MPS

October 2014.

The Failure of Starbucks Coffee See where they went wrong and how they may salvage their emerging Australian business

Customer Analysis Page 7

Porter’s 5 Forces Page 7

and much more...

October Issue of: BeanScene Pty Ltd Contributors: Belinda Barton 96097201 Scott Gardiner 11232321 Ellie Ratcliff 11391618 Matthew Spray 11228513 Stephanie Gelder 11204118 Tim Weston 11221076 Elizabeth Woods 11055023 Organisation Marketing Planning & Strategy UTS Kuring Gai Campus Eton Rd, Lindfield NSW 2070 (02) 9514 2000 ŠBeanscene Pty Ltd 2014 All Rigths Reserved

Editorial Why didn’t Starbucks take off in Australia?

This magazine will analyse why Starbucks failed in Australia, with a focus on where their marketing planning and strategy went wrong.

Established in 1971, Starbucks began as a single coffee outlet in the momentous Pike Place Market in Seattle, USA. Starbucks offered some of the finest quality coffee brew which is testament to their widespread global success today.

In 1981 Howard Schulz set foot in the Pike Place Market Starbucks for the first time, and it was at this time that Starbucks was destined for the colossal success it has today. Inspired by the romantic coffee scene most prevalent in European nations (namely Italy), Howard Schulz envisaged the American replica which would become the household norm for American’s ‘daily grind’.

Starbucks went on to establish themselves across the globe with 15,000 stores in over 50 countries. For the most part their internationalisation was a success with seamless integration into their newly discovered foreign markets, but not in Australia.

The following articles in the October issue of Beanscene Pty Ltd will provide an institutional standpoint as to why Starbucks have been unsuccessful in the internationalisation efforts (or lack thereof) when migrating to the beautiful shores of Australia.

Content

PESTLE Analysis 06

Customer Analysis 08

VRIO Competitive Advantage 14

Porter’s 5 Forces 16

Competitive Advantage 10 Porter’s Diamond 18

SWOT Analysis 12

PESTLE Analysis Macro Environment Political Forces. First of all, political factors refer to the stability of the political environment and the attitudes of political parties or movements. This may manifest in government influence on tax policies, or government involvement in trading agreements.

Starbucks has a large presence within the coffee industry and thus has several pressures from political aspects. Starbucks consists of various types of products from ranging corporate and governing offices. It shall be taken into consideration that, the volume of growth in the overall US coffee market has declined by 2.5% whereas the volume at which Starbucks has increased is by more than 12% (Schrage, 2004).

Economic Factors represent the wider economy so may include economic growth rates, levels of employment and unemployment, costs of raw materials such as energy, petrol and steel, interest rates and monetary policies, exchange rates and inflation rates. These may also vary from one country to another.

As the global market has seen some very unfavorable conditions over the past few years, the economy is a key aspect to consider for Starbucks. During 2010 & 2011, Starbucks was forced to close approximately 70 stores all over the world.

Due to the economic conditions not being ideal, there presents high risks in entering the market and maintaining success within the market.

Social factor represent the culture of the society that an organization operates within. They may include demographics, age distribution, population growth rates, level of education, distribution of wealth and social classes, living conditions and lifestyle.

Trends in coffee intake within the Australian market are increasing and show high demand. With the ever-present aging population, the need to consider social factors for Starbucks is important.

Technological factor refer to the rate of new inventions and development, changes in information and mobile technology, changes in internet and e-commerce or even mobile commerce, and government spending on research. There is often a tendency to focus Technological developments on digitaland internet-related areas, but it should also include materials development and new methods of manufacture, distribution and logistics.

Starbucks is one of the most reputable coffee brands in the United States, and this reputation enables them to stay ahead in other markets, such as the Australian and utilize processes from the US. They are able to utilize a successful robust distribution strategy. Starbucks had opted for various types of distribution strategies in order to reach maximum number of customer in a stipulated time frame (Schrage, 2004). The company has been trying to opt for various technological advancements including the Internet & the mobile applications. Starbucks launched a mobile payment system in the US.

“Everyone has their own opinion, but from where I sit (on a needlessly funky chair inside an advertising agency) Starbucks was doomed from the start...” - John Mescall, National Creative Director of, and a partner in, SMART

refer to the rate of new inventions and development, changes in information and mobile technology, changes in internet and e-commerce or even mobile commerce, and government spending on research.

There is often a tendency to focus Technological developments on digital and internet-related areas, but it should also include materials development and new methods of manufacture, distribution and logistics.

