INTERNATIONAL MARKETING MANAGEMENT

EPGDIB 2012-13

INDIAN INSTITUTE OF FOREIGN TRADE

Pick up an International company and study the International expansion plan of the company and justify the market selection

STARBUCKS

Submitted by Group -12

Shreeharsha – 61

Tanuj Mathur- 73

Ranga Babu Thota - 49

Venkata Surya Narayana Thota -74

STARBUCKS

Overview

Starbucks Corporation is an international coffeehouse chain based in Seattle - United States. Starbucks is the largest coffeehouse company in the world. Operates 16,635 stores in 50countries, including 11,068 in the United States, while licensees and franchisees operate more than 7,800 units worldwide (primarily in shopping centers and airports). Product Lines - Beverages – Coffee, Tazo Tea, Soda, Juices - Pastries - Whole coffee beans - Merchandise – Mugs, CDs.Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store in various countries. From a single small store that opened in 1971 to its status as a 21st-century Gourmet coffee giant, Starbucks has led a coffee revolution in the United States and beyond. Its three largest overseas markets are Japan (with more than 480 stores), England, (more than 370) and China and Taiwan (each with about 120 stores).

National Culture to Global vision of Starbucks Ensures that - Growth does not dilute the company's culture and the common goal of the company's leadership to act like a small company and also to create “Distinctive Starbucks experience in the face of rapid expansion.

The following six guiding principles to measure the appropriateness of decisions:

Provide a great work environment and treat each other with respect and dignity.

Embrace diversity as an essential component in the business is done.

Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of coffee.

Develop enthusiastically satisfied customers all of the time.

Contribute positively to communities and environment.

Recognize that profitability is essential for future success.

Adding to it is STARBUCKS MISSION Statement – Spanning Boundaries Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining uncompromising principles while growing.

Industry and Competitive Analysis

Market Structure is Monopolistic Competition and the Competitive Activity comprises large number of competitors with fierce competition . Competitors use location, product mix, and store atmosphere differentiation to establish market niche.

Industry Costs and Capital Structure is low to moderate for each location. Major start-up expenditures are property and equipment. Major operating costs are labor and cost of sales.

Various levels of non market influences

Industry PEST Analysis indicate that politics influences relationships between coffee producing nations and US State & Local government controls, Economic Influences Constant demand for food and beverages .Changes in disposable income can influence purchase levels. Through social Influences Consumer preferences could shift from coffee to other beverages Technological Influences Use of technology can improve operational efficiencies

Competitive Strategy has been focused differentiation serving niche buyers than rivals. Have unique capabilities to serve needs of target buyer segment. Be profitable and offer good growth potential resources and capabilities to serve an attractive niche.

International Marketing strategy's

Global marketing mix strategy and retailing formula is same throughout the world whereas product offerings and are modified to suit local tastes. Starbucks advertising strategies play a crucial role in the success of the business. The advertising strategies adopted by the firm are more local and differentiated rather than standardized.

Corporate Strategy Overview

Rapid Store expansion Strategy -

Domestic store expansion -

International store expansion -

Employee training and recognition -

Real estate,

Store design,

Planning and construction -

Store ambience Product Line Coffee purchasing Strategy Rapid Store expansion Strategy

‘ Starbucks Everywhere’ approach International Store Expansion - Company owned ,

Company operated stores or Licensing. STARBUCKS - Corporate Strategy

Employee Training and Recognition - System to recruit,

hire and train Baristas and Store managers - Screening - Training Programmes -

Award for partners Real Estate, Store design, Planning and Construction. -

Broad Range of store formats - High traffic ,High visibility store locations -

Control of average store operations cost - WI-Fi availability Store Ambience - Concept of ‘Everything matters’ - Assessment of standards. STARBUCKS - Corporate Strategy

Issues in Developing Its International Business Portfolio

American Coffee round the world Starbucks had to face issues in developing its international business portfolio. Starbucks focuses on profitable growth. Starbucks aggressively cluster new stores in prime locations in the world's fastest growing economies. Starbucks introduces its full range of products in phases, selling coffee and other beverages including tea and juices through retail stores in international countries. Selectively introduces specific products like its ready-to-drink coffee beverages to specific countries Eg. Japan, Taiwan and Korea to maximize profits

STARBUCKS what is the rationale to Globalize?.... With just 20% of the world's coffee consumed in North America, Starbucks has to aggressively sell its offerings in countries that already have dedicated coffee or tea drinkers.

