Case 4.1 Coping with the four dimensions of distance in the international expansion of Starbucks[i]
US-based Starbucks, established in 1971, is the largest coffee house company in the world. When it decided to leave its North American base, it opened its first overseas locations in Japan and Singapore in 1996, and it quickly expanded throughout Asia, Europe, Latin America and the Middle East. By early 2003, Starbucks had 1,532 coffee houses outside the US and Canada – 23 per cent of its 6,526 stores worldwide. However, these international stores accounted for less than 10 per cent of its total revenue. Returns on its overseas investments varied from country to country, but by 2003, it had not yet earned a net profit on its international investments as a whole. Nonetheless, Starbucks continued to expand into international markets despite slower profit growth and lower profit margins in these markets. In 2008, the global recession forced the company to refocus its strategy. Starbucks had expanded into too many low-profitability locations and this led Howard Schultz to resume his position as CEO, after spending eight years as chairman.[ii] Schultz remained in this position until April 2017, until he was succeeded by Kevin Johnson as the company’s new CEO.
While under Schultz’s leadership, Starbucks re-evaluated locations in terms of growth potential and closed 800 stores in the US, and 61 out of 84 locations in Australia.[iii] Most of these store locations had been open for less than two years and were established to drive incremental revenue rather than market share growth.[iv] Emerging markets are attractive to Starbucks as they have a growing middle class with greater disposable income to spend on high-quality beverages. Starbucks used its past experiences in the US to guide its expansion in these foreign markets. The company has been extremely disciplined in selecting locations by using statistics and models to identify and quantify business opportunities.[v] Most importantly, it strives to create the expected Starbucks experience while remaining locally relevant to the markets it operates in.[vi]
Cultural distance
The most important feature of cultural distance for Starbucks is the consumers’ relative preference for coffee vis-à-vis other drinks. Japanese and Chinese consumers are so used to drinking tea that it was not easy to cultivate a preference for coffee; most Latin American countries do not have an established mass consumer coffee market either.
Even in countries with a deeply engrained coffee drinking culture, local tastes are sometimes very different from what Starbucks offers. For example, Starbucks coffee appears to be more bitter than the classic Italian espresso and milder than the usual Austrian brew.
Yet, another cultural barrier is that the Starbucks brand has been associated with globalization and the export of American culture. For some Austrians, Starbucks coffee damages European values more than Coca-Cola. Even harder to overcome has been the perception in France of a linkage between Starbucks and American cultural imperialism.
Europe’s café traditions are entrenched and subtly different from those in North America. For example, in many Italian cafés, customers can purchase light lunches, cigarettes and pastries, as well as coffee. In Austria, people meet in coffee shops, smoke and drink there, and read free newspapers. These traditions contrast with Starbucks’ ‘take-to-go’ approach and its non-smoking policy.
Furthermore, sometimes certain cultural contexts exist whereby a widely practiced religion influences what most of a population can or cannot consume. For example, in the Middle East, a large percentage of the population follows Islam under the Muslim religion. Individuals practicing this religion can only consume halal food, adhering to religious rules, which greatly influences what companies like Starbucks can sell to consumers.
Administrative (or institutional) distance
Administrative distance in some host countries has also hurt Starbucks’ operations. For example, Starbucks registered its trademark in Russia in 1997, but did not immediately open any cafés there. In 2002, a filing was made by Sergei Zuykov to annul the trademark because it had not been used for the registered purpose, and he registered the name on behalf of a Moscow company. In 2005, Starbucks finally won its case as Russia aimed to join the World Trade Organization and inevitably enforced stronger intellectual property laws.[vii] However, as a result of the long legal battle, Starbucks suffered delays entering into Russia, one of the fastest growing retail markets in Europe.
Similarly, in Shanghai, China, Shanghai Xingbake registered its name as the standard Chinese translation for Starbucks in 1999, and also used the green-and-white Starbucks logo; in Qingdao, China, another coffee shop used the same Chinese name. Starbucks had to file a lawsuit, which it finally won against Shanghai Xingbake in early 2006.
