The case study reveals that Starbucks’ international presence is extensive. However, Starbucks does not currently have a presence in Sweden, Bulgaria or Nigeria.
You are to provide a management report that must address the following 3 questions:
1) Using a range of appropriate market selection criteria, assess the attractiveness of these three geographic (Sweden, Bulgaria or Nigeria)markets for Starbucks (40%).
2) Based on your research in question 1, reach a conclusion as to which one of these three markets would be most attractive for Starbucks to enter, and explain why (20%).
3) Based on your answer to question 2, what entry strategy would you recommend that Starbucks adopts to penetrate this market and why? (40%)
Report
To: Starbuck’s Management
From: Market Analyst
Date: 12th July 2007
Re: Starbuck’s International Operations
Starbucks’ international presence is extensive; however Starbucks does not currently have a presence in Sweden, Bulgaria or Nigeria As requested, this report has the following aims:
1) To assess the attractiveness of the Swedish, Bulgarian and Nigerian markets to Starbucks, using a range of appropriate market selection criteria.
2) To reach a conclusion, based on this research, as to which one of these three markets would be most attractive for Starbucks to enter, with justification.
3) Recommend an entry strategy for Starbucks to successfully penetrate the chosen market, with justification.
Assessment of the attractiveness of the Swedish, Bulgarian and Nigerian markets
Starbucks already has an existing connection to Sweden: CEO Howard Schultz previously worked with Hammarplast, “a Swedish housewares company which marketed coffee makers” (Subhadra and Dutta, 2003). It was whilst working for this company that Schultz first became aware of Starbucks, who was a major customer of Hammarplast at the time. A relationship like this could be useful for marketing and branding purposes if Starbucks decided to enter the Swedish market. Sweden is also quite an affluent country, and long term member of the EU, making it likely that the residents will have disposable income to spend on coffees and other beverages. However, as the country has been attractive to foreign investment for a long period of time, the coffee market may be highly competitive, with existing companies having significant levels of market power.
Indeed, Durevall (2007) investigated whether the major multinational coffee exporters were exploiting their market power in national coffee markets by limiting the demand for imports of coffee beans by keeping consumer prices too high to enable mass market penetration. Durevall found that the Swedish market structure was “typical of many consumer markets for coffee, with four very large roasting companies, two of which are multinationals, plus many small ones.” (Durevall, 2007) As a result of this study, Durevall found that there was evidence of some market power in the short run, but none in the long run. This implies that better management of operations and branding could give a company long term market power.
The market for coffee and other beverages is also increasing in Sweden, as reported by Dairy Industries International (2001). This study measured the consumption of milk, and found that it had risen significantly over the previous few years. The study found that this was largely driven by consumption of coffee drinks, such as latte and cappuccino, and meant that milk drunk with coffee stood at 140 million litres per year in 2001, which is 10% of Sweden’s national milk consumption.
Bulgaria is considered for entry largely because of the strong economic growth it has experienced as a result of entry into the EU, with strong growth being experienced in the years prior to entry (Emerging Europe Monitor, 2007). However, the coffee market in Bulgaria has been developing long before this, with Business Eastern Europe (1999) reporting on the Israeli company Elite’s launch of coffee into the Croatian market in November 1999, following successful operations in other Eastern European countries including Bulgaria. This indicates that Bulgaria has been experiencing strong economic growth since the end of the 20th century, and has a population with sufficient disposable income to spend on products such as coffee.
However, Emerging Europe Monitor (2007) also offered an economic outlook and analysis for Bulgaria. This showed several negative economic indicators, including the fact that “the country’s current account deficit has increased by 37.3 percent year on year to EUR 1.5 billion in the first quarter of 2007″ (Emerging Europe Monitor, 2007). Also, despite the country joining the European Union in January 2007, the total volume of its exports grew by only six percent year on year during the first quarter of 2007, reaching EUR 2.84 billion. This shows that, whilst Bulgaria is experiencing positive benefits from joining the EU, they are not as pronounced as many analysts have claimed, and are not factors to base a market entry decision on.
Nigeria’s economy, in contrast, is heavily dependent upon the oil industry, with oil providing around 90% of export earnings and 25% of GDP. The rest of the country’s economy is still largely based on agriculture, trade and some limited manufacturing, with agriculture making up 40% of GDP (Economist Intelligence Unit, 2007) Indeed, whilst large amounts of the oil wealth have been invested in long term development programs, these have largely been poorly maintained and have become dilapidated. As a result, with fluctuating oil prices and instability in the Niger Delta (Cummins, 2007), where large portions of Nigeria’s oil comes from, mass poverty is still widespread in Nigeria. Indeed, whilst Nigeria has a population of almost 150 million, potentially providing a massive market for coffee, with GDP of only $832 per head, Starbucks will likely struggle to promote itself as a premium brand in Nigeria (Economist Intelligence Unit, 2007).
Conclusion – which of three markets will be most attractive for Starbucks?
Starbucks positions itself as a specialty premium coffee retailer, which sells a wide variety of coffees and other beverages, both hot and cold, together with snacks and sandwiches. The company currently has a network of over 10,000 coffee shops in 37 countries (Datamonitor, 2007) which give the company a strong and well known brand image and clear differentiation from many other coffee brands. This scale and strong brand give Starbucks a high degree of bargaining power with suppliers and also and differentiate its offerings. However, intense competition in the retail beverage segment could adversely affect the company’s profit margins, and the company is currently still strongly dependent on the US market for the majority of its revenue and profits.
