Starbucks International Operations - Essay Example

 A REPORT ON STARBUCKS’ MARKET ENTRY INTO ONE OF THREE COUNTRIES: SWEDEN, NIGERIA OR BULGARIA Report Introduction: Starbucks is a retail coffee outlet that has emerged as one of the Fortune 500 companies in 2003. It has been pursuing a strategy of international expansion in order to promote growth. This is because while the domestic American market has offered it the maximum profits so far, this market is being saturated and if the Company is to continue to experience growth, it needs to expand internationally. There are some countries where Starbucks has already established its presence, such as Japan, Israel, China and some European and Arab countries. This Report analyzes the feasibility of Starbucks continuing its international expansion through selection of one of the three following countries: (a) Sweden (b) Nigeria and (c) Bulgaria. Sweden is an affluent European nation that is a part of the European Union, Bulgaria is a East European nation that has a much lower per capita income and is not yet a member of the European Union, although it is provisionally set to become one in 2007, while Nigeria is an African antion that is the poorest among the three countries. This Report will select one of these countries as potentially the best country that Starbucks could consider entering and then outline an entry proposal strategy that Starbucks could apply in order to derive the best benefits from that potential market. An Analysis of the Three Countries: Sweden: In terms of worldwide coffee consumption, Scandanavian countries (Finland, Denmark, Sweden and Norway) “continue to be the areas with the highest consumption (Reporter, 2007). For this reason, Sweden offers enormous potential for Starbucks coffee because it is one of the highest per capita coffee consuming countries in the world, which is estimated at 10 kilos for an 8 million population. (McCabe, 1994). According to Datamonitor reports, the Scandanavians are coffee fiends and the average Dane drank his/her way through 7.5 kilos of coffee in 2002, which is about 75 regular sized cups of coffee (www.beveragedaily.com). Sweden follows this trend closely and one of the reasons that has been put forward for high consumption of hot coffee is the cold weather in the country. Additionally, the Datamonitor report states that this trend could “partly be explained by high alcohol prices – these mean caffeine can be a far more cost effective way of getting wired than drinking” since coffee is also much cheaper (www.beveragedaily.com). However, there is one aspect that must be taken into consideration in countries such as Sweden, which are established coffee drinkers such as France and Italy. Firstly, there is the likelihood of competition from local coffee chains that have already established themselves successfully with a loyal customer base. Secondly, the scope for growth in such markets is restricted, largely because the demand for coffee is relatively inelastic and is unlikely to change much with significant changes in prices.(OXFAM Report). However, of late, there is also a trend emerging in countries of Europe such as Sweden that are established coffee drinkers, to heed the negative effects of caffeine, thus turning reducing coffee consumption in favor of new age beverages such as herb and juice based drinks and iced tea and coffee. These are emerging as new markets where there is little likelihood of reaching saturation point any time in the near future.(www.nutraingredients.com). Hence, if Starbucks proposes to enter this market, it would have to target itself into this new market niche and focus on its cold coffee rather than offering its traditional espresso, for which consumption is declining in Sweden. Another important aspect that must be considered by Starbucks is the question of existing competition in the Swedish market. On a total, there are only about 10 roasters that supply the entire Swedish market, of which 5 regional roasters hold 2.6% of the market while the other 5 roasters supply the rest of the market. Two of the largest coffee producers are Kraft General Foods and Lofbergs Lilla.(McCabe, 1994). However, there are several other independent and coffee chain competitors as well. Apart from Kraft and Lofbergs, one of these competitors is One-Café, a Swedish-Danish company that is opening a coffee shop in September in Denmark’s hot tourist spots to sell Ugandan coffee, which is also proposed to be wrapped in banana fibres and sold as a gift item.(New Vision, 2007). The superiority of Ugandan coffee is likely to make this venture successful by drawing discerning Swedish coffee drinkers. Another strong competitor could be Wayne’s Coffee, which owns 45 outlets in Sweden and has entered into an agreement with a Finnish-Swedish telecom operator TeliaSonera AB to provide internet browsing services at its cafes.(Nordic, 2005). This is likely to attract affluent Swedish customers, especially from the business community. 80% of the Swedish labor force is unionized, although there is also a counterpart employer’s organization for business. (www.infoplease.com). There is no fixed minimum wage, rather wages are set by collective bargaining, therefore the unionization of the work force would entail high wage scales for Starbucks in making its payments to employees. Real estate in Sweden is also expensive and would entail considerable investments from Starbucks in establishing its outlets, manning them and providing training to its employees. However, the Swedish economy is strong and unemployment is low.