Issues that Star Bucks faced

International joint ventures Culture Gender issues Marketing channels Cross-cultural management issues Saturated home market – leading to self cannibalization. Reaching Brand Maturity stage in U.S.

International expansion

Starbucks’s initial foreign forays were launched through joint venture and licensing arrangements with prominent local retailers. The first market developed in 1996 was Japan with the help of SAZABY Inc., a Japanese retailer and restaurateur

International Entry Strategies

Some of the methods Starbucks have used to expand and maintain their dominant market position.

Buying out competitors' leases

Intentionally operating at a loss

Clustering several locations in a small geographical area i.e., saturating the market

Starbucks fueled its initial expansion into the UK market with a buyout of Seattle Coffee Company and then used its capital and influence to obtain prime locations, some of which operated at a financial loss.

Starbucks in the 2000s greatly increased its franchise system, which permits Starbucks franchises only if they contribute to less than 20% of the franchisees gross income, are inside other stores or in limited or restricted access spaces, as to not dilute the brand image.

Globalization-issues faced and tackled in different countries

The Japanese are noted for admiring and adopting American products and trends such as blue jeans and Coca-Cola.

Critics warned that the Japanese would never buy take-out coffee in paper cups or accept the interior non-smoking policy.

Starbucks proved them wrong. Some 30% of its customers drink take-out coffee in those throwaway cups Japan Starbucks had to deal with an initial lack of acceptance from France's historic cafe culture,

With older consumers frowning on a big U.S. coffee house chain with standardized disposable cups. Younger coffee drinkers in France joined American tourists in Paris to embrace such favorites as Starbucks caramel coffee. France

Success in international regions

Key to success in China are coffee houses that empower China's emerging middle class to publicly display their new lifestyles and status while keeping Starbucks beverages as affordable luxuries.

China England Second biggest overseas market for Starbucks. Tackling imitators aiming at reducing market share of Starbucks.

Italy Lower pricing and popularity of local brands. Culture of serving food with coffee – Starbucks had to address the demand.

Star Bucks Foray Into India- An International Strategic Expansion Perspective

India has a population of nearly 1.2 billion people and a majority of this falls into the age bracket of 15-60 years of age, making it one of the youngest countries in the world with a median age of just above 25 years . Compared to this, the median age in the US and China is 37 years and in Japan it is 45 years.

The per capita GDP in India has seen a constant rise and with the booming IT/ Software services industry, India’s average economic growth over the last decade has been an impressive 7%.

With almost 29% of the population living in urban areas and an annual urbanization rate of 2.4%, the Indian consumer market holds immense potential for most businesses.

The improved political and legal reforms since the beginning of the 1990s have made it increasingly attractive for Foreign Direct Investments (FDI) inflows into India and equally easier for foreign companies to set up shop in India.

Hence it was only a matter of time that India would see its first Starbucks, especially when the coffee consumption in India was also rising along with the economical growth. However, in 1999 Starbucks decided to enter China and put the Indian plans on hold for the next few years. This could well have been a big mistake by Starbucks as the coffee revolution in India had already begun and local chains like Barista and Cafe Coffee Day (CCD) were mushrooming in every part of the country with almost one new café every day.

Since 2006, Starbucks has had a series of failed attempts to enter India starting with the joint venture with India’s RPG Enterprises to begin operations by mid-2007. Unsure of its strategies, the coffee giant pulled back only to enter again along with Future Group, another Indian conglomerate, through a joint venture (New Horizons Retail) with its Indonesian franchisee. This time it was the Indian government and the Foreign Investments Promotion Board (FIPB) that played the spoil-sport and the company was asked to re-submit its proposal through a FDI route instead of a franchisee. With the Indian FDI regulations allowing only up to 51% investment in a single brand at that time, Starbucks joined the likes of Tesco and Carrefour and decided to wait for the changes in FDI to take effect. By the end of 2007, Starbucks entered into a distribution tie-up with a leading multiplex operator PVR Cinemas for its select products on an experimental basis. However, with unclear evaluation of the demand for Starbucks in India, PVR Cinemas was cautious in rolling-out the coffee stores at its multiplexes.

Martin Coles, President of Starbucks Coffee International, once said, "Without sounding arrogant,We’re looking at our own strategy. There's nothing that keeps us doing business in India”. India is too lucrative a market for any international firm to overlook, especially for Starbucks when it has been successful in establishing itself in other traditionally tea-drinking nations like China and Japan.

