Case 9-1 Starbucks Expands Abroad - Robert Cascio, PhD

Case 9-1 Starbucks Expands Abroad

From modest beginnings in Seattle's Pike Street Market, Starbucks Corporation has become a global marketing

phenomenon. Today, Starbucks is the world's leading spe

cialty coffee retailer, with 2008 sales of $10,8 billion.

Starbucks founder and chairman Howard Schultz and his

management team have used a variety of market entry

approaches-including direct ownership as well as licens

ing and franchising-to create an empire of more than

12,000 coffee

in 35 countries. In addition, Schultz has

licensed the Starbucks brand name to marketers of non

coffee products such as ice cream. The company is also

diversifying into movies and recorded music.

However, coffee remains Starbucks core business; to

reach the ambitious goal of 40,000 shops worldwide,

Starbucks is expanding aggressively in key countries e~

Exhibit 9-1). For example, at the of 2006, Starbucks .

had 67 branches in 21 German Cities; that number is .

expected to reach 100 within

few years. Starbucks

had set a higher growth t arget r Germany; those plans

had to be revised, howeveJ, after a joint venture with

retailer Karstadt-Quelle ,dissolved. Now Starbucks intends to pursue t~e'r" expansion independently.

Despite competition

local chains such as

Einstein, Cornelius Everke, the head of Starbucks' German

operations, says, see the potential of several hundred

coffee shops in Germany."

Starbuc,ks' relentless pursuit of new market opportuni

ties .strates the fact that most firms face a broad range of

.

'

'

Exhibit 9-1: Starbucks opened a small coffee in Beijing's Forbidden City in 2000. In 2007, bowing to criticism that

of a Weste rn brand near the former imperial palace was disrespectful, Starbucks sed the hop. company still has more than 600 other locations in China. Source: Canca n Chu/Getty Images, c

FIGURE 9-1

Investment Cost of Market Entry Strategies

strategy alternatives. In the last c.hapter, we examined the com pany ell in develop'ed

without

~

exporting and importing as '

exploif global

cant

tation:You. learn

'

the strategic

. \'

f

.;: market opportunities.

r;for

other options available

Schultz in. cQntinuation

companies whose business models clude a

- , ., . of Case 9-1 at ie ndQf the .chapter. This the issue

ponent or store experience, exporting (in

. at Starbucks is aoing.To

,tent that

jeCtive

. .' sense) is not the best way to go global." this ?chapter, '

entering the ma rket is ?to achieve penetration, execu

-v we go beyond export ing to discuss seve ral additional

entry mode options that form a contin uum. As shown in

Figure 9-1, the level of

risk, and financial "

tives at global companies are advised cODsid er a mass-market 'ind~set. This may well ma n

dati:~ an ada ptation strategy, l ' For.mulating a market

.

'. ..

. , ,.

reward increases as a company moves from market entry strategies such as licensing to joint ventures and, ulti mately, various forms of investment.

When a global company seeks to enter a developing country market, there is an add itional strategy issue to

entry strategy means that

gement must decide

which option or options to use in Uing

tunitie ~

outside the home country.The

r"market e ntry

strategy company x~cutives choose will depend o n

their vision, attitude toward risk, much investment

address: whether to replicate the strategy that served

capital is available,and how much control is soug ht .

i~;?. LICENSING

".

" Licensing is a contractual aJTangement whereby one company (the licensor) makes a legally pro

tected asset available to another company (the licensee) in exchange for royalties, license fees, or

:some other form of compensation. 2 The licensed asset may be a brand name, company name,

patent, trade secret, or product formulation. Licensing is widely used in the fas hion industry. For

~xample, the namesake companies associated with Bill Blass, Hugo Boss, and other global design

lCons typically generate more revenue fro m licensing deals for jeans, fragrances, and watches than

their high-priced couture lines. Organizations as diverse as Disney, Caterpillar Inc., the

~tional Basketball Association, and Coca-Cola also make extensive use of licensing. None is an

,!)avid Arnold, The Mirage of Global Markets; How Globalizing Companies Can Succeed as Markets Localize (Upper

~Ie er, NJ: Prentice Hall, 2004), pp. 78-79.

n R. Root, Entry Strategies for International Markets (New ork: Lexington Books, 1994), p. 107.

265

.

Starbucks has also been successfu l in other European countries,

the United Kingdom and Ireland. This success comes

despite competition from local

such as Ireland's Insomnia

Coffee Company and Bewley's and the fact that per capita con

sumption of roasted coffee in the two countries is the lowest in

Europe. In January 2004, Starbucks opened its first outlets in Paris.

CEO Howard Sch ultz acknowledged that the decision to target

France was a gutsy move; relations between the United States and

France had been strained because of political differences regarding

Presi dent Bush's Iraq policy. Moreover,

culture has long been

an entrenched part of the city's heritage and identity. The French

prefer dark espresso, and the conventional wisdom is that

Americans don't know what good coffee is. As one Frenchman put

It, "American coffee, only water. We call is jus des chaussette

'sock Juice.'"

Not su rpri singly, Greater China- including the mainland,

Hong Kong, and Taiwdn - -represents another strategic growth

market for Starbucks. Starting Wit h one store Beijing at the

China World Trade Center that opened in 1999, Starbucks now

has more than 600 locations. Starbucks has faced several different

types of challenges in this part of th e world. First of all, govern

ment regulation s forced the company to partner with local firms.

