It's a Starbucks World*

*We only live in it.

By Heinz Bulos and Ria Llainne D. Mendoza
March 2004

here is this arcical scene in the
Mike Myers hit comedy, Austin
Powers: 1he Spy \ho Shagged
Me`, where Dr. Lil, transported into the
uture, inds out rom Number 1wo that
his eil organization had earlier bought
stocks o a small coee chain which hae
now become a global powerhouse, set up
to achiee world domination. Dr. Lil`s
headquarters sits on top o a tower with a
huge Starbucks sign on it.

\hen it makes prominent cameo
appearances in moies through product
placements or as part o the plot like
\ou`e Got Mail`, I Am Sam`, and
Zoolander`, Starbucks is obiously no
longer just a coee phenomenon. It`s
more than just a retail success story.
Starbucks has already become part o pop
culture.

As you choose your coee or the day, a
smiling young barista will greet you with
much enthusiasm. le ,or she, will take
your order and call your name a little
while later when the coee is ready. Ater
that you will sink in one o the plush soas
and cradle your mug or warmth. 1he
soothing music, the complementing
somber interiors, and the exhilarating
coee aroma lingering in the air will lull
your senses into one o lie`s comort
zones. In a little while you will be
shedding worry and tension away, as your
world resets into a comortable balance.

1his is one o the reasons why people go
to Starbucks despite the act that its
products are well on the side o pricey. As
they say, you pay or the ambiance. People
are willing to shell out an additional buck
or two to stay in a cool, cordial
atmosphere that is not quite home but
ery close to it.

It wasn`t always like this. 1he coee chain
originally started in 191 at the amous
Seattle`s Pike Place Market and it used to
be known as Starbucks Coee, 1ea and
Spice Store. Starbucks at the time supplied
roasted beans, not steaming gourmet
coee.

\hen loward Schultz isited their oice
or the irst time, he immediately knew he
wanted to work or Starbucks. In 1982
Schultz joined their team. A year later,
during a isit to Italy or a trade show, he
ound inspiration in the espresso bars in
Milan. le went back to conince the
Starbucks partners to create their own
espresso bars. In 1984, ater much
hesitation, they opened a small one and it
became a hit. Despite the success, the
partners did not want to expand into this
line o the coee business. Shultz ound
himsel leaing and creating his own
espresso bar, t Ciorvate, in 1985 with
inancial backing rom the Starbucks
partners. 1wo years later, he was back,
buying Starbucks or >3.8 million. By the
end o its irst year, Starbucks
Corporation tallied 1 stores.

In six years, Starbucks already has ,225
stores worldwide. Starbucks cas opened
up like mushrooms in a thunderstorm -
and it still continues to do so. It now has
3,9 company-owned stores in the US,
33 in the United Kingdom, 316 in
Canada, 40 in Australia, and 38 in
1hailand. And it is already raking in >4
bittiov in annual sales. In 2003 alone, it
earned >268 million in net proit.

1
low did it come to this Starbucks coee
is not exactly cheap. In Lurope, the
bastion o espresso culture, a cup would
cost about 30 cents compared to the
Starbucks tag o >3. Despite the price
disparity, people are willing to pay. 1he
ambiance and the quality coee are
considered well worth the price. But
people accepted it and Starbucks
continued its growth.

Starbucks can lay claim to the
phenomenon that is the specialty or
gourmet coee market. Schultz changed
the way the world drinks coee. It`s no
longer just a beerage you drink to gie
you a kick, it`s a liestyle. And he changed
the way we pay or it.

Iilling the worlds' cup
tarbucks is an excellent case study
not just on creating a new retail
category ,the specialty coee shop,
or on reinenting a commodity ,1all!
Deca! Cappuccino!,, but also on how a
company successully expanded rom
being local ,Seattle, then national ,United
States, to global ,28 countries and
counting,.

