Expansion into Asia-Pacific and Greater China

In 1996 the firm invested $1.5 million and established a subsidiary called Starbucks Coffee

International Inc. The focus of this subsidiary was on penetrating the Asia-Pacific region.

According to Kathie Lindemann, the director of international operations at Starbucks at that

time said “We are not overlooking Europe and South America as areas for future expansion.

But, we feel that expanding into these regions is more risky than Asia. The Asia-Pacific

region we feel has much more potential for us. It is full of emerging markets. Also

consumers’ disposable income is increasing as their countries’ economies grow. Most

important of all, people in these countries are open to Western lifestyles.”

Starbucks does not like the concept of franchising. They prefer to work with partners in

Japan and other Asian countries. Their approach to international expansion is to focus on

“Partnership first, Country second” i.e. relying on local expertise to establish the marketing

infrastructure. This is one of the keys to Starbucks’ business strategy for international

expansion.

Criteria for choosing partners in Asia

Similar philosophy in terms of shared values, corporate citizenship, and

commitment to be in the business for the long haul

Multi-unit restaurant experience

Financial resources to expand the Starbucks’ concept rapidly to prevent imitators

Strong real-estate experience with knowledge about how to pick prime real estate

locations

Knowledge of the retail market

Availability of the people committed to the project.

Starbucks has offered the highest quality Arabica coffee, handcrafted beverages, and

legendary service that combine to provide the unique Starbucks Experience to customers in

nine countries in the Asia Pacific region and in China. The countries in Asia Pacific include

Australia, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea

and Thailand.

Recognizing the growing importance of Asia Pacific to Starbucks Coffee International

operations and to ensure that customers receive a consistent Starbucks Experience, in 1999

the company invested in the region’s infrastructure by establishing the Starbucks Asia

Pacific Support Center in Hong Kong.

Entry into Japan

Japan is an essential part of Starbucks’ international expansion plan because the nation is

the third largest coffee consuming country in the world, behind the U.S. and Germany. Japan

is also an ideal country because it has the largest economy in the Pacific Rim.

In October 1995, Starbucks entered into a joint venture with a Tokyo-based Sazaby Inc. to

help Starbucks open 12 new stores in Japan by the end of 1997. This joint venture, called

Starbucks Coffee Japan, Ltd. amounted to 250 million yen ($2.33 million) in capitalization,

was equally owned by Starbucks Coffee International and Sazaby. The Tokyo-based

Sazaby, often recognized as a leader in bringing unique goods to the people of Japan,

operated upscale retail and restaurant chains throughout Japan. With Sazaby’s assistance

the firm opened two stores in Tokyo in September of 1996. The first outlet was in Tokyo’s

posh Ginza shopping district. The Ginza store was planned so that Japanese customers

could have the same “Starbucks experience” offered in U.S. stores. The firm’s second store

was located in Ochanomizu, a student area cluttered with colleges, bookstores and fast-food

restaurants. Since then, the number has grown to nearly 872 stores in Japan as on

2010.The stores offer the same menu as it does in its U.S. stores, although portions are

smaller. The names of items, such as ‘tall’ and ‘grande’ are also the same as the ones used

in the U.S. All of the stores also feature the company’s trademark decor and logo. In

addition, Japanese customers are able to purchase Starbucks coffee beans, packaged food,

coffee-making equipment as well as fresh pastries and sandwiches.

However, profits from the Japanese venture are still negligibly small. Operating costs, like

rent and labour, in Japan are extremely high, and Starbucks also has to pay for coffee

shipment from its roasting facility in Kent to Japan. Retail space in downtown Tokyo is also

more than double that of Seattle’s rent. Starbucks plans to eventually open a roasting plant

in Japan to help keep costs down. However, this is contingent if the stores in Japan prove to

be a success.

Entry into Singapore

The first Starbucks coffee outlet in Singapore opened on December 14, 1996, in Liat

Towers, with the help of BonStar Pte. Ltd., a subsidiary of Bonvests Holding Ltd., a

Singaporean company with food services and real estate interests. The store in Liat Towers

is located in Singapore’s main shopping district on Orchard Road, which is a very trendy

shopping center where the French department store, Gallery Lafayette, and Planet

Hollywood reside. Starbucks’ expansion into Singapore was its first expansion into

Southeast Asia.

