International Business Paper

* Name Withheld * INTB 620 Case 2 Starbuck’s International Expansion

November 19, 2012

In this case we reviewed an interview with the Starbucks Chief Executive Office, Orin

Smith dealing with the coffee store chain’s experience with international expansion. Starbuck’s

has achieved major operating in the United States since its beginnings. When Orin Smith joined

the corporation in 1990 the chain only operated 45 stores in the Pacific North West which have

grown to 7200 stores worldwide (1650 international stores, and 5550 in the US). Some of its

key advantages it has had in the US that supported its growth included: 1) operating concepts

such a real estate strategy of finding the best corners in the best markets and opening stores, 2)

reliance on good employees with a strong emphasis on training to enhance the customer

experience and consistently delivery high quality productsi, and 3) provide a unique sit down

customer environment modeled after the espresso bars of Italy while including modern

conveniences such as wireless internet access. However, when it came to international

expansion, Starbucks did not have major success but instead had very mixed results and

challenges where overall its international operations not being profitable since 1996. Issues

related to Starbuck’s international expansion include the following:

- Fierce competition in existing and new markets

- High real estate costs in comparison to US costs

- Cultural differences impacting management, employee, and operating experiences

- Cultural differences related to customer tastes, product preferences, and image

- Financial risk and impacts of overexpansion into new markets

- Impacts due to changing economic conditions

Analysis

One of the issues Starbucks encounters in its international expansion is fierce

competition from other coffee shops. This issue appears in two forms with respect to

Starbucks. One form is that in many European markets similar stores open with lower cost

products. The other stores typically are undercutting Starbuck’s prices, e.g. a Tall Latte sold at

Caffe Nero, a London Competitor, vs. $2.93 at Starbucksii. This type of price competition

naturally has a negative impact on demand for Starbuck’s products if similar products are

available. Independent of price differences leading to fierce competition another related issue

is that it has been common for the Starbuck’s model to be copied in new markets. This poses a

significant dilemma as it pushes Starbucks to act and expand rapidly in markets in which they

would like to enter to stay ahead of copycat competitors.

Another issue faced by Starbuck’s is related to one of their key advantages that

contributed to their domestic success in the United States; High Real Estate costs. As described

in the article when using their strategy to find the best corners in the best markets they met

challenges being profitable. The example in this case was in the United Kingdom where despite

having great volume, the real estate costs were too high. Furthermore they face the issue of

being difficult to relocate after obtaining the high cost locations.

The real estate issue is also tied to a much larger issue that has Starbucks has faced

during their international expansion. Early on in their international expansion Starbucks

attempted to copy their approaches to operations and management. This proved to not be as

effective. Key problems with this approach included the fact the less familiarity with local real

estate meant they may have not be able to as effectively locations for opening stores. Lack of

local knowledge is a major issue. Similar, their approach to sending expatriate management

from the United States to operate the business was not effective because American

management are less familiar with the local culture and business as compared to locally hired

managers. As the article describes however, this issue was realized and Starbucks has began to

make increased use of local management.

Similarly, consideration for local tastes is another issue related to international

expansion. Interestingly, according to the article Starbucks has had success with being able to

sell a consistent product line in multiple regions with some tailoring. An example of this has

been that the coffee that is served in other countries is the same as the coffee sold in the US.

Tailoring has occurred by Starbucks recognizing local preferences such as increased emphasis on

food in some markets or tea in China. In fact this potential issue has turned into a benefit as it

allowed Starbucks to discover and experiment with new products that in one market that it can

introduce into others. A negative aspect with respect to customer perceptions however

involves the image of Starbucks as an American corporation overseas. This can have a severe

enough impact that can lead to the closing of stores such as what occurred in Israel. In other

areas where the Starbucks image may be perceived “corporate colonial imperialists” iii,

expansion approaches have to be carefully considered.

Other issues faced by Starbucks are that of overexpansion and impacts due to economic

downturns. In their experience in Japan they attempted to capitalize on successes and quickly

expanded to 500 stores but experienced a loss of $3.8M. As it was indicated in the article this

may have been due to both economic conditions as well as growing beyond their capabilities.

As economic conditions have worsened in Europe there becomes even more reason for

consumers to lower cost, similar alternatives.

