Starbucks has deals with airlines, such as an agreement with United Airlines to provide Starbucks coffee to United’s about 75 million passengers a year. Through a licensing agreement with Kraft Foods Inc., Starbucks offers its coffee in grocery stores across the United States.
Brand Extensions
Starbucks launched a line of packaged and prepared teas in response to growing demand for tea-houses and packaged tea in 1995. Tea is a highly profitable beverage for restaurants, costing only around 2 to 4 cents a cup to produce. As its tea line became increasingly popular, in January 1999 it acquired Tazo, a Portland, Oregon tea company.
Starbucks coffee is also making its way onto grocery shelves via a carefully planned series of joint ventures. In August of 1996, an agreement with PepsiCo Inc. brought a bottled version of Starbucks Frappuccino to store shelves. Another 50-50 partnership, Dreyers’ Grand Ice Cream Inc. distributes seven quart products and two bar-products of Starbucks coffee ice cream.
Other partnerships by the company are designed to form new product associations with coffee. For example, the company’s music subsidiary, Hear Music, regularly releases CDs, some in collaboration with major record labels that are then sold through almost Starbucks retail stores.
While Starbucks is the largest and best known of the coffeehouse chains and its presence is very obviously in metropolitan areas, the firm’s estimates indicate that only a small percentage, about 7%, of the US population has tried its products. Through distribution agreements and the new product partnerships, the company hopes to capture more of the US market.
International Expand and Current Changes
International Expansion Strategies
Starbucks decided to enter the Asia/Pacific Rim markets from the first time when they want to going to global. Growing the number of consumers in the Asia Pacific countries and eagerness among the younger generation to imitate Western lifestyles made these countries attractive markets for Starbucks.
Moreover, the company decided to enter international markets by using a 3 pronged strategy which is joint ventures, licensing, and wholly owned subsidiaries. To entering a foreign market, Starbucks focused on studying the market conditions for its products within the country. It then decided on the local partner for its business. Initially, Starbucks test-marketed with a few stores that were opened in trendy places, and the company’s experienced managers from Seattle handled the operations.
After successful of test-marketing, local baristas were given training for 13 weeks in Seattle. Starbucks didn’t compromise on its basic principles. It ensured similar coffee beverage line-ups and “No Smoking” rule in all its stores around the globe. Moreover, when Starbucks entered into a joint venture with Sazaby Inc. to open Starbucks stores in Japan, analysts felt that Starbucks was unlikely to succeed. They even advised Starbucks to forego its principles such as its “No Smoking” rule and ensure that the size of the stores would.
Beijing and Starbucks’ Decision to Stay
Starbucks opened its first outlet in Beijing in January 1999 and has over 100 stores in the country today. However, Starbucks touched a nationalist nerve in 2000 when it opened a small coffee shop in Beijing’s Forbidden City. If ever there was an emblem of the extremes to which globalization has reached, this is it: mass-market American coffee culture in China’s most hallowed historic place. Even a McDonald’s in the Kremlin would not come as close. Starbucks opened its Forbidden City shop in September 2000, with a signature menu board advertising the usual Americano and decaf latte coffee and a glass display case filled with fresh glazed donuts, cinnamon rings and banana walnut muffins (People’s Daily Online, 2000).
Starbucks had taken extraordinary care to ensure that its presence was humble. To avoid ruining the atmosphere of the Forbidden City, the signs and brand images were placed inside of the store. This small store, barely a closet according to some reports, had only two small tables and a few chairs. It was located on the corner of the Forbidden City, among 50 other retailers, including some selling souvenirs and trinkets. Despite such a low-key presence, this store stimulates controversy. Lots of Chinese newspapers reported on reactions to the shop.
According to the People’s Daily (2000), the reason for the uproar is due to the cafe’s location: the Forbidden City, the world’s largest imperial palace. The Forbidden City is China’s best-preserved ancient architecture encircled by a rampart of three kilometers and first constructed in 1406. The Starbucks cafe is situated in the southeastern corner of the Hall of Preserving Harmony, one of the three most impressive buildings on the palace ground. The hall used to be the venue to hold feasts by emperors and nobles of ethnic groups on Chinese New Year’s Eve. Debates over the mini-cafe took place first on the web. A survey by Sina.com showed that over 70% of nearly 60,000 people surveyed were against to the cafe’s entry into the Forbidden City, the main reason was that can effects to Chinese cultural heritage and its atmosphere (People’s Daily Online, 2000).
However, the administrators of the Forbidden Palace and other government officials were supportive of Starbucks. Chen, a spokesperson for the Forbidden City Museum maintained that allowing Starbucks into the Forbidden City was part of their efforts to improve services in the area. He said: “The reaction has been very intense. Some people say this is a gem of Chinese culture and that foreign brands should not be allowed in. We can’t give up eating for the fear of choking.”
According to Horwat, “The Forbidden City location was a “C” site at best. But definitely not a “D” site, because there was still the benefit of brand presence. But the government said, ‘We think you should come in,’ and it was difficult to say no. There was no local community, only tourists.”
