April 28, 2003
Planet Starbucks (B): Caffeinating the World
Ten years ago, we had 125 stores and 2000 employees. [Today,] we have 60,000 people working in 28 markets outside North America, serving approximately 20 million customers a week. Our core customer is coming in about 18 times a month. With the majority of adults around the world drinking two cups of coffee a day and with Starbucks having less than 7% share of total coffee consumption in the U.S. and less than 1% worldwide, these are the early days for the growth and development of the company. We’ve got a model that has been well tested from market to market. Q&A With Starbucks’ Howard Schultz BusinessWeek Online, September 9, 2002
Peter Maslen, President of Starbucks International, had just returned from Greece where the company had opened its first café in downtown Athens. He had logged thousands of miles over the past few years shuttling from country to country extending the boundaries of the Starbucks empire. In anticipation of stagnating growth in North America, the company had embarked on a global expansion strategy with the objective of becoming “a great, enduring company with the most recognized and respected brand in the world.” Starting with Japan in 1995, the company had blazed through several key markets in Asia and Europe. The company looked to move into more of the emerging world, including Latin America. While much of the developed world had been conquered—or at least attacked—new growth potential had shifted to the less-developed regions. Although the company had already established beachheads in several emerging markets, many believed that the infrastructure and disposable income in these regions would present forbidding obstacles for Starbucks’ expansion strategies. As Peter Maslen sipped his cup of steaming espresso, his mind wandered to the challenges his company faced in global markets. Did it make sense for Starbucks to continue expanding globally at such a breakneck pace? Would the firm be able to meet the market’s insatiable appetite for earnings growth with its ventures into European and emerging markets?
Starbucks was founded in Seattle by Gerald Baldwin, Gordon Bowker and Ziev Siegl in 1971 as a gourmet coffee bean roaster and distributor. In 1982 Howard Schultz joined the company as a member of their marketing team. After a visit to Italy for a trade show, Schultz urged the partners to consider opening espresso bars in conjunction with their coffee sales. In 1984 Starbucks opened its first espresso bar in a small corner of the company’s downtown Seattle Starbucks store, to rave reviews. Although Schultz urged the company to expand the espresso bar line, the controlling partners, now Baldwin and Bowker, were unwilling to enter what they considered the fast food business, wishing to focus on the coffee roasting niche market.
Copyright © 2003 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Professors Michael Moffett and Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. This case draws upon information presented in “Planet Starbucks (A)” by the same authors.
Employees were trained to not only provide advice on coffee selection and appropriateness to potential customer needs. seemingly at the same time and all the while carrying on a conversation with the customer. 20. The Starbucks Experience had been designed to be pleasant.” Brandweek. Pendergrast.
We certainly don’t ignore the product. Feb. 174.1 Experience and ambience were central to the Starbucks strategy. It focused on spots that provided ready access to consumer foot traffic. Captivated by the sense of community and neighborliness that he had seen in the cafes in Milan. Stores were located in such a way to blanket a neighborhood and often several stores competed for patronage on the very same street. 1999 I tried to build an environment and a place that could provide our customers with an oasis. But we built the business through experience. pulled the espresso. the cafes offered several blends of special teas. but it is something we always knew we had and a lot of others didn’t. and with the financial backing of his former partners. six stores and roasting plant.
The Starbucks Experience
Howard Schultz’s dream was to take the concept of the Milan espresso bar to every corner of every city block in the world. localized pastries. The ambience of the cafes was accentuated by piping selected music to complement the atmosphere of warmth and comfort. While attending a housewares show in the city of over a thousand cafes. Schultz was quite impressed by the way in which the baristas (coffee brewers) prepared a cup of espresso. “Schultz’ Caffeinated Crusade. but to engage the customer. It was precisely this experience that Schultz wanted to bring to each of the Starbucks cafes. and coffee brewing equipment. Schultz wanted to transplant a similar ambience into each Starbucks store.28 billion by 2002 and was acclaimed one of the top 100 growing global brands.” Tea and Coffee Trade Journal. July 5. began building a global business which reached sales of $3. As Schultz observed. He envisioned each café as a gathering place for neighbors and friends or a place of quiet contemplation and perhaps even a neighborhood office for the work a day customer who might stop by to catch up on work and a steaming espresso at the same time. a selection of leading newspapers and magazines including Starbucks’ own in-house weekly. and the strong aroma of rich coffee wafting through. a “Third place” away from home or work. that would exceed their expectations. Location. Schultz bought the former Seattle Starbucks company. In addition to a broad selection of coffee and Italian style espressos.
. The Starbucks café was indeed a destination. It was pure theater to see a barista move effortlessly as he ground the beans. for $3. opened Il Giornale in 1985. Starbucks had however been both admired and criticized for these marketswarming expansion techniques that were used to proliferate within defined market locales.8 million from Baldwin (who wished to focus on managing Peet’s Coffee) and Bowker (who wished to cash out of the business).
Location.Howard Schultz then left Starbucks. 2002
The cafés exuded a sense of chic and featured comfortable seating. sometimes even sofas. Two years later. not through the product. Issue 2. uplifting and diverse. Vol. Location
The company displayed remarkable business savvy in choosing its locations. often using primary colors. This desire originated in the very first coffee experience that Schultz had in Milan. The stores themselves were designed to be bold and striking in their color palettes. “The Starbucks Experience Going Global. and with new investors. 1999. This approach to first-mover advantage in a market space gave Starbucks sufficient time to establish itself while holding competitors at bay. Schultz now was in control of Starbucks. M. July 5. an espresso bar that sold coffee and assorted coffee beverages made exclusively with Starbucks’ beans. The downside however was the cannibalization of revenues across stores
“Schultz’ Caffeinated Crusade.” Brandweek. typically in densely populated neighborhoods. and steamed the milk.