Bonvests was an ideal partner for several reasons. Bonvests had acquired expertise in

running food businesses, like the local Burger King chain. They also knew and understood

the local consumer market, government regulations, and the local real estate market.

Starbucks chose Singapore for its entry in the Southeast Asian market because of the highly

“westernised” ideas and lifestyles it had adopted. It was estimated that Singaporeans drank

more than 10,000 gourmet cups a day in 1996. Starbucks packaged a coffee-drinking

experience that the Singaporeans wanted, both trendy and American. In addition, the market

in Singapore had tremendous growth potential. Finally, the Singaporean market had no clear

leader in the specialty coffee industry. This meant that Starbucks had a good chance to

become one of the top contenders in that market.

Starbucks had 32 stores in Singapore as on October 2005.

Entry into Indonesia

In 2002, Starbucks launched its first coffee store in Jakarta, Indonesia, after signing a

licensing agreement with PT Sari Coffee Indonesia. It is housed on the ground floor of the

Plaza Indonesia, an upscale fashion shopping center and boasts of the familiar Starbucks

atmosphere of coffee, conversation and more. Since then the company has opened 32

stores in Indonesia as on October 2005.

Entry into China

China was predominantly a tea consuming nation and one of the smallest coffee markets in

the world. Hence it was a challenge for Starbucks to penetrate this niche market. Starbucks

inaugurated its first outlet in the World Trade Center in Beijing, China in January 1999

through a licensing agreement with Mei Da Coffee Co. Ltd. The company has collaborated

with different partners for its operations in China. In Shanghai and Hangzhou, Starbucks has

partnered with a unit of the President group. The President group is Starbucks’ partner in

Taiwan, whereas in North China, the company has partnered with H&Q Asia Pacific and

Beijing Mei Da Coffee. Starbucks has formed a Joint Venture with Maxim’s Caterers for

Hong Kong, Macau and South China.

As of the end of Q4 fiscal year 2010, there are more than 750 Starbucks locations

throughout Greater China, a region including the People’s Republic of China, Hong Kong,

Macau and Taiwan.

In addition to offering the Starbucks Experience to customers in major metropolitan cities in

Greater China, the company has also opened stores in cities such as Changzhou, Chengdu,

Chongqing, Dalian, Dongguan, Foshan, Hangzhou, Kunshan, Nanjing, Ningbo, Qingdao,

Shaoxin, Shenyang, Shenzhen, Suzhou, Tianjin, Wuxi, Wuhan, Xi’an, Zhuhai, Changsha

and Fuzhou. To support the accelerated expansion into mainland China and achieve greater

penetration throughout the region, the Starbucks Greater China Support Center was

established in Shanghai in 2005.

In May 2010, Starbucks entered Zhu Hai market, expanding its reach to 27 mainland cities.

In September 2010, Starbucks opened two stores in Changsha, making it the 30th mainland

market. In the same month, Starbucks entered Fuzhou market, now expanding to 31

mainland cities.

A replication of its stores concept worldwide, Starbucks in China caters mainly to urban

working people and thus its outlets are located in commercial areas. As regards advertising

for the Chinese market, Starbucks depends less on domestic advertising and more on

promotion through coupons and visits, which draw first time consumers.

Entry into India

The organized coffee market in India is around 600 crore, or 20% of the total domestic

coffee consumption of 3,000 crore.

The major players in India include two franchisees of overseas coffee retailers. These are

Barista owned by Italian chain Lavazza that bought a controlling stake in the coffee retailer

from C Sivasankaran, the Chennai-based entrepreneur and UK-based Costa Coffee for

which RJ Corp, owned by Pepsi bottler Ravi Jaipuria, is the exclusive licensee.

India allows foreign investors to own 51% in single-brand retail which would encompass

coffee chains such as Barista. Lavazza's exact equity holding in Barista is not in the public

domain.

Cafe Coffee Day, owned by entrepreneur VG Siddhartha and which has PE firms among its

shareholders, is another major player in this segment.

These chains have been thriving on rising demand from India's increasing upwardly mobile

middle class and youth, for whom hanging around in a coffee shop is still aspirational.

