Short Paper: Channel Strategy—Starbucks Corporation
Overview—Starbucks Corporation According to Starbucks’ 2011 Annual Report, the company is the premier roaster, marketer and retailer of specialty coffee in the world, with over 17,000 stores in more than 55 countries, as of fiscal year 2011. 011 was an important year for the company in that it celebrated its 40th anniversary (it was founded in 1971 in Seattle, with its first store in the historic Pike’s Place Fish Market) and also enjoyed one of its best years ever in terms of financial performance, with global revenues reaching $11. billion, an 11% same-store increase over 2010 for the company overall, with global sales (over the same period) rising more than 8%. CEO Howard Schultz noted that these impressive results were achieved during a time of dramatically rising commodity prices, including coffee, as well as a continually weak economic environment around the world, particularly in Europe and the U. S.
Due to the company’s strong performance over the last several years—a time during which time Howard Schultz instituted a dramatic turn-around strategy to cut expenses, close non-performing stores and pull back on some of its peripheral brand extensions like music and food—Starbucks is bullish on its prospects for future growth, particularly in foreign markets, where it plans to open 800 new stores in 2012, including its first-ever in India, where it is partnering with Indian conglomerate Tata. Starbucks began its strategy of expansion abroad in 1987, when it entered Canada.
Its first foray into a foreign market outside of North America was in Japan in 1996, where it has opened—as of 2011—its 900th store. The company reported that its international operations accounted for 22% of its overall revenue in 2011. As its core product, Starbuck sells high quality, whole bean coffee, along with handcrafted specialty coffee and tea drinks, a variety of food items (sandwiches, salads, etc. ) in its company operated stores and licensed locations around the world. The company also sells coffee and tea products through other retail channels such as grocery stores, Club stores and foodservice companies.
In a select number of its domestic and international stores, including the United Kingdom, Thailand, Canada and Chile, the company also sells coffee brewing equipment and other merchandise. Besides the primary Starbucks coffee brand, the portfolio includes Tazo® Tea, Seattle’s Best Coffee® and most recently the VIA® Ready Brew (instant coffee). Starbucks is one of the world’s leading brands, with its iconic mermaid logo so recognizable around the globe that the company joins a rarefied group of brand behemoths (like Nike, Coca-Cola and McDonald’s) where the logo by itself instantly conjures the brand, with no name needed.
In terms of culture, as a company, Starbucks is also known as much for its socially conscious stance on environmental issues, commitment to fair-trade practices and educational support for its farmers, plus its progressive employee-centric focus, as it is on its coffee. The company’s mission is to “balance profitability with a social conscience. ” What is the company’s current channel strategy? What is the reasoning behind this channel selection?
For its international operations, Starbucks chose a different path than it has taken with its domestic business, in which it owns its entire line of coffee-bar stores outright (leasing the space), with no franchise investments or partnerships. Instead, in its foreign markets, the company has adopted a strategy of joint-venture partnerships through company-operated and licensed stores to facilitate easy of entry, minimize risk along with upfront cost, and give Starbucks stores more appeal in the local community. As of the end of 2011, there were 2,326 company operated stores and 3,890 licensed stores outside the U.S. To evaluate and select its joint-venture partners, Starbucks developed a series of criteria, with the concept of “partnership first, country second” as a leading indicator so that the selection focused on company goals as opposed to country goals. This included seeking partners with similar values and corporate cultures, those with significant experience in the restaurant industry, plus sufficient financial resources to help saturate the market through “clustering stores” (a key Starbucks strategy). Partners were expected to make a long-term commitment, along with having a keen knowledge of the local eal estate market to locate and secure prime locations in high traffic, high visibility areas, another strategy that Starbuck employs with all its stores. The company notes in its 2011 Annual Report that licensees provide “improved, and at times, the only, access to desirable retail space”. For its licensee partners, Starbucks selects prominent local retailers with in-depth market knowledge and access, and requires employees working in these locations to follow the company’s detailed store operating procedures and undergo training classes similar to employees in company-operated stores.
How does the company’s channel design relate to the country in which the company is doing business? Does it make sense? When it sought to enter the Japanese market in 1996, Starbucks entered into a 50/50 partnership with SAZABY, a prominent, upscale Japanese retailer and restaurateur, that shared its commitment to providing customers with a highly trained, productive and service oriented work force, which Starbucks considers one of its primary competitive advantages.
The coffee culture in Japan at that time was that of a ‘kissaten’ or coffee house with a formal sit down atmosphere. However, Starbucks’s main competition in Japan was the largest and well-known chain of coffee houses run by the Doutor Coffee Company, which had gained popularity among young people with its more casual environment, where people stood at the bar as seating was very limited. Starbucks was able to effectively compete with Doutor by introducing its casual, yet more comfortable interiors that offered customers ample sitting room, and the option to dine in or carry out.
The company also had to overcome Japanese consumers’ initial unfamiliarity with the taste of espresso drinks (which it did through positioning espresso as a fine Italian beverage) and was also effective by adapting its drink menu to suit Japanese tastes by introducing a green-tea flavored coffee. How are the company’s competitive position and brand loyalty related to its channel selection? The design and layout of Starbucks stores has long been a driver of its success in China, where it recently opened its 500th location.
The company positioned itself, the European style ambiance of its stores, and its upscale coffee products as aspirational purchases which were appealing to China’s young and highly status-conscious up-and-coming middle class. But the stores’ layouts also served a more practical purpose—they offered a spacious, comfortable environment at a time when few restaurants offered air-conditioning. This propelled Starbucks stores to become the defacto meeting place for executives, gatherings of friends and the location of choice for China’s growing expatriate community to meet and do business since the stores offered free internet.