It`s interesting because, unlike, say,
McDonald`s or KlC, Starbucks is just
starting on its road to global domination.
It`s een more interesting because, unlike
McDonald`s or KlC ,or other ast ood
chains or that matter,, Starbucks sells >3
coee. Now, how many countries can
aord that

1he Starbucks story is one o marketing
and economics. No one doubts Starbucks
is a marketing success. But are Starbucks
stores in eery corner o the globe too
much o a good thing

1he Starbucks global inasion is quite
recent. Not counting its irst oray into
global expansion in Vancouer Canada in
198-not exactly global-it was really its
entry into Japan in 1995 that Starbucks
that ushered in a new era o the Starbucks
empire.

Soon, it started putting up outlets in other
continents - opening 1,25 stores in
Lurope, Asia Paciic, the Middle Last,
Arica, and the Americas by the end o
2003. It proed itsel successul een in
the tea countries such as China and Japan.
It recently opened its 1,000
th
store in Asia
Paciic.

Starbucks came to the Philippines in 199
when the Rustan Group o Companies
signed an exclusie agreement with
Starbucks Corporation to deelop its retail
operation through the Rustan Coee
Corporation ,the company declined to be
interiewed due to the busy season,. It
sent six managers to train in Starbucks
Seattle who subsequently manage local
Starbucks cas.

1he irst to open was Starbucks 650, a
resounding success. Ater six years,
Starbucks Philippines now 54 branches, in
Alabang, San Juan, Ortigas, Makati,
Quezon City, 1agaytay, Cebu City, among
others.

It`s easy to explain the huge success o the
Starbucks and the entire specialty coee
market in the Philippines, which is said to
hae grown by 400 in the past six years!
1he country has long been a coee
drinking population, with a long history in
the coee market as a producer and
exporter and a strong coee culture, albeit
limited to hotel lobbies and homes.
Coupled with lilipinos` ainity or
American brands and pop culture trends,
Starbucks was an easy sell.

A changing market
S
ut what brought Starbucks to the
Philippines ,and to more than 32
other countries, in the irst place
1he answer lies in the global coee
economy.

\e are talking about an >80 billion global
coee market, according to rough
estimates by Nestl in 2000. 1hat
represents around 56 billion cups o
coee eery year. But the bulk o coee
consumption is the instant coee kind,
dominated by the transnational coee
roasters such as Nestl, Procter &
Gamble, Krat, and Sara Lee. \orldwide,
the gourmet coee market accounts or
only 10 o the entire global coee
production. \et, it is the astest growing
segment.

1he coee market can be classiied into
retail sales, i.e., instant coee and roasted
and ground coees ound in groceries and
supermarkets,, and out-o-home coee
sales ,coee bought in coee shops and
restaurants,.

1he major markets or coee are the
United States, Japan, and \estern
Lurope, particularly lrance, Germany,
and Italy. In act, only 1 o the world
population considered sophisticates`
,those who drink more than cup o coee
a day, consumes 65 o all coee. And
these deeloped markets are slowing
down. Aerage growth rom 199 to
2001, according to Luromonitor, is a mere
2 or the US, 2.8 or Japan, -0.5 or
lrance, 0.8 or Germany, and 1.5 or
Italy.

On the other hand, countries that are
considered starting`, i.e. those who drink
less than a cup o coee a week, represent
5 o the world population and they
consume a mere 2 o the world`s coee.

A more attractie market, those
considered intermediary, consume 29
o all coee, make up 24 o the world
population. \e probably belong to this
category ,our aerage growth is 8.1,,
and so do other Asian countries such as
China ,.8,, Indonesia ,11.2,, Malaysia
,1.4,, 1hailand ,8.2,, and Vietnam
,10.4, as well as Lastern Luropean
nations such as the Czech Republic ,,
and lungary ,12.2,. South American
coee exporters such as Colombia ,10,,
Mexico ,13.6,, and Venezuela ,10.,
are prime targets also. Brazil, the number
one coee producer in the world, is both
a huge and growing market ,.8,.