Along with the legal battles parlaying in Russia and China, Starbucks also filed a lawsuit in 2018 against Delhi-based coffee chain ‘Sardarbuksh’ in India. ‘Sardarbuksh’ not only copied the company name, which is phonetically similar, but also infringed upon Starbucks’ trademark.[viii] Starbucks and the Delhi-based coffee chain came to a settlement, agreeing to rename ‘Sardarbuksh’ to ‘Sardarji-Bakhsh,’ while also amending the company’s logo.[ix]
Geographic distance
Geographic distance has affected Starbucks’ international expansion path. Starbucks opened Canadian stores as early as 1987, operating them essentially as domestic stores. In its Latin American expansion, Starbucks launched its first stores in Mexico, the Latin American country closest to the US, both geographically and culturally.
Geographic distance has also affected the choice of cities within host countries. In developing countries, major cities usually have better information infrastructure, thus facilitating information flows between overseas cafés and corporate management, and reducing bounded rationality.
Economic distance
To expand, Starbucks required a consumer base with a certain level of wealth. In many developing countries, Starbucks encounters problems because it is comparatively expensive. In Shanghai in 2001, for example, an espresso drink at Starbucks sold for CAN $4.90, nearly double the price of an entire meal combo at McDonald’s.
Moreover, economic differences affect Starbucks’ operational costs. For example, real estate costs in some host countries are far higher than those in the US.
How Starbucks reduced distance from foreign markets
Starbucks has used various tactics to reduce its distance from foreign markets. To reduce cultural distance, Starbucks has conducted extensive research in each country, using focus groups and quantitative analysis, to evaluate local cultural sensitivities and preferences. To reduce its cultural distance vis-à-vis Japan and China, for example, Starbucks decided to market its chic western image, rather than its coffee. In Europe, especially in those markets with a long coffee tradition such as the Scandinavian countries, France, and Austria, Starbucks has behaved very deferentially and diplomatically, stressing its respect for local cafés. To reduce the appearance of cultural imperialism, Starbucks has expanded into Europe in a low-key, humble and subdued way. In the Middle East, Starbucks translated product content into Arabic, added halal foods to accommodate for dietary restrictions, and refrained from offering alcohol on the menu to account for the local Muslim religion.[x]
To reduce economic distance, Starbucks has expanded primarily into developed countries. In developing countries, it has focused on major cities first (e.g., Beijing, Shanghai, Mexico City, Lima, Santiago) and only later expanded into smaller cities when confident that the smaller cities had consumers with the necessary disposable income.
To reduce criticism in the area of corporate social responsibility, Starbucks has established a policy of paying premium prices for coffee beans from local farmers in Mexico and Peru who use environmentally friendly techniques.
To reduce its own overall ‘foreignness’, Starbucks has sometimes partnered with local businesses.
Starbucks’ patience and tactics appear to have paid off. CEO Howard Schultz noted in 2004 that the firm’s international operations had finally started to show a profit.
Starbucks and Italy
Starbucks initially chose not to enter Italy despite this country being an important source of inspiration for the firm’s functioning. Howard Schultz envisioned evolving Starbucks coffee roasters into coffee shops after experiencing the Italian coffee culture in the 1980s. However, Italian customers have very different expectations as to what a ‘coffee experience’ should be, as compared to what is offered at Starbucks locations. Many variables, including the beans used, the size of the drink, the nature of the cups, and the speed of the service make the Italian market a challenge for Starbucks to enter. Criticism from local consumers was also a concern as many Italians consider Starbucks to be a symbol of American imperialism.[xi] Finally, the highly saturated coffee market in Italy made this location unattractive from an expected profitability perspective. For these reasons, Starbucks originally shied away from Italy with Howard Schultz claiming, “we haven’t looked at it as seriously as we had other markets, but at some point we will go”.[xii] However, the deep rooted traditions of the Italian coffee culture have slowly changed with competitors successfully offering coffee experiences that are similar to Starbucks’. Younger Italian consumers are looking for coffee shops that offer more than just a good cup of coffee; they want a casual atmosphere where long breaks can be taken. Keeping this in mind, Starbucks decided that it was time to enter Italy in 2018, but in a ‘modified’ way. Aside from opening its flagship roastery in Milan – the only roastery in Europe and one of five in the world – Starbucks had expanded to a total of eleven locations in Italy as of 2021, in partnership with Percassi [xiii], a reputed Italian company that supports large brands in establishing and operating franchise networks.