While Starbucks first entered the vast China market in 1999 via a series of 3 joint-venture partnerships with an initially low investment of 5% or less—High Grown Investment Group (majority shareholder in Beijing Mei Da), Shanghai Uni-President Starbucks Coffee Ltd. and Maxim Caterers Ltd. —since 2003, the company has embarked on a strategy of buying back equity ownership in these joint-venture partnerships.
Starbucks increased its holdings to 50% in Shanghai Uni-President Group in 2003, bought a 90% controlling stake in Beijing Mei Da in 2005 and in June of 2011, announced that it had signed an agreement with Maxim’s Caterers to give it a 100% ownership in over half of all the retail Starbucks stores in Mainland China. These actions indicate that Starbucks is now confident of its retail strategy in China and wants the control necessary to accelerate its rate of expansion in the country and “establish China as the second home market outside the U.S. with a goal of 1,500 stores by 2015”, according to John Culver, President of Starbucks International. Another critical market that Starbucks is focusing on is India, notorious among multinational corporations for its hugely inefficient bureaucracy, excessive regulations and confusing red tape along with widespread government corruption. Starbucks first attempted entry into the Indian market in 2007, but was unsuccessful due to both its inability to get government approval to invest or find a suitable joint-venture partner.
However, with the signing of an alliance at the end of 2011 with Tata, India’s flagship conglomerate that owns everything from Jaguar cars to steel mills and coffee and tea plantations in India, Starbucks is gaining a valuable foothold in a market whose domestic consumption of coffee has risen over 90% since 1998, according to government figures. Its agreement is two-fold—it will buy coffee beans from Tata and will work with the company’s affiliates to develop Starbucks outlets in Tata-owned hotels and other upscale retail stores.
There are also plans for operating stand-alone Starbucks stores in the near future with other joint-venture partners. Like China, India has a fast growing population of young, upscale and educated consumers who have much more disposable income than their parents and are attracted to Starbucks’ combination of European inspired coffee drinks and comfortable, yet sophisticated interiors. In addition to its retail footprint of company-operated stores and licensed locations (such as airports) Starbucks also views Asia as a promising market to sell its ready-to-drink bottled beverages.
In 2009, a licensing agreement was signed with Korean-based Dong Suh Foods to produce Mint Mocha Frappuccino®, Doubleshot Espresso® cans and Starbucks Discoveries® a chilled cup coffee beverage to sell in Korea, as well as export to Hong Kong. The company also signed similar agreements in 2011 to manufacture, market and distribute ready-to-drink beverages with European partner Arla, and Suntory in Japan. While Starbucks always encounters strong competition in new foreign markets, both from established local coffee chains, such as Cafe Coffee Day and Barista in India, Costa Coffee in London, along with the U. S. based Coffee Bean & Tea Leaf which is also focusing on rapid international expansion, Starbucks has successfully differentiated itself through its positioning as a clean, comfortable and inviting place in the neighborhood to connect with friends and business contacts, where you can have a positive coffee “experience” complemented by a knowledgeable, trained and friendly staff. Starbucks does have its detractors, usually due to its propensity to drive out local coffee establishments along with the high cost of a cup of coffee there, particularly in emerging markets like China, where only a small segment can afford its products.
In addition, while Starbucks puts a major emphasis on the quality and freshness of its beans to ensure its coffee tastes good, many are critical of its overly sweet, ‘handcrafted’ blended beverages, and some competitors, such as Coffee Bean & Tea Leaf, enjoy a better reputation in terms of the taste of the actual coffee. Ultimately however, Starbucks has carved out a highly profitable niche in its foreign markets through its proven channel strategy of working with established partners to develop and operate its popular stores in premier locations and sell a wide range of upscale beverages and food items in a warm and friendly atmosphere.
As the author of the blog, www. TheChinaExpat. com notes, increasingly Chinese consumers say they “love Starbucks—not the coffee per se” and rank Starbucks highest in terms of a place to gather. What changes do you recommend? Starbucks has done an enviable job in identifying the right partners to establish joint-ventures with and successfully penetrate foreign markets, even where most consumers were initially tea-drinkers. This strategy minimized cost, risk and gave the company a more local footprint.
However, as Starbucks has increasingly gained confidence in its ability to navigate new international markets, it’s likely that the company will continue to follow the path it’s currently pursuing in China and change the original ownership structure by buying out the equity stakes of its local partners. This will ultimately result in Starbucks fully owning its foreign operations over time to allow it to keep more of the profits, introduce new products and accelerate the opening of new stores.
Starbucks also has an opportunity to expand its distribution relationships with international grocery store chains to sell more of its pre-packaged products, including its newest offering, VIA, which should compete well with Nescafe’s instant coffee (which supposedly doesn’t taste good). As Howard Schultz notes in the 2011 Annual Report, CPG (Consumer Packaged Goods) are “on track to one day rival the profitability of our retail business”. There is also strong potential for the company to expand into the super-premium fresh juice segment with its 2011 purchase of Evolution Fresh, Inc. llowing it to more fully enter the $50 billion Health and Wellness sector. In conclusion, while Starbucks has returned its domestic operations to profitability, the U. S. market for Starbucks is close to being saturated, and the company is wise to look to foreign markets which still offer ample room to expand. The company should leverage the exceptional strength of the Starbucks brand in continuing to open new company-operated and licensed stores in premier locations abroad, seek ways to improve the efficiency of its supply chain by opening new roasting and distribution plants in key foreign markets (currently the only ones outside the U.S are in the UK and The Netherlands) and identify new sources for growing coffee and tea in countries with lower production costs such as India and China.
References
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