Analysis Of Starbucks Entering Foreign Market

Modified: 8th May 2017
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International business is that kind of trade that helps the world`s economy to increase its existing position. In this way, supply, demand and prices are influenced by the global issues. For instance, a differentation in political sutiation in Asia may raise manufacturing cost and cost of labour of an American company which is a region in Asia. As a result of this, an increase may be seen product`s or service`s price that the consemer have to purchase from a local store. When a decrease is seen in cost of labour, on the other hand then you can have to pay relatively less price on the product. (Hussey, 2008)

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It is also another advantage of going internationally that it gives an opportunity to developed countries to use their resources effectively like technology, capital and labour. Since a large number of the countries already have natural resources and different inputs such as labor, technology, land and capital, they are likely to produce many products more efficiently and sell them for cheaper values than other countries. A country may have a product from another country, if it is difficult or expensive to produce it in its national boundaries. In same way a country may have a product from another country, for the reason of that product can be produced in its own country but with worse conditions such as lower quality or higher cost. Global trading also helps different countries to take a part in global economy by encouraging them to become foreign direct investors. These individuals invest their money in the foreign companies and other assets. And also, the countries may become competitive global participants.

Entering a Foreign Market

Before entering international marketing, if we reflect on our perception what marketing means itself, we will face a few important definitions. According to Chartered Institute of Marketing, marketing is a “Management process which is responsible for identifying, predicting and providing customer requirements profitably”. (Lowe and Doole, 2001)

Marketing involves;

providing customer needs and wants,

finding out best ways and methods to provide these needs and wants,

orienting the firm towards the process of focusing on that satisfaction,

meeting organizational objectives.

In this way, it becomes important for the company or organization to prepare itself to achieve competitive advantage in the market. The company then needs to work on taking this advantage in the market. The company then needs to work on taking advantage by manipulating controllable functions of marketing, within the uncontrollable marketing environment which is directly affected by SLEPT factors, i.e. Political, Economic, Socio-Cultural, Technological and Legal. (Lowe and Doole, 2001)

When domestic and international marketing are compared, it is argued that”what differences there are between these two markets “. Actually, the key elements are still same. The concept is not likely to change to any market degree when a company moves from a domestic market to an international market. However, two main differences can be defined. First, of them, there are different approaching levels depending on international scope, and second, the company will be likely to face complexities and difficulties as the result of international marketing environment factors as it mentioned above. (Lowe and Doole, 2001)

General Review of the Market Entry Modes

For the majority of companies, the most important international marketing decision that they are most likely to take is how they should enter new markets, as these decisions which they make will directly affect every part of their business for many years in the future. There are advantages and disadvantages with each market entry method and critical in the decision-making process are the firm’s assessment of the cost and risk associated with each method and the level of involvement the company is allowed by the government, or want to have in the market. These factors determine the degree of control it can exert over the total product and service offer and method of distribution. (Chee and Harris, 1993) There is, however, no ideal market entry strategy and different market entry methods might be adopted by different companies entering the same market and/or by the same company in different markets.

The Alternative Market Entry Modes

The variety of alternative market entry methods are shown in figure below, depending on international involvement from virtually zero, when the company only makes its products for others to export but effectively does nothing itself to market its products internationally, to total involvement, where the firm might operate wholly-owned subsidiaries in all its key markets. (Chee and Harris, 1993)

The market entry decision is taken within the company and it is determined related to the company’s objectives and attitudes to international marketing and the confidence of its management team’s to operate in foreign markets. In order to select most appropriate and effective market entry strategy, it is essential to take into account some point including;

the company objectives and expectations relating to the size and value of predicted business,

the size and financial resources of the company

its existing foreign market involvement

the skill, abilities and attitudes of the firms management for international business

the intensity of the competition in target market,

the affect of existing and expecting tariff and non-tariff barriers

the nature of product considered for international entering the areas of competitive advantage, such as trademark or patent protection

the timing of entry in relation to the market and intensity of competitive situation