(www.news.bbc.co.uk). The country has a high per capital income of $41,060, with the capacity to spend on luxury items. It is also a member of the European Union, with the Common Agricultural Policy applicable within its borders. This has produced rich farmers and an industrial economy that is well developed. The Swedish social security system is also well established, which ensures that the people have high spending power, 90 percent of the population would be able to afford Starbucks’ products. It appears unlikely that the pro-American slant that is so attractive to Starbucks users in Asian countries would play a role in Sweden. Moreover, the fact that the country is neutral and does not form political alliances is a factor that is conducive to business in the region, especially with the public-private partnership between firms that is characteristic of the Swedish model. It is likely that Starbucks will be able to exist and function within a relatively stable economic and political environment in Sweden. The country’s infrastructure facilities are well developed and transportation, warehousing and communications should be to be a smooth operation for Starbucks in Sweden. Nigeria: In the case of Nigeria, Starbucks has the potential to start its retail outlets in a country that is keen to promote foreign investment, hence it is possible that there may be cooperation from the Government. However, the dangers that Starbucks might face include the disturbed political situation in the country and the inter faith rivalry between Muslims and Christians.(www.news.bbc.co.uk). Due to the ongoing violence between the two groups, there is an unstable environment that has been created in the country, with constant security problems. Another problem is the shaky infrastructure that results in frequent power cuts, which could be a problem for Starbucks in ensuring uninterrupted supply of its products (www.news.bbc.co.uk). While Nigeria has a good transportation network, with roads, railroads, airports and ports, these are not well maintained and Nigeria is plagued with congestion and deteriorating infrastructure. (www.photious.com). Thefts at warehouses, safe and timely transportation of goods, as well as having to pay bribes to acquire licenses, etc may all be potential problems that Starbucks could face in this country. The per capita income in Nigeria is only $560,(www.news.bbc.co.uk), which would automatically place services such as Starbucks out of reach of 80% of the population. However like other African countries such as Brazil or Uganda, Nigeria may possess a comparative advantage in terms of production of coffee since location and climate favor the growth of coffee beans, while cheap labor further aids in economies of scale in production. The African Development Bank is of the view that Nigeria offers great potential for coffee production, with about 40,000 hectares of suitable land being available and it proposes to disburse about $2 million in grants to enhance production, consumption, promotion and marketing of coffee.(Africa News Service, 2003). On this basis therefore, Nigeria may offer advantages to Starbucks in terms of economies in production that may be achieved, by ensuring a steady supply of superior coffee beans that may be used in its outlets. Moreover, its investments in acquiring stores and manning them is likely to be very low. However, security and poor infrastructure could prove to be a problem. Security in Nigeria is not assured, the country still ranks as one of the poorest countries in the world, with unemployment growing, corruption endemic and HIV/Aids on the rise (Crane, 2007). Fighting between religious groups and conflicts that break out in the oil delta is another significant problem, since there are large numbers of thefts of oil barrels as well as high levels of theft in other areas in Nigeria. One significant advantage is the large expatriate population in Nigeria comprised of individuals from several different countries, and these expats offer the best market for Starbucks products. The cost of living and per capita income is low for these expats as compared to other countries, added to which Nigeria also has the economies offered in the coffee industry by the facility to produce. As a result, this means that despite economies in production and establishment, Starbucks could find it difficult to be an economically non-viable concern, despite the large number of expatriates who are likely to frequent the Starbucks outlets. There is fierce competition and plenty of cheaper and superior variety coffee that is available and this could prove to be a disadvantage for Starbucks because it would either have to price its products much lower than the international standard or generate only a low volume of business from expatriates. Bulgaria: Bulgaria is a country that has made the transition to democracy and a market economy after years of being a communist state. After considerable struggle, it has managed to achieve a control of inflation and unemployment has fallen from the previously high figures of 20%. (www.news.bbc.co.uk). But the standard of living continues to be low and the per capita income is only $3450, which limits the scope of potential customers for Starbucks products. It is not yet a member of the European Union because of the concerns about corruption and crime that exist within its borders. Analysis of the coffee industry in Bulgaria has revealed that the most popular hot beverage in the country is coffee, accounting for 90% of sales and Euromonitor’s Reports reveal that there is a growing demand for specialist coffee shops in eastern Europe (Merrett,2006). According to the Euromonitor report, the reasons for the growing demand for coffee in Bulgaria have been summarized as follows: “The reason for the increase in the number of specialist coffee shops outlets was that these places became more popular as meeting places for young people and because the sub-sector was previously under-developed.” (Merrett, 2006). However, despite evidence of the growing popularity of coffee shop outlets, the number of such specialist chain coffee outlets stands at only 1.3% of the market, while independent stores dominate the sector (Merrett, 2006). Seven brands existed in 2005, therefore this is still a relatively undeveloped market as far as coffee chain outlets are considered, unlike the other European countries like Sweden, which are veteran coffee drinking nations. To add to the competition Starbucks might face in this market however, the British coffee chain, Costa Coffee entered the Bulgarian market at the end of 2006, in the country’s capital of Sofia, and plans to move further into the country in 2007.