In other words, or Starbucks and its ilk to
grow, it must look towards deeloping
countries o Asia, Lastern Lurope, and
South America, not the mature markets o
the US and \estern Lurope. 1he US
market is considered saturated with
Starbucks and other gourmet coee
shops, although the company continues to
expand in the country ,it opened 602 new
company-operated stores in iscal year
2003,, oten cannibalizing its own sales. It
also acquired rial Seattle Coee
Company, adding 0 Seattle`s Best Coee
and 1orreazione Italia stores. 85 o
Starbucks` total reenues come rom
company-operated stores.

1he real growth, howeer, is oerseas.
\ith 1,25 licensed retail stores already,
Starbucks expects to double the number
o its stores worldwide to 10,000 in the
next ew years. Although reenues rom
its US stores account or 85 o total
sales ,>2.8 billion in iscal year 2003,-a
22 increase-net reenues rom
international stores grew more by 31 to
>603 million. Analysts are giing
Starbucks a couple o years or the US
market to be oersaturated, concluding
that Starbucks will hae to rely on
B
oerseas sales to maintain double-digit
growth.

International strategy
tarbucks enters a country through
joint entures with local partners
and licensing agreements, much like
global ast ood chains. 1o make this
work, the potential partners must pass
ery strict requirements. Some companies
hae come up to Shultz and repeatedly
asked to become a partner but success and
background in operations are not enough.
Potential partners must hae inancial
solency, knowledge o local market
conditions, retail experience, and creatie
ability.

Beore it goes in any country, Starbucks
will conduct a thorough market study and
do ocus group interiews to determine its
potential. And once in, it will keep abreast
o its ca operations by keeping tabs on
the marketplace. 1o ensure quality, it
trains its management teams in its Seattle
acilities or 13 weeks. 1his training is the
imprinting period when new partners are
taught the alues and the meaning o
Starbucks. 1he company carries a
standard menu with mostly standard
coee concoctions. loreign operators
import their coee through Starbucks.
1he pastries though are sourced locally to
suit patrons. In certain coee-producing
countries like the Philippines, Starbucks
also introduces a local blend ,Kape Vinta
in our case,, sourced rom Cotabato,
blended with Indonesian coee beans.

Starbucks limits its equity in oerseas
operations, i at all. Licensed partners own
the entire operations, paying Starbucks
license ees and royalties and buying its
products or resale. In joint entures,
Starbucks` ownership oten does not go
beyond 20. 1hese arrangements make it
easier or Starbucks to set up in other
countries. On the downside, they make
less money on oerseas stores.

Starbucks also requires its international
partners to expand quickly. It`s no wonder
why there seems to be a Starbucks in
eery corner, particularly in the central
business districts. 1he Starbucks strategy
when it comes to location is one o
saturation. Starbucks stores coer a
densely populated area, giing it irst
moer adantage, thus setting up huge
obstacles to competitors. Consider it
coee shock and awe. 1he problem was
that stores too close to one another tend
to cannibalize their own sales. Just go to
the Makati area or instance. Starbucks has
become a popular landmark-as a
meeting place and as a marker or giing
directions-and that says a lot.

Interestingly, the company doesn`t
ranchise, preerring to retail control o its
stores. Len oerseas partners like Rustan
Coee Corporation are not allowed to
ranchise.

Challenging markets
ertainly, Starbucks is an astute
marketer. But its global expansion
is not without its challenges. lor
one, in deeloping countries, it can only
grow so much. Ater the urban areas that
make up a small proportion o the
population, where next And in
undeeloped countries, where a Green
1ea lrappuccino costs much more than a
day`s wage, is there a potential at all In
mature coee cultures, is Starbucks een
welcome In mature tea cultures, where
does Starbucks it in linally, in countries
hostile to American might and the trend
towards globalization, is there already a
backlash