Spain.69 million per store per year. Like most commodity products. It was against this backdrop that Starbucks started looking East. Beginning in 1999. Yet. and there were over a billion Chinese. Starbucks exclusively used arabica beans in its cafes. specialized in gourmet coffees which accounted for only about 10% of global coffee production. The consumer market for coffee was quite concentrated: 20% of the world’s population accounted for 65% of global consumption. The arabica grade was the premium coffee and commanded a price premium— typically about $0. The extremes in retail sales purchases and consumption were the Italians. and France. falling to $0. The Swedes clearly had the highest per capita consumption in the world. Exhibit 1 provides an overview of the structure of the global coffee market in the year 2000.
The World Market For Coffee
Coffee was the second most widely traded commodity in the world behind crude oil. Its wares were available through mini-Starbucks cafes located within grocery stores. The robusta grade was considered an inferior grade of coffee with a fairly high level of bitterness. Proctor & Gamble (USA). and its Italian competitor Illy. It entered several distribution agreements with well established companies such as Kraft Foods for distribution of coffee related products. Many of the emerging markets. Its roasted coffee beans. this revenue per store value had continuously declined. sales in North America had shown signs of slowing. Latin America. and parts of Indonesia and Vietnam were the leading coffee growing regions. most of the world’s coffee was grown in small farms encompassing just a few acres. East Africa.located in close proximity to one another. Kraft Foods (USA). Despite this pride of place amongst commodities. Arabica was much more aromatic and full flavored and preferred by coffee connoisseurs worldwide. on all United Airlines flights. Central America. The company had leveraged multiple channels to sell its coffees and related products. Only Japan and the United States to date had any real markets in ready to drink products (like Starbucks’ Frappucino product). The market for coffee was decidedly global. instant coffee was extremely unpopular with the Swedes. Buyers such as Starbucks. and in Barnes and Noble bookstores. there were only a little more than eight million Swedes. Chile. quaffing 1097 cups per year.20 per pound—over robusta. Sweden. and the Philippines. making up only 9% of retail sales. and ice cream products were sold through both specialty and mass-market retail grocery chains. Most of the intermediate buyers were large transnational packaged foods companies. The differences in consumer preferences across countries were dramatic. countries like Mexico. the prices for green beans (unroasted coffee) fluctuates wildly with changes in demand and supply which in turn is driven by growing conditions. at airports.
. while a full 35% of all retail coffee purchases by the Swiss was for instant coffee. was the propensity of some national populations to consume their coffee outside the home. where 100% of retail purchases were for instant coffee. The top four firms—Nestlé (Switzerland). The price of coffee in 2002 reached record lows of $0. Out of home coffee consumption was the highest in absolute consumption (average cups consumed per capita per year) in Switzerland. and the one of most immediate interest to Starbucks. and Sara Lee (USA) collectively purchased roughly 50% of the coffee produced globally. Given their product mix and development of new roasting techniques. The coffee market was subdivided between retail sales (instant coffee and roasted and ground coffees purchased in supermarkets for home consumption) and out-of-home coffee purchase and consumption (the coffee cafés like Starbucks). while the Chinese averaged per capita consumption of less than one cup. the lowest price in a century. Despite these systematic attempts to proliferate through multiple channels and multiple locations.56 million per store in 2002. many of these buyers were able to make do with robusta grade. Between 1995 and 1998 Starbucks had averaged $0. For example although the Swedes and Swiss were the top two consuming populations. however. 96% of all retail purchases being roasted and ground to 4% instant. The second major distinction.42 per pound for robusta grade.
Trung Nguyen (Vietnam).
Russia.A. the challenges were formidable. the more popular chains were Tully’s Coffee and Seattle’s Best Coffee (both headquartered in Seattle USA). Many of these local favorites were
Original data from Nestlé S.
Source: Nestlé S. May 20. 2000 Retail Coffee Sales Roasted Ready and to Instant Ground Drink 80 777 — 220 415 — 80 565 – 145 363 — 100 207 — 15 323 — 30 298 — 305 24 — 108 155 — 57 207 4 290 24 — 125 55 45 166 5 — 222 14 — 125 26 — 137 2 — 127 — — 110 9 — 78 8 — 0. The Coffee Bean and Tea Leaf Company (Los Angeles USA) and Tim Hortons (Canada).A. 2000.2 In contrast the beginners (people consuming one cup or less per week) accounted for 57% of the world’s population but only 2% of coffee consumed. roasted and ground.)..K. Instant coffee is also frequently termed soluble. May 20. posing a significant challenge to the Starbucks business model. regional and sometimes international chains. Costa Coffee (U. Total annual per capita consumption is the sum of instant. In addition to the national competitors there were several local and regional chains within national markets that enjoyed limited popularity such as Dutour (Japan). and Thailand. Dome (Australia) and Barista (India). presented in Starbucks Corporation Reference Book. consumption in the developed world was declining with the markets migrating to the developing countries.’s Nescafe Division. Merrill Lynch. It was estimated that the sophisticates (people consuming one or more cups of coffee a day) accounted for 65% of total coffee consumption but they represented only 17% of the world’s population. the freshly brewed coffee market and specialty coffees represented a far more fragmented domain with several companies operating a variety of local. Nescafe Division. 2002.Exhibit 1
Global Coffee Consumption. Much of this population lived in countries that had not developed a taste for gourmet specialty coffee. In addition to the ubiquitous Starbucks. ready to drink. and out of home. Much to the dismay of coffee marketers. demonstrated extremely low levels of out of home coffee consumption.8 — — Out of Home as Percent of Total 22% 26% 12% 23% 41% 29% 29% 28% 40% 38% 26% 42% 40% 17% 17% 13% 11% 8% 10% 20%
Per Capita Consumption Country (cups/year) Sweden 1097 Switzerland 855 Germany 735 France 658 Spain 517 Italy 478 Brazil 463 Australia 459 Canada 438 United States 424 United Kingdom 424 Japan 360 Korea 286 South Africa 286 Mexico 181 Chile 159 Philippines 142 Russia 129 Thailand 96 China 1
Out of Home 240 220 90 150 210 140 135 130 175 160 110 150 115 50 30 20 15 10 10 0.
