Proposed Expansion Strategies Of Starbucks Into Indian Market Marketing Essay

The following report is based on the proposal for Starbucks Corporation to make a direct foreign investment in India by penetrating its market with its product and services.

Strategic recommendations for the future course of action is provided in order to achieve market competitive advantage.

1.0 INTRODUCTION

Starbucks is the world’s leading speciality coffee retailer, producing and selling a wide variety of beverages, as well as pastries and confections, through some 8,400 coffee shops throughout 30 countries around the world. Starbucks has grown to become one of the most talked about globalized brands in recent times. In the four years since going public, the chain of coffee bars has become wildly successful by turning one of the world’s most pedestrian beverages into a premium product, wrapped in a carefully cultivated, widely recognized brand name that extends far beyond what’s in the cup. It is a brand that’s defined as much by attitude as it is by products. The Starbucks “experience” is about more than a daily espresso infusion; it is about immersion in a politically correct, cultured refuge from everyday hassles.

Having established itself as a global force, many analysts are asking whether Starbucks can continue to go from strength to strength. Sustained success will require sharp focus on a set of key challenges, including innovation and experimentation. In order to achieve a competitive advantage, the company continues to rapidly expand its retail operations and pursue opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels. SWOT analysis is given in Appendix A to highlight company’s current strategic position.

Company’s proposed expansion into India is likely to bring a strategic challenge for the company. India is seen as having the greatest potential for multinational corporations. India is a highly diversified country. There is, nonetheless, a core culture based on a shared religion and political experience. India now has a growing middle class, an increase in disposable income that is considered rather opportunistic for company’s expansion.

To give a more in-depth insight into Indian market for Starbucks operations, macro-environmental framework is presented in Appendix B, including the analysis of political, economical, social and technological factors that will affect Starbucks’ proposed operations.

2.0 EXPANSION INTO INDIAN MARKET

India is a mixed economy, where both public and private sector enterprises work together to achieve economic development for the country. India has many large and dynamic private sector companies which operate in all areas of economic activity – trade, commerce and industry, without much interference from the government.

India is a nation of more than 1.03 billion consumers (The Economist, 2001). It has an expanding middle class of 150-200 million consumers, most of whom are well educated and speak the English language. In the revised per capita income estimates, on the basis of the World Bank’s purchasing power parity (the exchange rate that equates a country’s goods and services with international prices), it is estimated that India’s per capita income is $1,150, with a GNP of a trillion dollars. As a result, India is ranked as the sixth largest economy in the world.

India is the world’s largest democratic republic; although government bureaucracy does not have ultimate control over business decisions as in China, it has a lot of influence. Multinationals, such as Starbucks will be seen as vanguards of a new colonialism (Cateora and Graham, 1999), are continually thwarted through such measures as prohibitive tariffs (e.g. on computers and softwares), bans in importation (e.g. automobiles), quotas and other non-tariff measures (Schlender, 1997).

In spite of the huge potential of the Indian market, there are various challenges Starbucks expansion will have to face, including six distinct issues concerning the economy, management, marketing, government, labour and finance. India is perceived to have a more favourable general business climate than, for instance in China.

At current growth rates, corporate investment in Asia will not have a tremendous impact on the short- or medium-term growth and profitability of multinationals. For Starbucks in particular, it will be just another matter of gaining a broader global representation and greater market share.

2.1 Main Investment Advantages

The Indian economy, already the fifth largest in the world – after US, Japan, China, and Germany, is growing faster now than at any time in the past fifty years. On average, India boasts a GDP growth rate of more than 6 percent annually since 1991 (Panigrahi, Ede and Calcich, 2002).

India is fast industrialising and with its vast labour force and talented people, the Indian government is striving to make the country an industrial giant within a decade.

India, with the largest middle class in the world, also ranks second, after China, in terms of overall population (over 1 billion). For example, India has 1.03 billion people and about 170 people per car. The US, on the other hand, with a population of 275 million people, has three people per car.