Starbucks has adapted its Italian product offerings to acknowledge that super-sized drinks accompanied with lots of milk would not align well with the coffee culture of Italy. Rather, Starbucks decided to offer espressos and made-to-order ice cream and pizza as staple items in Italy, instead of items listed on its classic menus.[xiv] In addition, the design of Starbucks’ Italian stores emulates a high end fashionable aesthetic to cater to the world’s design and fashion capital.[xv] Furthermore, the centerpiece of Milan’s roastery utilizes a bronze roasting cast, as opposed to copper used within the Shanghai and Seattle locations, as bronze is a material notorious in Milan design and architecture.[xvi] While these factors have been tailored to fit the culture of Italy, customers have begun to adapt to “Starbucks [as a] Third Place – [a space] between work and home – where they can come to study, catch up with friends or simply take a moment out of their day to relax over a warm cup of coffee.”[xvii]
Starbucks moving forward
In 2008, Starbucks’ sales began to decrease in several key North American and international markets as consumers’ income levels had been affected by the recession. Howard Schultz resumed his role as CEO to refocus the company’s strategy and brand, which he felt had become ‘commoditized’ by the rapid expansion.[xviii] As a result, underperforming stores were closed, and a greater focus was placed on customer experience and innovation. In the years following, Starbucks successfully introduced VIA, an instant coffee product, and released Starbucks K-Cups to provide clients with alternatives to their coffee experience. K-Cups provide Starbucks’ consumers with the opportunity to brew their very own cup of Starbucks coffee at home using the Keurig single brew system. The company also removed ‘Starbucks Coffee’ from its logo to better position itself for moving into new product lines and international markets.
Along with Starbucks K-Cups, Starbucks attempted additional innovations during 2009 by piloting the sale of alcoholic drinks and night-time hours in Seattle. Given the success of this pilot project, it rolled out its evening menu to thousands of stores,[xix] only to later halt all but nine locations serving the evening menu. Media suggested that challenges related to service and food offerings were the two main factors that caused the program to fail.[xx] For instance, Baristas switching to serving food that didn’t align with that of a coffee shop represented an odd adjustment; and adding a new product like alcohol altered the image of the coffee chain, and not necessarily in a positive way.[xxi]
Aside from this setback, Starbucks established a successful joint venture in January 2012 with Tata Global Beverages to enter the Indian market. The initial plans were to establish coffee houses in 50 locations in major cities to capitalize on a newly booming coffee culture within the traditionally tea-dominated country.[xxii] Partnering with Tata, a company with a strong tea heritage and presence in India, helped to bridge the cultural gap. India provided a unique challenge for Starbucks because of the changes the company needed to make to its products to adapt to local tastes, mirroring a similar phenomenon that was discussed for the Middle East. For example, when McDonald’s entered India the company was forced to remove all items that contained beef products to cater to the local religion (Hinduism). Starbucks’ Indian operations also source 100 per cent of their coffee and food products from India, a first for any of its international operations.[xxiii] Indian regulations stipulate that any foreign entity can own a maximum 51 per cent stake in an Indian venture and must source at least 30 per cent of its inputs from local suppliers.[xxiv] Starbucks’ joint venture with Tata Global sources coffee entirely from the latter firm’s subsidiary Tata Coffee Ltd in Bangalore.
