The Market Entry Strategies Adopted by Starbucks - Essay Example

Introduction Foreign market entry strategies require decision concerning the entry mode, marketing plan and the control system. These decisions can impact the success of international ventures. While the four most common modes of entry are licensing, exports, joint ventures and wholly owned subsidiaries (WOS), the mode would depend on the country-specific factors. The most dominant paradigm in choice of entry mode is Dunning’s eclectic model which is based on ownership, locational and internalization framework (Lin, 2000). The internalization perspective pertains to minimization of transaction cost and avoidance of market failure. Starbucks wanted to be the most recognized and respected brand in the world. Their mission was to open new coffee shops round the world – either company-operated or licensed stores. After a stable business in North America, Starbucks started looking at international expansion through licensing and joint-venture partnerships (Darguste, Su, Tu & Wei (2002). They were aware of the different cultural features in different markets and hence tried to alter their international expansion strategy in different regions (Starbucks, 2003). The MNC also needs to pay attention to local consumption habits apart from facing the resistance from anti-globalization organizations. Because of this, several competitors have to be faced as all look for early mover advantages. This report analyzes the entry strategies of Starbucks for the UK and China. Methodology Information for evaluating the entry strategies in UK and China, details have been obtained from academic journals and the internet. These information have been evaluated against the entry mode theories. Main findings Starbucks – corporate culture Starbucks stores are usually located in high-traffic locations such as malls, grocery stores of busy street locations. They are well lit and they use lot of cherry wood and artwork for the interiors. The store size ranges from 200 to 4000 sq. ft. They also set up cafes and carts in supermarkets, hospitals, office buildings and shopping centres. They also enter into licensing agreements with companies such as Kraft Foods to offer coffee at the grocery stores in the US (Kotha & Glassman 2003). However, the business model would differ across regions. They usually find local business partners in foreign countries as it is easy to negotiate local regulations and they test with a few locations. They look for partners that share the same values, culture and goals about community development. They use experienced Starbucks managers initially and then they send the local managers for training to the headquarters. They adapt the food and décor to the local tastes. The three major factors that they look for in overseas ventures are demographics, branding and financials. The market entry strategy for the UK and China were taken after evaluating the local business environments. Global market potential Majority of the adults around the world drink about two cups of coffee per day and Starbucks has less than 1% of the global market share (Kotha & Glassman 2003). Hence this is the period for growth and development. Moreover, Starbucks is a popular global brand but they make less money in overseas ventures because most have a local partner. Local partners are safer and easier to start with even though the profit margins are slim. They were also aware that the entry into foreign markets posed certain blocks such as mass culture that infected traditional values. US commercialism was despised especially in emerging markets and it was generally felt that the American brands invaded foreign markets (Starbucks, 2003). The international markets that were not well known required strategic planning and any MNC has to proceed with caution in unknown markets. Asia – market potential The typical consumer in Asia had tea-drinking culture and looks for variety, improved taste, convenience, quality and health-benefits (Starbucks, 2003). Coffee appeals to the youth and the non-tea drinkers. China’s ongoing economic reforms have opened up the economy. This has brought changes in the lifestyle of the people and an increase in the disposable income of the people (China, 2007). It is estimated that the economically active population of China would stand at 1005 million by 2015. The coastline cities like Shanghai, Beijing, Guangzhou and Shenzen are more affluent than other parts of China. Per capital incomes in these cities are higher than the national average. The consumption pattern of the urban Chinese has undergone a change. For luxury goods, brands matter to the Chinese consumer. Companies like Nestle and Danone has achieved success in China which suggests that consumers are brand-conscious. China – culture and market environment The market potential is very high as consumers are habitually and traditionally tea consumers. In China however, coffee consumption is still in the growth stage and consumers are still trying adapt to the taste, there is high growth potential (Starbucks, 2003). According to Euromonitor, coffee consumption in China is restricted only to the urban coastal regions and concerns only 0.1% to 0.5% of the Chinese ((Pons, Xiaoting & Puel, 2007). However, the demand for coffee has been generated as between 1998 and 2003 the coffee sales increased by 90 percent. Since the entry of Starbucks in 1999, the real consumption of coffee has picked up and the number of chain outlets has gone up. In China, coffee is associated with the West and the segment that drinks coffee is exposed to western influences comprising of young urban dwellers, expatriates