Legal factors are much like political factors, such as national employment laws, international trade regulations and restrictions, monopolies and mergers’ rules, and consumer protection. The difference between Political and Legal factors is that Political refers to attitudes and approaches, whereas Legal factors are those which have become law and regulations. Legal needs to be complied

with whereas Political may represent influences, restrictions or opportunities, but they are not mandatory.

There are several legal issues that Starbucks considers and needs to adhere to. There are several requirements that Starbucks needs to adhere to under employment law. There is also a range of health and safety regulations impacting them, along with consumer protection issues.

Environmental impacts can include issues such as limited natural resources, waste disposal and recycling procedures.

There is also a range of environmental factors that Starbucks considers crucial.

Starbucks holds the environment close to their business model and aims to create meaningful and sustained change.

The need for companies to become ‘greener’ and conduct themselves in a more sustainable manner is becoming more and more common. Starbucks is able to assist in this through building more energy-efficient stores. They also introduced easier recycling options for customers. This is all in a push to reduce their environmental footprint.

Customer Analysis They say that when Starbucks opened in Australia in July 2000, it was doomed to fail. Is Australia’s strong coffee culture the reason which led to the fail of Starbucks in Australia?

Market Segmentation The major problem with Starbucks is that it didn’t segment the market at all. Starbucks failed to divide the market into distinct groups of buyers with different needs, characteristics or behaviour who may require different products. Starbucks purely, ‘didn’t seem to pay much attention to product optimisation - in short, they just took what worked in the US, and tried it here’ (Mescall 2010, para. 3). The ultimate downfall resulted in the, ‘International coffee chain Starbucks to close 61 Australian stores’ (The Age, 2008).

The segmentation dimension failure to note the following:

64% of consumption is in breakfast hours

54% of people over the age of 18 drink coffee

Geographic differences – there was no knowledge of the importance of Australia’s coffee culture, Australian coffee culture is not tied down to the inner cities or trendy beachside holiday havens. Its front and centre in numerous country towns, wine regions and right across our cities.

Physiographic differences – the lifestyle, attitudes and interests of the market were disregarded. Coffee is now the dominant hot drink in Australia with 2.1 billion cups bought from cafes and other vendors a year.

60% of Australians need coffee to start the day

Purchasing behaviour – Australians believed in the unique coffee culture, selection of shopping venues, buying process and behaviour. Projects that Australians purchased approximately 23.4 million kilograms of coffee products in 2013.

Demographic – coffee is now the number one hot beverage across all age and socioeconomic groups Statistics: 54% people over 18 drink coffee, 64% total consumption during breakfast, 60% total percent of Australians need coffee to start the day.

Market Targeting When introducing the Starbucks chain to Australia, Starbucks opted for an undifferentiated strategy.

Starbucks failed to target a particular market and instead make the crucial error, ‘to adjust its product to suit Australians’ coffee tastes, of which lean more towards Europe’ (Patterson 2014, para. 10).Targeting involves evaluating each market segment’s attractiveness and selecting one or more segments to enter. However Starbucks failed to research Australia’s extensive culture and assumed it to be the same as the US.

Market Positioning Starbucks failed to create a competitive position for the Starbucks stores. They continued with the same menu and did not adapt to Australian culture. What worked in the US was bitter, weak coffee augmented by huge quantities of milk and sweet flavoured syrups. Not so much coffee, as hot coffee-based smoothies. For the Australian consumer, raised on a diet of real espresso, this was always going to be a tough sell. The failure of Starbucks continued when they immediately tried to impose themselves, with multiple store openings in every city. This positioning resulted in Australians to be unwelcoming to this American franchise. Starbucks imposed itself, taking key store sites, hanging huge signs and trying to make Australians order in coffee sizes like Grande and Tall. Basically, Starbucks said to us: “That’s not how you drink coffee. This is how you drink coffee.” Basically Starbucks was dumped on Australia’s doorstep failing to deliver to the Australian consumer an organic experience.

Competitive Advantage Strategy For a firm to sustain above average profits into the long run, it must position itself with a sustainable competitive advantage within the industry which it operates (Porter 1985). Despite the strengths and weaknesses a firm possesses, it must operate under a generic low cost or differentiation strategy when seeking to sustain above average profits and a competitive advantage over its rivals.

Dependent upon the scope of the industry, these strategies may focus on a broad scale or a variant of the two, which is low cost focus, or differentiation focus. The focus strategy applies to a narrow or niche market, as opposed to a broad scale market.

Cost leadership as a strategy refers to a firm becoming the lowest cost producer in the industry which it operates. The sources of the cost advantage vary, and may encompass economies of scale, technology, supply chain dominance or access to raw materials. These cost advantages, combined with an ability to command a price that is comparable to the industry average allow the firm to command higher returns and above average profitability.