Forecasts indicate that by 2010, only 9 percent of the Indian population will be elderly, while the elderly, by comparison, will make up 19 percent of the US and 30 percent of the Japanese populations. Thus, consumers in India are comparatively young, having a potential to powerfully influence economic growth and consumption patterns.

In India, the outlook is favorable for companies looking to build long-term value and improve manufacturing efficiencies. But Asian markets may not be the easy answer for companies attempting to boost their short-term growth. By investing in India, Starbucks should take a careful look at what really affects returns to public shareholders. Most investors and executives want a piece of the booming Asian market for the right reasons. With vigorous growth in the region, getting into India, and other countries should position companies well for the expected groundswell of shareholder value.

Over the past five years, India, the largest democracy in the world, has put in place the foundations of a deregulated market-driven economy. It is hardly surprising then, that a growing number of US companies, motivated by favourable investment climate and the region’s huge reserves for both human and natural resources, have begun to seriously consider investing there.

2.2 Financial Analysis of India

Financial matters in India [1] are governed through more than 800 decrees and provisional regulations (Belcsák, 2005). The whole financial system, including banks, financial institutions, and stock markets, is yet to be organised. Simultaneously, in the financial sector, banks and financial markets remain plagued by lack of expertise, government mismanagement, corruption, and unclear legal status. Until recently, virtually all of India’s banks and financial institutions were state-owned, government controlled organisations. However, after the implementation of a liberalisation programme, and imposition of international financial standards, domestic state-owned banks and other financial institutions are less tightly controlled and more professionally managed.

India is “a functioning market economy” with the majority of companies becoming consumer focused and market driven, getting increasingly urbanized, using technology to replace labour, deriving an Asian approach to management as distinct from the same followed by the West and are beginning to establish networks with other nations to face the rest of the world (Marshall, 2005). Many of these trends are applicable to India and it is no wonder that leading multinationals, including Starbucks, are making it a point to ensure that they have a strong presence in India.

In today’s context, the wealth of a nation is synonymous with the wealth of its organizations and to ensure that large domestic firms play their due role in the country’s development, the government of a developing country must provide the required support. The Government of India seems now to have understood this important requirement and recently proposed that it would delegate required managerial autonomy to various leading public sector units of the country.

A number of recent policy changes have promoted foreign direct investment (FDI). The government has reduced exchange control regulations for companies with significant foreign participation. The 10 percent tax rate on long-term (12 months or more) and the 30 percent tax rate on short-term (less than 12 months) capital gains are the same for both Indian and foreign firms and investors. Dividends and interest income are taxed at a rate of 20 percent (Country Review, 2005). Article (2005) states that the key at tribute of multinational company, such as Starbucks is not that it engages in foreign production, but that it finances at least part of the production in its home currency. It is suggested that the stronger currency enables companies in the company’s area of advantage in investing over weaker currencies, because of investor’s preference for securities denominated in the stronger currency and hence, a cheaper cost of capital. A strong home currency discourages and weaker currency encourages FDI in the nation.

2.3 Coffee Market in India

India accounts for approximately 4.5 percent of world coffee production and has coffee importing countries, including Italy, Germany, Russian federation, Spain, Belgium, Slovenia, US, Japan, Greece, Netherlands and France (Mulligan and Authers, 2003). The coffee market itself in India is rather fragmented with no evidence of market leaders. Meanwhile with increasing competition amongst different multi-national brands, companies are coming up with added facilities. Coffee shops tend to focus on quality service, providing a cool and soothing ambience.

Currently, Indian industry is expecting marginal improvement in price realisation in the global market. The quality and aroma of Arabica variety of Indian coffee is much diverse than in other global coffee markets. The Indian Coffee Board is quite sensitive to the plight of the country’s coffee industry and has been consistently following possible corrective measures to make the domestic industry feel least impact of adverse international market condition. Majority of coffee shops in India large cities are privately owned and there are only few bi players, such as Tata Coffee, Hindustan Lever, Nestle India, Barista Coffee.