Although the traditional mass market coffee segment was dominated by the major transnationals. Although it would make sense to target beginners with the hope of turning them into sophisticates. as quoted by Merril Lynch.
• Trung Nguyen. preventing it from undertaking the rapid expansion of stores per the joint venture agreement. Thailand. It had franchise operations in Singapore. China. Brazil and Paraguay. Taiwan. Brunei. Australia and Indonesia. much of its marketing focus was limited to building dominance in the U. It had expanded internationally through licensing agreements and had set up Tully’s Coffee Japan. Tully’s Japan operated more than 40 stores largely in the TokyoYokohama region. Korea. the United Arab Emirates. AFC also owned Torrefazione Italia. and creative
. Beginning with its entry into Japan in 1995. was engaged in significant international expansion both through its own network of stores as well as through franchise agreements. a subsidiary of the fast food chain Wendy’s. was a bit misleading given the limited ownership held by Starbucks relative to its local partner. Initial reports showed that the company’s cafés were performing well especially in the exotic blends. a Vietnamese chain of coffee stores. As illustrated by Exhibit 2. and Popeyes Chicken & Biscuits. • Tully’s Coffee operated over 100 stores in the United States. The company’s strategy was to focus nearly exclusively on these two markets.
Mode of Entry
The rapid expansion overseas was built around joint ventures with local partners and rounded out through company owned stores. China and the Southeast Asian region. Korea. • The Coffee Bean and Tea Leaf Company. promising to deliver a Vietnamese experience to its patrons. the Philippines. Singapore. Much of its expansion effort was through franchised operations. Saudi Arabia. Thailand was a reluctant majority ownership.
Expanding the Starbucks Empire
Starbuck’s first foray into marketing coffees abroad began with operations in Vancouver Canada in 1987. Church’s Chicken. Indonesia. It had a total of 104 cafés in Singapore. Its largest presence outside the United States was in Japan where it operated 40 stores. Cinnabon. The frequent use of the joint venture form.also eyeing the global market and some had selectively ventured abroad to set up cafés especially in countries such as Japan. The company was trying to cash in on its origins. an Atlanta-based food company with a fairly large footprint in the fast food business. prior retail experience. Israel. In early 2002 Starbucks was forced to buy-out the interest of its local partner as a result of financial difficulties experienced by the partner. Thailand (97% Starbucks) and the United Kingdom (wholly owned as a result of the acquisition of a large existing coffee chain followed by rapid expansion). the company had opened close to 1. Ueshima had a presence in Southeastern China. and Japan and was looking for franchisees in the United States. founded in Los Angeles. However until 1995. Taiwan. the company set forth fundamental qualifications it expected of its potential partners. operated 400 outlets in that country. The exceptions were Australia (90% owned by Starbucks). Starbucks international expansion was achieved primarily through joint ventures and licensing agreements. The company had also entered into franchising agreements with Ueshima Coffee Company to sell Tully’s products in Asia (outside Japan). South Korea (40% Starbucks).000 locations in over 20 countries by 2002. Seatlles Best had expanded to Japan.S. • Seattle’s Best Coffee was a subsidiary of AFC Enterprises. Thailand. Even in this short list. operated over 2100 stores in Canada and 150 in the United States. however. • Tim Hortons. the United Arab Emirates and Korea. knowledge of local market conditions. Given the reliance on joint ventures and licensing as the preferred modes of foreign expansion. These criteria included financial solvency. primarily focused on the Pacific Northwest region. Malaysia. marketplace.
Before entering a new country.Exhibit 2
Starbucks’ International Operations and Partnerships Starbucks’ Agreement Ownership majority-owned 90% jv 19. Sydney Telegraph. changing trends and opportunities in the café markets. Schultz eventually had a change of heart and signed on with Hofer to set up operations in Sydney and Melbourne. 19. It was constantly in touch with café operators to keep abreast of the marketplace. and the potential demand for gourmet coffees in the country. S.C. After having been rebuffed by Howard Schultz once.com.
