Starbucks Failure in International Market - Essay Example

STARBUCKS FAILURE IN INTERNATIONAL MARKET Executive Summary Starbucks, a reputable international investor has faced a wide range of challenges while venturing in its global expansion. It investment in Japan is one of the greatest failures that resulted from underestimating competition rivalry and inability to adjust to market characteristics. The complexity of market characteristics such as culture, competition and customer behaviour patterns resulted to the highest financial losses. The purpose of this report is to outline the various reasons that underpins Stanbucks failure in the international market, and to provide a relaunch strategy that would see the company regain its position as a successful international investor in failed regions. STARBUCKS FAILURE IN INTERNATIONAL MARKET Introduction Starbucks is an international coffee and Spice Company that operates within over 60 countries in the global food and beverages industry. The company has invested in the food and drinks industry, which has become a target by many investors today. The company started from a humble beginning back in 1987 in US under the leadership of Baldwin, Bowker and Siegel, and now is one of the top international companies that supplies coffee products. As the pressure in the domestic market increased, the company management focused on international expansion to evade competition and market saturation. However, the company’s international expansion has faced a wide range of challenges due to complexity of the international market. The weakness of the company hails from its inability to focus on the characteristics of the international market such as culture, competition, customer behavior patterns, which has led to losses. This article seeks to detect the cause for Starbuck’s failure in international market, Japan for this purpose, and develop strategies to overcome these challenges (Belson, 2010). Therefore, this piece of work will provide the company with a platform to succeed in the international market. Critical Evaluation The Market Choice In international strategy, organizations look for markets that are potential for their products and one that provides an opportunity for organizational development. One of the international markets that Starbucks has focused on is the Japanese market, one of the largest coffee consumer markets (Fukao and Amano, 2003). Rapid development of the Japanese economy has been an attractive feature for many investors. As the economy stabilizes, the purchasing power of the consumers will increase and hence the demand will escalate ('United Kingdom Food & Drink Report, 2014). Therefore, the company’ choice for this market was a wise decision. The aim of Starbucks Company was to enter into Japan and acquire a top position before the onset of market pressure. However, although Japan is a potential market for a hospitality company such as Starbucks it is evidence that market forces influence the consumer behavior pattern. First, completion is inevitable in this market as Japan has well established coffee companies. Doutor coffee and Pronto Corp are two top service providers in the Japanese market and have already gained strong customer loyalty. Therefore, Starbucks was bound to face stiff competition from the two coffee companies (Mclean, 2000). Besides, the threat of new market entry is a major setback for the company. Just like the company eyes Japan as a potential market, more coffee companies are planning an entry strategy in this potential market. The impact of competition is that the market prices will go down and the profit margins will decrease considerably. Therefore, the company failed to foresee the challenges in the market before launching their international strategy. In Japan, culture is a major influence of the customer purchasing patterns, and hence a game changer in the coffee industry. While Starbuck has been suited for a diverse culture in its Home market, there is evidence that cultural attitudes within the Japanese market will influence their purchasing behavior (Lee-Young, 2014). For instance, the people in Japan prefer to use their local languages and hence they will visit Hotels that can understand their language. Therefore, the Japanese local coffee suppliers have an upper hand in winning customers over Starbucks. To adapt, Starbuck requires employing from the local society to create a culturally sensitive experience, while training would be essential to promote the Starbucks business culture if the company has to succeed in the market (Mclean, 2000). Lastly, while Japan is a potential market, it is prone to rapid saturation as the number of investors increase rapidly. Since the main players in the market are focusing on rapid expansion by opening up as many stores as possible, it is likely that the market will reach saturation very fast. This poses a challenge for Starbucks to gain roots with a well anchored business model to ensure that they can survive both in the short and long-term. The impact of market saturation within the international market may have dire consequences for an organization. Saturation increases the customer bargaining power, intensifies competition and reduces the incentive for further expansion. Therefore, although Starbucks was venturing in a potential market, the risk for failure in this new market was very high due to the rapid dynamics of the market. Market Entry Strategy In its aggressive overseas expansion, Starbucks has focused on joint venture market entry strategy to push business in their target markets. In Japan, the company launched a joint venture with Sazaby Inc, one of the local retailers in the country. The two companies had an equal share partnership with Starbucks investing about $10 million in this venture as a direct investment. A joint venture strategy is one of the low-risk international market entry strategies (Fields, 2000). The international company has an opportunity to borrow a strong business culture from the local retailer and assume the positive image that the local company already enjoys in the market. Besides, this strategy allows the company to shield itself from customer rejection and hence incur lower risk of facing customer turn-off at its entry (Verbeke, 2013). Starbuck’s choice of this strategy can be considered as a wise decision especially when entering high risk markets such as Japan. However, the company’s market occupation strategy has resulted into weaknesses within the company. As soon as the company entered this partnership, the