Starbucks - International Business - Case Study Example

Overexpansion Starbucks can be said to have expanded too fast to levels that it could not manage effectively. An account of the expansion and its impacts is given by Gray and Wal (2012, p. 43). The two authors note that in the early 2000s, Starbucks was focused on expansion, increasing its presence across the globe, opening additional stores and populating stores with a wide variety of products, including books and music. New stores were opened on a daily basis and an apparently new list of new products was introduced into the stores, until Starbucks could be regarded to be doubling as a gift shop. Gray and Wal (2012, p. 43) also quote the chief executive officer (CEO) of Starbucks, Howard Schultz, who indicated that the company was obsessed with growth, and that they took “our eye off operations and became distracted from our core business”. With the increase in presence in different regions and number of stores, Starbucks was able to realise increased profits. As well, every incremental product resulted in increased sales plus productivity in every store. The increase in the number of stores and products was however detrimental in some way. As indicated by Gray and Wal (2012, p. 43), the incremental changes caused Starbucks to slowly lose touch with what its customers wanted – that is efficient and high quality service, a high quality product (coffee) and a good place to enjoy it. The result was that the company did not offer customers the types of products and services that they desired. Eventually, Starbucks was forced to close 600 stores in the United States in 2008 and to reduce the number of its employees by 7 per cent because of an overall decline in productivity across the stores in light of the global economic crisis (Gambardella 2009, pp. 3-4; Tovstiga 2010, p. 31; Booker 2011; Mascarenhas 2011, p. 167). In addition to this, the company’s share price fell substantially because of a decline in the company’s overall performance (The Economist 2008; Tovstiga 2010, p. 31). The problems facing Starbucks can be attributed to the point that although businesses must make money so as to survive and be successful, their sole purpose should not be to make money (Speegle 2010, p. 77). Rather, it is important for businesses to focus on having the most desired products in the market, offer them to customers at a fair price, and ensure that the customers are satisfied. Even today, the problems of expansion still confound Starbucks. Although the company has been able to deal with the problems associated with the overexpansion in which it was engaged in recent years (Booker 2011), it has still opened 500 more stores across the Asia Pacific region, notably China (FlorCruz 2013). Also, in terms of the density of stores, Starbucks seems to be reaching customer saturation since it has very many stores operating close to each other (Gambardella 2009, p. 4). Hence, as the company continues opening new stores in different regions, it needs to ask itself a number of questions so that it does not repeat the decline that it experienced during the global financial crisis. These include how it can increase its size but still remain true to its customers, how far it can extend the brand before it dilutes it, how it can innovate without compromising its legacy, how it can spread its reach without losing control of the business environment, and how it can offer customers a sense of discovery while growing at a high rate among others (Simmons 2005, p. 106). Starbucks must address these questions in order to ensure that its expansion strategy in the Asia Pacific region and in other areas in which it will venture in the future becomes successful. Increased competition Starbucks faces growing competition from a number of players in the fast food industry. A review by Gambardella (2009, p. 4) suggests that even though Starbucks faces competition from similar coffee shops that operate as coffee-houses, its key competitors for the product itself (coffee) are the fast food companies such as Dunkin’ Donuts and McDonald’s. This means that in addition to being concerned about direct rivals in terms of other coffee shops, Starbucks now has to also worry about what major fast food stores are doing in terms of providing coffee to customers. Being a premium coffee shop, Starbucks is faced with the threat of fast food outlets like Dunkin’ Donuts and McDonald’s offering “cheaper but almost as good coffees” (Brizek n.d, p. 1). This means that customers who would like to take coffee but cannot afford the premium prices offered by Starbucks are likely to go for cheaper but good alternatives from such fast food stores. The competition from major fast food outlets is so stiff that after initially leading based on a Customer Loyalty Engagement Index survey of 2007, Starbucks surrendered the position to Dunkin’ Donuts in 2007 (Lamb Hair & McDaniel 2012, p. 532). Also related to this point is the argument that a survey conducted in the United states around the same time showed that over 60 per cent of Americans had scaled back on expensive coffee (such as the one offered by Starbucks) (Lamb Hair & McDaniel 2012, p. 532). This suggests that more and more people preferred cheaper coffees from other players either in the coffee shop category or in the fast food segment. According to Lamb Hair and McDaniel 2012 (p. 532), this was good news for fast food operators such as McDonald’s, which in turn started making plans to open outlets in 14,000 restaurants in the United States. With such a move, it can be argued that Starbucks lost a large segment of its customers. The years during and after the global financial crisis of 2008-2009 have also seen a further reorganisation of Starbucks’ competitors in the fast food sector. For instance, in addition to McDonald’s opening coffee bars in 14,000 restaurants in the US as indicated above, Dunkin’ Donuts capitalised on Starbucks’ woes during the global financial crisis to increase its customer numbers such that 63 per cent of its sales in the United States were from beverages (Lussier 2012, p. 152). By 2008, Dunkin’ Donuts was the largest chain for coffee and baked goods, offering services to 2.7 million customers a day in about 8,800 outlets located in 31 countries (Lussier 