. licensed or joint ventures.5% jv-public 40% license – jv 18% license – license – license – jv 5% license – jv 50% jv 18% jv 19. de Mexico. de C.A. 2001.153 358 795 eoy 2003 Stores 60 15 45 45 21 5 70 5 12 570 30 5 98 42 57 6 35 82 13 20 137 37 470 1. the company conducted rigorous quantitative market studies and extensive focus group interviews to get a pulse of the marketplace and potential. Middle East M. W. appointing him Managing Director of Australian operations. Starbucks trained the management teams of all cafes at its Seattle facilities for a full 13 weeks. Puerto Rico MacNaughton Group Singapore Bonvests Holdings Ltd. February 7. 2002. As Starbucks International VP Peter Maslen
T. Thailand --------United Kingdom --------System-wide Company-owned Licensed/JV
Source: Merrill Lynch. Despite the intensive process of market and partner selection.H. New Zealand Restaurant Brands Ltd.3 Starbucks’ involvement in the operations of its cafes. Winning a partnership agreement. Malaysia Berjaya Coffee Co Mexico S. Markus Hofer was a prime example of this.L.5% license – jv 5% jv 19.
ability. p. he persisted by sending frequent reports about the coffee business in Australia. This training was an important part of the launch process because it helped the company imprint the values and meaning of the Starbucks experience on its new recruits.5% jv 18% jv 5% license – jv 19. varied only in degree. March 15. and “Bottom of the Harbour.912 572 1. Cup by Cup. Alshaya Co. however.” J. It was critical that the people who ran the front-end operations of the company exude the Starbucks spirit. “How to Become a Starbucks Millionaire. Liddle.L.” Australia internet. May 20. 2002.V. Hofer resigned his post in March 2002 when he decided to cash-out of the Australian business and sell his share back to Starbucks as a result of the generally sluggish performance of Australian operations. the company was constantly being courted for partnership ventures in many international cities. Rolfe. SA Switzerland Bon appetit Group Taiwan President Coffee Co. He had campaigned tirelessly to gain a Starbucks franchise in Australia.5% jv 5% majority-owned 97% wholly owned 100% April 2002 Stores 29 3 26 25 0 0 25 0 5 357 23 0 65 32 42 0 29 40 2 7 91 26 297 1. Philippines Rustan Coffee Corp. South Korea Shinsegae Department Store Spain Grupo Vips & Europastry. took much tenacity in addition to the desirable financial strengths.340
Country Partner Australia --------Austria Bon appetit Group China (Beijing) Mei Da Coffee Co China (Shanghai) Shanghai President Coffee Co Germany KarstadtQuelle AG Greece Marinopoulos Brothers SA Hong Kong Maxim’s Caterers Limited Indonesia PT Mitra Adiperkasa Israel Delek Development Japan Sazaby Inc.
8%). The company standardized its menu of coffee offerings in most locations worldwide with some localization of its baked goods and pastries. Mitra Adiperkasa.5 At that time Starbucks believed that it was not ready to move into Europe’s well established café scene.5%). accessed 10/6/02. Holland (3. the partner in Indonesia. The company’s first focus was Asia. while P. Starbucks was guaranteed a 5. Issue 2. 2002.6% of global imports). 2002
Asia and the Far East
The decision was made to go to Asia first because we felt that the maturity of the coffee market in Europe was very strong and was not going to change much over the years.3%). and not consumption.7%).000 in licensing fees and a 6% royalty. the 10 largest coffee importing countries for the decade of the 1990s were the United States (25. February 20. Starbucks first and largest international venture outside North America. The cafés were required to buy most of their coffee related supplies through Starbucks.T.” Tea and Coffee Trade Journal. Although the company’s equity position in its joint ventures varied across a wide range. Vol. These terms did appear to vary somewhat by location and market potential. “Starbucks brand is built on passion. Japan (7. For example it was reported that Delek Fuel. there was a tendency to minimize its holdings and require the local partner to shoulder most of the capital cost. For example Starbucks’ Shanghai partner used an airline catering company and a bakery chain to buy pastries. although many of the countries in the region were among the largest producers of coffee in the world and also frequently the original source of much of Starbucks coffee. Germany (14. Innovation. Starbucks’ Israeli partner. This continuous involvement and training ensured that the Starbucks experience was indeed consistent across locations. “Expanding the Coffee Experience: Starbucks Keeps Sales Brewing with New Products. but they could make mutually acceptable local arrangements for procuring baked goods. the United Kingdom (3.org/ market/importations.2%). paid $250. Italy (6. Pendergrast. Canada (2. Spain (3. October 1. Note that these are importation statistics. The Asian market was in its developmental stage and we had an opportunity to position Starbucks as a leader in a new industry.4%). inspection teams from Starbucks were dispatched every two months to make sure that the operations met company expectations and standards. “The Starbucks Experience Going Global. reportedly paid a $2 million licensing fee up-front. and Sweden (2.25% per year until reaching zero. and Global Expansion. Even in the case of Japan.5% royalty on sales while its local partner earned only a 1. Source: www. Exhibit 3 provides a comparison of the cost structures of North American and International company-owned stores.coffeeresearch.2%). and you can easily feel the passion of our partners in any of our international stores.
The Economics of Global Expansion
A Starbucks joint venture or licensing agreement required the payment of an up-front licensing fee.4 Once the cafes were up and running. the company would not source locally. 174. France (7. Even in its most recent expansion into Latin America.” Beverage Industry.0% royalty.8%). a royalty on sales after operations began and the purchase of all store furnishings and coffee-based materials from Starbucks itself. 5 According to the Coffee Research Institute. The company’s standards were so exacting that Starbucks even insisted on shipping its own roasted coffee back to coffee growing countries where it had operations. the second largest coffee importing country in the world.
The Caffeine Crusade
Starbucks had ventured into Canada very early on but true international expansion of its café concept was started in 1995 with its entry into Japan. which then fell by 0.
0% 2. Much of Asia had a very strong tea culture that had been nurtured over centuries.7% 4.0% 10. which were not available in the United States.) Total EBITDA margin Depreciation & amortization EBIT margin
EBITDA = earnings before interest. such as green tea frappucino. pre-open.4% 3. Afternoon Tea.3% 4.7% (44.0% 10.8% 7.