Alternatives

In this article we learned about some of the existing approaches being used to address

the international expansion issues encountered by Orin Smith and Starbucks. Some of the

approaches included opening wholly owned stores, joint ventures with local corporations, hiring

local management, and tailoring products and services to local tastes and preferences. To help

address the issues that were presented several alternative strategies are presented.

1) License Sale of Starbucks Products before Store Expansion – In this alternative Starbuck

has a significant shift from existing expansion approaches. To enter new markets,

instead of opening new store locations that provide the Starbucks experience, Starbucks

instead licenses the sale of its products and equipment for the sale in non-Starbucks

coffee shops or other retail outlets. This is intended provide lower risk when entering

new markets as real estate would not be purchased and staff would not need to be

trained. Tailoring of products is dependent on what is ordered by the coffee store

owners. Starbucks would then monitor sales data and trends based on the orders that

are being placed by store owners to help evaluate where they may see success if

Starbucks stores were opened. The marketing and promotion of the licensed products is

determined by the store owner at the international store location.

2) Expansion through Franchise Opportunities – In this alternative Starbucks would in a

similar way to the first alternative attempt to reduce its risk by allowing potential store

owners to open franchises in the locations of their choice to sell Starbucks products. The

stores would be recognizable as Starbucks cafes allowing Starbucks to have a more

visible presence while reducing the corporation’s burden of obtaining real estate. The

franchise owners would be local to the area where the franchise is being opened.

Starbucks would extend its training to Franchise owners to allow them to leverage best

practices and to create similar customer experiences that have contributed to past

success.

3) Expansion through Joint Ventures – In this alternative, Starbucks would partner with

existing corporations in the countries in which they would like to expand. Starbucks

would utilize local management to support the selection of real estate and develop

marketing approaches and to tailor products based on customer preferences. Starbucks

would require training to allow them to leverage best practices and to create similar

customer experiences that have contributed to past success. Through working with the

joint venture partners, training would also be tailored to incorporate local culture and

customs.

Additionally, market selection is a key aspect to be considered. Two alternatives will be

discussed.

1) Mature, wealthy markets – Typically wealthier markets and countries with a strong

presence of coffee drinkers and cafes, and high incomes such as Western European

countries.

2) Emerging, growing markets – Typically markets with a growing middle and upper class,

less presence of cafes and café culture.

Decision Criteria

In analyzing the alternative approaches Starbuck’s can use when considering

international expansion, it is important to considering certain decision criteria. The following

criteria will be considered.

1) Does the alternative allow Starbucks to control the store and customer experience? – In

this criteria we mainly focus on the amount of control Starbucks has over how its

products and services will be perceived. One of Starbuck’s advantages has been its store

experience which allowed it to stand out from other competitors and is the reason it has

been copied in some markets.

2) Does the alternative add significant financial risk? – In this criteria financial aspects of

implementing the alternative are considered. Currently the international operations are

not turning a profit and have led to store closures. Past decisions have led Starbucks to

be stuck in certain high cost areas such as the UK expansion which has proved to be

difficult to relocate from high costs, low profitability areas.

3) Does the alternative address long term competitiveness? – Though financial

considerations are important, if an approach does not consider how Starbuck’s can

address the competitive nature of the industry, it would not be a viable approach. The

example of this is coffee chains modeled after Starbucks rapidly expanding in new

markets.

Analysis of Alternatives

Using the decision criteria discussed above, each alternative can be analyzed to

determine if it is appropriate for Starbucks for international expansion.

Expansion Approach:

1) License Sale of Starbucks Products before Store Expansion

a. Does the alternative allow Starbucks to control the store and customer

experience? – This alternative does not provide Starbucks with any control over

the store and customer experience. How Starbucks products are marketed is left

to the store owner and can have the potential to negatively impact the Starbucks

image. The alternative also minimizes the interaction between the corporations

that may want to tailor products for other markets. Because it is up to the

smaller store owner, there is less feedback to influence product development

decisions.

b. Does the alternative add significant financial risk? – This alternative minimizes

financial risks to Starbucks as there is no risk while acquiring costly real estate for

the opening of new stores, training employees, and maintaining operations.

c. Does the alternative address long term competitiveness? – Though this

alternative has small financial risk for entering new markets, it has a negative

impact on Starbuck’s ability to achieve long term competitiveness. Because

there are issues with fierce competition from chains copying Starbucks and

rapidly expanding into new markets, Starbucks would effectively never gain

competitive advantage since it would not have any strong presence to promote

their products.