Snapshots of Indian market advantage

Estimated Domestic Consumption (From 1995 )

Calendar Year Quantity (in MT)

1995 50000

1996 50000

1997 50000

1998 50000

1999 55000

2000 60000

2001 64000

2002 68000

2003 70000

2004 75000

2005 80200

2006 85000

2007 90000

2008 94,400

2009 102,000

2010 (prov.) 108,000

Ownership Specific AdvantagesThe Starbucks brand has become almost synonymous with coffee all around the world and the same is the situation in India even though India does not have a single Starbucks outlet. Having opened its first store in 1971, Starbucks has been highly successful in starting a cult following that has put theStarbucks brand at a level higher than just a coffee shop. The passionate staff and their unique blends of the best coffee beans have propelled Starbucks as a way of life in many parts of the world.

The vision created by Howard Schultz, the President and CEO of Starbucks, has resulted in over16,000 stores adding almost 1500 stores in the last one year. The company has recorded revenues of more than $ 10 billion and over $ 300 million in net Earnings by 2010.

The strong financial position and the relatively low debt-ratio, gives Starbucks a very big advantage over its rivals especially in terms of expansion strategies and the ability to undertake risks and buy-out local competition, irrespective of which market it chooses to enter. Additionally, Starbucks has years of experience and knowledge about various cultures around the world which gives them an edge in international operations. Their success in tea-drinking nations like China and Japan has to be given due credit and the company will surely benefit from these learning when it looks at the Indian market. Starbucks has built up a reputation it cannot afford to damage.

As far as India is concerned, Starbucks has already had prior association and some knowledge about the Indian market conditions, economic and political situation and the changes in consumer trends, as has been brought out earlier. Their alliance with India’s Tata Group for sourcing coffee beans has been in existence since 2004 , and although previous joint ventures have been unsuccessful, Starbucks has had relations with a number of Indian retailers for entering the Indian market. This gives the company definite advantages as compared to Costa Coffee (the first foreign coffee chain in India), which has been around for a few years now but is relatively unheard of in most parts of the country. Besides the above, the corporate culture, efficient governance, and the employee welfare schemes of the company have received wide acclaim, making Starbucks one of the best employers in the US. As a mark of recognition, President Bill Clinton had even discussed the Starbucks’ employee health scheme with Schultz in 1992. This is an area which could strongly favor Starbucks in a country like India where employee welfare is given low priority and most low level workers are still treated shoddily and without any family or health benefits.

Internalization (Control)Following up on the ownership advantages, it was necessary for Starbucks to focus on these areas in order to internalize certain activities so that its competitive edge is maintained especially in India where tough competition is already governing majority of the market share. The most important for Starbucks is its blends of coffee and its unique roasting techniques. The company has to be very careful while entering into joint ventures in India so as not to lose this advantage to its rivals. Moreover, its relations and contracts with Tata Coffee for supply of coffee beans have to be looked into. The major issue here for Starbucks is the continued source of the best coffee beans as one of the major competitors of Starbucks in India (Barista Coffee) is owned by the Tata Group. This puts Starbucks in a precarious situation and there may be a need for the company to secure other sources for the coffee beans that it might need for the Indian operations. Moreover, the ‘Starbucks’ brand that has such a strong connotation to it must be protected at all costs. Hence Starbucks is already into legal battles with similar sounding names like ‘Starstruck’ in India. Starbucks has registered trademarks in several different Indian languages but what is more important is that the company must also devise means to trademark similar sounding names in order to protect its brand and intellectual property rights. Another possible threat to the ownership advantages of Starbucks lies in the prevalent ‘employee theft’ in India, and the strong likelihood of competitors ‘stealing’ trained personnel and baristas from Starbucks and thereby undermining its success in the Indian market. Under such circumstances it might seem that an agreement with a local well-established partner would be a safe bet and Starbucks could look at reviving the relations with those Indian companies that had shown interest early on.

Location Specific AdvantagesComing to the advantages inherent to the Indian market conditions, it might be suitable to cover the PESTLE framework here as it is most relevant in describing the specific market environment.

