Starbucks Coffee: Marketing Environment and Consumer Behavior in Italy - Term Paper Example

International Business: Marketing Environment and Consumer Behavior in Italy - The Case of Starbucks Coffee - / Course Date Total Number of Words: 2,553 Introduction Since mid-1980s, Howard Schultz has been successful upon introducing a variety of high-grade coffee such as latte, mochas, espresso drinks, and Frappuccino ® ice blended coffee throughout the U.S. market (Starbucks, 2009). After 20 years of introducing Starbucks Coffee in the U.S. market, the tremendous increase in demand for good coffee gave a strong business opportunity for Starbucks Coffee to expand its business domestically and internationally. Strategic development for the international development of Starbucks coffee is a vital factor which may contribute to the success of Starbucks’ mission of dominating the coffee market all over the world. Having a good brand name is not enough to make Starbucks Coffee successful in terms of profitability in countries outside the United States. The first few Starbucks International retail stores opened in Tokyo back in 1996; U.K. market in 1998; London and Manhattan in November 2005. (Mercer, 2005) Starbucks was able to penetrate the U.K. market through the acquisition of roughly 60 Seattle Coffee Company outlets and re-branding the stores as Starbucks. In September 14, 2006, Diedrich Coffee, the rival of Starbucks Coffee announced selling 40 of its company-owned retail stores to Starbucks. (Juice Caster, 2006; Breitbart.Com, 2006) Despite the company’s aggressive behavior in terms of its expansion in the global market, Starbucks is not present in the Italian market. Aiming to give the readers a better understanding of the subject matter, the origin of Starbucks will be provided followed by discussing the company’s product-line, the importance of knowing the basic marketing concept and the cultural analysis on international marketing. Upon analyzing the market environment of coffee retailing industry in Italy, some of the most controversial environmental and marketing factors that made Starbucks unable to penetrate the Italian market including the consumer behavior of Italian coffee drinkers will be thoroughly discussed. The Origin of Starbucks The establishment of Starbucks Coffee that we see in the market today originated in Italy. Back in the early 1980s, Howard Schultz visited Milan’s espresso bars which gave him the idea of the coffee market potential in the United States (Starbucks, 2009a). Although Starbucks was able to adopt some of the Italian culture, the company had no choice but to redesign the whole coffee experience based on the preferences of the U.S. target consumers. The cultural differences between the U.S. and Italian market is probably one of the main reasons that made Starbucks’ management refuse to even try penetrating the Italian market. About Starbucks’ Product-line Starbucks Coffee serves drip brewed coffee, espresso- and non-espresso-based hot and cold beverages, tea, and ice-blended drinks. (Starbucks, 2009) In addition to a wide variety of coffee drinks, the company offers pastries, salads, and sandwiches to the customers. The company also sells coffee beans, coffee-brewing equipments, other merchandises including Starbucks exclusively made mugs, and cups aside from Starbucks Entertainment products like books, music, and film. Importance of Knowing the Basic Marketing Concept Increasing the company’s sales and profitability is the main goal of each business enterprise. Given the fact that all humans have their own specific needs and wants, the study of marketing is focused on enabling a company to address these concerns. There are products that can easily satisfy the specific need of consumers. In line with this matter, the product preferences of each consumer are usually guided by marketing variables such as the product value, cost, customer(s) satisfaction, and market distribution which is included in the study of marketing mix or the 4 P’s known as price, product, promotion (marketing communication), and place (distribution). (Kotler & Armstrong, 1997: p. 52; McCarthy & Perreault, 1993: p. 46; Stanton, Etzel & Walker, 1991: p. 13) By using the 4 P’s as a guide, it will be easier to determine the market environment and consumer behavior of Italian coffee drinkers in relation to the case of Starbucks Coffee. Market Environment of Coffee Retailing Industry in Italy Italy is one of the most advanced countries that have acquired a different taste for a cup of high quality coffee. Considering that Italy has a rich source of good quality coffee products, most of the coffee roasting businesses have already invested a lot not only in technology issues but also with the proper handling and serving of outstanding quality coffee (Bell, 1993). Because of the readily available coffee supply and espresso machineries, approximately 1,500 small Italian businesses are related to the roasting and retailing of coffee throughout the Italian market back in 1991 (Bell, All Business, 1991). Italians have developed a strong habit of coffee drinking. As of 2006, Italian coffee drinkers consume approximately fourteen billion espresso coffees each year (Illy & Illy, 2006). Aside from the thousands of private small coffee shops who are serving the coffee retailing market throughout the big cities in Italy, the market for coffee in Italy has long time been saturated by some big multinational coffee companies like Lavazza, Segafedo-Zanetti, Proctor & Gamble Italia, Cafes de Brasil, IllyCaffe, and Iricaf (Bell, All Business, 1991) and famous coffee retailers such as Greco and Aragno in