3.0 PROPOSED EXPANSION STRATEGIES OF STARBUCKS INTO INDIAN MARKET

3.1 Cultural Context

According to Hofstede, national culture plays an important role in individual’s behavior and attitudes. It is recognized that individual’s behavior in culture groups are strongly influenced by the values held in that society. Some of these values influence consumption patterns. Swaidan and Hayes (2005) pointed out that Indian culture, like many other Asian cultures, exhibits high collectivism and uncertainty avoidance. Similarly, Todeva (1999) found that Asian consumers are less prepared to take the social risk to try new products. On the other hand, the discomfort of being left behind presses them to follow suit if they believe others have tried the product. The innovation curve among Asians is, therefore, steeper and negatively skewed.

In India, Venezia (2005) observes, you will find a society that has, like Europe’s, the diversities of a continent and the unities of a civilization. Such is the measure of the magnitude of the nature of diversity in Indian society whose features Indian industry had inherited. Societal diversity is not an unmixed blessing for corporations and their management. It is argued that in India, generally speaking, the weaknesses of societal diversity such as caste, for instance, are superimposed on its business and industrial organizations and exacerbated. Collectivism that is highly evident in India, is characterized by a tight social framework, in which people distinguish between in-groups and out-groups.

According to anthropologists Kluckhohn and Kroeber, the essential core of culture consists of traditional ideas and their attached values. These values influence how people judge behaviour or situations and shared values direct people of the same culture to react in a similar way to a certain situation (Venezia, 2005). A major study by Hofstede defined business culture as learned assumptions and beliefs, attitudes and values shared by members of a group. India can be considered with a high score, along this dimension reveal a culture’s orientation toward the present and past. Having a high Confucian dynamism culture India values the relative importance of personal steadiness and stability, saving face, respect for tradition, and reciprocation of greetings, favours, and gifts.

Understanding of the cultural norms is a reliable basis for understanding behavioural responses and outcomes in the international buyer-seller dissolution process. For example, cultural norms operating in diverse culture in India compared with Australia is likely to have a significant influence on the styles of management and communication strategies that are appropriate for managing long-term and cooperative relationships. In particular, India is likely to have a cultural environment that is considerably complex to manage.

Globalization has blurred the line between industrialized countries and developing nations by integrating politics and culture into management improvement. Typically, in business relationships in Asia between Asian and Western companies, where both cultures use and understand that management styles should be designed to be high in collaboration and low in assertiveness, we posit that both parties use a cooperative style. Starbucks needs to understand the national culture within which the company plans to operate, and the extent to which it adjust its communications accordingly. It is possible that Starbucks may have an inappropriate evaluation of the host culture of the overseas company in accordance with which it designs its communications.

The trend in Indian public administration continues with a rationalist scientific approach that reflects the values of a nation. Hofstede analyzed as having small power distance, weak uncertainty avoidance, strong individuality, and masculine being exported around the world through globalization (Freeman and Browne, 2004). This is possibly due to the political instability. Higher stress, at the national level, is correlated with weak rule orientation and lower employment stability. It is possible India has found its natural balance in relation to its native culture and values.

3.2 Strategic Alliances [2] 

By entering a new market, Starbucks is likely to spur domestic competition and introduce a more dynamic style and new coffee experience.The company will also generate more labour and promote Western attitudes towards service and its provision.

