A Case Study Of Starbucks In India, China And The UK
Starbucks Sells 4 million cups of coffee in a single day. Such sales would still be unheard of if Schultz had not changed the model of business from one that sold coffee and equipment to classic cafes that offer a romantic ambiance for customers to sip on fine espressos and cappuccinos. Starbucks was started in 1971 by three friends, Jerry Baldwin, Gordon Bowker, and Zeg Siegel, who were from Seattle. The friends adopted their style of roasting coffee beans from Alfred Peet, who from the 1950s had been importing tea and excellent Arabica coffee into the United States. Howard Schultz, who was hired at Starbucks in 1982 as head marketing, urged the friends to adopt a café model after traveling to Milan and witnessing their successful cafes. Schultz broke away, started his cafes in 1985, and bought Starbucks from friends in 1987, having run a successful parallel chain of coffee cafes (Bondarenko, 2016). Today Starbucks has an empire of over 29,000 stores across 80 countries globally, a majority being in its home country, the United States. Starbucks has ventured in the Asian Pacific and European markets despite Costa Coffee, giving it a run for its money in the later market. For these non-us markets, Starbucks had to change its business strategy to compete favorably against other beverage retailers and to gain entrance in the foreign markets. This research reviews some of these strategies in China, India, and The United Kingdom.
Starbucks business model
Starbucks maintains a chain of cafes in a mixture of retail and franchise business models with company-owned and licensed cafes (Krikorian, 2014).In FY2018, revenue from the company-owned stores made the 80% lion share while sales from the licensees made the rest. The main product in the company's mix is Tea and coffee-related beverages, which are served with a variety of snacks, as shown in Figure 1. Customers can also buy packaged Tea and coffee to prepare at their premises ( Cuofano, 2017). Starbucks is looking to increase company-owned cafes to control the quality of products and services delivered to its broad base of loyal customers. It is this customer-centric attitude that has made Starbucks success in businesses. Starbucks' vision is to build a community around coffee drinkers so that customers feel like they have a third place between home and work. The company made $24.7 billion in revenues in FY2018, with $17 billion coming from the company-owned cafes, see Figure 2 . Starbucks has been expanding overseas due to the saturation of stores in the USA. The corporation had to be flexible during entrance to the various foreign markets of India, China, and The United Kingdom, as I will review in this international direct investment case study.
Starbucks in India
Starbucks entered the Indian market with a 50:50 joint venture with Tata Global Beverages in 2011(Fischer & Roy, 2019). For the first time, Starbucks run an outlet that relied on a partner-owned roasting facility with most of the coffee being sourced and roasted locally. A partnership with Tata Global enabled Starbucks to penetrate the Indian market easily. The reliable brand name of Starbucks has helped it to be readily accepted by customers in this new market who perceive western products as superior. In India, they had to adapt to the culture and below is a market analysis of Starbuck's entry into the Indian market based on Dunning's eclectic paradigm, Figure 3.
Starbucks Indian market entry analysis
Fischer and Roy (2019) note that three factors affect the operations of the company abroad, namely, ownership advantages, location advantages, and internalization advantages.
These are benefits that a company has based on its tangible and intangible assets. Large multinational corporations have an advantage over other smaller competitors owing to their sizes. Fisher and Roy (2019) note that the principal competitive ownership advantage Starbucks has is its globally infamous trademark. The brand is associated with premium quality western products and culture and thus attract more customers even overseas. The Starbucks brand was trademarked in 10 Indian languages as early as 2008, to protect the company's competitive advantage. Starbucks branded cups serve as mobile billboards, increasing awareness of the brand. Moreover, Starbucks has won the hearts of many customers in India as in the USA by selling lifestyle and attitude; therefore, the customers pay the premium prices (Fischer &Roy, 2019). The company has also built a strong reputation through its employee welfare programs, such as paying fees for training its baristas. It also has training and education programs that improve the production technique sending the best baristas to new markets to continue the Starbucks culture and uphold its high-level global standards (Fischer &Roy, 2019). The production process is designed to minimize the waiting time and standardize it for the over 87,000 products they offer. Therefore Starbucks has enough tangible and intangible resources that have enabled it to venture into overseas markets.
They include economic, political, and institutional factors that attract companies to do business in the countries. Fischer and Roy (2019) note that the more these benefits complement the ownership advantages, the higher the likelihood of the success of the business. Starbucks found the opportunity to invest in a sustainable emerging Indian market that expects a 20% growth from the increasing disposable incomes of a westernized population. Furthermore, Starbucks was able to source different Tata companies exclusively securing raw materials, which is per its goal of increasing the intrinsic value of the chain. This also eradicates uncertainty and gives Starbucks a competitive advantage. The wages of its personnel in India are also much lower compared to the sales resulting in lower spending and higher returns on investment (Fischer &Roy, 2019).