and white collar workers. It also includes Chinese who have returned from abroad. Since this denotes a change in the lifestyle, the new coffee drinkers are susceptible to major brands. Sales of coffee in China depend on the symbol of the brand and are associated with luxury and good taste. In China, Starbucks had to tread with caution due to it being a predominantly tea consumers market. While the economy was growing, demand for coffee was low. China is one of the smallest coffee markets in the world. It entered China under partnership with different firms in different parts of China. This was necessary because the Chinese consumers are skeptical about international brands and if a local name is attached to it, they would try the product. Hence they started at a very slow pace in 1999 and focused on the urban consumers (Darguste, Su, Tu & Wei (2002). Thus most of their stores are located in the commercial centres in Shanghai, Beijing and Taiwan. To draw the first time consumers, they did not rely on local advertising. Instead, they used coupons and personal visits. This is because the consumers in China rely on word-of-mouth to learn about a brand rather than on the media (Chan, 2005). When Starbucks opened their first store in Beijing, they had to be discreet. They met with resistance with the local people although the government and local officials supported the entry. The people however felt that this was an infiltration into the local culture and could cause damage to the local cultural heritage (Starbucks, 2003). The Chinese media gave it a negative coverage but since there was no real local community and no local push-back tendency, they stayed in China. China is one of the most challenging environments in which to conduct and negotiate business (Buttery & Leung, 1998). Marketing in China is difficult because of the importance given to personal relationships (guanxi) and culture and language become the major impediments. The Chinese culture is based on cooperation rather than competition. The Chinese create an emotional bond with any brand and for luxury items they prefer branded products. Anything that has to be sold in China must have a local flavour and taste. They do not like any infiltration which demonstrates their cohesive culture. Even Coca-cola had to adopt to the local culture in order to succeed in China (Hollis, 2006). Emerging markets pass through windows of oppurtunity that remain open for 5 to 10 years (Kearney, 2006). China ranks 5th as far as market attractiveness are concerned in retail food sector. Since international retailers are fueling growth in China, market saturation is on the rise.Another challenge in entering in Asian markets is that they are traditionally tea consumers and coffee consumption is just about 10-15% of the world’s coffee consumption (Starbucks, 2003). However, coffee production and consumption is expanding. To build brands in a land as vast and complex as China requires that marketers recognize the physical, emotional and cultural needs of the consumers (Hollis, 2006). In mature markets like Europe, Starbucks can apply brand development strategies but in countries like China clear brand positioning must be maintained. In mature markets they can have horizontal line extensions but in China the same strategy could confuse consumers. Since in China, the strategy is first to familiarize the consumers with the product and its benefits, Starbucks had to first make its presence known. It makes sense to build deep emotional relationship with the Chinese consumers. The sales in China may not grow very high because of the predominant tea culture in the country. People drink tea at home and coffee in public. It is an “attitude” to consume coffee publicly (Pons, Xiaoting & Puel, 2007). Moreover, it is expensive and hence all of these reason suggest that its growth may not be too much and not too fast. In China, the Starbucks café’s are a place for personal and professional meetings. The locations are easily accessible and the amenities enhance the brand image. Starbucks today offer WiFi from their outlets and this is an added attraction in China because even though most people own a computer, internet connectivity is poor. Thus, people use the internet while sipping coffee at Starbucks. Being seen at a Starbucks café is a status symbol. Evaluation of UK market In the UK, when Starbucks entered, the British coffee market was not mature. There was resistance to American culture. In the UK, Starbucks entered through acquisition. They acquired Seattle Coffee Company that had stores at 38 retail locations (Kotha & Glassman 2003). At that time this was the fastest method that Starbucks could enter into Europe and expand. With low levels of competition, Starbucks could build an enduring global brand. They studied the local market before entering UK and they found a significant oppurtunity in the British coffee market. There were no language barriers and hence organizing business would not be difficult. It was with the idea of gaining knowledge about the local market, the regulations and restrictions that they entered through acquisition. Once they had gained experience and understood the market, the risks were minimized, and then they chose the resource-intensive route of WOS. Cultural differences exist in the US and the UK culture and hence Starbucks looked for a local company to adapt to the British coffee culture. They made direct investments in the UK to enter. At that time the British coffee market was not mature and the competitive pressure was high. The acquisition gave them a lot of advantages. Now Starbucks Coffee Company Ltd UK is a WOS of Starbucks, USA. They have