Japan.5% 4.6%) 5.2% 4. etc.5%) 22. the founders of Sazaby became interested in the Starbucks concept and then approached Howard Schultz to explore a joint venture in Japan. taxes.0% 1.0% 12. The company instituted a no-smoking policy because it believed that cigarette smoke destroyed the natural aroma of coffee.7% 4. 2002 North American 100.6% International 100.0%) . The blue chip consultants that Starbucks had hired prior to entering Japan unanimously concluded that a no-smoking policy combined with service in paper cups would ring the death knell for Starbucks. each with a 50% equity interest.) Other Total Cost of Goods Sold Gross margin Store Expenses Salaries & benefits Regional overhead Advertising Operating supplies Other (taxes. was introducing some variations that appealed to the local market.2. Starbucks and Sazaby constructed a very traditional equal partnership.2% (5. Sazaby. within a few short weeks after entering Japan. The JV had opened its first store in Ginza in August 1996 and had immediately attracted a loyal following. Sazaby had 180 outlets and was engaged in a variety of products ranging from lifestyle furniture and clothing to tea and confections. depreciation and amortization.7% 27. Tea drinking held the pride of place in countries like Japan where elaborate rituals had been devised to both institutionalize the beverage and establish tea drinking as an inextricable way of life in those societies. 2002.9% 3.4% 7. While on a visit to the United States. and had a visible presence in the important locales of Japan.
.4% 2.8%) 50.0% 16.2% 1. EBIT = earnings before interest and taxes. it was quite clear that the consultants were wrong on both counts. The no-smoking policy did not seem to hurt and the Japanese seemed quite comfortable sipping their coffees from paper cups. etc. Fortune came knocking on Starbucks’ door in the form of an unsolicited business inquiry from a Japanese group.6%) 16.” Merrill Lynch.Exhibit 3
Comparative Cost Structures of Starbucks’ Company-Owned North American & International Stores. It served its coffees in paper cups thus going against the grain on most of the conventional wisdom that had been passed down about retailing in Japan. May 20.7% 4. pp.4%
Net Revenues Occupancy costs Roasted coffee: Green coffee Other (freight.6% (8. The customers were educated about various coffee blends and exposed to an environment that was remarkably similar to the Starbucks cafés in the United States. shrink. In time the local venture.8% (38. etc.2% 27.3%) 61.4% 3. Source: “Starbucks Corp. Starbucks however set out to change these norms.2% (39. with the blessings of Starbucks.3% 0.8% 2. 26-29. However.) Food Milk Retail media (newspapers.5% 5.6% (49. which had been operating a chain.
S. 2002. Although average Japanese store sizes were half that of the United States.9 million to a loss of $4. December 2. However many believed that these measures were unlikely to make a significant dent.” BusinessWeek Online.-based chains such as Peet’s and Seattle’s Best had entered Japan with full vigor. we underestimated the size of the market just like we did in America.” BusinessWeek Online. ”Everyone realizes we cannot continue at this pace.S. the café was a success. the only unit within Starbucks’ international network to be listed independently of the parent.
“Is Japan Losing Its Taste for Latte Already? Losses Climb as Starbucks Japan’s Growth Grinds Down. The Palace of Heavenly Purity was after all the original residence of Chinese emperors and still the symbolic center of much of Chinese culture.
. The joint venture proved so successful that it undertook an initial public offering (IPO) in October 2001. Given the ingrained Chinese disposition toward tea. The company’s sales forecast had been trimmed by 10%. 2002.2 million.000. Many critics felt that nothing short of slowing down new store openings could help Starbucks return to the black in Japan. Starbucks executives believed that the decline in same store sales was core to their strategy. this is the best-performing market on a unit level for Starbucks in the world.” says Johanna Metzger. When it opened a café within the walls of the Forbidden City. China: Storming the Forbidden City. It first negotiated a licensing agreement with Beijing Mei-Da. and it had revised its earnings forecast downward from a profit of $7. It’s also the second largest in the world [after the U.”6 Starbucks had reacted by instituting a wide range of cost cutting measures that included procuring some supplies from Southeast Asia instead of from the United States. dollar equivalents of Japanese yen share price). The joint venture grew rapidly. When we came here in August of 1996. Saturation of some market areas had led to cannibalization as expected and the competitive battles between stores was playing out. Appendix B provides a comparison of Starbucks Japan with three major competitors at the time of the IPO. U. and we’re opening two new stores a week in Japan. a wholesale distributor for Starbucks since 1995 in the city of Beijing. promising to deliver the vaunted Starbucks experience at the nominal price of $2. chief marketing guru at Starbucks Japan. many of the traditionalists gasped at the seeming capitalist assault on the bastion of Chinese culture. reaching more than 250 stores nationwide by 2002 and was projected to operate more than 500 stores by 2003. September 9. These cafés charged roughly $7 for a coffee and the price entitled the customer to use its facilities for two hours. Coffee chain competitors such as Dutour which had been content to sit on the sidelines and serve robusta coffees at low prices in the early years had now migrated upwards into the rarefied reaches of arabica and higher margins. China opened its doors to foreign companies and Starbucks ventured in to test the waters. “Q&A with Starbucks’ Howard Schultz. At the lower end of the spectrum were the low priced chains which usually served robusta coffees below $2 per cup.50 per cup. We’ll have 500 stores by September 2003. they averaged nearly twice the sales. Starbucks sought to build a new niche.
In the year following the initial public offering in Japan.S. Starbucks had entered in a measured way.