Moving forward to 2018, Starbucks announced the formation of a Global Coffee Alliance with Nestlé to expand its international reach of branded Consumer Packaged Goods (CPG) and Foodservice.[xxv] Under this alliance, Nestlé obtained the rights to license a variety of Starbucks’ coffee and tea products in home and away-from-home channels, while Starbucks received USD $7.15 billion from Nestlé. Moreover, Starbucks’ brand was advertised on the single-use capsule systems of Nestlé[xxvi]. The two companies also decided to collaborate by bringing Starbucks-Ready-To-Drink coffee beverages to consumers in Southeast Asia, Oceania, and Latin America by 2022.[xxvii]
In 2020, Starbucks announced a plan to optimize its North American metropolitan markets by revamping the formats of its stores in accordance with evolving customer preferences. This restructuring included closing approximately 820 stores in the U.S. along with an additional 790 already closed or ‘identified for closure’ locations.[xxviii] Starbucks’ restructuring plan included additional “drive-thru locations, the expansion of delivery and a pilot of curbside pickup-only coffee shops.”[xxix] By June 2021, Starbucks had over 33,200 company licensed and operated stores within 83 markets.[xxx]
Both in countries with a coffee drinking heritage (such as Austria), and in countries without such a strong coffee drinking heritage (such as Japan and China), Starbucks appears to have become successful. In fact, China is Starbucks’ fastest growing market outside the U.S., holding approximately 36% of the market share.[xxxi] That said, tea drinks remain the most popular drink in China as compared to coffee by approximately two times.[xxxii] It appears that despite varying levels and types of distance, Starbucks has experienced successful international expansion.
QUESTIONS
- What are the four dimensions of ‘distance’ in Starbucks’ international expansion?
- How did Starbucks reduce the ‘distance’ vis-à-vis host countries?
- What specific examples from the case demonstrate Starbucks creating new FSAs and recombining resources to overcome elements of distance?
- Looking only at the four dimensions of distance, should Starbucks invest in Japan or China? If yes, give the reasons why; if no, why not?
- If you had been in charge of the international expansion of Starbucks, what would you have changed (e.g., the pace, the choice of host countries)?
- Ghemawat left company-specific questions unanswered, but see if you can answer this one: in the case of Starbucks, what are the interactions between company-specific features and the four dimensions of distance?
- Can you provide an update on Starbucks’ international expansion, using materials available on the Web?
[i] John Authers and Mark Mulligan, ‘Coffee culture comes to the coffee-growers’, Financial Times (2003), 14; Ariane Bernard, ‘New American beachhead in France: Starbucks’, New York Times (2004), A.5; Paul Betts and John Thornhill, ‘Starbucks steams into Italy’, Financial Times (2000), 17; Keith Bradsher, ‘Starbucks aims to alter China’s taste in caffeine’, New York Times (2005), C.3; John Murray Brown and Jenny Wiggins, ‘Coffee empire expands reach by pressing its luck in Ireland’, Financial Times (2005), 27; Mure Dickie, ‘Starbucks wins key Chinese lawsuit over brand’, Financial Times (2006), 24; Steven Erlanger, ‘An American coffeehouse (or 4) in Vienna’, New York Times (2002), A. 1; Stanley Holmes, Irene M. Kunii, Jack Ewing and Kerry Capell, ‘For Starbucks, there is no place like home: its overseas expansion is running into trouble’, Business Week (2003), 48; Andrew Kramer, ‘He doesn’t make coffee, but he controls ‘Starbucks’ in Russia’, New York Times (2005), C.1; Glen McGregor, ‘Starbucks empire finds it a hard grind in China’, Times – Colonist (2001), C.7; Mark Pendergrast, ‘Career journal – manager’s journal: Starbucks goes to Europe .. . with humility and respect’, Wall Street Journal (Eastern Edition) (9 April 2002), B.16; New York Times, ‘Starbucks in European venture deal’, New York Times (2000), C.28; New York Times, ‘Starbucks sees overseas profit’, New York Times (23 May 2003), C.9; Andrew Yeh, ‘Starbucks aims for new tier in China CAFES’, Financial Times (2006), 17.
