Case Study: Pearson Education Limited ©

Case 9-1 Starbucks Takes Coffee Culture Around the World Starbucks has also been successful in other European countries, including the United Kingdom and Ireland. This success comes despite competition from local rivals such as Ireland’s Insomnia Coffee Company and Bewley’s and the fact that per capita consumption of roasted coffee in the two countries is the lowest in Europe.

Starbucks currently has more than 1,200 outlets in Europe; that figure includes company-operated stores in Austria, France, Germany, the Netherlands, Switzerland, and the United Kingdom, as well as licensed locations in Greece, Russia, Spain, and the United Kingdom (see Figure 9- 3 ). Scandinavia represents a major opportunity; for example, Finland leads all other countries in per person coffee consumption, at nearly 27 pounds per year. Nordic neighbors Norway and Sweden are also in the top five. To date, Starbucks has been slow to expand in the region. However, that is changing as Starbucks partners with Norway’s Umoe Restaurant Group. Michelle Gass, the executive in charge of Starbucks’ European unit, is determined to make Starbucks a household name in the region.

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Figure 9-3 Starbucks Global Presence: Select European Markets

In January 2004, Starbucks opened its first outlets in Paris. CEO Howard Schultz acknowledged that the decision to target France was a gutsy move; after all, café culture has long been an entrenched part of the city’s heritage and identity. The French prefer dark espresso, and the conventional wisdom is that Americans don’t know what good coffee is. As one Frenchman put it, “American coffee, it’s only water. We call it jus des chaussette—‘sock juice.’”

Also high on Starbucks CEO Schultz’s wish list for Europe: an outside-the- box coffee product that will enable him to open shops in Italy. “That’s a dream that I have yet to accomplish,” Schultz says. Some would say the CEO’s dream could turn into a nightmare. After all, Italy’s coffeehouse tradition dates back more than 400 years, and today more than 110,000 coffee bars are scattered the length and breadth of the peninsula. Sniffed a spokesman for one of Starbucks’ European competitors, “The Italian café

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is a culture that the Americans have repackaged. They concentrate more on their image than the coffee.”

Starbucks Introduces Coffee Culture to China

Not surprisingly, Greater China—including the mainland, Hong Kong, and Taiwan—represents another strategic growth market for Starbucks. Starting with one café in Beijing at the China World Trade Center, which opened in 1999, today Starbucks operates more than 400 outlets in mainland China. Another 700 units are licensed locations in China, Hong Kong, and Taiwan. Plans call for a total of 1,500 outlets by 2015.

Starbucks has faced several different types of challenges in this part of the world. For one thing, China is a nation of tea drinkers. Also, government regulations initially forced the company to partner with local firms. After the regulations were eased, Starbucks stepped up its rate of expansion, focusing on “Tier One” metropolitan areas such as Beijing and Shanghai.

Another challenge comes from the traditional Chinese teahouse. Indeed, one rival, Real Brewed Tea, aims to be “the Starbucks of tea.” A related challenge is the perceptions and preferences of the Chinese, who do not care for coffee. Those who had tasted coffee were familiar only with the instant variety. Faced with one of global marketing’s most fundamental questions—adapt offerings for local appeal or attempt to change local tastes—Starbucks hopes to educate the Chinese about coffee. Meanwhile, the company has rolled out new products—for example, red bean Frappuccino and a Hainan chicken and rice wrap—that are designed to appeal to local tastes.

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Chinese consumers exhibit different behavior patterns than in Starbucks’ other locations. In China, most orders are consumed in the cafés; in the United States, by contrast, most patrons order drinks for carryout. (In the United States, Starbucks is opening hundreds of new outlets with drive- through service.) Also, store traffic in China is heaviest in the afternoon. However, this behavior is consistent with Starbucks’ research findings, which suggest that the number 1 reason the Chinese go to cafés is to have a place to gather.

Weathering the Economic Crisis

Meanwhile, when the global economic downturn deepened, cash-strapped consumers cut back on nonessential purchases. The notion of a “$4 latte” seemed out of step with the times, and some perceived Starbucks’ premium brand image as a liability. Even before the economy nosedived, Schultz had circulated a memo to senior executives titled “The Commoditization of the Starbucks Experience.” In the memo, Schultz warned that overaggressive market expansion was compromising the company’s brand experience.

In part, the memo was a response to unofficial Web sites and blogs, such as starbucksgossip.com, where customer and employee complaints and company information were circulated. To better connect with its customers, Starbucks created a social media Web site known as My Starbucks Idea (MSI; http://mystarbucksidea.force.com). Within months of MSI’s launch in 2008, nearly 75,000 ideas had been submitted. Forrester Research recognized Starbucks’ social media initiative with a Grandswell award in the “Embracing” category. Today Starbucks has more than 50 million “likes” on Facebook.

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Starbucks also stepped up efforts to communicate with the general public using traditional media. Working with the BBDO advertising agency, Starbucks launched a corporate branding campaign that was timed to coincide with a major revamping of its food offerings. Full-page print ads in The New York Times and USA Today were keyed to the tagline “It’s Not Just Coffee. It’s Starbucks.”

Sensing a window of opportunity, McDonald’s executives proceeded with plans to roll out McCafé, a branded coffee concept featuring cappuccino and other coffee drinks at prices significantly lower than Starbucks’. At a Starbucks in Paris, for example, a cappuccino is €4.00 ($6.00); a comparable drink at McCafé is €2.00 or €2.50. McCafés feature sophisticated brewing equipment and special coffee blends.

Starbucks Innovates at Home

Back in Seattle, in 2014 Starbucks was preparing to launch a new venture, Starbucks Reserve Roastery and Tasting Room. Growth in mass-market coffee consumption in the United States was slowing, a sign that it was entering the mature phase of the product life cycle. For several years, Starbucks had been selling limited quantities of seasonal Reserve beans that were much more expensive than the company’s regular offerings. Why does, say, a pound of Aged Sumatra beans cost $29.95 while “regular” Sumatra costs $12.95? Known as “single-origin coffees,” the Reserve beans typically are sourced from small farms with limited production capacity. Some produce as few as 60 bags of green coffee beans each year. To ensure a reliable source of Reserve beans, Starbucks is cultivating relationships with small-scale farmers. The company even bought Hacienda Alsacia, a coffee producer in Costa Rica.

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Schultz is determined to appeal to the upscale segment of coffee aficionados who geek out over geographic and agricultural details, who can appreciate the nuances of such so-called microlots, and who are willing to pay up to $7 for a freshly brewed cup. To bring his vision to life, Schultz bought a 15,000-square-foot building near the first Starbucks and transformed it into a “theater of coffee.” Liz Muller, creative vice president for global design at Starbucks, says the goal of the Starbucks Roastery is to “create a space to reinvent retail for the 21st century.”

Discussion Questions 9-5. In the United States, nearly two-thirds of Starbucks outlets are company owned; the remaining one-third is operated by licensees. Outside the United States, the proportions are reversed: About two- thirds are run by licensees or partnerships in which Starbucks has equity stakes. What is the explanation for the two different market expansion strategies?

9-6. In response to the economic downturn, Starbucks launched

a new line of instant coffee called VIA Rea