Starbucks India

Based on the GE/McKinsey Business Assessment Array shown below, the business unit

positioning of Starbucks India would be medium whereas the industry attractiveness is high.

Thus Starbucks would be in “Build” stage where it has to invest in order to develop

capabilities in order to serve the Indian Consumer.

Based on the strategy that we have seen Starbucks has been following in other Asian

countries, it is predicted that Starbucks would collaborate with a local partner in order to

develop the marketing infrastructure.

Starbucks had tried to enter India by striking an alliance with Kishore Biyani's Future Group

three years ago, but these plans were rejected by the Foreign Investment Promotion Board,

or FIPB, the government body that regulates inflow of foreign money into India's factories,

shops and mines, on the grounds that the equity structure was ambiguous. New Horizons, a

51:49 JV between Starbucks’ Indonesian franchisee VP Sharma and Future Group CEO

Kishore Biyani, was to be the licensee for Starbucks’ operations in India. New Horizons was

to set up, operate and manage Starbucks stores in India. But the alliance never saw light of

the day after the Indian government asked Starbucks to amend its application

twice.Seemingly irked by this, Starbucks withdrew its proposal and decided against coming

to India, at least for some time.

According to ET Bureau (Jan 29, 2010), Starbucks has revived its plans for India and has

begun talks with Shyam and Hari Bhartia-controlled Jubilant Group for a possible alliance.

Jubilant Foodworks, part of Delhi-based Jubilant Group, is the India franchisee for Domino's,

the pizza chain. The group's flagship is Jubilant Organosys, a leading contract manufacturer

of pharmaceutical products.

The launch of Starbucks into India could be divided into 3 timelines.

1) The entrant phase i.e. the first year- This phase would be a pilot project in which

Starbucks would open multiple outlets only in New Delhi and Mumbai (biggest Metropolitan

cities of India) in prime locations to check out the initial response of the brand among the

people. This would give an idea about any change in the future expansion process as well. It

can also increase awareness of the people about its advent in the Indian market by selling

merchandise so that the masses become aware of the presence of Starbucks in the Indian

market.

2) The second timeline would be for the next two years where it would target the

Metropolitan cities namely Bangalore, Hyderabad, Chennai, Kolkata, Lucknow, Goa,

Chandigarh etc. along with opening multiple outlets in various cities rather than just opening

one outlet in each city. This would be apt as the resource channel in a particular city to cater

to its outlet would already have been established; hence the overhead of catering to other

outlets would not be very high. Setting up multiple outlets would help the company in market

penetration as the customers today look for convenience and having a Starbucks at their

neighborhood would definitely be an added advantage in the brand establishment process.

3) The third timeline could be for the next two years wherein it would target various

companies (Business houses, Conglomerates, Multiplexes, and Airlines etc.) to cater to

their in house needs as all these entities cater to the educated middle class and the upper

middle class category which would lead to further strengthening of the brand as Starbucks

does not believe in promotion of its brand but it believes in selling its brand by word of

mouth.

Simultaneously in each stage, they would be entering into other arenas other than just Food

& Beverages. This would chiefly involve the sale of Music of various mobile operators,

Internet Surfing Stations, branded merchandise etc. This would give the customers an added

advantage of visiting Starbucks and would further strengthen the Starbucks Brand.

Starbucks would seek to follow a translational strategy in India. Starbucks always pays a lot

of attention to local needs and customs and always tries to adopt a strategy which is line

with the prevailing scenario of the respective country. This can be understood by the

following statement given by the Chairman of Starbucks Howard Schultz: “We remain highly

respectful of the culture and traditions of the countries in which we do business. We

recognize that our success is not an entitlement, and we must continue to earn the trust and

respect of customers every day.”

On the other hand, Starbucks emphasizes that the best practices are adopted in each

country by sharing resources and facilitating co-ordination and co-operation across country

boundaries. For instance, Starbucks has strict quality checks and ensures that the coffee

beans used in USA are exactly similar to the ones used in China or any other region. In fact

the beans are specifically shipped to various countries under the supervision of the

headquarters.

Transnational strategies are challenging to implement, but are increasingly critical for the

success of the organisations in international markets.

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