Main barriers to entry, in accordance to Porter’s competitive forces framework, will include the new power of suppliers and competitors’ already established supplier relationships and the knowledge of the market. One popular way to become involved in business is through franchising. While franchises are also a popular way of entering some international markets, strategic alliances are increasingly utilized. In fact, strategic alliances are often required by some countries, rather than other modes of entry, as they involve local firms directly in the business. Davis (2000) and Welles (2001) suggest that historically Starbucks does not like franchises, which is why the group in order to successfully enter Indian market, might consider this expansion through joint ventures and other partnerships. However, the company should keep in mind that Asian companies have not been particularly kind to minority and public shareholders. Numerous publicly listed companies have seen their share price drop amid accusations that the controlling shareholders manipulated the relationship between listed and privately held subsidiaries. Poor governance contributes to market inefficiencies, which in turn lead to volatile markets that have to make larger corrections periodically in order to adjust for gaps in information and in perception.

3.3 Marketing Mix

For a successful penetration into the market, Starbucks will have to establish a defined marketing mix, including:

Product: Coffee shops may have their unique characteristics, but it also possible to see many parallels between the sector and other retailing and catering sectors. Over the years, Starbucks has grown to become one of the largest purchasers of high-quality arabica coffees. With a growing proportion of young people in India, the company might put also have in-store entertainment facilities and Internet.

Place/distribution: Starbucks need to place its shops into central locations, as the rural part of the country still lives in poverty. Customer convenience and service delivery will have to be understood.

Pricing: As Asia emerges from economic downturn, a growing middle class is willing to spend money. However, Indian population is predominantly characterized by an attitude to save money. The company will have to benchmark its products and prices in accordance to competitors, and also considering the market trends and the consumer incomes.

Promotion: Starbucks uses various promotional strategies, including catalogs, the Internet, advertisements in local media but mostly, it uses word-of-mouth. The very location of its stores is a strong marketing tactic.

To appreciate what is at stake, understand the psychology behind the brand. Advertising has never created Starbucks’ image. It was built on two things: the quality of its product-it really is a better cup of coffee-and the store experience. The retail experience also extends to sparkling service and an unspoken invitation to linger over a cup of coffee in the store. (Donation, 2003)

The middle class populations in India will be targeted by Starbucks as potential markets for consumer durable goods. The company might use community events and sponsorships as the most effective marketing tools. Incorporating knowledge of consumer attitudes about the beverage and food industry Starbucks is entering should help in designing strategies to reach target markets. Indian consumers tend to be opinion leaders; less loyal to the same food product; and more responsive to product promotions and advertisement. Food prices are of a great importance to all Indian consumers. The company will have to use its ability to market itself as an ideal as much as a product-a caffeine-infused oasis for the hip and trendy.

3.4 Strategic Choices

There is no “best” corporate strategy. The main focus of the business-level strategy should be based on how to compete effectively in the market. It is the core issue of how value is realised in a business, after all, value is realised only when a buyer is prepared to pay for the product. The extent to which they are prepared to pay a price which provides profits superior to those of competitors will therefore determine the extent to which that business is highly regarded by its owners and investors.

Bases if strategic choice need to take account of the environment in which Starbucks operates. It is important, therefore, to recognise the role of organisational resources, capabilities and core competence in terms of the bases on which competitive strategy and advantage may be built. Porter’s generic strategic framework enables Starbucks to apply one of three main strategic options in order to achieve a sustainable competitive advantage, that include cost leadership, differentiation, and focus. Sustaining bases of competitive advantage is likely to require a linked set of organisational competences which competitors find difficult to imitate. Strategies of collaboration may also offer alternatives to competitive strategies. In a new uncertain environment, Starbucks’s competences need to be found in company’s culture and structure, which will encourage speed, innovation and the capacity to gain business success.

The choice of a right entry route is critical to the future success of Starbucks. In accordance to Johnson and Scholes (2002), a unified framework linking country risk, country familiarity, the stage of the country’s development, technology and transaction cost has to be provided that a particular entry decision cannot be viewed in isolation and that such decisions are considered in relation to the overall strategic posture of the firm.

