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Costa Expanding Into South Korea
In this report we looked into the successfulness of Costa Coffee if they were to expand into South Korea. We found there to be many advantages such as high domestic demand for coffee and a large number educated wealthy consumers who are the target audience for the company. We used OLI and PESTEL to investigate the different facets of the business before briefly reviewing different modes of entry which the company could undertake. We then decided that a joint venture would be the best method of expansion into South Korea due to being able to tap into existing knowledge of the market place linked with Costa’s extension knowledge and success in the market place and it’s strong brand.
Table of Contents
Costa Coffee was founded in 1971 and has grown over time to be the second largest coffee chain in the world (behind Starbucks) and the largest in the UK. It currently operates in 31 countries around the world and has recently been acquired by The Coca-Cola Company for $5.1 billion which indicates there will be further global growth. The company relies on two main store formats; traditional coffee shops and express vending machines known as Costa Express. These are commonly situated in areas with high amounts of footfall such as high streets, transportation, universities and hospitals. UK Costa Express revenue significantly increased by 18% in 2018 due to changing consumer habits (RetailAnalysis, 2018). They allow Costa to cater to a larger proportion of consumers and show that they are willing to adapt to consumer needs in order to meet demand (does not make sense?). In this report we will assess South Korea using OLI and PESTEL before discussing different modes of entry which Costa could undertake.
We are using two main frameworks to understand if South Korea is a good country for Costa to expand into. The first we are using is OLI which looks at the ownership advantages, locational advantages and internationalisation advantages. In order to further understand the locational advantages we are using PESTEL which stands for political, economic, social, technological, environmental and legal. These two frameworks allow us to look at all areas of business in order to advise on the best possible course of action.
In 2010, Costa overtook Starbucks to become the largest coffee brand in the UK due to the operation of a total of 1,069 stores (Tajeram M., 2018). In 2018 this had increased to 2,422 stores with an additional 1,399 stores overseas. Simultaneously, the revenue of Costa increased steadily from 2010 to 2018 (The Statistics Portal). This high number of stores gives a strong global presence which is the main ownership advantage. Costa will continue to expand in order to increase their global market share after being acquired by Coca-Cola in January 2019 (Molly Fleming, 2018).
Products and Trademark
Costa primarily sells coffee, along with other hot and cold drinks, savoury snacks, sandwiches, cakes and pastries. The distinctive selling point of Costa coffee lies in their coffee making process. They insist on selecting the best coffee beans and employ coffee roasting masters who have recognised coffee industry professional qualifications in order to provide customers with the best product experience. Costa uses the classic slow roasting method to avoid the burning of coffee which occurs when it’s roasted at a high temperature for a short time. This allows the coffee beans to release a more mellow taste. They innovatively blend different coffee beans and launch new products according to the tastes of people in different countries and regions. The brand power of Costa coffee is strong as it is widely recognised and their customers have a high level of brand loyalty.
Historically, South Korea has had a restrictive negative attitude towards foreign direct investment. In order to develop national industries and prevent foreign capital from controlling the lifeline of the country, South Korea enacted the Foreign Capital Introduction Law in 1960 to control and restrict foreign direct investment. In 1966, South Korea revised the Foreign Capital Introduction Law, which adopted a more relaxed policy on foreign capital. Foreign direct investment was mainly for the export of trade services or for imported industries which couldn’t be met by domestic supply, lack of raw materials or are very complex technologically. Foreign investment is mainly based on joint ventures. The Foreign Capital Introduction Law, revised by South Korea in 1973, even prohibited foreign‑owned enterprises.
In the 1980s, due to the balance of payments deficit, South Korea tightened overseas direct investment by Korean businessmen and relaxed restrictions on foreign capital inflows. For the sectoral distribution of FDI flows to South Korea, manufacturing was the largest recipient in the early liberalization period, absorbing 67.4% of FDI in the period 1962-1986. This trend continued until 1993, when the share of the manufacturing sector exceeded 65% of total FDI inflows. Manufacturing as a percentage of total foreign direct investment has remained at about 55% since 1996 (Kim and Hwang, 2000). After the Asian financial crisis, South Korea realized the importance of foreign direct investment. In 1998, South Korea enacted the Foreign Investment Promotion Law to encourage foreign direct investment, which greatly improved the investment environment in South Korea. For the first time, the regulation allows local governments to grant foreign direct investment tax and rent reductions, simplifying the process of approval of foreign direct investment and making it transparent. In addition, the regulation also proposes to establish foreign investment zones to attract large-scale foreign direct investment.
South Korea’s economy appears to be recovering and stabilizing. A comprehensive restructuring of the financial sector will make it more robust, transparent and efficient. In turn, a stronger financial system would increase the productivity and profitability of real sector investment by allocating capital on an economic rather than political or other considerations. All these will help create a better investment environment for medium – and long-term foreign investors.