[ii] Howard Schultz, ‘Health growth’, Leadership Excellence (May 2011), 6.
[iii] Susan Berfield, ‘Starbucks: Howard Schultz vs. Howard Schultz’, Bloomberg Businessweek Online ( 2 July 2008).
[iv] Howard Schultz, ‘Health growth’, Leadership Excellence (May 2011), 6.
[v] Allen Webb, ‘Starbucks’ quest for healthy growth: An interview with Howard Schultz’, McKinsey Quarterly (March 2011).
[vi] Ibid.
[vii] Andrew Kramer, ‘After a long dispute, a Russian Starbucks’, New York Times (7 September 2007).
[viii] ‘Starbucks vs Sardarbaksh Local coffee chain agrees to change logo, name to Sardarji-Bakhsh,’ Business Today, (28 September 2018).
[ix] Rasul Bailay, ‘Storm in a coffee mug: Starbucks versus Sardarbuksh,’ Economic Times, (30 August 2018).
[x] Farah Fathy, ‘The successful story of Starbucks in the Middle East,’ Globalization Partners, (23 July 2020).
[xi] Adrian Michaels, ‘Starbucks bows to Italy’s baristi’, Financial Times (27 December 2007), 9.
[xii] Stephan Faris, ‘Grounds zero: a Starbucks-free Italy’, Bloomberg Businessweek (9 February 2012).
[xiii] Starbucks Company Information, 2019: https://stories.starbucks.com/emea/stories/2019/starbucks-celebrates-one-year-in-milan-plans-to-open-in-more-italian-cities/, retrieved 23 August 2021.
[xiv] Ivana Kottasová, ‘Starbucks is opening its first store in Italy. Frappuccinos aren’t on the menu,’ CNN Business, (6 September 2018).
[xv] Ibid, 13.
[xvi] Uptin Saiidi and Sarah Whitten, ‘Starbucks just opened its first location in Italy – see why it’s not your typical store,’ CNBC, (6 September 2018).
[xvii] Ibid, 13.
[xviii] Maureen Morrison, ‘2011 marketer A-List: Starbucks’, Advertising Age (7 November 2011), 30.
[xix] ‘Starbucks goes Big on Booze: Evening alcohol menu planned for thousands of U.S. stores,’ Financial Post, (24 March 2014).
[xx] ‘Starbucks Corporation (SBUX) Discontinues Failed Alcohol Test,’ Nasdaq News, (10 January 2017).
[xxi] Ibid.
[xxii] Geetanjali Shukla and K. R. Balasubramanyam, ‘All perked up: The entry of Starbucks will probably segment the Indian market, but existing cafe chains are unlikely to cede any ground’, Business Today (4 March 2012).
[xxiii] Starbucks Corporation, ‘The coffee we serve will be completely sourced locally’, Mint (31 January 2012).
[xxiv] Sapna Agarwal, ‘Starbucks will enter India in joint venture with Tata’, Bloomberg (31 January 2012).
[xxv] Starbucks Company Information 2018, https://stories.starbucks.com/press/2018/starbucks-and-nestle-form-global-coffee-alliance/, retrieved 24 August 2021.
[xxvi] Ibid.
[xxvii] Nestlé Company Information 2021, https://www.nestle.com/media/pressreleases/allpressreleases/starbucks-rtd-coffee-beverages-southeast-asia-oceania-latin-america, retrieved 24 August 2021.
[xxviii] Starbucks, Q3 Quarterly Report (2021), 11.
[xxix] ‘Starbucks to close up to 300 locations in Canada by the end of March,’ CBC News, (13 January 2021).
[xxx] Ibid.
[xxxi] Evelyn Cheng, ‘Starbucs faces more competition from local beverage brands in China, its biggest market outside of the U.S.,’ CNBC, (28 April, 2021).
[xxxii] Ibid.