company used the “blanket all areas” strategy that the company has deployed in many other international markets. In this strategy, Starbucks main aim is to open as many stores as possible to ensure that they can cover a wide area of the country. This way, Starbucks products will always be available for access by the customer across the countries. To do this, Starbucks opened 470 Japanese stores in an effort to expand its coverage within this market within a period of 7 years (Verbeke, 2013). While this was an aggressive strategy, the consequences had far reaching effects for the company. Too many stores resulted into market saturation in key cities such as Tokyo hence reducing the customer traffic within the stores. Therefore, the company high store operating cost contributed to reduction in the organizational profits, and hence an obstacle for further development. The partnership with Sazaby was a market winner strategy that resulted to a considerable company profit growth in the first two years. However, in the third year, Starbuck reported a loss of $3.9 million on revenues of $467 million (Holmes, 2013). The company’s losses can be linked to market saturation, high operational costs and increase in market competition. The company failed to monitor its expansion strategy and identify the break-even point where further expansion would not result into further profit generation. Evidently, new stores captured over 30% of the old stores hence reducing customer flow in the old stores (Fields, 2000). Therefore, the company market operation strategies were ineffective leading to market saturation and hence losses within the company. The company’s strategy to reduce the operational costs by cutting on wages resulted into loss of employee loyalty, which further became a challenge for the company. From this perspective, Starbucks strong market entry strategy was weakened by its poor expansion strategies that ignore the changing market conditions. Segmentation, Targeting and Positioning Marketing segmentation refers to the grouping of a broad business markets into smaller subsets markets comprising of consumers with similar tastes and preferences, a strategy used to ensure that a company optimizes its performance. Hunt (2010), in his marketing theory, states that market segments are groups of unique customer tastes that an organization must strive to satisfy. In the food and beverages industry, Starbucks have used different products to target different customer segments. For instance, the “skinny” line of drinks developed in 2008 was a superior strategy that ensured that those who were conscious of sugary foods could enjoy a cup of low sugar drinks with a Starbucks store (Hooley, Piercy & Nicoulaud, 2008). However, it is clear that new market segments are rising and there is need to satisfy them if the company has to remain profitable. In Japan, behavioral market segmentation was essential for Starbucks if the company had an intention of capturing this market. However, the company unstructured expansion that sought to flood Japan with their stores ignored the consumer behavior patterns within the Japanese market. Evidently, Japanese prefer non-spiced coffee, one of the factors that the company would have considering while subdividing its target market. Over its history Starbucks has used positioning strategy to survive in the competitive market. Market positioning helps a company to have a competitive position within the market and to win loyalty from its customers (Verbeke, 2013). So far, the company’s unique corporate image has become an important marketing feature. The company is well known globally and this gives it a unique identity in the food and beverages industry. However, the company has risked the loss of identity since the time that the company ventured in the provision of foods and snacks within it stores. The company experienced a heightened business challenge in Japan two years after its entry, a time when the company experienced a flat growth rate. One of the reasons is because some of the strategies in this organization turned out against the initial company plans. For instance, the company taste changed when the company started selling foods, which unintentionally changed the coffee aroma that had attracted the customers into the company. The company needs to rebrand its image to ensure that it retains its popularity within the company (Hooley, Piercy, & Nicoulaud, 2008). Losing its identity may jeopardize its position in the market, which is crucial if organizations have to remain productive. The company’s international strategy started late in 1995 through partnership with Sazaby (Buchanan and Simmons 2013). The main aim of the company was to open “living-room-in-a-coffee-house” or mini-outlets in airports, stadiums, airline offices and bookshops. However, the international market was a challenge due to different tastes and preferences and the existent of coffee market in these countries. This positioning strategy was crucial for the survival of the company within this international market (Starbucks, 2013). The company intends to provide comfort within its outlets to ensure that it can provide relaxation within it target locations. The company’s positioning strategy seems to be inspired by the customer preferences within airports, stadium, airline offices where comfort is a priority. The company commitment to ensure that it was providing an experiential brand strategy can be visualized in the way the company equipped its stores with comfortable sitting arrangements. The company’s failure in the market can be linked to the company’s failure to use customer taste variations as a factor while positioning their products in the market. Evidently, Japanese has both high income and middle income earners and this influences their choice of products. While the high earning few in Japan prefer luxurious hotels, which Starbucks majorly focused on, the middle income earners prefer economy grade hotels where price is a sensitive issue. Therefore, while opening their stores, the company positioned itself as a luxury company that caters for the needs of high income earners in Japan. Since the main target population was small, and the company had many stores, Starbucks was bound to experience low customer inflow and reduced profits in the long-term (Thompson & Arsel, 2014). Evidently, the company customer flow reduced by 10% within the next two years, which resulted into financial loss at a time when the company was already operating at high maintenance costs. Therefore, it