However, this list of entry modes is likely to be meaningful when the other factors which affect the entry mode and are very specific to the company’s particular situation. For instance, the regulations of laws of the host country might be a barrier for a company to own 100 percent of an operation in that country. All companies should identify, analyse and monitor these external factors and consider their potential affect on their products/services. Although these external factors take place outside of the firm’s management team’s control, they all must be taken into account as much as internal factors. (Chee and Harris, 1993)

According to Terpstra and Sarathy (1994), alternative methods of foreign market entry can be summarized basically as shown below;

Production in HomeMarket

Foreign Production Sources

-Contract Manifacture

-Licencing

-Assembly

-Joint Venture

-100 Percent Ownership and / or

Indirect Exporting

-Trading Company

-Export Management Company

-Piggyback, etc.

Direct Exporting

-Foreign Distributor

-Agent

-Overseas Marketing Subsidiary

STARBUCKS IN CHINA

In 1999, when Starbucks invested into China, the company entered the joint-venture agreement with three big local partners: Beijing Meida Coffee, Shanghai Uni-President Starbucks Coffee Ltd and Maxim’s Caterer (Asia Pulse, 2006). On the one hand, the company was able to meet requirements from the Chinese governments’ regulations and lower the risk and level of investment when entering a new market. In return, Starbucks sacrificed its control over development of those individual companies while only earning loyalty fees (ibid). As a result of joining the World Trade Organization (WTO) in 2001, Chinese government has loosened regulations on foreign investment, especially the removal of restrictions on foreign investment. Since then, share of local partners is no longer required for foreign companies (ibid). Consequently, Starbucks has paid out more than USD 21, 3 million to gain its share to 50 percent in Shanghai Uni-President Starbucks Coffee. Similarly, the company increased its stakes in Maxim’s Caterer to 51 percent and control over 50 percent of stock in Beijing Meida Coffee (Harris, 2007). Such forward integration gives Starbucks more control over its expansion which will be more aggressive in the near future (ibid). Besides, Starbucks is also concerned with coffee sources and prices. Currently, for the Chinese market, Starbucks imports coffee beans from its suppliers all around the world (Reuters, 2007a). Since these suppliers have been controlled tightly by the company’s specialists, Starbucks can assure the quality of its products in China. However, Starbucks needs to pay import duty. Depending on the type of coffee, this duty may vary from 10 to 30 percent (Friedlnet, 2003). To make the problem worse, coffee prices have jumped from 89.36 US cents per pound in 2005 to 113.20 US cents per pound in 2007 and is expected to grow higher in 2008 (Reuters, 2007a). This may consequently influence the price of Starbucks product and influence Starbucks performance. In America, as a result of the increase in price of dairy product, Starbucks raised the price of its coffee drinks by 9 cents and 50 cents for its whole bean coffee in 2007 (Reuters, 2007b). This is the second time Starbucks raises its prices. The first time this happened was in 2006 when Starbucks raised 5 cents for all of its drinks (USA Today, 2006). To prevent such potential price change in the future, Starbucks has been working with coffee farmers in many parts of China and trying to help them meet the company’ standards. Jinlong Wang, president of Starbucks greater China, expressed that “China does produce some quality coffee and sourcing from China would start very soon, maybe in a couple of year” (Reuters, 2007a). Starbucks also plan to build a roasting plant in China. This backward integration when applied successfully in the future, will give Starbucks a huge competitive advantage.

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After initial success with more than 540 stores across China, Starbucks is striving hard to expand its operation and turn China into the biggest overseas market in near future. However, the Chinese market has many differences to other market that Starbucks has entered. Average coffee consumption in China is projected to increase by 20 to 25 percent each year. Therefore, much more opportunity is waiting for Starbucks in the near future. Despite its success, Starbucks should continuously monitor changes from the external environment and prevent unfortunate incidents such as in 2000 when Starbucks was kicked out of the Forbidden City, a symbol of Chinese Culture (CNN, 2000). Failing to monitor and respond properly, China can be a graveyard for Starbucks’ ambitions.