Following some agitates of articles in the Chinese media; CNN began to run news clips of this story in the US. Watching this unfold in the US media, some senior managers at Starbucks became alarmed at the negative publicity. According to Soon Beng Yeap, the immediate reaction was to close the store due to the relentless negative coverage generated by the international media. After serious discussion among the senior executives, he felt as guests in a foreign country, we should be respectful of our hosts – the Forbidden City officials – who invited us to be there in the first place. The company decided to not pull out because it was the international media that stirred up the whole controversy. It was all media-driven. A few reporters got hold of the story and ran with it, all citing the same survey by Sina.com. Starbucks Company was very disappointed by the negative media coverage, which created a false sense of “cultural imperialism” about our intentions in opening the store, especially when they worked very hard to be culturally sensitive and listen to the local community (People’s Daily Online, 2000).
The controversy has since died down, as a recent report in the Singapore Straits Times newspaper on February 2003, indicates: “If anything, the tourists were more upset than the Beijing residents about the presence of Starbucks in the Forbidden City, complaining that it was out of place in a historical site (Smith, C. S., 2003).
Current Changes in the Marketing Environment of Starbuck
Modes of Entry into International Market
Normally, there are 6 ways to enter a foreign market: through exporting, turnkey projects, licensing, franchising, setting up a wholly owned subsidiary in the host country, and the last is joint venture with a host country firm. Each mode of entry has advantages and disadvantages. The method a company chooses depends on a variety of factors, including the nature of the particular product or service and the conditions for market penetration in the foreign target market.
Exporting
Almost companies begin their global expansion with exports and then switch over to another mode. The volume of exports in the world economy had grown significantly due to the decline in trade barriers throughout 1990s. However, exporting still remains a challenge for smaller firms. Firms planning to export must identify foreign market opportunities, organize themselves with the mechanics of exports, and learn to deal with foreign exchange risk.
Turnkey Projects
In this way, the contractor handles every aspect of the project for a foreign client, including the training of operating personnel. After the completion of the contract, the foreign client is handed the key to the plant that is ready for operation. Turnkey projects are usually used in the pharmaceutical, chemical, and petroleum refining industries.
Licensing
Licensing is an arrangement whereby a company (which is licenser) grants the rights to intangible property just like patents, processes, inventions, formulas, designs, copyrights, and trademarks to another company (which is licensee) for a specified period of time. The licenser receives a royalty fee from the licensee. For instance, in the early 1960s, Xerox licensed its patented xerographic know-how to Fuji-Xerox. It was initially meant in 10 years, but the license was extended several times. In return, Fuji-Xerox paid Xerox a royalty fee about 5% of the net sales revenue that it earned.
Franchising
There is a similar between franchising and licensing, except that it requires long-term commitments. In franchising, the franchiser selling both intangible property to the franchisee and also insists that the franchisee abide by the rules of the business. In some issues, the franchiser also assists the franchisee in running the business. The franchiser receives a royalty payment that is usually a percentage of the franchisee’s profits. Service companies usually selected for franchising. For instance, KFC’s pursues its expansion abroad through franchising. KFC’s sets down strict rules for the franchisees to operate their restaurants. The rules broaden to cooking methods, staffing policy, and design and location of the restaurants. KFC’s also organizes the supply chain and provides management training and financial assistance to the franchisees.
Wholly Owned Subsidiaries
In a wholly owned subsidiary, the firm owns 100% of the stock of the subsidiary. Wholly owned subsidiaries can be established in a foreign country within 2 ways. A company can set up new operations in the foreign country or it can acquire a local company and promote its products through that company.
Joint Ventures
In opposite side with licensing and franchising arrangements, joint ventures allow companies to own a stake and play an important role in the management of the foreign operation. Joint ventures require more management assistance, direct investment and training, and technology transfer. Joint ventures can be equity or non-equity partnerships. Equity joint ventures are contractual arrangements with equal partners. Non-equity ventures are where the host country partner has a greater stake. In some countries, a joint venture is the only way for a foreign company to set up operations.
SWOT Analysis
Strengths
Product diversification.
Established logo, developed brand, copyrights, trademarks, website and patents.
Company operated retail stores, International stores (no franchise).
High visibility locations to attract customers.
Valued and motivated employees, good work environment.
Good relationships with suppliers.
Industry market leader.
Globalized.
Customer base loyalty.
Product is the last socially accepted addiction.
Widespread and consistent.
Knowledge based.
Strong Board.
Strong financial foundation.
Weaknesses
Size.
Lack of internal focus (too much focus on expansion).
Ever increasing number of competitors in a growing market.
Self cannibalization.
Cross functional management.
Product pricing (expensive).
Opportunities
Expansion into retail operations.
Technological advances.
New distribution channels (delivery).
New products.
Distribution agreements.
Brand extension.
Emerging international markets.
Continued domestic expansion/domination of segment.
Threats
Competition (restaurants, street carts, supermarkets, other coffee shops, other caffeine based products).
US market saturation.
Coffee price volatility in developing countries.
Negative publicity from poorly treated farmers in supplying countries.
Consumer trends toward more healthy ways and away from caffeine.
Fragile state of worldwide production of specialty coffees.