would have been a wise decision for the company to focus on middle income earners, who are more to return to profitable growth in Japan. The 7Ps of Marketing Mix The 7Ps of marketing is a superior approach of analyzing the marketing strategy that a company employs to roll out its products (Smith & Taylor, 2004). The company has shown commitment to defining high quality products that meet the customer tastes. The “sweet scented’ coffee has been a unique quality products desirable by many customers. However, the company’s commitment to high quality products and expensive services was a complete turn-off for the middle income earners in Japan. Targeting the top class in Japan was a grievous mistake at a time when the middle income earners were the greatest proportion (Fowler, 2014). Companies such as Doutor coffee have profited in the market by targeting the middle income earners as one way of increasing their target customer population. Therefore, Starbucks product design was bound to lead the organization to failure in the long-term focus. The company promotion strategy has been unique all through with the company involving technology and direct marketing strategies in rolling out the products to the customers. For instance, the company’s online presence has helped the company to brand its image in the international scope. The company was spending over 10% of its revenue for its market strategy as part of its commitment to establish its products within the market. This is one of the strategies that can be associated with Starbucks success within the international market (Seaford, Culp and Brooks, 2012). As compared to the other companies, Starbucks managed to launch its brand image quite fast, which made it a well-known brand in Japan. In terms of price, the company introduced weak price-based models which resulted to decline in its profits. As the Japanese customers demand less costly services, it becomes hard to sell expensive products that the company provides. In a period of intensive competition, the suppliers are bound to surrender their price bargaining power to the consumers. Companies use price competition to satisfy customers who demand cheap, high quality services within the market (Onkvisit and Shaw, 2014). As compared to Doutor coffee, Starbucks prices are much higher, which makes it unattractive for the customers. Ignoring the price issues within the market contributed to business loss in the company. However, it was a tough decision for Starbucks to engage price competition at a time when most its stores were already operating at high costs. Another important element of the 7Ps marketing model is people. The company has over 6 thousand employees entitled to full employee benefits, which helps to win their loyalty. However, it is clear that the company has yet to satisfy its customers by providing the cheap and quality services. The company has also been poor in collecting customer feedback especially in its online presence (Fields, 2000). Its ability to streamline its processes through the use of information technology has been an important achievement for the company. The use of the web platform and social media as marketing platform is crucial in this era of technology. However, there is pressure to remain unique due to the evolving social media marketing strategy that demands a two way communication strategy. In the changing market environment, the company has a challenge to use its strength and take advantage of its opportunities to overcome its weaknesses and market threats. To begin with, it is crucial that the company focuses on price reduction strategies to ensure that it provides affordable products to its customers (Zott and Amit, 2011). In a time of economic recession, price is an important factor that customers consider while purchasing from different shops. One strategy to reduce prices would be to employ part-time employees, who work on demand (Gamble and Thompson, 2013). This will help to reduce the high expenses that the company from paying full benefits for full time employees. The company can provide health benefits to win the loyalty of part-time employees. The organization can also reduce its expenses by closing a number of the domestic stores and using fewer stores to cover the needs of the Japanese market. Reducing the operational costs will help the company provide products that cam attract the middle income who consider price as an important factor while purchasing. Secondly, the company should focus on diversifying its products to meets the diverse needs of the company. It would be a wise decision for the company to shun from selling food products that have jeopardized the company’s unique identity. To maintain the aroma that has been a major strength for the company in its history, the company should consider introducing fruit based drinks that may add to the fragrance of the smell in the company (Lussier 2012: Cardenal, 2012). In addition, this will help the company to acquire a competitive position. The ability of the company to diversify to more customer-focused products will give the organization an identity and help it to remain profitable through positioning in the market. Conclusion In conclusion, Starbucks is a company that has faced many challenges in its international expansion strategy. Its strong market entry mode, ability to invest in quality has attracted many customers and helped it survive periods of market crisis. Its ability to remain flexible in decision-making and strategy modification helped the company to remain profitable. However, the issues of culture, market saturation and change in customer preferences have undermined its expansion in markets such as Japan. The company’s weak expansion strategy has resulted in low operation efficiency while ignoring the customer demands for low priced products. The company should consider alternative ways of reducing the expenses to be able to launch price-based strategies in the Japanese competitive market. For instance, the company should consider closing a number of its stores and employing part-time employees. This will ensure that the company’s investment cost is low and has the ability to offer low price product to majority middle income earners in Japan. In addition, the company should consider diversifying its product by selling fruits and juices, which are unique to its identity, rather than foodstuffs that are affecting the aromatic coffee smell that customers have enjoyed in the shops posing the risk of brand dilution. 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