However, if a firm is able to achieve these cost advantages, it must address the issue of differentiation. The firm’s product must be a sufficient substitute for competitor’s products in order to sustain the advantage

and avoid price cutting which may diminish the cost advantage and reduce profitability altogether.

Differentiation as a generic strategy relies upon the firm providing some unique aspect of its product or service to the market which is valued by the consumer.

This strategy allows the firm to position itself in the market with a premium attached to its price and therefore produce above average returns. This premium must offset the extra costs incurred in producing the differentiated product in order to successfully implement this strategy.

Starbucks Coffee is a commodity. It is broad-scale and consumed in a variety of products and ways around the world. It is a valuable resource that is accessible and easily processed, inviting a rich playground for competitors. A sustainable competitive advantage for Starbucks in Australia could not be replicated as it were in the United States, when Starbucks pursued growth through acquisition and dominating supply chains to eliminate competitors in a form of cost leadership.

Starbucks in Australia failed to achieve each of the generic strategies and was stuck in the middle. It attempted to implement its cost leader strategy through acquisition of leases and saturation of the Australian market in an attempt to dominate supply chains in the same way it operated in the United States. It also

attempted to implement a strategy of differentiation through offering a one-stop coffee shop that had elements of both product and service that were not readily available in Australia. This included a product menu offering a variety of coffee drinks and an ‘ambience’ including Wi-Fi capability, newspapers and other offerings for customers that allowed them to spend longer in the store. These differentiated aspects of the Starbucks model, whilst offering value to the consumer, were easily replicated and therefore unable to be sustained solely by Starbucks. Imitation of the differentiated aspects significantly eroded the profitability delivered and Starbucks was therefore unable to sustain this route to sustainable competitive advantage.

Starbucks pursuing the cost leadership strategy through acquisition of store space

and attempting to run competitors out of the market was at odds with the costs incurred providing the differentiated aspects of the product and service. Starbucks also failed to acknowledge the Australian culture that did not place significance on premium priced coffee products that were offered in complement with individualised service available at independent stores. The willingness of Australians to pay a premium for a differentiated service removed the ability of Starbucks to enter a cost-leader position through its supply chain dominance.

As it can be seen, Starbucks attempted to implement a combination of both generic strategies, and failed to achieve either of them. This rendered them ‘stuck in the middle’ and ultimately contributed to the failure of Starbucks in Australia.

SWOT Analysis Strenghts

Weaknesses

•

Over 9,000 coffee houses globally

•

Strong presence located only in America

•

‘Starbucks Experience’ - Free Wifi, coffee and social hub

•

Negative publicity not only in Australia but across the globe for poor quality coffee and customer service

•

Incredibly strong financial records, generating billions worth of profits globally

•

Lack of research when entering the Australian market

•

Globally recognised brand

Opportunities Threats •

Strong appeal to Australian coffee culture

•

Lack of penetrative coffee franchises

•

Westernised country, with similarities to the American culture

•

Large supplier networks to easily access Australian Markets

•

Gloria Jeans and Coffee Club entered the market around similar stages

•

Anti-Franchise mentality of Australians; ‘Support for the little guy’, creating extremely strong competition

•

McCafe exploits much the same qualities as Starbucks

•

The ‘Starbucks experience’ is easily replicated today

Value Only value-adding resources can lead to competitive advantage. So what does Starbucks offer?

•

Coffee?Shakes?

•

Teas?

•

Muffins?

•

Super-sizes?

•

Essentially what Starbucks have done is overestimate the customer-perceived value of the Starbucks services.

Rare Valuable common resources and capabilities must be RARE to lead to sustained competitive advantages.

•

Weak coffee augmented by huge quantities of syrup and sweet flavoured syrups

•

What we are looking at are ‘hot coffee based smoothies’!

•

The Starbucks brand was overestimating its points of difference.

•

Australia had an already strong coffee culture with world-class baristas, so the idea that Starbucks can come in as a franchise and charge a higher premium is unsubstantiated.

•

Quality of product compared to independent cafes was dismal

Imperfectly Imitable Valuable and rare resources and capabilities are a source of competitive advantage only if competitors have a difficult time imitating them.

•

•

Coffee consumption in Australia is 2.4kg/capita and rising, according to ABS.

average 1.23 million cups of coffee/ day •

•

The city of Sydney consumes on

Coffee is engrained in Australian society; nothing Starbucks has introduced is new.

•

Conclusion is that Starbucks has failed to adjust its product to suit an Australian offering

•

Lacked product optimization, they took what was working in the US and attempted to try it here.