The marketplace and workforce in India are becoming more diverse every day. In fact, workplace diversity is considered a major challenge and opportunity for human resource management. It makes integration both difficult and easy depending on how diversity is viewed and used. The sources of diversity and its uses make a difference to what it means and how it impinges on organizational purpose and human behaviour at the workplace and beyond. Workplace diversity in India may have been partly inherited from centuries of customs and practices, partly imposed from colonial heritage and largely acquired through corporate omissions and commissions. They have implications for global competitiveness and for managing human resources/ industrial relations (HR/IR). Clearly analysing cultural norms and attitudes towards management will be beneficial for Starbucks in the long-term.

4.0 CONCLUSION

Starbucks has become a great successful company in the coffee bean and beverage business. A large part of this success is due to its effective strategy. To further grow, Starbucks will need to expand further in other areas of the United States as well as internationally. Due to India being one of the largest coffee drinking nation in the world, Starbucks expansion into India market will be an effective expansion strategy. Although, the expansion is occurring at such a rapid rate that investors worrying issue is of oversaturation. Therefore, Starbucks will have to look into other avenues for maintaining profits and further success. Considering partnerships and venture might be an effective strategy for Starbucks that can reduce the potential threat of the new market.

New market penetration is a challenging and uncertain area of business. Hence, for Starbucks’s effective market entry, a great emphasis should be given to market analysis. The culture and corporate strategy must also be maintained for success. This will ensure the health of the organization throughout the proposed expansion.

APPENDIX A

SWOT ANALYSIS: STARBUCKS

1. Strengths

Financial resources: The company is the world’s number one specialty coffee retailer, and as such is has a greater financial reach than practically all of its competitors. Huge financial resources enable the company to take advantage of market opportunities, investments and expansion activities that are not available to smaller firms with a reduced capital. Starbucks has considerable financial strength. For instance, in fiscal 2003, Starbucks generated revenues of $4.1billion, a 24% increase on the previous year. (Company Report, 2004)

Global presence: Starbucks is a truly global brand. The company has roughly 7,570 retail store locations around the world (as of September 2004), the majority of which are company owned and operated. The company has cast its net across 30 countries in a bid to establish a pioneering image, and although such a strategy has generated limited early returns form its international business, the company has succeeded in developing a truly global brand.

A disciplined innovator: Starbucks is a disciplined innovator, and good management of its innovation time line is one of the primary reasons behind the company’s success in generating consistent high level of same store sales. Starbucks currently has a number of new ideas being tried and tested in its stores. In 2002 the company introduced new Frappuccino Blended Beverages, and in 2003, the “Iced Shaken” refreshments product line was launched. Starbucks’ ability to roll out new initiatives and produces relatively quickly is a considerable competitive strength for the company. That is can rapidly fill gaps in its calendar is a by-product of Starbucks’ company-owned retail structure, vertical integration of many products and relatively simple store operations. Customers are also increasingly drawn to the company’s music compilations, produced for the company by Hear Music.

Consistent strength of core product: In the last eight years, Starbucks has consistently derived increasing proportions of its annual revenue from its beverages business unit. It is good for Starbucks to focus on the beverage market, as this core product division dictates the direction of other units, such as merchandise and food. A continued growth in the beverages unit represents overall company growth for Starbucks, as it shows the consistent strength of the core product.

2. Weaknesses

Reliance on US market: Given the company is an international brand with wide ranging operations, it should be looking to generate a greater proportion of revenues from outside the US. Such is Starbucks’ reliance on this market, the company entire performance will be materially affected should the company’s US unit under-perform, as a result of economic conditions or increased levels of competition.

Rapid build-out hangover: Starbucks based its international strategy on the basis that maximum benefit can be derived from entering markets early to capture a first mover advantage. In accordance with this, the company rapidly cast its net, establishing operations in around 30 countries since 1995, and in doing so, incurring sizeable overhead charges. Also, in the company’s haste to increase its scale, some rash decisions were made and some of these mistakes have delayed progress to profitability.