CHINA`S ECONOMIC SITUATION AND STARBUCKS` MARKETING STRATEGY

The China market is important to the Company’s long-term growth prospects – doing business there and in other developing countries can be challenging (Allen and Raynor, 2003). Since the first Starbucks outlet on the Chinese mainland opened in Beijing in 1999, Starbucks has become one of the most popular brands among Chinese white-collar workers aged between 25 and 40, surveys have shown (Asia Times, 2006). And nowadays, there are around 212 outlets in several big cities in this country, such as Beijing, Shanghai, and Guangdong.

China, after the United State, will be expected to become the second largest coffee-consuming country. China has the biggest world’s population; coffee drinking is popular among young generation, which has approximately 1.3 million potential consumers. So, too, was the opening of the first fully company-owned Starbucks in Qingdao. It is reported that Westerners and businessmen from Hong Kong and Taiwan represent 30% of customers at chained cafes such as Starbucks. Moreover, a perspective growth in production of coffee beans in China appealed to Starbucks’ investment. For the advantage that China domestic market can supply abundant coffee beans, instead of importing from the United States.

Since China’s open-door policy of economy and society, China now has dramatically grow in economy, thus attracted potential foreign investments, which led to rapid increase in the number of foreign investors. In addition, modern lifestyle of Chinese teenagers and adults supports the western specialty coffee shops. Meeting and negotiation business in a warm and characterless designed coffee shop have become more popular in China. (Fowler, 2003)

However, as Starbucks expannd its borders rapidly in China, it may face the most challenge that China has nearly 5,000 years of tea drinking, and its location-scouting skills and marketing savvy need to be test. To promote and popularize drinking coffee, Starbucks has become a sponsor for an internet coffee center. On the other hand, Starbucks select high-visibility, high-traffic café locations. Although Starbucks is already a well-known in China, it aimed to increase its share in Shanghai and Taiwan joint venture with President Coffee from 5% to 50%. (Fowler, 2003)

According to Chinese economic today, even to middle-class Chinese, Starbucks is more like a luxury. Moreover, Starbucks faces an uphill battle. The conflict between traditional culture and Western still exists in China. After Starbucks launched a shop in Beijing in December 2000, local media reported that 70% of people, who have been surveyed, would prefer not see the chain there as the Starbucks in the Forbidden City indeed ruined the image of traditional Chinese culture. (Seattlepi, 2005)

Chinesse Cultural Structure

Chinese are historically tea-drinking people. China is the homeland of tea. (Du Feibao). The tea leaf contains an alkaloid (5%, mainly caffeine) which is a stimulant (Du Feibao, 2007). Caffeine is very addictive, when used in high quantities. This may suggest that the caffeine in Starbucks coffee is the reason why Starbucks may have a really good chance at converting China into a people who consume coffee just as much if not more than they drink tea.

Positive Outcome of Starbucks coffee

Stock in Starbucks is a hot commodity. Starbucks shares have climbed 16% over the past year and will now cost forty-five times trailing earnings. People who have invested in Starbucks are making lots of money. Starbucks investors are also doing well because of the fast growth of the company in China. British review of 21 different studies on caffeine found that the popular pick-me-up cut exercisers ratings of perceived exertion by 5.6%. As a result, these exercisers were able to run, bike, and swim 11% faster and longer. Caffeine, when used in moderation, can have a positive outcome. (Jackson, 2003)

Negative Outcomes of Starbucks coffee

There have not really been any negative outcomes financially for Starbucks Corporation and its investors. They are making an obscene amount of money, however consumers often spend too much money on the Starbucks coffee products. A cup of coffee at Starbucks cost, on average, five dollars. If one was to add up all the money one spends on Starbucks coffee from the time the company was established, they would be able to retire by now.

Most coffee contains a large amount of caffeine. Doctors recommend a daily caffeine intake of no more than 200 mg (milligrams) or less. A six ounce cup of coffee contains 175 mg of caffeine. Heavy coffee consumers normally have more than one cup of coffee a day. Coffee is known to be very high in caffeine. Starbucks coffee is very expensive and too much caffeine is not good for one’s consumption.