Almost six years after we opened here [Japan]. Many customers used the cafés for meetings as well. Cultural criticism aside.Starbucks Japan priced its offerings much below the premier Japanese café chains such as Ginza Renoir which were billed as havens for the harried executive seeking peace and quiet.]. After years of studied disinterest. “We’ve downshifted a bit. heading toward 1. first testing its coffee in major restaurants and hotels in Beijing before setting up cafés. the share price tumbled from a peak of $690 to $101 (U. The company blamed the misfortunes on a faltering economy while analysts believed that competition had a role as well. So we’re sitting here today with approximately 360 stores.
a city that Starbucks rated as “saturated” the number stood at one café per 9400 people. the first two years of operations saw a consumer base of roughly 70% local Chinese. In Shanghai for example.html. Starbucks’ Shanghai partner trained a staff of 300 people who aggressively went out into the market to introduce the public to the intricacies of coffee.50. It was widely believed that sales growth in Shanghai would outstrip Beijing in the near term. to enter the Shanghai market. McIntyre. Our coffee shop looks like Starbucks but in terms of service. it will indeed be the U. an astounding level of saturation at one café per 475 inhabitants.K.By early 2002 the company was operating 25 stores in Beijing. The successful launch of a Starbucks café directly across from one of the oldest tea houses in the country in Yu Gardens. Mr.50 and $3. Although many market experts predicted that Starbucks’ consumers in China would be predominantly Western expatriates. and U-Like Coffee. Mr. right down to the décor. market was in many ways very different from Continental Europe.chinanow. September 1998
The café culture of Europe had been widely institutionalized over several generations. after all. so it’s with humility and respect that we come back to Europe. tables. Italy. Starbucks added Maxim’s Caterers as a partner at the same time.S.K. Coffee. Starbucks entered a joint venture with Shanghai President Coffee.
. It was. they tried hard to duplicate the environment and offerings of Starbucks. Although many Chinese consumers traditionally believed coffee to be foul tasting and bitter. many were now acquiring a taste for what they considered a luxury beverage. already had over 120. and the prices were extremely similar to outlets in the United States. In the two years that the company operated in Shanghai. (one of Shanghai’s premier historical sites) was testimony to its remarkable market entry efforts. Riding on the coattails of Starbucks’ success. A cup of coffee was priced between $2. a U. it was believed were hard to change. Many among the older generation had a favorite café right in their neighborhoods that they patronized. all hoping to garner a share of the coffee-smitten Chinese. American coffee had never earned a respectable reputation in Europe. A manager at U-Like. many local entrepreneurs were opening competing coffee chains. Peter Maslen. and coffees. for example. they can’t match us… at Starbucks you always have to queue at the counter. the company was happily
“Wake Up and Smell the Copy!” B.”7
Europe: The Coffee Bastion
We know that Europe has a long coffee tradition. This was somewhat surprising to some as the ambience in the Chinese cafés. Tea & Coffee Trade Journal. an exorbitant amount in a country where per capita monthly income was only $84. entering the Hong Kong market. http://www. magazine racks. Milan which had first inspired Howard Schultz. Heartened by the success in Beijing. Lu Yimin remarked “Our coffee is better than Starbucks. retailer with a chain of 64 cafés located in prime spots throughout the country in 1998. including educational activities focused on potential customers. equivalent of carrying coals to Newcastle. it increased the number of outlets there to 21.com/english/shanghai/city/features/ coffee. The company had adopted some novel ways of breaking down consumer resistance to coffee. While these were relatively small operations. BBC News. Starbucks launched its European expansion with the acquisition of Seattle Coffee Company. the menu offerings. the operator of Starbucks cafés in Taiwan.000 cafés. February 2002 If the company succeeds in establishing a major foothold in Europe. Even in Seattle. new entrants included Discovery Café. Although the U. Many of them were faithful copies of the Starbucks cafés. Loyalties.
Neighborhood cafés that had originated in Latin neighborhoods around Calle Ocho and Sweetwater had spread like wildfire engulfing the entire city.
M. With Humility and Respect. catch on with Austrians because we have the best coffee in the world. Technically Starbucks had opened its first Latin American coffee shop in Puerto Rico in August 2002.” The Seattle Times. the Latin American experience had started in Miami several years before. The main difference. and sweet potion known as café cubano. the elegant cafés skimmed the top of the market with old world charm and ambience while the neighborhood cafés resonated with the locals who stopped by for local gossip. and Germany.S. 2002
Latin America: Taking It to the Growers. the company proceeded to open chains of cafés in Austria. as quoted in“Starbucks Jolts Europe’s Coffeehouses. The Cuban neighborhoods of Miami were complex networks of walk-up kiosks. Miami’s Cuban population had brought their centuries-old coffee tradition with them.. Its initial foray onto the Continent was via a flagship café in Zurich in 2001. “Starbucks—that’s water. May 19. They were places in which members of the community gathered to discuss the news. An association of 274. and take-aways. seemingly flanking France and Italy for the ultimate assault. I don’t think people feel the need to go to a place like Starbucks to sip coffee for hours. “Who’s going to eat those stupid hamburgers when we have our wienerschnitzel and sausage stands?” Stefan Janny of Profil of Austria. neighborhood cafés. the Czech Republic and Germany into an association to preserve and protect the storied café culture from foreign influence. Ricardo Illy. Entry into the emerging economies of Latin America was a proposition quite similar to expansion in Western Europe. There was also the problem of entrenched competition from the up-market cafés in many European cities. a prototype fictional coffee grower. In many ways Miami possessed a much more sophisticated taste for coffee compared to its new rival.8 Some believed that the price of espresso could also pose a problem for Starbucks. Starbucks would have to pick its spot in the pecking order to be recognized. Seattle. thick. everybody said. home of the world famous Illy brand of coffee. Founder of the Slow Food Movement Common wisdom would be that it has to fail—that it would not. for decades as a symbol for good quality Colombian coffee. however. For example in Trieste. Juan Valdez. Still the company saw entry onto the Continent as a very serious challenge. could not. “Starbucks Goes to Europe. Italy. along with a strong shot of espresso. Hungary.” There was also bound to be some reverse competition from established Latin American players who wanted a piece of the U. Growing from strength to strength.. long lines of people were waiting to get in even before the store opened on a cold March morning. was that many of these economies were the ones that were growing coffee. planned to open a chain of cafés in Miami shortly under the Juan Valdez label. one local proffered a review. Many critics did not believe Starbucks could ever fill this role. When McDonalds arrived. To Peter Maslen’s relief.” The Wall Street Journal. Prendergast.30. while Starbucks charged closer to $2. but for all intents and purposes. push carts. had been widely promoted in the U. the Mayor of Trieste and Vice President at Illycaffe had organized café owners from Italy. peace and quiet.
