Starbucks. International Business Concept and Starbucks in Germany

Table of Contents

1 Introduction

2 Starbucks’ International strategies
2.1 Competitive Forces
2.2 Entry Strategies
2.3 Success factors
2.4 Problems of globalisation

3 Starbucks in Germany
3.1 German Coffee Market
3.1.1 Coffee Shop trend
3.1.2 Coffee - unquestioned front runner in the beverage consumption of the Germans
3.2 Starbucks’ Joint Venture with KarstadtQuelle AG

4 Conclusion

5 Appendix

6 Table of References

1 Introduction

Starbucks Corporation was founded in 1985 by Howard Schultz. The origins of Starbucks reach back to 1971, when the Starbucks Coffee Company was founded by three students in Seattle. These students, Gerald Baldwin, Gordon Bowker and Zev Siegl love coffee and tea. And this was the only reason why the set up the Starbucks Coffee Company. They just want to bring the best coffee in the world to Seattle. This time Starbucks only sold the coffee beans and the according coffee machines and mills. In the first ten years four more stores were set up. Howard Schultz, who was working in a Swedish house ware company this time, recognized the development and increasing demand of coffee mills of Starbucks.

Infected by his interest in this company he started his research in Starbucks. He often went to Seattle and always met the founders of Starbucks, trying to convince them to employ him. Howard Schultz, who had no idea about coffee, but a lot of knowledge about selling, stayed very obstinate and so finally in middle of 1982 he became a manager at Starbucks. Since he joined the company he started to learn as much about coffee as he could. Inspired from the Italian coffee culture, which he got know during a visit in Milan, he wanted to introduce a coffee bar culture in the United States.

After disagreements with his partners he decided to set up his own business. So, in 1985 he opened his first coffee bar in Seattle – Il Giornale. To get the capital he needed he spoke to 242 investors. 217 declined, but the others gave him the money to win the competition together with Starbucks.

In 1987 he could purchase the Starbucks Coffee Company and most important the brand name that he used for all his stores, as Starbucks was a more familiar brand to the Americans.

When he acquired Starbucks for US-$ 3.8 million the company had already 11 stores and about 100 employees. He kept almost all the employees because he also wanted to make Starbucks become a social company. So, he also paid more than the minimum wage, cares for good health insurances and even offered stock options to part-time employees. So it was no surprise that Starbucks had the lowest fluctuation rate among the restaurant and fast food business sector.

But today also some ex-employees mention that the good and social image of Starbucks is a fallacy, as there are long working hours and not many chances to be promoted. In 2001 managers from about 700 stores sue Starbucks for unpaid forced overtimes. Starbucks finally agreed to pay US-$ 18 million.

Howard Schultz’ strategy was to found as many stores as possible and also as fast as possible. He even paid up to twice of the local rents to get some good places for his stores and to beat the competition. Also he completely acquired already established coffee chains and stores. For instance, he spent US-$ 23 million for the COFFEE CONNECTION which owned 25 stores in Boston.

Coffee consumption is not very high in the USA. For instance, the consumption in Scandinavia is twice as high as in the USA. But since the 1990s it started to recover the peak from the ‘60s and ‘70s. As Starbucks was able to reserve this trend they had great success in the USA and the number of stores increased rapidly. Nowadays they have even more stores in the United States than McDonald’s. Worldwide Starbucks employs about 74’000 people (last reported count) in over 8337 stores right now. And international highlights are for example one Starbucks in Vienna just opposite the Hotel Sacher, which is very famous for the old Austrian coffee culture or a store in Tokyo with the highest sales of all Starbucks stores worldwide.

The majority of Starbucks’ sales were made with company-operated retail stores, but also 15% of the sales were made by specialty operations such as selling coffee beans to hotels and airlines or revenues from licensing agreements. Starbucks also has a joint venture with PepsiCo and an alliance with Dreyers Grand Ice Cream with whom they introduced the Frappuchino-line.

In 1995, when the US market almost reached saturation, Starbucks Coffee International was forced to concentrate on international operations.The strategy to enter a foreign market was mainly joint venture, in some markets they also used licensing as entry strategy. In 1995 the first joint venture was formed with SAZABY INC. to enter the Japanese market. More Asian-pacific countries and later European countries followed.