2) Expansion through Franchise Opportunities

a. Does the alternative allow Starbucks to control the store and customer

experience? – This alternative allows Starbucks to have more influence on the

promotion of its products. The Franchise would provide a strong presence as

compared with licensing and a stronger relationship with a Franchisee would also

allow Starbucks the ability to make better product development decisions for the

target markets. However without having complete control of the store locations

Starbucks cannot enforce the creation of a common customer experience as it

can through the training it utilizes for all employees in its domestic operations.

b. Does the alternative add significant financial risk? – This alternative significantly

reduces financial risks to Starbucks as the Franchise is assuming the risk when

acquiring real estate and operating the store.

c. Does the alternative address long term competitiveness? – There are negative

aspects and risks associated with this approach as well. In the very competitive

marketplace Starbucks would be taking a risk by not having more control because

it can potentially pass on knowledge and expertise what may become a future

competitor.

3) Expansion through Joint Ventures

a. Does the alternative allow Starbucks to control the store and customer

experience? – This alternative provides the most flexibility for Starbucks to

control the store and customer experience. Through a joint venture its stores will

be fully integrated into the corporation, similar to how Starbucks operates

domestically. Starbucks will be able to control and tailor the products and

services that are sold and furthermore will be able to ensure employees are

trained to corporate standards. Because this alternative is a joint venture,

Starbucks utilizes a key lesson learned of employing a management, staff, and

marketing that better understands business operations, real estate, and

customer preferences in the target market.

b. Does the alternative add significant financial risk? – This alternative can add

significant financial risk as Starbucks Corporation will still need to finance the

purchase or rental of store locations.

c. Does the alternative address long term competitiveness? – This alternative is

effective in allowing Starbucks to address long term competitiveness because it

will allow Starbuck to make the decisions on store opening and control rate of

growth. This option gives Starbucks the flexibility to rapidly enter a market to

combat emerging competition. With long term vision in mind it may help to

favor quick expansion by opening store locations and establishing a strong

presence to combat competition early.

Market Selection:

1) Mature, wealthy markets

a. Does the alternative allow Starbucks to control the store and customer

experience? – This alternative may be slightly impacted by the market location. If

there is an established coffee culture in a mature market there may be more of

an expectation to conform to the existing culture, thus restricting how Starbuck’s

may choose to operate and develop its store and customer experience.

b. Does the alternative add significant financial risk? – For this decision criteria this

alternative is partially favorable as there may be a customer base that can more

easily afford the Starbucks products. Alternatively the established markets also

have the issues associated with higher real estate costs which can reduce the

profitability of entering those markets.

c. Does the alternative address long term competitiveness? – This alternative may

have more challenges with respect to long term competitiveness. These markets

may attract or have already attracted competition due to the customer base

having higher incomes or because of an existing café culture. Because of this,

Starbuck’s may have more challenges and risk with respect to growing and having

a strong position in the market.

2) Emerging, growing markets

a. Does the alternative allow Starbucks to control the store and customer

experience? – In an emerging market Starbucks may have a greater opportunity

to excel, primarily if there is a small or no café culture already present. In those

cases, Starbucks will have the opportunity to establish the café culture and a

dominant position.

b. Does the alternative add significant financial risk? – Because this alternative

focuses on emerging markets with growing middle and upper classes there is not

a significant risk as store locations can be focused towards wealthier areas of

cities and grow outward over the long term. The potential for lower real estate

costs also make this alternative attractive.

c. Does the alternative address long term competitiveness? – This alternative

provides a significant advantage to competitiveness as it allows Starbucks to

establish early market dominance and become the major café culture of the

areas it is entering.

Preferred Alternatives

When evaluating the alternatives against decision criteria there are several which would

be worthwhile for international expansion. These select preferred alternatives would be used in

combination with each other.

Regarding the expansion approach, the preferred alternative would be to expand

through the use of Joint Ventures. The licensing and franchising alternatives provided less risk

financially which may have helped reduce Starbucks existing exposure to financial losses

however the ability to address long term competitive that is more possible through joint

ventures and control of store locations is a more critical decision criteria. As identified in the

article there are large markets such as China and other populous Asian countries that present a

significant opportunity. Starbucks should have a long term vision where becoming the early

dominant leader can leader significant growth and profitability. The ability to control the

customer experiences in their expansion and the rate of opening of opening new stores will

allow them to be more competitive.