2012, p. 152). Also, Dunkin’ Donuts has continued to push toward dominance in offering coffee and donuts, having opened 338 new locations in the first six months of 2010, and with plans to be present in 15,000 locations the world over by 2020. The main attribute that seems to be propelling Dunkin’ Donuts to greater heights is focus on the strength of the brand and quality of its products (Lussier 2012, p. 152), which is similar to what Starbucks used to offer before it started the unplanned expansion and growth that eventually adversely affected the quality of its products and services as explained above. Therefore, Starbucks needs to put emphasis on high quality service, high quality product (coffee) and a good place to enjoy it, as was the case initially. Decreased discretionary income among customers Since the occurrence of the global financial crisis, reduced discretionary incomes among customers have forced many of them to stay away from the high prices offered by Starbucks for its products. According to The Economist (2008), prices of food items were at an all-time high during the global financial crisis. This scared off customers, who instead of going for the expensive coffee offered by Starbucks, decided to try cheaper coffee alternatives offered by fast food chains such as Panera Bread and Dunkin’ Donuts. The Economist (2008) notes that these chains offer coffee at a price that is about one quarter of the price offered by Starbucks for its premium coffee. This undoubtedly explains why a survey in the United States showed that 60 per cent of Americans had reduced their consumption of expensive coffee (Lamb Hair & McDaniel 2012, p. 532) as indicated above. It is also argued that because of prevailing poor economic conditions, customers may have less discretionary income to spend (due to the fact that they set aside a large part of their money for other more pressing needs) (Gambardella 2009, p. 3). Therefore, the pool of potential customers who would have bought Starbucks products may decrease based on the prevailing conditions. This is particularly the case since other competitors in the fast food industry (mainly Dunkin’ Donuts and McDonald’s) have been reported to be realising increased sales and market penetration (Gambardella 2009, p. 3). Although Starbucks caters to a different market segment compared to Dunkin’ Donuts and McDonald’s, there is a possibility that Starbucks may continue to lose its existing and potential customers to the major rivals if it continues to rely solely on the premium coffee segment. In addition to the above information, an analysis of Starbucks’ prospects by Sun et al. (2013) shows that instabilities in economic factors such as labour costs, variations in discretionary income and employment have greatly affected the performance of the company. For instance, the company had to shut down 79 stores in 2012, many of them located in the Europe, the Middle East and Africa (EMEA) region as a result of weak economic performance. Such instances are an obstacle to the company’s growth plans. As well, in an unfavourable economy, the price premium that Starbucks charges its consumers may only serve to put the company in a vulnerable position since customers are more likely to be keen on selecting cheaper options (Sun et al. 2013, p. 7). Cultural differences in different areas of operation Because of increased competition in the United States, Starbucks is expanding into other new markets, especially China. With 500 new stores in the Asia Pacific region as mentioned above, the company hopes to get a strong footing in large markets such as China. However, capturing the market in China is not easy because of cultural differences between China and the Western world. While Starbucks is marketing coffee, China is a country whose population has a tea-drinking culture (FlorCruz 2013). Therefore, Starbucks seems to be literally trying to change the pop culture: what the people in countries such as China drink and eat, when they work and play, and how they use up their time and money (Ferrell, Fraedrich & Ferrell 2010, p. 450). As a result of the culture in China, which is set to surpass Canada as Starbuck’s largest market outside the United States, the company has had to do a lot of tailoring to its marketing processes to suit the Chinese market. For instance, the company came up with a brand of Starbucks branded teas in the country in 2010 to suit the needs of the people (FlorCruz 2013). In addition, it had to introduce blends of coffee that utilised coffee beans that were sourced locally (FlorCruz 2013). Further, the company has to select its target market segment in China carefully, mostly targeting China’s growing white collar population, particularly individuals who have been acclimatised to the Western coffee-drinking culture since the product’s price is higher compared to local standards (FlorCruz 2013; Kline 2005, p. 201). Yet, despite these efforts to suit the culture in China, Starbucks has been able to maintain a market share of only one per cent of the country’s hot beverage industry, with studies showing that in 2012, on average, every person in China only took two cups of coffee, which is far below the world mean value of 134 cups per person annually (FlorCruz 2013). From the information above, it is apparent that Starbucks still has a lot to do it if it is to venture into new markets such as China and become successful. For instance, de Mooij (2010, p. 273) argues that the brand concept is largely a Western, individualistic occurrence since brands in general are positioned as unique personalities with abstract traits in terms of personality characteristics. Further, de Mooij (2010, p. 273) notes that across individualistic cultures (such as the United States) personality traits differ, meaning that one brand personality will not be equally attractive across all cultures. This can be said of the Starbucks brand in China, which has not been able to flourish in the country despite having been able to take the Western countries such as the US and Canada by storm. Starbucks thus needs to continue using strategies such as introduction of Starbucks tea to win the market progressively and to rely on local partners for expansion (Booker 2011). 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