More promising for foreign investors is a fundamental shift in government policy and, to a lesser extent, public attitudes. The government seems determined to use foreign direct investment as a means of building a more efficient and productive economy. The Korean economy desperately needs the capital, technology, expertise and management expertise associated with FDI to overcome its structural problems. In turn, a more efficient economy will attract more foreign investors. Thus, there is a symbiotic relationship between FDI and efficiency. In short, the prospects for foreign direct investment in South Korea are brighter than ever. (Park and Kang, 2000)
In South Korea, the strongest competitors of CostaareStarbucks and Ediya coffee. Firstly Starbucks dominated the Korean coffee market (International Comunicaffe, 2017). It was launched in South Korea in 1999 and had a rapid expansion with South Korea having one of the most amount of stores anywhere in the world with regards to its population, area and GDP (Visualising Korea, 2018). Close ties between South Korea and the United States helped to stimulate domestic demand for coffee (Keyhole, 2015). Moreover, South Koreans consider that Starbucks symbolizes wealth and status, and the awareness of health benefits associated with black coffee promoted the brand further in South Korea (ibid). Furthermore, the policy that franchises are not allowed to open more than one stores within a 500 meter radius (Ho Kyeong Jang, 2018) limited its competitors’ growth such as Caffé Bene which is the largest local coffeehouse chain. Ediya Coffee owns the largest number of coffee stores in South Korea in 2017 (International Comunicaffe, 2017) and is estimated to be the most profitable coffee franchise. (Ho Kyeong Jang, 2018).
The competition in Korean coffee market is further intensified by the fact that coffee consumption in Korea is growing at a rate of 30% a year which is five times faster than demand in other countries in Pacific region (Coffee and Cocoa International, 2016). The potential size of the market demand attracts more coffee brands to join, for instance, Blue Bottle Coffee which comes from the United States announced that their second coffee store will be opened in Seoul in the second quarter of 2019 (MarketWatch, 2019). Although Costa has lost the advantage of being a first mover, it should still succeed because of the high level of brand awareness and quality. The price of Starbucks in Korea is the highest in the world, which means that the relative higher price of Costa to domestic brands should not be a disadvantage.
South Korea is a highly technologically advanced country, for example it has some of the fastest internet speeds in the world. (ZOEY CHONG, 2018). The Korean public are big users of social media such as Instagram and Twitter which allows them to learn about the products they want (Nordeatrade, 2019). Therefore, there is an opportunity for Costa to promote themselves on social media in order to establish their reputation and attract more customers. In addition, Costa may benefit from Korea being the world’s largest exporter of machinery and the 5th largest R&D power worldwide (ibid) as they could be able to produce their machines there, allowing them to save money.
Costa needs to consider the impact of its operations on the environments in which operates in as well as the environmental regulations in different locations that it wishes to diversify into. Environmental regulations can also impact relationships between Costa and its host country i.e. South Korea including communities and other businesses.
South Korea’s environmental policies needs to radically improve and lack clear direction “fall into the bottom ranks (rank 36) in international comparison. Its score on this measure has declined by 0.3 points relative to 2014” https://www.referenceforbusiness.com/management/Int-Loc/Location-Strategy.html which means that Costa’s commitment to environmental sustainability will be welcomed by the South Korean government.
Costa is committed to the improving and sustaining the environment and does everything it can to use sustainable, recyclable products and equipment. Costa’s coffee roastery is “one of the greenest in the world with year on year carbon reduction, an amazing 100% renewable energy supply and 0% waste to landfill” https://www.costa.co.uk/responsibility/environment/
Costa needs a sustainable milk supply that is utterly traceable to succeed in its operations and at present this may present a challenge to South Korea due to issues that it has had over the years (as recent as 2018) with foot and mouth disease. https://uk.reuters.com/article/us-southkorea-footandmouth/south-korea-confirms-foot-and-mouth-disease-at-hog-farm-idUKKBN1H3067. In the UK Costa is committed to “supporting the British dairy industry and safeguarding future British milk supplies” https://www.costa.co.uk/responsibility/environment/ and this country support could be attractive to South Korea as there is potential for joint ventures with other organisations.
The key law relating to foreign investment is the foreign investment promotion act (FIPA). FIPA regulates foreign direct investment (excluding portfolio investments), the purchase of shares in Korean companies by foreign entities or individuals to maintain financial relationships.
The main regulatory agencies are the trade, industry and energy ministries, which are the central administrative agencies that implement various foreign investment regulations.
Korea has also designated certain regional areas to induce foreign investment under the Free Trade Zone Act and the Free Economic Zone Act.
These Acts are administered by the trade, industry and energy departments and specific local governments that apply to the free trade/economic zone. Foreign exchange and remittances in connection with foreign investment are regulated by the foreign exchange transactions act (FETA). Tax incentives for foreign investment obtained under FIPA are governed by the special tax limitation act (RSTA) and other tax-related laws. The ministry of strategy and finance is the main government agency implementing the FETA and RSTA.