•

The Starbucks business model is to charge a slight premium, so you can sit there for an hour on one really large coffee.

•

The business model was not sustainable, particularly in the high property rates of cities like Sydney.

•

‘Essentially Starbucks was not our (Australia’s) cup of coffee’

Except for maybe portion sizes, which have been proved to be incompatible with our culture.

Organisational Exploited Is a firm organized to exploit the full competitive potential of its resources and capabilities?

•

Lacked product optimization, they took what was working in the US and attempted to try it here.

•

Rapid expansion created a brand image of forcing itself in to the Australian culture, imposing a business not readily accepted in Australian society.

•

Attempted to impose itself on the Australian public

•

Experience created was not organic but implanted

•

Entered a mature market.

•

•

Relied on its reputation

Others like Gloria jeans offer a brand experience comfortable to Australians unlike Starbucks

Porter’s 5 Forces In order to establish the contributing industrial components within Starbucks’ strategy, Porter’s 5 forces analysis allows for a summary of external forces. The forces include; the threat of new entrants, the threat of substitute products, the bargaining power of suppliers, the bargaining power of buyers and the existing competition.

New entrants: Starbucks holds a large percentage within the coffee industry, owning approximately 11,000 chains in the United States of America alone. Barriers to entry are quite high with differentiation and development of unique ideas running short. The culture of coffee itself makes it difficult for a new entrant to make its mark in a location, with chains saturating most of the current market for coffee drinkers.

Starbucks came to strife when entering the new market in Australia, failing to recognize that we had a culture of our own within independent boutique cafes as oppose to large chains.

Substitute products: The coffee industry has an edge of its threat of substitute products. In the take away drinks market, there are thousands of substitute products, however, with hot drinks that provide energy and fulfillment, there are very few products that offer an alternative solution. Companies such as Coca Cola struggle to find an edge, with high levels of sugar and artificial ingredients. Consumers are aware of potential alternatives such as

Iced Coffees and energy drinks, however, with market saturation and take away coffee shops ‘popping up’ on every main street corner, it isn’t difficult to stick with what you know; hot coffee. However, the difficulty here is offering the superior product over your competitors, who have introduced new flavoured teas, organic coffee products, soy milk, etc.

Bargaining power of suppliers: Starbucks is dedicated to the quality and quality control of their coffee. Their supply methods are subject to a high level of volatility, due directly to supply and demand of the Arabica coffee beans. This level of supply and demand affects their prices, often leading to a price above market; a premium. Suppliers in this instance have the power of negotiation, often viewed as a threat to the company. The location in which the product is developed and even the weather will affect the end price.

Starbucks is true to its suppliers, offering loyalty to benefit both them and their customers.

Bargaining power of the buyer: In the specialty coffee industry consumers have the power of choice and alternative, thus the power to influence the way in which a company, such as Starbucks, retains and maintains loyalty. A consumer in this industry has no attachments to a product or company and further no switching costs, therefore they hold power in regards to bargaining and influencing production and pricing.

Existing industry rivalry: Existing rivalry in the Coffee industry is extremely high. Although holding a large market share, Starbucks must compete with companies such as Costa, McDonalds, Dunkin Donuts, in America alone. When entering the Australian market, Starbucks failed to recognize the coffee market we have established. The competition was much larger, and consumers were more attracted to local independent coffee shops that offered something ‘different’ to a regular chain such as Starbucks or even Gloria Jeans.

Threat of new entrants

Rivalry among existing Bargaining power of YOU

competitors

Threat of substitute products

Bargaining power of US (the supplier)

Porter’s Diamond From Porters Diamond of National Advantage Analysis, we find that Starbucks requirements such as a quality workforce and prime locations were readily available in Australia. We had access to premium coffee beans and roasting facilities that were available in America in the 1970’s when Starbucks started. (Factor (input) conditions) Consequently, Starbucks was largely horizontally integrated in Australia as oppose to vertically integrated in the US. The huge demand for their products that they experienced in America, was not experienced in Australia because the innovation and experimentation with products, roasting techniques, syrups, was not happening and was not the source of their competitive advantage. (Demand Conditions) Supporting industries were readily available in the US and became one of its core competencies, e.g. Starbucks strives to integrate such things as real-estate

into its value chain (that is, in America they bought the leases of small coffee shops and chains to re-brand them as Starbucks) Intense rivalry and tough market conditions in US market resulted in innovation, but in Australia, intense rivalry and tough market conditions were not met with a competitive product and subsequently Starbucks failed in Australia.

May 2011.