Rome, Gambrinus in Napoli, Guibbe Rosse and Gilli in Florence, Florian and Quadri in Venice, Pedrocchi in Padova, Tommasco and San Marco in Trieste, and Il Piatti, Il San Carlo, Il Fiorio, Il Barati, and Il Milano in Torino (Illy & Illy, 2006). Among the local coffee manufacturers in Italy, Lavazza is considered one of the biggest coffee companies based in Italy. With €1 million turnover, the company is considered to be the most successful in terms of being able to capture the interests of the young and professional Italian espresso drinkers (Bell, All Business, 2008). Because of the tight market competition and Italians’ love for coffee, the local baristas in Italy were able to introduce different coffee recipes in the local market such as: (1) espresso (59.8%); (2) cappuccino (13.5%); (3) correttos (12.3%); (4) macchiattos (9.9%); and (5) decaffeinated coffee (4.5%). (Illy & Illy, 2006) (See Chart I – Available Italian Coffee Recipes on page 5) Starbucks’ Industry Analysis The retail coffee industry for Starbucks International is very complex. Basically, there is a large number of potential entrants because of the low barriers to entry and exit. Considering the low cost of investment that comes with establishing a coffee shop enables anyone to easily enter the coffee shop industry. Since there are a large number of competitors, substitute to Starbucks Coffee products is also significantly high. For tis reason, Starbucks’ target consumers have a high bargaining power over Starbucks’ products and services. On the contrary, the bargaining power of suppliers is relatively low due to globalization. The company could easily select a good supplier of coffee beans and other related products and merchandises that the company sells to its consumers. (See Appendix I – Starbucks’ Industry Analysis on page 15) Environmental and Marketing Factors that made Starbucks Unable to Penetrate the Italian Market Similar to the café culture in France, Italians prefer their coffee strong or a shot of bitter tasting espresso, fresh, well prepared and served along the sidewalk under an umbrella. (Paetz, 2007) On top of the differences between the U.S. and Italian market when it comes to coffee preferences, the market in Italy is much more complicated because of the country is “‘ultra-protected’ by unfair anti-free market laws, powerful trade unions, cryptic bureaucracy which serves to discourage foreign investors.” (Bittanti, 2007) Aside from the cultural aspects, Italians are conservative and narrow-minded when it comes to edible things. Italians prefer to patronize their own culture when it comes to food products. Upon analyzing the market environmental and consumer behavior, the common factors that made Starbucks refuse to penetrate Italian market includes issues related to the tight market competition, relatively low market price for coffee products, difficulty in positioning Starbucks Coffee in Italian market, . Tight Market Competition in Italy’s Coffee Retailing Industry Considering the fact that multinational coffee companies like Lavazza, Segafedo-Zanetti, Proctor & Gamble Italia, Cafes de Brasil, IllyCaffe, and Iricaf (Bell, All Business, 1991) and famous coffee retailers such as Greco and Aragno in Rome, Gambrinus in Napoli, Guibbe Rosse and Gilli in Florence, Florian and Quadri in Venice, Pedrocchi in Padova, Tommasco and San Marco in Trieste, and Il Piatti, Il San Carlo, Il Fiorio, Il Barati, and Il Milano in Torino (Illy & Illy, 2006) have already established a strong brand name in Italy, it would be very difficult and very costly for Starbucks to convince its target consumers to patronize Starbucks Coffee. Market Price Differences between Starbucks’ Coffee and Coffee in Italy Pricing is a very sensitive issue when it comes to the success of marketing for coffee products. Specifically the customers’ perception regarding the value of the product is one of the most important determinants of the price. A kilogram pack of coffee Robusta and Arabica beans in Italy is sold at only $8.22 as compared to Starbucks’ $9.95 – 13.45 (Starbucks, 2009 b; Illy & Illy, 2006) whereas each cup of coffee in Italy is being sold at $ or 75₵ - €1 as compared to Starbucks’ $ 1.45 (Starbucks, 2009 c; Ree, 2006). Considering the fact that there are a lot of coffee manufacturers that offers high quality coffee bean at a much lower market price, Starbucks will not be able to compete with the retail price of Italy’s café’s due to the fact that Starbucks is only importing its coffee beans from its accredited suppliers. On the other hand, selling Starbucks Coffee in Italy at a lower market price as compared to its other stores in different countries may have a negative impact over is global consumers. In other words, the huge price differences between Starbucks’ coffee and the readily available coffee throughout the different geographic areas in Italy makes it very difficult for Starbucks to compete with the existing coffee retailers in the Italian market. Difficulty with regards to Product Positioning for Starbucks Coffee Zeithamal (1988) defines perceived quality as “the consumer’s judgment about a product’s overall excellence or superiority”. Aside from the market price of coffee products, customers’ perceive quality in coffee products and services are among the important factors that could significantly affect their buying behavior. Basically, it is the customers’ perceived quality that enables them to: (1) differentiate a coffee product from other retailers; and (2) have a reason to purchase a coffee product or patronize a brand. Starbucks Coffee will have a difficult time positioning its product in Italian market due to the