Reliance on beverage innovation: An important long-term risk to the company’s stock is a lower valuation caused by a slowdown in US sale store growth. Starbucks’ store sales growth has been largely driven by beverage innovation, but there are questions over how long this can last. Diminishing return from beverage innovation, one of the company’s competitive strengths, would have a significant adverse effect on the company’s performance.

Performance of International operations unit: Starbucks’ International operations division has faced problems of expansion, with a number of openings failing to be successful. In 2003 Starbucks Coffee International ended its joint venture with the Delek Group of Israel. Following this decision, Shalom Coffee Company, the joint venture between Starbucks Coffee International and the Delek Group, closed its six Starbucks stores in Tel Aviv.

3. Opportunities

International operations: By the end of fiscal 2004, Starbucks’ international business should finally achieve profitability. About 23% of the company’s stores are located outside North America. Key markets include the UK and Japan, which should provide useful indicators for the respective performances of Starbuck’s other operations in Europe and Asia.

Growth market: The specialty coffee sector accounts for roughly 15% of the US retail coffee market, which is already worth $21 billion. By 2005, the retail coffee market is expected to be worth $22 billion, and the specialty coffee sector will grow to account for 41% of this market. Starbucks has a market share of over 40% of the specialty coffee market, and the anticipated growth in this category will offer the company considerable opportunities for further growth and expansion in the near future.

Starbucks Visa Card: The Starbucks Visa Card is likely to bolster revenues in 2005. During 2004, the company’s retail sales mix by product type was comprised of approximately 78% beverages, 12% food items, 5% whole bean coffees and 5% coffee-making equipment and accessories. (Company Report, 2004) By diversifying its revenue streams Starbucks should be able to both increase the stability of its financial position by reducing its reliance on certain product lines, and also grow its revenues.

Clustering of company units: With the continued growth of the coffee market, the company has looked to expand its business, including those areas where it has an established presence. Working on the basis that a key driver of business is the convenience of the company’s outlet location, Starbucks has looked to cluster its units so as to dominate particular areas. The financial reward derived from this practice has been found to be considerable, as new outlets have not been found to eat into the business of existing outlets. A continued strategy of unit clustering, and a focus on stores that have convenient access for pedestrians and drivers, represents further opportunity for Starbucks to capture an increasing share of the coffee market.

4. Threats

Supply risk: Starbucks is dependent on trading companies and exporters for its supply of green coffee. The company is looking at securing long term supply contracts, and in some cases has had to pay inflated prices in order to obtain such contracts. Starbucks responded to world coffee prices reaching 30-year lows during 2001 by offering suppliers more money to guarantee supply, and as such the risk of non-delivery on such purchase commitments is low. However, the nature of the business dictates that the company’s dependency on suppliers does put it at risk.

Slowing US retail sales: Long-term concerns regarding US store growth potential still remain. If current growth continues, saturation levels within the North American retail division will be reached inside five years. This represents a considerable concern for Starbucks, given that over the last two years, domestic retail has been the source of about 75% of the company’s revenue growth and an even greater proportion of profit growth. Before they reach saturation point, US retail sales growth will slow considerably over the next three to five years, further increasing the pressure on the international division to justify the company’s investment in expansion.

Competition: The global coffee market is a very competitive sector, and Starbucks must compete against the likes of restaurants, coffee shops, and street carts. A major competitor, with substantially greater financial, marketing and operating resources than Starbucks, could enter this market at any time and compete directly against the company. Starbucks must be aware of competition on all levels and maintain its operational performance if it is to retain its status as the world’s leading specialty coffee retailer.

Volatility of market: Starbucks is at risk to the volatility of the supply and price of coffee. The company’s search for superior standard coffee means it can be adversely affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of organizations and associations that have in the Starbucks Corporation past attempted to influence prices of green coffee through agreements establishing export quotas or restricting global coffee supplies. The actions of these associations could cause a degree of costly disruption to Starbuc

 

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