(Merrett, 2006). The company plans to enter the market through a franchisee, Coffee Lite. The leader in the Bulgarian market is however Kraft Foods International, which strengthened its market position in Bulgaria in 2001 by purchasing Bulgaria’s leading coffee supplier company. (www.foodnavigator.com). Strong labor unions are also a part of the Bulgarian economy, since it has made the transition from a Communist economy. This has been a problem for businesses in the region, who have to cope with these unions and their demands while simultaneously suffering from low productivity and environmental problems.(Whitford, 1998). Moreover, the fact that Bulgaria is not yet a member of the European Union but concerns exist about corruption and crime in the country is a factor that has to be taken into consideration by Starbucks in arriving at its decision. Bulgaria is provisionally to become a member of the European Union in 2007, however this is subject to reformation in areas such as agriculture and security, as well as strong efforts to fight corruption.(www.news.bbc.co.uk). Bulgaria has been criticized for failing to adopt a new anti corruption penal code and its inadequate efforts to combat crime. There is also a lack of press freedom in the country and some of the repression and lack of openness that characterized the earlier Communist regimes. The potential best market for Starbucks to enter: The belief in the beneficial effects of free trade that exists today is largely a function of the theory of comparative advantage that underlies the Ricardian model of international trade (Henderson, 1993:827). Comparative advantage is the ability possessed by a particular organization to produce and provide a particular good or service at a lower cost relative to competing goods. Therefore, comparative advantage possessed in one area of production indicates that the country has some favorable factors working on its behalf or has perfected specialized techniques in the production of that good, so that it is able to produce it more efficiently (Mankiw, 2007: 52). Starbucks ha sbeen successful in this aspect, because it has been able to acclimatize itself to its host country culture by varying the range and nature of its products. According to Porter (1996:64), “Competitive strategy is about being different.” Porter also states that “Strategy is the creation of a unique and valuable position, involving a different set of activities……different from rivals.” (page Porter 1996: 68). Applying this in the case of the coffee industry, it may therefore be noted that with more consumers focusing on ethical shopping and being willing to pay higher prices to ensure that poor farmers receive better returns, this has put pressure on multinational corporations to ensure a measure of corporate social responsibility in their operations. Therefore, when Starbucks considers moving its international operations into a poor country such as Nigeria, where coffee is being produced, its spacious stores and catering to the more affluent sections of the population could prove to be a damper on its image in the poor country. In keeping with this trend, Nestle has for example, introduced a fair trade instant coffee and claims that it is a commitment to help poor farmers, however organizations such as the World Development Movement have characterized it merely as a move to cash in on a growing market (BBC News Report, 2005). Efforts to promote sustainability have also been advocated by the Kraft Company which now pays a premium of 8 to 12 cents per pound of coffee that is grown in accordance with standards of sustainability set out by the Rainforest Alliance.(Wunderlich 2006:11). Kraft is a significant competitor for Starbucks in most countries, therefore Starbucks will necessarily be faced with higher costs and the need to maintain standards of sustainability in Nigeria. As pointed out in the OXFAM Report on coffee, 70% of coffee consumption is in the United States and developed European countries, which are OCED countries. Demand has reached a saturation point and there is not much elasticity in demand that may be expected in these markets. On this basis, the less mature markets such as Asia, Eastern Europe, South America and North Africa provide much better prospects for a growth in coffee consumption over the long term, since coffee is still primarily a luxury good in most of these countries.