In Italy. Many of these venues had become institutionalized over time. Starbucks coffees were not getting good reviews from dyed-in-the-wool coffee fanatics here. still less to buy take-away cappuccinos in paper cups. The average price of a cup of coffee at the local neighborhood cafés of Europe was about $0.relieved by the initial success of the British cafés. Miami was well known for its vibrant Latin culture with a strong leaning toward the Cuban coffee influence that predated the rest of the United States by at least five decades. April 9. 2002. Having become accustomed to a fairly strong. Alberto Bottalico. Austria.00. As could be expected. market. politics and sports of the day.000 Colombian growers. Much like Japan where there was a well established pecking order for cafés.S. The obstacles to an entry into Italy and France were formidable. the Colombian Coffee Growers’ Federation.
What markets should they enter next? Would it make sense for them to shore up their leading positions in the markets they were already in before launching further expansionary moves? With much of the low hanging fruit already gone. and Latin America would be no different. international expansion. There were rumors that Starbucks was looking at India as its next major market entry. a powerful Indian conglomerate. the price disparity between the local brew and the one that Starbucks offered was fairly steep. 2001. Barista had fitted its cafés with imported Italian furniture. creating insurmountable barriers to competitive entry.Starbucks insisted on holding prices at U. “Barista to Float Coffee Retailing Venture. it was now time for Starbucks to spell out a clear strategy of market selection and development that would continue to deliver superior performance into the future. and plans were being finalized for entry into Southeast Asia and the Middle East. before shipping roasted beans back to the Latin American stores. K. Furthermore Starbucks was sure to face competition from relatively well-capitalized Indian coffee chains that had already established roughly 200 cafés in major cities. the company would be able to bring its homegrown knowledge to bear. like Venezuela. Barista.S.S. The objective was to move into eastern Europe ahead of Starbucks.
In countries where there is a culture of espresso.–like levels throughout its stores worldwide.
. It had almost unflinchingly cannibalized its own sales through saturated store locations in the U. Owner of Arabica Coffee franchise in Venezuela. Associate Press Newswires. it presented challenges larger than those seen even in China. However. Many wondered whether Starbucks was up to the challenge. September 30. economic and social conditions that were quite similar to India. vivid and vibrant colors and an ambience that rivaled that of Starbucks—but at a lower price. Barista believed that its strategy would resonate very well with emerging markets which had a set of environmental. The venture had already established a roasting facility in Venice.
B. Although India was a logical next step in the implementation of Peter Maslen’s international growth strategy.9 Barista presented another competitive challenge. sometimes even four times as expensive.10 With a distinct focus on the emerging economies. August 29. Diagle. and appeared to be doing the same in other markets. Kurian. had opened 100 cafés in India’s major cities in a span of only two years. Starbucks cafés in the Middle East were instantly confronted with an Arab boycott. It had always believed that the first mover advantage was a critical ingredient in its success. Jean Paul Coupal. Most of its coffees were priced under a dollar. Staking new territory first meant that it could soon populate and perhaps saturate the markets with its cafés. Starbucks won’t have any sort of success. Brazil and Argentina. attention would inevitably have to turn to the emerging economies. Since the company had addressed many of the larger developed markets. to expand cafes into foreign markets. Even here Starbucks planned to source centrally and have the coffee transported to its roasting facilities in the U. when he had voiced strong support for the Israeli cause and denounced the Palestinian position. The result was an Israeli partner who wanted out. Howard Schultz had learned this lesson the hard way. Monthly per capita income in India was a scant $24 compared to China’s $84. But would this high price work in markets where disposable income was not high by any standard? Expansion in Latin America would take Starbucks into the heart of coffee-growing country. The front runner. Managing in emerging markets could also be politically charged.S. Late in 2001 the company had concluded an agreement with the House of Tatas.” Business Line. 2002
The Road Ahead
Starbucks was in a race for growth. There is no room for mediocrity.
4 31.541 1.0 99.3 21.1 1.9 22.2 9.0 2.1 2.962 France 59.8 17.8 94.2 1.1 21.3 4.5 2.145 Switzerland 7.0 20.3 2.919 Poland 38.2 5.6 25.7 10.8 96.5 1.6 71.8 84 7.3 11.4 30.