For Market selection, the preferred alternative is to enter emerging markets. The more

mature markets with café cultures and higher incomes may appear more attractive but the

intense existing competition can prove to more risky. Because of existing price pressures

already experienced in markets such as the UK and the existing culture and established

competitors either from traditional cafes or new competitors similar to Starbucks entering into

emerging markets is the more preferable alternative. As was mentioned in the expansion

approach, the alternatively that support larger growth long term and flexibility is more

attractive. Selecting a market that has a growing middle class that can afford Starbucks

products, has a nascent café culture, and lower cost real estate option in major areas will allow

Starbucks to grow and be dominant in markets with potential for growth.

In summary the recommendation is for Starbucks to identify emerging market countries

that do not have a significant café culture and existing competition and to own and operate

Starbucks cafes through partnership in a joint venture.

Implementation Plan

The recommendation for Starbucks to approach international expansion includes the following

steps.

Note: I included estimates for demographics and costs because I did not readily find figures

when researching Starbucks (demographic information, costs of opening stores internationally,

etc.) in documents such as their Annual Reportiv.

1) Select new country and cities for expansion based on demographics.

a. Countries that have large cities with at least 20,000 people earning greater than

$10,000 per year.

b. Countries that have underserved or highly fragmented café industry (no

competitor with more than 10% market share).

c. Country has at least 2 midsized food service industry corporations that can be

partnered with or acquired.

d. Timeline: Research and Determine 1 city in 1 country during Month 1.

2) Evaluate potential joint venture partners

a. Evaluate based on experience and reputation

b. Evaluate option to partner or acquire controlling stake

c. Timeline: Evaluate and form partnership by Month 3.

3) Prepare localized strategy and tailored training plan

a. Evaluate potential store opening locations

b. Develop product and store tailoring plan

c. Develop tailored training program

d. Timeline: Develop plan and programs, select location by Month 6

4) Construct initial locations and train staff

a. Construction of initial 5 store locations

b. Training of store opening staff and training locations

c. Timeline: Construction and training complete by Month 9.

5) Store opening

a. Focus on initial foot traffic as staff gains experience

b. Plan promotional events and advertising

c. Timeline: Store opened by month 10

6) Evaluate operating performance

a. Determine if store location should be moved

b. Begin planning expansion to 20 stores

c. Timeline: Evaluate perform by month 12

7) Expansion Year 2

a. Expand to 20 stores by month 24, 2 large cities

b. Revenue per year

b.i. 20,000 potential customer*20% market share per city

b.ii. Customers purchase 2 product average price $3 per day

b.iii. Customers visit stores 5 days a week, 52 weeks per year

b.iv. Expected revenue = 10000 x 20% x 2 x $3 x 5 x 52 x 2 cities = $12.48M per

year

8) Expansion Year 3

a. Expand to 60 stores by month 36, 6 large cities

b. Revenue per year

b.i. 20,000 potential customer*40% market share per city

b.ii. Customers purchase 2 product average price $3 per day

b.iii. Customers visit stores 5 days a week, 52 weeks per year

b.iv. Expected revenue = 20000 x 40% x 2 x $3 x 5 x 52 x 6 cities = $74.88M per

year

In summary the implementation plan provides for revenue generation in year 2 with significant

growth starting in year 3 as Starbucks becomes more established and popular, gaining increased

i � http://www.gaebler.com/Starbucks-Training-Program.htm

ii � http://voices.yahoo.com/starbucks-international-european-market-1391669.html?cat=3

iii � http://voices.yahoo.com/starbucks-international-european-market-1391669.html?cat=3

iv � http://services.corporate- ir.net/SEC/Document.Service?id=P3VybD1odHRwO i8vaXIuaW50Lndlc3RsYXdidXNpbmVzcy5jb20vZG9jdW1lbnQvdj EvMDAwMDgyOTIyNC0xMi0wMDAwMDcvZG9jL1N0YXJidWNrc18xMEtfMjAxMjExMTYucGRmJnR5cGU9MiZmbj1Td GFyYnVja3NfMTBLXzIwMTIxMTE2LnBkZg==