Starbucks’ Challenges in Venturing Indian Market
According to the case study, lack of appropriate partner in India was one of the major challenges faced by Starbucks in its internationalization venture given that Indian market was composed of many small individual retail shops.
Selecting a partner from the many retail outlets was a big challenge because of their number and retail standards that did not meet the requirements of Starbucks.
It was a challenge for Starbucks to find an appropriate partner and co-venture to grow and market its brand in India because of issues, such as Starbucks’ working ethics and intense advertisements for the brand to survive the cutthroat competition from the other competitors.
Starbucks’ pricing was another major challenge in entering Indian market. Coffee costs at Starbucks were set at their best as compared to other world companies. In India, the prices must be lowered in order to compete with the prices of other coffee retailers, which may result in loss or little profits for the company.
Another major challenge was the rising rate of sugar related diseases, such as obesity, heart diseases, increased blood pressure and diabetes. Starbucks has been the target of many consumer health groups’ movements and World Health Organizations worldwide.
These groups have been campaigning against the high-fat and high-calorie products sold by Starbucks. If Starbucks products are introduced in Indian market, it may cause the increased cases of heart diseases, obesity and cancer.
For example, such Starbucks product as Banana Mocha Frappuccino mixed with Whipped Cream contains 11 grams of inundated fat and 720 calories. Consumer health groups recommend Starbucks to publicize the smallest cup size and apply healthier coffee shortenings.
The North Indian culture largely prefers tea so people in the region have little preference for coffee. Research carried out by the Indian government proved that the coffee consumption had stagnated at 50,000 tons per year, hence making it a challenge for Starbucks to venture into Indian market.
The purchasing power parity in India is too high, and this has attracted all coffee retailers to locate their shops in India, hence increasing the rate of competition in the market. For instance, South India has intense competition for coffee customers because the region’s culture prefers coffee to tea. All the coffee shops in the country are targeting the southern market, thereby having prompted a fierce competition.
For Starbucks to survive in the southern market, it will be forced to enter it with a price below the existing market prices in order to attract some customer. This may make Starbucks operate at negative profits for some time, thereby posing it as a challenge to the company.
For example, the amount of coffee consumption in South India was estimated to be 39%, while that of North India was 15%, showing how intense competition for coffee will be focused on Southern Indian market.
Indian market lacks operation efficiency in terms of operation costs. Northern Indians have very different tastes and preferences when compared with the Southern Indians in terms of coffee consumption.
This factor will force Starbucks to offer a product made to suit both regions; Northern Indians believe prefer instant coffee for its convenience while Southern Indians believe that constant coffee has chicory so filter coffee is the best.
Reasons for Expansion to Overseas
Starbucks has pursued overseas expansion to avert competitors from dominating or identifying the market prior to it, thus the company develops the western brand in other continents to ensure its advantage of the growing demand for coffee in other countries.
Additionally, it has reduced its operating costs, and diversified its business risk and self-protection. These are some of the reasons that have propelled Starbucks’ venture in oversees market.
Starbucks has entered the overseas markets to expand its markets and raise its sales, thereby increasing the company’s profits. For example, Starbucks chose to expand to India because India has a large potential market for the products offered by the firm, such as coffee.
The population of India stands at more than 1 billion people with an annual growth of 6%. When Starbucks expands to international markets, it gets a chance to make its contribution to trade related issues in the international business.
Starbucks expands to international markets to reduce its operating costs. Starbucks identifies the resources it needs and the place where it can get them at the lowest cost in the international market. Companies move to international markets to take advantage of the low labor, production and transportation costs.
For example, Starbucks moved to Japan because Japan was the third largest coffee exporter in the world. This meant that the operating costs for the company were reduced due to the low purchasing costs.
Companies diversify to spread their market evenly in different locations. The economic effects of inflation, deflation or change in trade policies of one country that the company invests in will have little impact on the company’s cash inflows.
Starbucks diversification helps in reducing or eliminating the interdependence of the US markets on each other, and as a result, a negative shift in the economy does not cripple the company’s operations.
Companies expand to overseas markets for self-protective reasons, which are to guard themselves against their potential business rivals or to gain competitive advantage. By Starbucks having moved to international markets, the company has aimed at exploring markets that are less competitive.