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2 Starbucks’ International strategies

Since the beginning of Starbucks an orientation towards growth was visible. After a constant growth within the USA a saturating market made it necessary to find alternatives in order not to stagnate. The result was an international focus for the company. In order to be successful in business, in a domestic as well as in a foreign market, different factors are of importance. These factors can be described and analyzed on the basis of Porter’s five forces model. Porter’s framework sees five major factors that influence a business: threat of substitute products, bargaining power of suppliers, bargaining power of purchasers, rivalry between competitors and entry barriers to a market.

2.1 Competitive Forces

Substitute products influence the demand for a company’s product. More substitutes offer a bigger choice for customers. As a result, with increasing price elasticity and given the same utility of a good, decreasing prices for substitutes will result in fewer sales. In a perfect market the competitor with the lowest price will attract all customers. To be successful, customers must be able to see a higher benefit from using a certain good in order to be willing to pay a higher price for it. A different sort of substitutes is the alternative use of money, so instead of going to a coffee house a cinema visit might be an alternative to spend money. However, most customers go to Starbucks to have a drink, and they will most likely not abandon a cinema visit for a cup of coffee which makes the threat of substitutes offering different experiences smaller.

Starbucks is not only a coffee house, but offers an experience. In relation to this substitutes have to be measured at the package Starbucks offers its customers: a huge variety of coffees, nice ambience, fancy decoration and wireless LAN access in most of its American and European stores. It is hard for a normal supermarket or coffee shop offering hot and/or cold beverages to imitate Starbucks, although e.g. in Britain different other retailers have a similar assortment, similar music, decoration and ethics, they cannot equal the brand of Starbucks and the image connected with it. Thus, Starbucks can ask for a premium for their offer. Problems appear when Starbucks is reduced to a coffee house. Then any other café is equal to Starbucks and cheapest price or habits coffee culture is the main factor for customers, especially in countries with a big coffee culture where Starbucks is new and scarce.

The bargaining power of suppliers is determined by their chances of influencing the price they get for their product. If suppliers are concentrated or few or if switching costs between suppliers are high, their influence is big.

Today as in the past years, coffee is the second-most traded commodity behind crude oil. In coffee industry, there are many small suppliers, competition is big and the products are exposed to global price fluctuations making it hard for farmers to make long-term calculations. A result of more countries starting to produce coffee prices slumped from over one US-dollar during the 1980’s to less than 50 US$ cents for one pound of coffee today. As there are only two sorts of coffee beans, Robusta and Arabica from which only the latter is being used for premium coffee, suppliers wanting to serve Starbucks have to create and maintain a high quality standard and offer good prices. As prices are so low, their profit margin is diminishingly small or they might even sell with loss. Power of suppliers therefore can be considered as weak. As a minimum means of protection Fair Trade coffee was established in the second half of the 20th century. It is a not-for-profit program that ensures coffee producers in poor countries to get a fair price for their goods. But despite Starbucks paying higher prices for their beans, Fair Trade contributes only to a diminishingly small part to Starbucks’ business^[1].

In return for a superior quality the Seattle company specially trains suppliers to meet their standards, takes samples to identify quality differences at early stages and, in addition to Fair Trade, pays prices above market average^[2] in order to maintain their quality standard and to have a good relationship towards their suppliers. But in regard of the expansion strategy of Starbucks preserving a constant supply of high quality coffee will become difficult. High quality coffee is a scarce resource and crops are naturally limited. Through this suppliers might gain a stronger position to negotiate with Starbucks and the coffee industry in general.

At the other end of the value chain are the customers. The normal customer who visits a retail store has no negotiating power. His price is fixed. Customers with a stronger position are those who demand large amounts giving them a better position. Starbucks deals with both types. Apart from the retail store customer Starbucks has got partnerships with big companies like Pepsi, Dreyers, Barnes & Noble etc. They are able to improve the image of Starbucks and have a strategic value as they helped develop new products and to increase Starbucks market share^[3]. Because of this they are able to make demands towards Starbucks and negotiate prices.

