Starbucks

Starbucks is an international coffee company based in Seattle, Washington. The pace at which the company has been growing has made Starbucks one of the fastest growing companies in the United States and the largest coffeehouse company in the world. In 2002 there were 5,688 Starbucks outlets in 28 different countries and nearly 60,000 people were estimated to be employed by the firm. To continue its pace of growth international expansion is important to Starbucks. However, settling in some international markets has been unsuccessful for the firm. The company has been unable to understand and market to consumers in international markets. It has also been unable to tackle issues related to globalization and it seems to have lost its unique organizational culture.

Analysis in this case has been done at the industry level. The coffee industry is becoming less attractive. This finding is based on an application of Porter’s model of competitive forces which measures the attractiveness of a market (Porter, 1979) (Porter has been referenced in upcoming posts on Brand for thought).

The company faces its own issues in an industry that is loosing attractiveness. Competitive rivalry within the industry is intense. The growing number of coffee shops and the existing number of businesses is very high which allows customers to have high bargaining power. This means that customers can easily switch between sellers if they wish to. There are many suppliers of coffee bean all over the world which means that the bargaining power of suppliers should be low. However, if raw materials required are unique or are of exceptional quality then suppliers may charge high prices for unique resources. In such case the supplier has high power. Starbucks in particular looks for premium coffee beans from different parts of the world. The threat of new entrants is high mainly because setup costs for a small business or seller is fairly low. Even though Starbucks is known for buying, roasting and selling its own coffee and may spend up to $350,000 for opening a new store; there are smaller firms which have found lesser capital intensive ways to start up a coffee business. The situation resembles an open market place in which entry barriers are low. Threat of substitutes to coffee is high as well. Even though there is no beverage which is exactly the same however there are many others which have the potential for overshadowing the demand for coffee.

Critical Factors in this case include globalization, understanding the customer and the Starbucks culture. Globalization is the growing sense of international integration which has allowed multinational corporations to enter new markets all over the world. It is a critical factor in this analysis because it is one of the reasons why corporations like Starbucks have been able to grow beyond their base and spread into other countries. Internationalization for such firms is not just lucrative but has been driven by the fact that the United States market is saturating. However, it is important to note that corporations like Starbucks itself are partially responsible for saturating the market because of the rate at which they have been growing and have already flooded neighbourhoods with their outlets. Global expansion though can be an issue when Starbucks fails to make enough profits on each store that it has opened. Most of its stores are operated with a local partner and profit sharing in such cases becomes lower and often the company has to compromise on the level of supervision regarding maintenance of stores that it can’t directly monitor. Starbucks is an American brand which is also considered as a sizeable symbol of ‘Americanization’. Americanization is an idea that is still not welcome in many countries. Corporations like Starbucks have been publicized as sources of anti-globalization, capitalism, degradation of labour and cultural imperialism. Social awareness and the criticisms of globalization therefore can have strong influences on a firm’s operation strategy and brand reputation (Kotler, 2003).

Understanding and researching target consumers particularly in foreign markets is a critical factor in this case. Starbucks has previously spent a lot of effort in planning its entry into foreign locations however not much attention has been paid to researching target consumers in these markets. Even in the United States in 2002 only 7% of the population had tried the company’s products. A reason for pulling out of some foreign regions has been that the demand has been very low. Consumers in such markets follow a unique buying behaviour and possess have unique values and beliefs which need to be studied. Standardizing a product for example, introducing a national chain of cafes styled as Italian coffee bars and located at busy or high-end locations in some countries may not work. In some regions such ideas may seem alien or intrusive to consumers. Therefore, clever positioning becomes important and correctly marketing to the sensibilities of consumers in foreign markets is important in such cases. Even though positioning ultimately lies in control of the consumer advertising is a communication tool that marketers can use (Dann and Dann, 2007). There has been a lack of advertising in the case of Starbucks. The company’s outlets were perceived as its biggest source of advertising and brand-building. Total advertising spend was estimated as 1% of the company’s annual revenue. It is clear that advertising spend could have be slightly increased to try and leverage demand.

A unique set of attitudes, experiences, beliefs and values were initially defined as the ‘Starbucks culture’. Top management support is critical in building a strong organizational culture (Kotter, 1992). However, organizational culture at Starbucks changed along with changes that were made to the senior management at Starbucks. In 2000 Howard Schultz also the founder of the company stepped down as chief executive of Starbucks and was taken over by someone else. Schultz was responsible for initiating the original Starbucks culture. This unique culture was lost because different leadership styles tend to induce different types of organizational culture (Miller, 2004). Schultz was also not part of Starbucks Coffee International, Inc. which has been responsible for most of the company’s international business development decisions. Organizational culture was the key success factor of Starbucks which was now lost. An organization’s culture should take into account the interests of all individuals within the organization (Smith, 2003). The company’s workforce was seen as a unique asset until a large number of jobs were recently cut down in order to maintain profitability.

The recommended solution for Starbucks would be to focus on the way it segments its market. As understanding consumer dislikes and likes has been the main problem for Starbucks in international markets like Beijing. It could also look at product development or positioning of its products in a way that would suit these markets. Using a mix of promotional tools in order to build an acceptable brand is important as well. Based on how successful it is the company could then aim at building brand loyalty in the long run in these markets.

(Any comments on this post are welcomed by the author)