On the irst challenge, Starbucks still has
plenty o room or growth. Countries like
Indonesia, 1hailand, and the Philippines
S
C
share common economic proiles. In act,
een China and Russia hae populations
that hae aerage monthly earnings in
close range. Coee consumption in these
markets is growing ast. And in Indonesia,
China, and the Philippines where
Starbucks already has a presence, the
market-een the urban areas-are ar
rom being saturated. \hat is challenging
are countries like Russia and 1hailand,
which hae extremely low leels o out o
home consumption, 8 and 10
respectiely. But that een shouldn`t be a
major problem. 1he Philippines` out o
home coee sales as a percentage o total
sales is only 11 but Starbucks is huge
here. As proen again and again, the
enormous youth market-willing to spend
their limited disposable income, or
allowance, to be hip and trendy-will
carry the tide in these countries.

A more daunting problem is cracking into
less deeloped countries. India,
surprisingly, poses a major challenge or
Starbucks. Per capita income per month is
only >24. But the real problem in India is
that there`s already an entrenched local
player. Still, India is a ast growing
economy with major urban areas. As or
the truly depressed economies o the
world, Starbucks need not rush into these.
1here are still too many other countries to
conquer.

But what about the deeloped but
declining coee markets like \estern
Lurope lor example, Italy-the bastion
o coee culture-already has oer
120,000 cas, equialent to one ca per
45 inhabitants ,talk about market
saturation!,. Ca owners rom Italy,
Austria, lungary, the Czech Republic,
and Germany organized an association to
presere and protect their ca culture
rom oreign inluence.

Italy is indeed a tough country to crack.
lor one, Italian coee bars sere good
ood and good coee. Good ood at
Starbucks lmm. Second, Italian coee is
cheaper, around 55 cents to 6 cents.
American espresso is >1.50. And lastly,
Italians swear by their coee. Schultz,
howeer, declared that Starbucks will
eentually come to Italy.

In the deeloping countries o Latin
America, where there`s already a strong
coee culture, locals sni at the quality o
Starbucks coee. Plus, the price disparity
is signiicant. In both markets, Starbucks
aces a more ormidable opposition,
unlike here where it`s welcome with arms
open wide. So ar, the coee chain has
outlets only in Austria, Germany, Greece,
Spain, Switzerland, United Kingdom,
Mexico, and Puerto Rico ,and recently in
Peru, Chile, and 1urkey,. But no Italy,
Sweden, and Brazil. But it just recently a
store in lrance, so it only goes to show
there`s no stopping Starbucks.

As or tea drinking countries, as has been
proen, this has not been an obstacle at
all. Starbucks is big in Japan, 1aiwan,
China, and long Kong.

lor the Middle Last, which is largely
hostile to the US and all that it represents,
well, at least those relatiely moderate
countries such as Saudi Arabia, Lgypt,
United Arab Lmirates, Kuwait, Qatar,
Bahrain, Oman, and een Lebanon, hae
Starbucks stores. \ho knows,
Aghanistan and Iraq could be next.

Certainly, Starbucks is succeeding in its
global expansion. But it`s not making
money. In Japan, its largest oerseas
market, and key to its global expansion,
there is now a serious concern. Starbucks
Japan is no longer making money,
announcing an annual loss o >3.9 billion.

It took oer stores o its partners in
1hailand, Switzerland, and Austria, which
were inancially troubled. It closed six
unproitable stores in Israel. In act, its
entire international business-sae or
Canada-is operating at a loss, around
>18.5 million. \ith Canada, it`s in the
black with >5.5 million. 1he problems o
its oerseas partners can be traced to
higher real estate and labor costs. And
they require more extensie administratie
support. Analysts say Starbucks should
rethink its licensing and joint enture
approach, but igure its international
operations will improe this year.

\hen Starbucks started, some said it will
only last or a short time, yet ater two
decades it remains strong. Analysts
predicted its demise ater some changes,
yet it remains growing. It is like its
product, strong and perky. So ar,
Starbucks manages to rise at eery
challenge. And it will continue its global
expansion, caeinating the world one
store at a time.