As Starbucks is a premium coffee brand, it generally relies on its target market having a significant number of middle and high earners with disposable income to frequent its coffee houses. As a result, Nigeria is unlikely to be an attractive market for the company as it has such a significant proportion of its population below the poverty line. Also, the current tensions in the Niger Delta are in danger of spilling over into large scale anti-western sentiment, which Starbucks could find itself caught up in. For these reasons, Nigeria is the least preferred market for Starbucks.
Bulgaria is a strongly developing economy, with a growing middle class and increasingly close ties with the rest of Europe through its EU membership. As such, Bulgaria will likely be a valuable market for Starbucks in the future. However, as Bulgaria is still in an early stage of its EU membership, there are concerns over whether its economy is strong enough to support the type of conspicuous consumerism Starbucks depends upon. In contrast, Sweden is an affluent, well developed market, which currently has an oligopolistic coffee market. As such, there is space for a premium global brand such as Starbucks, especially if the company can manage its offerings enough to create long term market power, something other Swedish coffee makers have failed to do (Durevall, 2007)
Entry strategy for Starbucks to successfully penetrate the chosen market, with justification
As part of its strategy to reduce its dependence on the US by increasing its worldwide offering, Starbucks opened stores in several new countries in 2005, including Jordan, the Bahamas and the Republic of Ireland (Datamonitor, 2007). Also, in 2006, the company entered the South Korean market by importing US-produced bottled “Starbucks Frappuccino” coffee drinks, and is planning to enter markets in other developing countries, such as Brazil and the Russian Federation (Datamonitor, 2007). These new markets will enable Starbucks to growth significantly and, if successfully exploited, will help the company to diversify its revenues away from its current dependency on the United States. However, several economists and analysts claim that Starbucks’ international offerings are managed much worse than the US stores. These issues are compounded by the volatile international markets, which are often not anticipated or managed by executives (Subhadra and Dutta, 2003).
As a result, several analysts have claimed that Starbucks should “rethink its entry strategy in international markets and focus on pricing to achieve real success” (Subhadra and Dutta, 2003). Some analysts have also claimed that Starbucks should avoid risky developing markets where the political climate is uncertain and Starbucks may face resistance. Sweden’s political and market conditions are very stable, so this in not a major concern when entering the Swedish market. However, as Starbucks is entering a new market with established competitors, it needs to choose its entry and pricing strategies carefully in order to best penetrate the market and ensure long term success.
There are two main pricing strategies available to Starbucks when entering the market: skimming and market penetration (Jeannet and Hennessey, 2004). Both of these strategies can be combined with promotion and placement strategies to provide an overall marketing strategy. Given that Starbucks is positioned as a premium brand, a skimming strategy is usually seen as the best entry strategy, with the company leveraging its brand and setting a high price to attract the most affluent customers. This strategy would be combined with premium advertising and placement strategies aimed to position Starbucks as a luxury brand, associated with success, comfort and affluence. In contrast, market penetration would involve offering initial discounts and low prices with the aim of attracting as much market share as possible. The aim would then be to convert this market share into repeat and loyal customers, and gradually remove the promotional and discount prices to produce a consistently profitable operation (Ghauri and Cateora, 2006).
In this case, I would recommend that Starbucks follow a penetration strategy, in spite of its positioning as a premium brand. This is because the Swedish market already has two multinational coffee companies operating in it, and these companies are likely to vigorously defend their market positions against any new entrant. As such, if Starbucks attempts a skimming strategy, the incumbents will simply use their existing brand strength to reinforce their credentials as premium brands and hold on to their existing customers. However, Starbucks can use its bargaining power over its suppliers, and its strong financials and cash flows (Datamonitor, 2007), to maintain a price war for a significant period of time, wearing down the other companies in the marketplace whilst positioning itself as a provider of high quality, reasonably priced, beverages.
Whilst this strategy will likely result in short term losses for the Starbuck’s Swedish operation, these losses will all be incurred whilst attracting customers, i.e. in losses on the supply of coffee beans, rather than in losses on marketing and advertising, which are not Starbuck’s core competencies and which will all be sunk costs. Starbucks has the advantage of not needing to meet existing profit and revenue targets in the Swedish market, in contrast with the incumbents. As a result, if Starbucks is willing to pursue an aggressive pricing and entry strategy, it can grab market share from the incumbents, and can then use its experience, bargaining power and brand strength to grow sustained long term market power in the Swedish market.
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References
- Business Eastern Europe (1999) Bean counters. 20 Dec 99, p. 4.
- Cummins, C (2007) Unrest Grows in Nigeria. Wall Street Journal – Eastern Edition; Vol. 249, Issue 104, p. A6.
- Dairy Industries International (2001) Coffee fans boost milk consumption. Vol. 66, Issue 8, p. 7.
- Datamonitor (2007) Starbucks Corporation. Datamonitor Company Profiles Authority; United States.
- Durevall, D. (2007) Competition in the Swedish coffee market, 1978-2002. International Journal of Industrial Organization, Vol. 25, Issue 4, p. 721.
- The Economist Intelligence Unit (2007) Country Profile: Nigeria.
- Emerging Europe Monitor: South East Europe Monitor (2007) Export Growth Slowing. Vol. 14, Issue 7, p. 5.
- Ghauri, P. and Cateora, P. (2006) International Marketing, 2nd Edition. Mcgraw-Hill, Berkshire.
- Jeannet, J. and Hennessey, H. D. (2004) Global Marketing Strategies, 6th Edition. Houghton Mifflin Company, Boston.
- Subhadra, K. and Dutta, S. (2003) Starbucks’ International Operations ICFAI Center for Management Research (ICMR); Ref no. 203-032-1, p. 12.