Political EnvironmentThe Indian economy has been experiencing more stability as far as the Government and political scene is concerned. There has been reduced internal turmoil resulting from political influences and this has created a better working environment for industries and businesses in

India. The current United Parties Alliance (UPA) government headed by the Indian National Congress party (INC) has shown more tolerance towards foreign countries in general and towards foreign investments in particular, and the recent reforms have placed India considerably high in the ‘Doing Business Report, 2009’ released by the World Bank (www.doingbusiness.org). However, the ongoing elections in India are expected to result in turning the tide in favour of the radical Hindu opposition party the Bhartiya Janta Party (BJP) led National Democratic Alliance (NDA), which is opposed to ‘westernisation’ of the Indian culture. On the basis of this, it becomes safer for Starbucks to enter into an alliance/joint venture with an Indian company that can provide a buffer from the political backlash and consequent inroads into the Indian business scenario. Moreover, Starbucks needs to be vary of possible opposition from the existing competitors (CCD, Barista, etc.) through use of political influence and delaying tactics. However, likelihood of this is fairly low as the Indian market is large enough to accommodate more players and the incumbents in the Indian gourmet coffee industry will be minimally affected by Starbucks’ entry.

As far as the demographics are concerned, the majority of the Indian population is still rural but the urbanization is occurring at a respectable 2.4 % annually. In spite of this, the sheer size of the total Indian population makes the urban population large enough for businesses to perform well. As the population gets increasingly heterogeneous and the education levels improve, the standards of living have also been elevated, which makes the environment extremely conducive for companies like Starbucks that are looked at as an up market entity.

Macro-Economical EnvironmentThe Indian economy has been predominantly based on agriculture as the majority of its population, mostly in rural areas, is dependent on agriculture for sustenance. However, over the last decade or so, the ratio is changing in favors of industrial and the services sector (www.eiu.com) with nearly 83% of the GDP arising out of these two sectors. Overall, the Indian economy faces a tough task as the fiscal deficit has been increasing and the policies required to overcome it have been found difficult to implement. Many of the industries and sectors of the country depend on heavy subsidies by the government and restrictions have been put on the extent of FDIs permitted in certain sectors.

In spite of the Prime Minister’s promise to open up the retail sector to FDIs, the issue has been mainly unresolved. However, certain sectors like manufacturing, advertising, pharmaceuticals, hotels, tourism & restaurants, and some others have been opened to 100 % FDI. This has great implications on the future prospects of Starbucks in view of its India strategy. However, foreign investments in real estate are largely prohibited and this strengthens the case suggested in this paper that Starbucks needs to find a locally established retailing partner in order to set its foot into the Indian gourmet coffee retailing business.

The world’s largest democracy is currently also one of the largest and most attractive markets in the world. The World Bank report (www.doingbusiness.org) has indicated that India had jumped 12 places in 2008 compared to the previous year and although it is currently placed at a dismal 122 out of 181 countries, the report has indicated a respectable rank for the credit facilities for Indian business environment. As a result, Starbucks or its likely Indian partner may find it that much easier for establishment of the joint venture and retail outlets in India. Besides this, there is an increasing trend for franchisees in India and the improved credit availability bodes well for the prospective franchisees too.

The global economic downturn seems to have impacted the Indian economy to a lesser extent as compared to its western and more developed counterparts. The Indian economy has been growing at an average of 7 % for the last decade and has maintained an above average growth despite the global financial slump (www.cia.gov). The trend is likely to continue and this makes India a safe investment proposition, especially if Starbucks is likely to consider entering India in the near future.

Almost 80 % of India’s industrial growth is attributed to specific parts of the country; mainly in the states of Gujarat, Maharashtra, Haryana, Karnataka and Tamil Nadu and this also indicates that Starbucks might have to explore early opportunities in these areas as the majority of urban population is located in and around these areas.

Socio-Cultural EnvironmentThe increasing number of educated youth in India has also fuelled the skilled English speaking services sector leading to increased per capita GDP and improved living standards for the people.

India’s per capita GDP (PPP) was estimated to at $ 2800 for the year 2008 compared to $ 2700 for 2007 , which indicates that the people are able and willing to spend more money on life quality improvement. This has implications on coffee consumption as coffee is still considered as an exclusive beverage compared to the traditional tea. Whereas tea has a market penetration of nearly 94 %, coffee consumption has increased from 59 % in 2003 to almost 65 % in recent times. The explosion of cafes and gourmet coffee outlets is an indication of the rising coffee culture in India and an indication to Starbucks that the Indian market is far from reaching saturation. The main competitors for Starbucks (CCD and Barista) have already established close to 1000 cafes in India over the last few years (www.businesstoday.intoday.in) and they continue to expand at a phenomenally high rate. While tea consumption is reaching maturity, the expenditure on coffee is likely to grow at 9.5 % .