Consequently, the firm has used the income gained to finance the shops in competitive markets. Starbucks has reduced the competitive pressure from other New York coffee sellers by moving to the overseas markets.
Benefits of Expanding to Overseas
Expanding to overseas markets has helped Starbucks accelerate its growth. Due to venturing in overseas market, Starbucks has opened approximately 8,330 coffee outlets. This has been made possible because of the quality services that the firm offers to its customers and the increased demand for its coffee.
Starbucks has also accelerated its growth through attracting many business partners and ventures all over its overseas businesses. Another benefit gained by Starbucks from expansion to overseas markets is that the company has created brand loyalty among its customers. Its potential and upcoming customers are in a position to enjoy their favorite coffee brand at different regions of the world.
This makes Starbucks retain its customers because the firm does not have to keep on changing its coffee brand once it changes its location to India. Overseas investments have contributed to the ability of the firm to diversify the stream of revenue.
Starbucks enjoys the high revenues share generated by its ventures located in different regions outside New York. For example, Starbucks is receiving profits from its shops located in Japan and China.
Starbuck expansions in overseas markets benefit the firm since it outsources marketing strategies used in different regions and applies them in its local markets.
Local resources are used to improve the international markets while international strategies are used in improving local markets to win over more customers, gaining a competitive advantage over other local companies.
International opportunities give Starbucks more exposure and experience in marketing and production; for example, skills gained in Japan can be used to improve China’s market, and vice versa.
Starbucks’ Core Competencies
Starbucks’ main competencies are focus on quality, exceptional customer service, incessant product improvement, concern for its workforce, and its drive to expand to new markets. From the inauguration at Starbucks, Schultz’ focus has been on offering freshly roasted and poured coffee of high quality, and customers have appreciated it.
To ensure the quality was maintained, Shultz discovered that smoking and foxy smells could change the taste and quality of the coffee, thus it is forbidden to smoke in coffee shops or the employees are not allowed to use full-flavored perfumes.
Starbucks has the competence of diversifying and creating new ventures in different locations. The firm created HP (in-store CD burning), Pepsi Company (bottled Frappucino drinks), Kraft Foods Corporation and Dreyer’s (Starbucks Ice Cream). In India, Starbucks has identified Tata Beverages to collaborate with to expand its product line.
Through these partners, Starbucks manages to reach different markets and grow rapidly. For example, Starbucks opened 50 shops through partnerships and joint venture outlets in China, and in Japan, it has added 360 more shops as result.
Starbucks has an idea to locate a coffee shop on every building with easy access by every customer. In Boston, Starbucks had opened 24 coffee outlets because the company believed in locating coffee shops in the same region. This tactic allowed Starbucks to colonize a certain region, consequently eliminating the competitors and growing customer loyalty.
Starbucks has the competence of diversifying its products and customizing it to meet the needs, demands and preferences of certain region and customers. In some regions, people prefer hot coffee, while in others there is an increased demand for cold coffee because of the weather, and customers’ tastes and preferences.
Starbucks offers hot drinks in four different cup sizes, namely, short with 8 oz., Grande with 16 oz., Venti with 20 oz. and tall with 12 oz. On the other hand, cold drinks are offered in three different cup sizes; iced tall-12 oz., iced grande-16 oz. and iced venti-24 oz. In addition, Starbucks introduced Frappuccino, a frozen drink prepared from low-fat milk, coffee, ice and sugar.
Transferring Core Competencies to Overseas Markets
Starbucks has managed to transfer these competencies to its overseas markets. Starbucks has used its competencies to select Tata Beverages as its partner in Japan and China where the firm has created both the partnerships and the joint ventures with businesses to sell its coffee in the countries. In India, Starbucks plans to collaborate with Tata Beverages as well to market its brand in the market. It has also partnered with Pepsi Company, Kraft Foods Incorporation and Dreyer’s.
In each overseas outlet, the quality of coffee has been maintained. Starbucks promotes selling coffee in its outlets. The company is against the idea of franchising. According to Schultz’s view and belief, franchising can make a company lose its culture, which is its strength in the market.
Starbucks teaches coffeehouse employees not only how to prepare coffee but also how to impart the company’s passion to its products to the customers. Starbucks helps its partners’ employees understand Starbucks’ mission, vision, objectives, targets and goals in business. In addition, such rules as customers should not smoke in the shop and employees could wear only delicate perfume are maintained.