After the regulations were eased, Starbucks stepped up its rate of

expansion, focusing on metropolises such as

and Shanghai.

Another challenge comes from the traditional Chinese tea

house. Indeed one rival, Real Brewed Tea, aims to be "the Starbucks

of tea ." A related challenge is the perceptions and preferences of

.' the Chinese, who do not care for coffee. Those who had tasted

coffee were only familiar with the instant

Faced with one of

global marketing's most fundamental questions-adapt offerings

for local appeal or attempt to change local tastes-Starbucks hopes

. 0 educate the Chinese about coffee.

. Chinese consumers exhibit different behavior patterns than in Starbucks' other locations. For one thing, most orders are con

sumed in the cafes; in the United States, by contrast, most patrons

...order drinks for carryout. (In the United States, Starbucks is open \ng hundreds of new outlets with drive-through service.) Also,

~tore traffic in China is heaviest in the afternoon. This behavior is

~onsistent with Starbucks' research findings, which suggest that

.?the number-one reason the Chinese go to gather.

is to have a place

.

as a result of the global economic downturn,

ash-strapped consumers were cutting back on non-essential pur

ases. The notion of a latte" seemed out of step with the

es, and some perceived Starbucks' premium brand image as a

bility. Even before the economy nosedlved, Schultz had circu

ted a memo to senior executives titled "The Commoditization of

e Starbucks Experience ." In the memo, Schultz warned that

.er-aggressive market expansion was compromising the com . brand experience.

In part, the memo was a response to unofficial Web sites and

..' s such as starbucksgossip .com w here customer and employee

complaints and company information were

To better

connect With its customers, Starbucks created a SOCIal media Web

site known as MyStarbucksldea .com (MSI). Within months of MSI's

launch in 2008, nearly 75,000 ideas had been submitted. Forrester

Research recognized Starbucks' social media initiative with a

Grandswell award in the "Embracing" category. But Starbucks also

stepped up efforts to communicate with the general public using

traditional media. Working With the BBDO advertising agency,

Starbucks launched a corporate branding cam paign that was

timed to coincide with a major revamping of its food offerings.

Full-page print ads in The New York Times and USA Today were

keyed to the tagline "It's Not Just Coffee. s Starbucks."

Sensing a window of opportunity, McDonald's executives are

proceeding With plans to roll out McCafe, a new branded coffee

concept featuring cappuccino and other coffee drinks at

s

that are significantly lower than Starbucks'. At a Starbucks In Paris,

for example, a cappuccino is 4.00 ($6.00); a comparable

at

McCafe is 2.00 or 2 .50. McCafes feature sophistICated breWing

equipment and special coffee blends.

In Europe, Starbucks currently has about 1,300 locations.

McDonald's plans for a total of 1,200 McCafes by the end of

2009. McCafes can currently be found in Ireland, Germany, RUSSia,

and Italy; France and Austria are next. Some McCafes are located

inside existing McDonald's stores; others are freestanding locations

near th e regular restaurants.

Case 9-1 Discussion Questions

1. In the United States, about two-thirds of Starbucks outlets

are company owned; the remaining one-third are operated

by licensees. Outside the United States, the proportions

are reversed: about two-thirds are run by licensees or

partnerships in which Starbucks has equity stakes. What

is the explanation for the two different market expansion

strategi es?

2. In response to the economic downturn, Starbucks recently

launched a new line of instant coffee called VIA Ready Brew.

The company also developed a breakfast value meal that

costs less than $4. Do you agree with these decisions?

3. In the long run, which company is more likely to win the

global "coffee wars," Starbucks or McDonald's?

Sources: Andrew Ward. "Why Schultz Has Caused a Stir at Starbucks:'

Financial Times (February 26, 2007), p. 21; Janet Adamy. "Different Brew:

Eyeing a Billion Tea Drinkers, Starbucks Pours on in China," The Wall

Street Journal (November 29, 2006). pp. A I. A 12: Gerhard Hegmann and

Birgit Dengel, ?'Starbuck.s Looks to Step Up Openings in Germany."

Financial Times (September 5. 2006). p. 23; Steven Gray, '''Fill 'Er Up

With

The Wall Street Journal (January 2006), pp. A9. A10: John

Murray Brown and Jenny Wiggins. "Coffee Empire Expands Reach by

Pressing Its Luck in Ireland," Financial Times (December 15, 2005). p. 21;

Gray and Ethan Smith. "New Grind: At Starbucks. a Blend of Coffee and

Music Creates a Potent

The Wall Street Journal (Jul y 19, 2005).

pp. A I. AII : Noelle Knox. "Paris Starbucks Hopes to Prove U.S. Coffee

Isn't 'SockJuice:" USA Today (January 16.2004), p. 3B.

293 ,, ii

Warren J. Keegan

Lubin Graduate School of Business Pace University-New York City and Westchester, New York

Mark C. Green

Department of Business Administration and Economics Simpson College- Indianola, Iowa

Upper Saddle River Munich Paris Montreal Toronto

Singapore Taipei Tokyo

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