In addition, foreign investment companies and their operations are governed by various domestic laws, regardless of foreign investment, since they are domestic companies established under Korean law. But if the foreign entity owns 50 per cent or more of the shares, the companies will be considered “foreign companies” expropriating the land.
A multi-national enterprise can enter a foreign market in several ways including: international franchising, having branches, contractual alliances and equity joint ventures and wholly foreign‑owned subsidiaries. Costa being owned by Coca-Cola could enter the South Korean’s market through direct investments however due to not having a track record of success in the coffee market joint ventures will be the suggested way forward looking to replicate the success that Costa has had in the China market through joint ventures. “Whitbread PLC announces that Costa has acquired 49% of its South China Joint Venture from its JV partner, Yueda, for RMB 310 million (£35 million). This acquisition provides full ownership in this important growth market and is in line with Whitbread’s strategy to focus on key international opportunities. Costa currently owns 51% of the joint venture which operates 252 stores in the south of China, including 93 stores in Shanghai.”(Whitbread, 2017))
The OLI paradigm analyses “why”, “where” and “when” MNCs make decisions regarding ownership, locational and internalization (OLI) advantages. Ownership advantages are specific to a particular firm, constitute competitive advantages towards rivals and allow the company to take advantage of investment opportunities both domestically and internationally. Dunning (1980) divided ownership advantages into three types: the first is the standard advantages, which any firm can have over another producing in the same country, including: size, monopoly position, established market position, special access to inputs or and markets, and superior technical and/or organizational knowledge. The second type regards the advantages that a branch of a national firm may have over a new firm, specifically relating to the benefits acquired for belonging to an existing organization.
These benefits include access to innovation and technology at low marginal costs, access to cheaper inputs and knowledge about market and local production. The third type of ownership advantage refers to the experience that the firm has because of its involvement in international operations, and the multi‑nationality fostered by the firm’s background (Letto-Guilles, 2005). In the same direction, ownership advantages evidence that what a firm does, or is about to do, is closely linked to its routines and previous bases (Shin‑Horng & Meng Chun, 2005).
Globalization has been a competitive strategy that many companies have adopted in order to achieve and expand market share and profitability and maintain sustainable development. Foreign Direct Investment (FDI) is an internalisation strategy in which the firm establishes a physical presence abroad by acquiring productive assets such as capital, technology, labour, plant and equipment. When a firm is entering a foreign market or internationally expanding for the first time, there are many potential risks. It is notable that the concept of risk and uncertainty cannot be ignored. In this part, the potential risks that Costa can encounter when entering the South Korea market will be discussed and strategic recommendations are provided to conquer them.
Firstly, Costa needs to consider the risk of losing control of its technology to its partner by doing joint venture. Even though joint- venture agreements can be made to reduce the risks and get holding mass ownership in the enterprise, it can be difficult to find a foreign partner who is willing to do business for minority ownership. Moreover, Costa should think about the power of control over subsidiaries. There may be a risk of getting lesser control compared to the foreign partner.
Secondly, many potential risks can be occurred by acquisition. Many acquisitions collapse because of insufficient screening before the acquisition, misunderstanding between the cultures of the acquiring and acquired firms and sometimes overpay for the assets of the acquired firm. These difficulties can be overcome by thinking carefully about acquisition strategy. Thus, Costa needs to consider the operation, financial position, and management culture of the acquired firm. After that, Costa has to make sure that the firm does not pay too much for acquisition and the organisational cultures are similar
Thirdly, market risk is also a prospective danger for Costa. A coffee shop occupies almost one in every two buildings in popular retail and business area of South Korea. The market is getting crowded gradually and South Korea’s café boom is near saturation point. (U.S., 2019) In this situation, the sector that Costa want to target and its own positioning is becoming a key factor to think about. Costa needs to undertake a thorough market analysis in order to understand the demand conditions.
Another risk Costa will face is that the high density of competition in the South Korea’s coffee market. There are already many big competitors like Starbucks, Coffee’ Bene, Ediya and 7-Eleven. Starbucks stands as a market leader and it ahead of all competitors in South Korea. (Comunicaffe International, 2019) With regards to this point, the strategy that Costa adopt is very important to survival in the market. Costa should adopt the most competitive strategy that creates the most value for the firm.
Lastly, a business strategy risk is a big factor that Costa needs to consider. It cannot be denied that deciding which strategy to undertake is a very essential but difficult step. Costa needs to use a strategy that allows the firm to enter the market smoothly whilst growing quickly and sustainably.
- (RetailAnalysis, 2018) Kristian source of reference
- (Tajeram M., 2018) ? Source of reference
- (The Statistics Portal) ? Source of reference
- Marketingweekcom. 2019. Marketing Week. [Online]. [5 February 2019]. Available from: https://www.marketingweek.com/author/mollyfleming/ (date of access)
- (Kim and Hwang, 2000) ? Source of reference
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