Apart from these factors competition is big in retailing business among coffee chains. The biggest competitor for Starbucks is McDonalds. They have a very big infrastructure, one of the largest networks in existence, but a different image. They have a rather minor image and their offer is still oriented at a fast satisfaction of needs. In contrast to this Starbucks offers an environment where spending time is the main point. Different coffee chains try to imitate Starbucks and are able to attract customers as their focus is a bit different. One of the biggest competitors, Canadian Second Cup, focussed on shopping malls but is expanding to single locations now as well. So in general competition is very big. Despite this fact Starbucks has managed to become the biggest player in this business, so not only their success in the USA is evident but a certain contribution of their international business is included in this success as well. So as there is hardly any power of suppliers, only few purchasers who are able to put pressure on Starbucks but big competition in combination with many different coffee cultures around the world their expansion strategy is very difficult.

Their huge international presence started with the saturation of the American market. Lack of experience in international business made it harder to initiate international expansion. Therefore the strategies of Starbucks have to be taken into account as well as the five factors influencing their business.

Furthermore certain risks can be identified when a company goes international.

- Strategic risks: The problems described by Porter can be seen as strategic risks. They are external threats a company has to foresee and react to but can hardly be influenced by a company. A company can only adapt to the environment by developing competences, acquiring know-how and by this being able to minimize strategic risks.
- Operational risks arise from within the company when doing business. A broken machine e.g. can be the cause for production problems or inadequate personnel might prevent a company from understanding customer needs.
- Political risks are immanent in the political system of a target country. State regulations, instability, etc. can prevent a company from being successful in foreign markets. Understanding and openness towards political influences is necessary in order to reduce difficulties beforehand.
- Environmental risks comprise negative environmental effects that have to be dealt with by a company, e.g. pollution or waste. This category seems to be of minor importance to a single Starbuck’s business unit, however, on a global scale, environmental concern has to be integrated into the strategy of Starbucks.^[4].

All these risks have to be dealt with. In order minimize the impact of occurrence, 4 different mitigation methods can be used helping to decrease uncertainty about a risk and at the same time prolonging the period for taking action against it. Four categories of mitigation strategies most often used are

- avoidance: a risk can be avoided if strategies with less risk and the same expected profit are chosen
- acceptance: is necessary if consequences of a decision are known
- control: a continuous monitoring and adaption process are the most common strategies to minimize risks and to cope with them effectively
- transfer: if a risk is visible the information should be made accessible to all partners of the companies in order to enable them to react. Sharing the risk relates to risk management, insurances, warranties or contractual risk shifting.^[5]

Graphic 1: International Risks and Mitigation Strategies

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source: own illustration

2.2 Entry Strategies

There are different forms of entry strategies to a foreign market. Modes of foreign production comprise licensing/franchising, contract manufacturing – being unsuitable for Starbucks’ business, joint ventures and wholly owned subsidiaries. The key element is to find the entry strategy that allows a company to benefit most from a given market potential.

In order to achieve this, several categories of factors have to be considered.

The first category is company factors consisting of international experience, resources, international strategies and flexibility. These factors are internal factors and can be influenced by a company in the long run. Factors that are related to the product and/or the customer are the second category. These are degree of newness, openness towards new products, need for service, etc. A last category consists of factors related to the target market, where market size, market potential, entry and trade barriers, competition and other factors are relevant.

How these factors can be dealt with is partly determined by the mode of entry to a market. Depending on the entry strategy, the way a market is accessed can be influenced. Key questions are ease of market access, control over foreign operations, costs and risks, possibility to gain market, customer and operational knowledge and experience, chances of winning competition and strategic fit.

[...]

^[1] Starbucks Coffee Company, http://mba.tuck.dartmouth.edu/pdf/2002-1-0023.pdf, [referred 10.11.2004].

^[2] STARBUCKS, FAIR TRADE, AND COFFEE SOCIAL RESPONSIBILITY, http://www.starbucks.com/aboutus/StarbucksAndFairTrade.pdf, [referred 10.11.2004].

^[3] Subdahara/Dutta, Starbucks’ International Operations, in: ICFAI Center for Management Research, p.3, 2003.

^[4] Subdahara/Dutta, Starbucks’ International Operations, in: ICFAI Center for Management Research, pp. 1-11, 2003.

^[5] Gibson/Walewski, Risks of International Projects: Reward or Folly?, http://www.cpbis.org/sloan/sloan_conference/tues_pm_s2_p2/s2_p2_track_b/GIBSON%20Handouts%20Session%202%20Part%20II%20Track%20B.pdf, p.4, [referred 05.11.2004].