.4 12.2 48.1 168.7 Y-o-Y* 97-01 (%) -10.410 1.453 Hungary 10.3 32 127.4 8.7 39.0 11.9 13.6 2.396 Norway 4.9 -1.6 30.3 31.5 1.9 2.3 192.5 0.2 1.3 18.3 85.4 6.267 Czech Republic 10.3 10.5 21.7 47.7 7.017.011 Germany 81.0 1.486 Sweden 8.6 8.611 22.0 165.8 3.6 11.9 30.3 126 3.2 -12.0 4.5 2.2 9.9 -12.8 89.3 -0.2 2.3 12.4 3.016 Belgium 10.0 4.2 Retail Coffee Consumption (thousands of tons) 1999 2000 2001 18.6 6.4 30.1 -1.2 4.Appendix A EUROPE
Retail Coffee Consumption and Population by Potential Market Retail Coffee Consumption (thousands of tons) 1999 2000 2001 31.9 54.8 190.6 CAGR* 97-01 (%) -2.1 14.0 61.7 160.6 Y-o-Y 97-01 (%) 8.0 27.3 3.5 1.4
2001 Avg Monthly Population Earnings Country (millions) (US$) Austria 8.6 191.3 48.2 28.8 22.8 57.6 1.8 -3.5 8.108 Greece 10.0 59
*Y-o-Y growth 97-01: Year-over-year growth rate for the 1997-2001 period (2001/1997-1).620 61.6 3.2 2.8 9.9 21.4 52.1 364 Italy 57.0 7. Source: Euromonitor—Global Market Information Database.4 29.4 9.3 1.0 3.5 14.6 14.6 352.4 -0.7 4.4 2.6 2.6 70.7 53.8 2.8 1.056 United Kingdom 59.4 1.1 -1.2 29.7 26. CAGR 97-01: Cumulative average annual geometric growth rate for the 1997-2001 period.8 36.5 2.5 2.1 7.7 -0.3 -3.0 42.529 22.2 -7.7 418 Russia 145.6 46.2 2.2 0.0 353.2 1.1 28.4 28.8 -0.0 30.281.9 CAGR 97-01 (%) 2.6 10.7 180 81.9 2.1 52.8 85.3 48.6 58.6 37.2 18.6 1.8 3.2 350.3 65.1 1.2 5.4 24 212.6 803 77.1 2.5 6.1 24.0 105 Spain 39.9 4.715 47.3 7.4 14.3 58.4 85.223 ASIA & AUSTRALIA Country Australia China Hong Kong India Indonesia Japan Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2001 Avg Monthly Population Earnings (millions) (US$) 19.4 48.5 40.28 364 Finland 5.2 38.6 5.7 31.2 10.9 27.3 58.2 8.
6 2.0 CAGR 97-01 (%) -1.3 4.0 27.4 33.6 405 6.3 Y-o-Y 97-01 (%) -5.7
MIDDLE EAST Country Egypt Israel Saudi Arabia AMERICAS Country Argentina Brazil Canada Chile Colombia Mexico United States Venezuela
*Y-o-Y growth 97-01: Year-over-year growth rate for the 1997-2001 period (2001/1997-1).2 28. CAGR 97-01: Cumulative average annual geometric growth rate for the 1997-2001 period.0 10.0 Retail Coffee Consumption (thousands of tons) 1999 2000 2001 27.2 4.8 12.
.0 540.Appendix A
Retail Coffee Consumption and Population by Potential Market (continued) 2001 Avg Monthly Population Earnings (millions) (US$) 63.7 10.0 12.8 2.6 47.2 41.0 46.0 27.1 44.2 4.6 367 Retail Coffee Consumption (thousands of tons) 1999 2000 2001 4.7 2.2 4.974 2001 Avg Monthly Population Earnings (millions) (US$) 37.4 CAGR* 97-01 (%) 8.4 641.1 19.2 694.5 388 100.3 19.8 0.9 413 30.2 41.9 34.1 50.6 66.5 7.3 1.4 281 276.154 24.9 28.6 7.2 27.3 379 39.3 41.2 4.2 42.7 9.2 648.3 740 168.4 13.0 32.4 8.7 561. Source: Euromonitor—Global Market Information Database.640 21.4 Y-o-Y* 97-01 (%) 39.2 6.9 1.6 569.6 2.3 34.9 1.2 26.9 3.1 18.0 13.096 15.
0 17.7 5.9 4.0 0.2.1 30. taxes.1 Ginza Renoir 121 121 0 1 (6) na na na 100. October 15.0 36.8 4.8 71.4 89.9 9.Appendix B
Starbucks Coffee Japan & Competitors.1 18.2.2 15.6 86. October 2001 Starbucks Coffee 227 227 0 110 (0) ¥500 ¥180-200 ¥70-80 100.0 18. and amortization Source: Starbucks Coffee Japan.6 .9 63.0 28. p.1 6.
.4 0.0.4 11.5 5.5 12.2 Doutor Coffee 766 158 892 100 (18) ¥300-350 ¥100-120 ¥80-130 100.7 2.0 10.9 .7 5.8 13.8 50.5 4.4 7.3 5.0 0. depreciation. 2001.9 Tully’s Coffee 23 19 4 15 (0) ¥400-450 ¥60-80 ¥20-35 100.6 37.3 49.5 18. Daiwa Securities.3 9.9 9. 7-8.9 ---.3 2.0 49.5 13.3 61.9
Number of stores Directly operated Franchises Number of openings (closings) Average purchase per customer Annual sales (million ¥) Capital expenditure (million ¥) Percent of Sales Comparison (%) Sales Cost of goods sold Gross profit Labor Rents Royalties Other Total SG&A EBITDA Depreciation Operating profit Taxes Net income
na = not available EBITDA = earnings before interest.2 0.0 12.9 2.6 39.2 25.