These mainly focus on the transaction costs of the business looking to invest overseas. Companies should choose whether to outsource from external contractors or to internalize the process. Fischer and Roy (2019) notes that external outsourcing is feared because when control is low the institutional environment in the target country poses a challenge. The Starbucks model of business focuses on service; therefore, its core competencies are shifted towards capabilities such as the knowledge of baristas. Partnering becomes essential when venturing into new complicated markets, and thus Starbucks brought some internalization advantages as Tata added market knowledge and strategic networks.
Starbucks has therefore used this FDI and Joint venture strategies to penetrate and establish its business in the Indian markets successfully.
Problems faced by Starbucks in India
The main problem encountered was a different culture since Indians prefer Tea to coffee. Tata Starbucks had been serving coffee in its Indian stores since 2012, but with the acquisition of Teavana, Starbucks introduced Tea in all the 88 stores in India in 2017. This, together with problems related to real estate, has been diminishing Starbucks` profits in its Indian market.
Starbucks in China
Starbucks entry strategy in china
Starbucks entered the Chinese market in 2014 and started the business in Taiwan through a joint venture with Uni-president a Chinese food, and Beverage Corporation (Chang et al., 2014). The joint venture was beneficial to Starbucks since the Uni-president is already familiar with the political, competitive, cultural, language, and business systems of Taiwan. Chang et al. (2014) note that the company decided to source material locally from the Chinese markets instead of importing from the United States. President Starbucks Coffee Taiwan limited does the marketing and distribution of the products while the Uni-president Corporation is responsible for its manufacture. Starbucks had to train the workers on the technical methods of production for its wide array of different products. Uni-president Corporation saved Starbucks time and resources required to learn about various cultural differences in Taiwan (Chang et al., 2014). Furthermore, the joint venture allowed risk sharing between the two corporations, which would have been a hindrance from the entry into the Chinese markets.
Opportunities in China
A Joint venture
The joint venture with Uni-president foods has opened up many opportunities that aided in the penetration of the Taiwan market. Firstly Starbucks saved on exporting costs by allowing local sourcing of the raw materials. Local supply also gives reliability per the internalization goal of the O.L.I. Framework.
Understanding of the demographic culture
The Uni-President Corporation had a deeper understanding of the Chinese culture about coffee drinking as it had established itself in Taiwan for some time. According to Chang et al. (2014), 75% of Chinese people drink a cup of coffee every day. Therefore they had to know if the population where the stores were located was more likely to spend more on high-end coffee than to buying from a local coffee shop. Starbucks cafes offered more than mere coffee since they provide an ambiance where people can interact and even work. They also had to learn about some habits of the target Starbuck's clientele, for instance, keeping in mind that in some areas such as city centers, the customers would rather have their coffee on the go owing to a busy schedule.
Taiwan had a stable economy at the time of the Starbucks establishment. Taiwan's G.D.P. was speculated to grow in the new future, and therefore Starbucks was sure to be welcomed to a market of a people with a high purchasing power.
Favorable political climate
China's political ideologies promote foreign direct investment to foster good political and economic ties with overseas. This provided an excellent political environment for the establishment of Starbucks in Taiwan. Taiwan did not have many political rows at the time of the establishment of Starbucks.
Strategic Geographical location
Starbuck`s start up in Taiwan was imperative because of its strategic Asia Pacific geolocation and the proximity to supplies (Chang et al., 2014). Since the company only trades with suppliers who are audited by the C.A.F.E. practices, fair-trade, and other externally audited companies, their position made shipping and importing costs more manageable. Secondly, Chang et al. (2014) note that Starbucks setting up operations in Taipei allowed it to receive more foot traffic from the city and made it more visible for marketing purposes. Starbucks targeted urban areas such as near businesses and universities where the where demand for coffee was higher.
Availability of Labor
A broad labor market in Taiwan from a vast aging population was available for employment at Starbucks. Chang et al. (2014) note that in china older people took up jobs at supermarkets, convenience stores, and fast food joints to postpone their retirement ages. Furthermore, this aging population worked with as much enthusiasm as the younger generation for they needed to sustain some members such as their recently graduated children who were unemployed following the low wages by Chinese companies. Starbucks was allowed to hire baristas from already established markets who had the technical know-how who would, in turn, teach more baristas. Also, Taiwan allowed high automation of the production process to increase the efficiency and standardization of some of the Starbucks popular products (Chang et al., 2014).
Problems encountered in china
The Chinese tea culture involved tea parties of large groups of people of up to 10 people in contrast to the western culture of few people at a table. Starbucks, therefore, had to design store layouts that would accommodate such large groups without strain (Flanagan, 2016). Another incidence of cultural misunderstanding was when Starbucks opened a store at the Forbidden City in Beijing, China. Flanagan (2016) argues that the move was perceived as capital imperialism and public uproar led to the closure of the Starbucks store at the Forbidden City.
Court rows over trademarks
One of the problems Starbucks faced while entering the Chinese market were trademark rights infringement by unfair competitors. The introduction of an expensive brand of coffee created a vacuum for cheaper alternatives for people of lower means. This created a room for bad players to hitchhike by marketing products using Starbucks trademarks in china. Halper(2006) notes of one such court row where Starbucks sued two companies for infringing its trademarks to attract customers. The business used the name Xingbake which is the name that Starbucks uses in china and even sold drinks bearing Starbucks names like Frappuccino and Yukon-blend. They also made menus, business cards, cups, windows, and receipts with the Starbucks logo. Starbucks, however, won the case, which was determined by the Shanghai and Qingdao courts. The courts found that the right infringements had occurred and ruled for Starbucks on all grounds (Halper, 2006).