Positive Effects on Culture

Starbucks stores are bringing people together in lots of different ways in China. People like the idea of being able to go to Starbucks for more than just a cup of coffee. Consumers are getting together at Starbucks to study or just to hang out and relax. They have created an atmosphere that is conducive to almost any thing one would like to do. Whether writing a paper, studying for an exam or just doing some research on the internet, Starbucks has what one needs. Starbucks have bridged the gap between the middle and upper class. Gourmet coffee is no longer something that can be afforded by upper class only. Everyone is drinking it, hanging out and having a good time. (Jackson, 2003)

RECOMMENDATION PART

IMPORTANCE OF CHOOSING AN EFFECTIVE INTERNATIONAL MARKETING STRATEGY

In today`s competitive international world, one of the most significant tasks for many companies which are preparing itself to enter a foreign market is to make the right decision about how the company should enter a foreign market. One reason for this is that this decision is likely to influence every part of its business for a long perid of time in the future. However, there are advantages and disadvantages of every single foreign market entry modes. For the aim of selecting the most appropriate and effective foreign market entry strategy, it is essential to take into account some point including; (Chee and Harris, 1993);

the company objectives and expectations relating to the size and value of predicted business,

the size and financial resources of the company

its existing foreign market involvement

the skill, abilities and attitudes of the firms management for international business

the intensity of the competition in target market,

the affect of existing and expecting tariff and non-tariff barriers

the nature of product considered for international entering the areas of competitive advantage, such as trademark or patent protection

the timing of entry in relation to t he market and intensity of competitive situation

RECOMMENDED STRATEGIES

In most of the Chinese cities which has been developing and changing rapidly, it is easier to find places that will embody the right lifestyle are more like gambling than science. Starbucks should go on using joint ventures or licenses with the other organizations to own and operate Starbucks stores, as this philosophy is different from its domestic approach, where the stores are largely company-owned. The opinion is that an experienced local partner may help the company to identify locations, sift through tax issues and give Starbucks stores a more local community appeal. Once the market is established Starbucks will be given an opportunity to purchase a controlling interest in the partnership, which will then allow them more control and management of the overall operation and direction of the business.

Starbucks is a company which adds more than five stores in a day to its store chain. For this reason, the company should deeply consider every single factor regardless their importance level. For instance, the stores that are planned to open should be on the way the people who use the commuter traffic and need some drink before change their way of target. And also, the number of the people who use that area as their way should be taken into account. Starbucks should also consider of entering new locations as its brand name is getting more poplar day by day.

The company should consider of opening new stores which are around the existing ones as the custmers sometimes have to wait on a big queue for a long time. This is likely to help the company to serve more dring in a shorter time.

Besides adding stores, Starbucks should also consider of making its own vending machines and launching them in places where it is difficult to open a store. In this way, these machines will let customers purchase hot drinks without going a Starbucks shop. This will be additional income for the company and, on the other side; it will reduce the number of the people who are waiting on the queue in the shops.

Within deciding whether to open directly operated stores or not in the Chinese market, first of all a general expansion strategy should be clarified. Since China is one of the largest markets in the world, it provides enormous growth potential, particularly as the economy currently starts to improve. Even though Starbucks had to face some major issues in the past period and China is not known to be the coffee drinking nation, a further expansion for a global company such as Starbucks is unavoidable.

It is the best alternative for Starbucks to directly operate a couple of flagship stores in prestigious locations, in order to create further brand awareness, retain control over the Starbucks image, as well as to avoid crucial future mistakes. Nevertheless, Starbucks should continue its international strategy of licensing more coffee shops than directly operating them. Hence, the majority of newly opened stores should further on be licensed to their local partners, since they are aware of the local customs, culture and regional knowledge. However, Starbucks should hereby increase its monitoring to avoid further crucial mistakes in the already touchy Chinese market.

 

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