(Oxfam Report). Therefore, if Starbucks considers entering Sweden, it must face the fact that growth prospects for the future will be limited and competition will be fierce. Entry into the Swedish market would also be expensive from an operational point of view and the returns may not justify the substantial expenses that would have to be made in establishment and employee costs. This is because of the existing competition from other coffee outlets and the limited drawing power of Starbucks’ American image in Sweden. This would appear to suggest that Bulgaria and Nigeria may offer better prospects from a long term and costs point of view as compared to Sweden, where coffee consumption is likely to remain stable at what it is now. However, as also stated in the Oxfam Report, actual increase in consumption will depend upon the macroeconomic performance in those countries and the extent to which individual incomes rise. In view of the problems that have been cited above in Nigeria, with deteriorating infrastructure, constant theft, corruption and the political instability in the country, Starbucks is likely to face more problems in setting up in Nigeria. The availability of cheaper products will also severely restrict the markets available to Starbucks in Nigeria. There are also problems with corruption in Bulgaria and the lack of a free press. However, as compared to Nigeria it is better developed, with a higher per capita income. Moreover, the popularity of coffee and the American capitalist image among young people could prove to be a big draw. When Bulgaria becomes a member of the European Union, it is likely to benefit from free trade and European markets. Starbucks’ decision to enter Russia has been criticized as a move made too late to try and capture an already congested market. (Merrett, 2006). However, this move into Russia could prove to be an advantage, since some transfer of facilities and training to Bulgaria may also be possible, lowering initial costs of establishment. The most important factor that is in favor of the Bulgarian market is the fact that it is relatively untapped and shows significant growth potential from a long term point of view. There is evidence that consumers in Bulgaria are interested in coffee, especially hot coffee, and that its popularity is increasing. Being such a cold country and with the costs of alcohol being high, coffee could offer Bulgarians a cheap and warm substitute for alcohol and is likely to especially appeal to younger people who generally cannot afford high priced drinks. As compared to Sweden, Bulgaria offers economies of cost and the move to establish in Bulgaria is likely to be much less expensive than a move into Sweden. Moreover, since the market itself is new and not clearly defined, consumers would not have fallen into product purchase patterns and the existing brands in Bulgaria are still not firmly established. This leaves Starbucks with enormous scope for brand building in the Bulgarian market, since it is like virgin territory that the Company can enter and build itself up. Some of the advantages inherent in being the first mover in a business opportunity are (a) technological leadership (b) pre-emption of assets and (c) buyer switching costs. However, there are also disadvantages associated with being the first mover, notably market uncertainty and shifts, as well as incumbent inertia and free rider effects. Starbucks is fortunate in some aspects that it is not the first entrant, because it has not been subjected to market uncertainty and there is sufficient evidence available to indicate that there is growing popularity for coffee in Bulgaria, which makes an investment in this area likely to succeed, if other aspects are also well planned. Therefore Bulgaria should be the selected country for Starbucks to establish itself next. Entry strategy: The best entry strategy in Bulgaria would be as a wholly owned subsidiary, in order to derive the maximum benefits. Bulgaria could be Starbucks’ pilot project in East Europe and can form a base from which it can expand into other east European countries that are likely to benefit economically in the neat future from becoming members of the European Union. In this way, Starbucks can avail of the full benefits in the long term potential that exists in this market. It will be able to achieve and maintain a degree of control over its operations that will not be possible in a joint venture, where there could be too much scope for stealing of technology, corruption and inability to realize location. It may be necessary for Starbucks to work in association with local firms in Bulgaria who have some clout with the Government and will be able to secure licenses, etc, however, it is recommended that Starbucks select a good distribution and marketing firm for this purpose. In this way, they will also be able to gain information on the internal problems that may be peculiar to the Bulgarian economy and way of doing business. However, by starting its own subsidiary, Starbucks can retain full control over business operations and profits. Starbucks needs to start its entry strategy by carrying out pre-entry surveys. It could offer samples of its product to Bulgarian customers in targeted areas and find out how popular its product is likely to be if its coffee shop is opened in the local area. Such surveys can also include questions about customer preferences and tastes, especially among the Bulgarian youth. This will help Starbucks to carry out any modifications in its product offerings to suit the local market. Areas which could be targeted first are Sofia the capital city and surrounding areas. It would be a good strategy for Starbucks to focus upon reaching the younger segment of the population, hence its advertising and marketing strategy should be geared towards this section of the public. Since American music and culture are a big draw with the youth in Bulgaria who have just surface from the restrictions of communism, the stores could feature many of the symbols of American culture that are popular abroad. Once Bulgaria becomes a part of the European Union, there will an increased flow of traffic from other European countries and it is likely that such American symbols will be equally attractive to people from other east European countries as well. For example, Starbucks could consider setting up entertainment centers within its