Alienation of younger, domestic market segments.
Corporate behemoth image.
Cultural and Political issues in foreign countries.
In addition, although Starbucks profits have increased significantly over the years, there are reasons for the company to be more careful. Sales are still growing rapidly, but the rate is slowing at existing stores. Some analysts attribute this to store cannibalization, as Starbucks has been known to open stores within one block of each other in hopes of saturating the market.
Otherwise, this approach may also exacerbate competition among close Starbucks stores and damage the company culture including the workforce, resulting in a decrease in employees’ performance. Growth has been effected by poor merchandising efforts, which leaves many products, like mugs and coffee makers, on display for years.
Current Changes in the Marketing Environment of Starbuck
When investing overseas, there is a Starbucks way. The company finds local business partners are almost foreign markets. It tests each country with a number of stores in trendy districts, using experienced Starbucks managers. It sends local baristas to Seattle for 13 weeks of training. Then it starts opening stores by the dozen. Its coffee lineup doesn’t vary, but Starbucks does adapt its food to local tastes. In Britain, Starbucks won an award for its mince pie. In Asia, its offers curry puffs and meat buns. The company also fits its interior décor to the local architecture, especially in historic buildings. According to Peter Maslen, president of Starbucks Coffee International said that Starbucks doesn’t stamp these things out cookie-cutter style.
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Although Starbucks is committed to owning its North American stores, it has sought partners for much of its overseas expansion. Our approach to international expansion is to focus on the partnership first, and then will be country. The company relies on the local connection to get everything up and working. The key is finding the right local partners to negotiate local regulations and also other issues. Starbucks looks for partners who share their values, culture, and goals about community development. They are also primarily interested in partners who can guide them through the process of starting up in a overseas location. According to Kathy Lindemann, SVP of Operations for Starbucks International, Starbucks Company looks for firms with:
(1) Similar philosophy to ours in terms of shared values, corporate citizenship, and commitment to be in the business for the long haul,
(2) Multi-unit restaurant experience,
(3) Financial resources to expand the Starbucks concept rapidly to prevent imitators,
(4) Strong real-estate experience with knowledge about how to pick prime real estate locations,
(5) Knowledge of the retail market, and
(6) The availability of the people to commit to our project.
For many years, analysts have observed that the US coffee-bar market may be reaching saturation. They point to market consolidation, as bigger players snap up some of the smaller coffee bar competitors (The Washington Post, 1995). Furthermore, they note that Starbucks’ store base is also maturing, leading to a slowdown in the growth of unit volume and firm profitability. In response of some argue, Starbucks has turned its attention to foreign markets for continued growth.
However, analysts pointed out that the success of Starbucks was due to its profitable domestic operations. It was reported that most of Starbucks’ international operations were losing profit. Starbucks’ Japanese operations reported a loss of $3.9 million (Japan constituted the largest market for the company after US) in May 2003, and the company also performed inadequate in Europe and the Middle East. Analysts pointed out that Starbucks’ international operations were not as well planned like its US operations. They also observed that the unstable international business environment made it more difficult for the company to effectively manage its international operations. A lot of analysts felt that it was important for the company to focus on its international operations. With the saturation of US market, Starbucks would be forced to look outside the United States for revenues and further growth.
To duplicate the astonishing at returns of its first decade, Starbucks has no choice but to export its concept dynamically. In fact, some analysts give Starbucks only two years at most before it saturates the US market. The chain in August 2002 operates 1,200 international outlets, from Beijing to Bristol. Thus, there are around 400 of its planned 1,200 new stores will be built overseas, representing about 35% increase in its foreign base. Starbucks expects to double the number of its stores worldwide to 10,000 within 3 years (Starbucks Newsroom, 2009).
Starbucks Company decided to go to new suppliers for items such as mugs, in order to have a better control over operational costs. It was reported that the company was thinking of sourcing mugs from low-cost Japanese vendors rather than importing them from US and that it was planning to source its paper goods, such as plates and cups, from Southeast Asia.
On the other hand, in 2003, Starbucks also announced that it would slow down its pace of expansion by opening around 80 stores (compared to the 115 stores in 2002). Company sources also revealed that Starbucks would close down its loss-making stores. However, analysts pointed out that closing the loss-making stores and adopting cost cutting could increase profitability only in the short run and not drive future growth.
Some analysts figured out that Starbucks should rethink its entry strategy in international markets and focus on pricing. They also felt that because the company was relatively debt free and had around $300 million US in free cash flows, it should be able to rebuild its overseas operation.
However, they cautioned Starbucks against the external risks resulting from volatile political and business environments around the world. They felt that with increasing tensions between the United States and the rest of the world, the business environment, especially in the Middle East and Southeast Asia, was becoming increasingly volatile. Acknowledging the risks involved in the international markets, Schultz said, “We’re not taking our success for granted. We also understand that the burden of proof at times is on us given the fact that a lot is being written and there’s more sensitivity than ever before about America and American companies. These are the very early days for the growth and development of the company internationally. There is a big world out there for Starbucks to expand in clearly. Only time can tell whether Starbucks will be able to brew its success in the international markets or not.
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