On the other hand, with almost 550 million people forming part of India’s labor force, and with unemployment considerably high at 6.8 % (www.cia.gov), the cost of labor is likely to remain low. This possibility is augmented by the fact that an increasing number of people are moving away from the traditional occupation of agriculture and turning to urbanised locations for manual labour that is better paying. This again provides a significant advantage for Starbucks to consider while entering India, especially if it is to source its raw materials locally.

With the changing culture of the Indians toward coffee consumption and the increase in disposable income amongst the youth, the cafes have come to act as a place for socializing and as hangouts mainly for collegians and young people. Although this might sound as a highly lucrative situation forStarbucks, it must be kept in mind that the normal cup of tea or instant coffee at a road-side stall in India would cost no more than Rs. 5.00 (approximately $ 0.10). The Indian consumers are extremely price sensitive, and in many parts of the country the Rs. 35.00 (approximately $ 0.70) for a cup of Cappuccino (at CCD or Barista) may still be considered a luxury. The most challenging task for Starbucks will be to match this pricing if it aims to be successful in India. With an average Starbucks coffee priced at over $ 3.00 (approximately Rs. 150.00), Starbucks might possibly face an uphill task in wooing the Indian consumers. However, it remains an option for Starbucks that while the local chains like CCD and Barista focus on the large low end

consumer market, Starbucks could cater to the needs of the smaller but growing upper segment, thus eliminating competition and maintaining its niche image in the environment.

Technological EnvironmentIndian coffee has been improving in quality continuously and almost 80 % of India’s coffee is exported. As mentioned earlier, Starbucks has entered into an alliance with India’s largest coffee producer, Tata Coffee since 2004. The whole process leading to the forging of this alliance was the fact that in 2004 Tata Coffee had won the Gold Medal for the ‘Best Robusta in the World’ at Grands Crus de Café, Paris . This also shows that the Indian coffee growers are seriously working at improving the standards in order to bring India up to mark in the world of coffee. With low cost of labour and easy availability of high quality coffee beans, Starbucks would be well placed to do business in India. If Starbucks was to take this into consideration, the building up of strong working relations with the Tata Group could also be the key to achieving lower costs and probably Starbucks might even be able to match the prices offered by its local competitors.

Legal EnvironmentIn the business environment, there exists a perception that the sanctity of the contract may not be well respected in India. However, India has adopted the Geneva Convention and is bound to enforce international legal proceedings. Although it may be accepted that limitations do exist in the Indian legal system, an autonomous body, the International Centre for Alternative Dispute Resolution, has been established to hasten domestic and international disputes. Moreover, the Indian judicial system remains largely free from the political interference and pressures that other institutions in the country are subjected to. Moreover, enforcement of copyright laws and trademark protection is questionable as in spite of improvement in the system over the years piracy is widely prevalent. The case of ‘Starstruck’ and the ongoing legal proceedings with Starbucks has already been mentioned above.

The Indian government’s willingness to become part of the Madrid Protocol might provide some consolation to foreign firms as this will allow the extension of trademark protection into India. But the fact that India still remains on the US Trade Representative’s (USTR) Priority Watch List, does not fare too well for firms looking at entering the country. Another drawback might be that India has yet to approve the United Nations backed World Intellectual Property Organisation (WIPO) treaties

CONCLUSION:

In spite of some serious drawbacks mentioned above regarding the business environment forStarbucks in India, the advantages as brought out with the help of the Eclectic Paradigm far outweigh the limitations especially if Starbucks focuses its attention on the socio-cultural aspects of the Indian business environment. The fact remains that India is an emerging economy and like all emerging economies, it will be plagued by certain shortcomings. Over and above this, the retail food market in India is expected to grow by 9 % and although the traditionally tea-drinking country is the largest producer and consumer of tea in the world, coffee has made steady inroads into the minds and lives of the people serving nearly a million people every day (www.indiacoffee.org). Starbucks has already entered most of the emerging economies except India, which seems to surprise everyone including its potential competitors in

India, and it is clear from the analysis and the arguments provided above that the time is just right for Starbucks to try its luck now, albeit cautiously and with adequate preparation.

After all, India is (after China) undoubtedly the most developing amongst the emerging economies. Finally, how Starbucks decides to make its mark on the Indian gourmet coffee market and when it does so has to be left to the management of the company. However, it might prove beneficial for the company to dwell a bit upon adopting a multi-tier strategy and thinking beyond conventional Greenfield entry modes in order to harness the immense potential that India holds.