all wholly owned subsidiaries in the UK while in China they have entered either licensing as in Beijing but mostly in partnership with local people. In both the UK and China, Starbucks has become a natural meeting place for people. UK is a saturated market and hence there has to be focus on efficiency and low costs because of competitors. This is necessary to maintain the market share. The market environmental factors in China were conducive to entry. Competition was practically non-existent and the demand had to be generated because of the tea consuming culture. Thus the potential for growth existed. Market risks existed because of the anti-globalization sentiments of Americanization of culture, since Starbucks is an American company. However, by taking a local partner such risks could be mitigated to certain extent because the Chinese consumers prefer to build relationship with known people and business partners. Infra structure existed in China and the market was ready. What was lacking was the initiative to tap the potential and hence the decision to enter China in 1999 was appropriate. In emerging markets with uncertainties of demand and other risk factors, collaboration is a more flexible form of entry and exit (Lin, 2000). This strategy also helps to improve competitive positioning. Because of the risks involved including lack of organizational capability, firms are not willing to invest massive resources in emerging and new markets. This is another reason that local partners are preferred as the risks too can be shared. Any form would develop the capability to absorb the uncertainty by accumulating experience and market-specific knowledge. In the UK, when Starbucks entered, uncertainties were high because of the cultural differences and lack of knowledge of the British business characteristics (Linnskog, 2008). The acquisition strategic helped them to eliminate these disadvantages. Since, Starbucks is resource-intensive, the risks were high but the acquisition of Seattle Coffee was a strategic decision. As a company, Starbucks has a global management efficiency requirement and management risk attitudes. They used the entry into UK as a springboard to reach the entire Europe. PEST Analysis Starbucks has faced community push-back situation in both the UK and China. In London, one of the activists campaigned against the firm and Starbucks decided not to open a store there. In China too, in Beijing they opened a store in a historic district and following adverse comments in the local and international media, they decided to stay put (Kotha & Glassman 2003). In the UK it is seen as an American chain and British media is very critical of that. Coffee market is crowded in the UK with Café Nero, Coffee Republic and Costa Coffee and hence there has to be push sales. In China there was revolt against the mass-market American coffee culture in the most hallowed historic place, the Forbidden City. But in China it was not the local media or the local community that wanted Starbucks to push back. The uproar was created by the international media and hence they decided to stay put in Beijing. Starbucks has excellent management skills and initially they send their managers at each new location. They also send the local managers to Seattle for training for a brief period. Conclusion Thus, the business environment in both UK and China posed challenges when Starbuck entered. Their entry strategy in the two countries differed and is justified. They used acquisition strategy in the UK which became a gateway to Europe. Language and resources barriers were not there and to overcome the risk factors of a foreign land, the acquisition strategic worked. They soon became wholly-owned subsidiaries and hence could retain larger profit margins. Currently the competition in UK is high but Starbucks has the capability because it has its outlets very strategically located. In China, they entered through partnership because this region posed several challenges. Language and cultural barriers, tea culture and an emerging economy, forced the company to evaluate and adopt the partnership approach for China. Here they had to literally create demand but they have succeeded. Hence, their entry strategies in both China and the UK are justified. They had assessed the risks in both the countries and they had the management capability to face the uncertainties and the challenges. References Buttery, E.A., & Leung, T.K.P. (1998). The difference between Chinese and Western negotiations. European Journal of Marketing. 32 (3/4), 374-389 Chan, K. (2005). Store visits and information sources among urban Chinese children. Journal of Consumer Marketing. 22 (4), 178–188 China. (2007). New Consumer Dynamics: the impact on modern retailing. Retrieved online 28 April 2010 from http://www.pwc.com/Extweb/pwcpublications.nsf/docid/DD3BFAFBAE31B5FD852571FE005C9AE2/$File/china.pdf Darguste, V., Su, A., Tu, A., & Wei P. (2002). STARBUCKS COFFEE: EXPANSION IN ASIA. Retrieved online 28 April 2010 from http://www3.interscience.wiley.com:8100/legacy/college/kotabe/0471230626/text_cases/starbucks.doc Hollis, N. (2006). Brands in China:Devaluedor Déjàvu? Retrieved online 28 April 2010 from www.integral.co.at/dImages/Brands_In_China_-_Jun_2006.pdf Kearney, A.T. (2006). Emerging Market Priorities For Global Retailers. Retrieved online 28 April 2010 from http://www.fibre2fashion.com/industry-article/pdffiles/emerging-market-priorities-for-global-retailers.pdf?PDFPTOKEN=aa08f347978a429261cbebae2ed012caad701aba|1272593486#PDFP Kotha, S., & Glassman, D. (2003). Starbucks Corporation: Competing in a Global Market. 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