Starbucks in the United Kingdom
The United Kingdom café industry experienced a turnover of $7.2 billion in revenue in the year 2014. Starbucks entered the U.K. market after the acquisition of 65 Seattle Coffee Company London based stores in 1998. Today Starbucks had over 900 stores in the U.K. in 2012, and its success in the United Kingdom was primarily because Starbucks was able to keep up with U.K.'s popular culture and preferences. Starbucks Coffee Company U.K. is the company subsidiary which acted as a springboard to venture in the U.K. market. Since the Seattle coffee company had a greater outreach and an understanding of the U.K. market, Starbucks did not struggle in penetrating the market. The entry was a milestone in its international expansion because today, Starbucks is a market leader in the U.K.
Opportunities in the U.K
Room for expansion
Starbucks has an opportunity to expand its market in the U.K. through differentiation of service delivery. Starbucks wants to add to its 100 owned and licensed stores the U.K. and has already begun establishment in London. Together with a partnership with uber eats, the company looks to cut a niche in the ecommerce business in the U.K.
Problems Starbucks faced in the United Kingdom
Negative Impacts of due to political uncertainty
In 2016 after the Brexit, Starbucks experienced a 61% profit slump in its profits from £34.2m to £13.4m (Rodionova, 2017). According to Rodionova (2017), the Brexit reduced consumer confidence and hence, the reduction in profits for Starbucks in the U.K. Moreover, the growth slowed from 3.8 to 1 percent during this period. Such political changes have been detrimental to the growth of the corporation in the British markets.
Court laws on tax evasion
Starbucks has been receiving an upheaval owing to its low volume of taxes not only in the United Kingdom alone but also in other markets. The company paid 4.5 million euros in taxes despite making profits to the tune of 162 million euros in the year 2018. This was a 2.8 percent tax, while the British government requires corporations to pay 19 percent of charges of the total profits. Starbuck's complex business model makes the correct calculation of taxes hard because it runs a business in subsidiaries.
Summing up Starbucks had to employ various strategies such as joint ventures and acquisitions when entering various markets. Today Starbucks runs subsidiaries and licenses franchises to effectively manage business overseas. These methods have enabled the corporation to grown into a market leader in the various overseas markets and at home in the USA.
How would you have done things differently?
For the U.K. market, I would have run Starbucks as a joint venture to reduce consumer bias on the foreign brand. The perception of the brand to the public is crucial, and I believe that if the British saw the brand as one of their own, there would be a reduction in the 61% profit slump. Another thing I might have done differently would be the desaturation of the Starbucks stores in the United States. The saturation of Starbucks cafes has diminished growth in profits per store since they are too close to each other. Keeping in mind that each store has recurrent costs in terms of real estate and operational costs, saturation reduces the overall profits for Starbucks. Furthermore, I would expand the ecommerce business to compensate for the reduced physical stores. As people in urban areas get busier every day, more people would prefer their cup of coffee delivered to their offices than having to walk into a physical store. Ecommerce is growing exponentially, and Starbucks ought to invest more in it.
What new threats or opportunities may be encountered?
New Threats that are being encountered by Starbucks in its foreign direct investment are such as
Some threats that face Starbucks are such as the growing stiff competition in the markets. More prominent fast-food corporations such as Dunkin donuts and Mc Donald's have been growing and offer similar products. Moreover, Starbucks faces competition from other smaller coffeehouses that sell products at a more subsidized rate.
Health awareness trends
More people are realizing the benefits of healthy living and are avoiding sugar-related products. This trend has been on the rise as people in first-world economies move to healthier food options to combat the increase in cases of cancer and obesity. This could be a possible threat to the sales of Starbucks as it offers products that have high sugar content.
Would it be worthwhile to invest more money in this venture?
Yes, Starbucks still has more growth potential, especially in the European, Middle East, and African markets. With globalization, more people still perceive western products to be of superior quality and want to establish their status quo by relating to products such as those of Starbucks. I, therefore, believe creating new stores in this market would realize Starbucks' growth with time.
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Halper, A. (2006). Starbucks Wars: Chinese Courts Say “No Hitch-Hiking Allowed.” The China Quarterly, 188, 1155–1163. doi: 10.1017/s0305741006000725
Rodionova, Z. (2017, April 13). Starbucks is the latest company to comment on how Brexit is impacting them. Retrieved November 9, 2019, from https://www.independent.co.uk/news/business/news/starbucks-brexit-blame-profit-slump-61-per-cent-coffee-shop-2016-a7682636.html.
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Figure 1.Starbuck`s product mix
Figure 2.Starbucks revenue from company owned and Licensed stores in 2018
Figure 3.The OLI framework of the eclectic paradigm