fact that the coffee retailing market in Italy has already been saturated by its local coffee retailers. The market price for raw coffee beans is relatively cheap. For this reason, the local restaurants and other small- and medium scale coffee retailers are already serving the coffee market in big cities and rural areas. Given the fact that the market price of Starbucks Coffee is relatively high as compared to its potential competitors, it would make the prospective Italian buyers to think twice about purchasing Starbucks Coffee. Recommendation Shifting from national to international and global business entails new challenges. In line with this matter, Starbucks’ global marketing managers should be prepared when dealing with the culturally overlapping situations effectively. To narrow down the differences in the culture of other countries, a culture analysis should be conducted. Engaging in international business is more complex than operating a business in domestic market. This is primarily due to the differences in the government policies, the status of economic development and growth, the socio-cultural environment, and/or the prospective consumers’ attitude and behavior regarding Starbucks products. (Czinkota & Ronkainen, 1996) The marketing strategies that Starbucks will apply in Italian market needs to be tailored to the cultural background of Starbucks’ target consumers. The marketing approach should highly depend on the cultural influences such as communication objectives, differences in communication and linguistic styles, cultural attitudes, beliefs, and/or information processing. To avoid culturally overlapping situations, the marketing managers’ instinct and understanding the cultural differences between two specific countries is necessary to avoid ‘culture-triggered’ marketing errors such as what happened in Starbucks Germany. Starbucks should take advantage of incorporating its cognitive skills, soft skills such as understanding the way people think and feel. (Deresky, 2000) For instance: The use a foreign language in the Starbucks’ logo is also an effective part of its international marketing strategy. Likewise, conducting a strategic planning in international marketing is an important area wherein the marketing manager should consider the cultural dimension of a foreign country. (Terpstra and Sarathy, 1997) A good industry analysis and environmental study is a pre-requisite in formulating a marketing strategy wherein the behavior of competitors, terms in conducting a joint venture / licensing contract or managerial attitudes need to be considered. (Terpstra and David, 1991) Managing international sales or negotiations are also based on a highly culture-sensitive situation. In order to make international deals successful, the manager(s) should spend time investigating on the culture of the country in which Starbucks is planning to negotiate with. (Hofstede, 1997) Developing a cultural awareness, empathy, and emotional acceptance of a different country is vital in developing a good relationship with the target business partner. Starbucks should definitely lower down the price of their coffee because the company’s competition with Italian old cafés is very high. With regards to Starbucks coffee products, the company should try to come up with a new taste that is suitable and more accepted for Italian coffee drinkers. Considering the fact that Italian coffee lovers prefer to drink strong espresso, Starbucks should exert more effort to meet the taste and quality of coffee Italian consumers are looking for. Since Italians are very conservative with the food they eat, Starbucks should offer food based on the preference of Italian consumers. With good price and quality product, Starbucks will be known throughout France through its traditional use of ‘spread-of-mouth.’ With regards to place of distribution, Starbucks should choose a venue along the sidewalk where they could set-up an umbrella which is more preferred by the Italian consumers. To avoid possible political conflict with the trade unions, Starbucks should strictly follow the general guidelines of the country with regards to minimum wage contract. Conclusion Since Italy has its own ready sources of good quality coffee and machinery, Italian coffee drinkers are very sensitive to the price and quality of coffee they purchase in the local market. Because of the heavy competition within the global market of coffee retailing, it is crucial for Starbucks to offer competitive price in order to win and maintain its customers’ loyalty. Product is also vital since each nationality has their own preferences concerning their preferred cup of coffee. With good price and product, Starbucks will be able to easily promote the business globally through good ‘spread-of-mouth’ or publicity. Aside from utilizing the 4 P’s in marketing mix, the ability of marketing manager to determine the target market’s cultural differences is the key to the success of conducting an international business. Even though there are a lot of market factor that could negatively affect the consumer behavior of Starbucks’ target market, there is still a possibility for the American brand to be able to be accepted in Italian market. To increase the possibility of becoming accepted in Italian market, Starbucks’ international marketing manager should focus on analyzing not only the cultural differences between the U.S. and Italian market but also the political and social differences between the two countries *** End *** Appendix I – Starbucks’ Industry Analysis References: Bell, J. (1991, March 1). All Business. 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