retail outlets, where extra large television screens could broadcast videos of American pop stars such as Eminem, Christina Aguilera, Justin Timberlake and other popular stars of today. Music is an integral part of youth culture and many east European countries have been experiencing a trend for increased number of bars and dance spots where rock bands play. While Starbucks cannot convert its outlet into a dicso, nevertheless, the music lends an ambience and atmosphere of youth which will attract Bulgarian youth. While retaining its no smoking policy, Starbucks could however offer smoking outside by placing tables on the street where patrons can enjoy coffee and smoke as well. Starbucks could also offer its health variety of hot drinks and cold coffee to appeal to the health conscious youth. The advertising for Starbucks retail outlets should present it as a successful American icon, a ubiquitous symbol of American culture. Products such as burgers and hot dogs could also be offered at Starbucks outlets. It is recommended that Starbucks follow a cautious policy in so far as expansion of its stores are concerned. While it could consider opening up several stores in the Sofia region, it would be advisable to watch the progress before venturing into other areas, especially since the Company will be starting out as a wholly owned subsidiary. The hiring of a good company is a vital necessity, to carry on negotiations with the Government to obtain necessary licenses to open up the outlets. It will also be necessary to hire a good warehouse in the Sofia region as well as arrange for timely transportation of products to the Starbucks outlets. Trucks and vans carrying products can be armored and properly secured to avoid theft along the way. Starbucks may have to resign itself to payment of some bribes initially if it has to set up in Bulgaria and this aspect will have to be factored into the costs. Pricing of Starbucks products also needs to be competitive if it is to survive in the long term. It may be better for the Company to offer its products at a slightly lower price at first, to suit the Bulgarian pocket as well as to gather its market. The Company needs to carry our market surveys to determine what prices are being offered by other retailers and coffee chain outlets and price its product accordingly. If Starbucks had been the first coffee chain to enter the Bulgarian market, then its products would have automatically enjoyed some pull among the public. However, since there are already some competing coffee chain shops that have already entered the Bulgarian market, Starbucks needs to examine the prices at which those outlets are offering their products, and price their products lower so that customers are drawn to Starbucks. Once the products have picked up and are enjoying popularity and as the economic situation in Bulgaria improves, the Company can consider increasing prices. Starbucks needs to advertise itself well if it is to succeed. It is proposed that after the sample offer stage is over, the Company enter into advertising of its product as soon as it has acquired its locations. While it is desirable that the flavor of the original American Starbucks is captured, it is recommended that the establishments in Bulgaria could be slightly smaller and more cozy, offering a similar atmosphere to a cool nightclub with colored lighting. Employees selected could be primarily young people who can be easily trained and will add to the youth oriented favor of the place. While the older population is also likely to be attracted to Starbucks because of the nature of its product, it is better for the Company to market segment itself towards the younger population, since older people are likely to favor the communist culture they are used to and may not be as attracted to the icons of American culture as young people are. Depending upon the kind of business it is able to generate, the Company could later consider introducing other features to attract the older population, such as health drinks and foods, as well as a separate section where older people can enjoy a more restful environment. The existing labor unions in Bulgaria may pose a problem for Starbucks, just as the likelihood of having to pay bribes. However, if Starbucks primarily employs students on a part time basis, it will enhance the youthful appearance of its outlets and at the same time, allow for some flexibility in dealing with payments. While it is likely that trained managers and personnel may be part of a union and this could result in higher costs for Starbucks, some savings could result from hiring part time personnel. Moreover, it is likely that Starbucks’ good treatment of its employees may be beneficial in addressing the concerns of the Unions, who may be happy with the employee incentive schemes that Starbucks already offers as a part of its operations worldwide. Therefore in conclusion, it must be emphasized that good preparation will be required of Starbucks is to effectively enter into Bulgaria. A great deal of preliminary research will be required, as well as sample surveys to acquaint the public with the product and to determine customer preferences. A good local Bulgarian company will have to be hired to function as a liaison and this selection must be made carefully, so that they can provide effective service in negotiating the hurdles of corruption and unions. The reason why a wholly owned subsidiary has been recommended is because of the long term potential in this market, which could also extend to other East European markets. While this may be a riskier proposition, it may be possible to address some of the risks by proper preparation and careful planning of the entry strategy. 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