Executive Summary
This report will put in place an operational strategy for the turnaround of the Starbucks Australia segment after a widespread closure of stores. The report analyses the competitive environment of the company and come up with the possible solutions to the problems of Starbucks Australia.
The report will also address the long term survival strategy for the Starbucks Australia so as to meet it meet its global market leadership and great customer experience targets. All the proposed solutions in this report will be in line with overall global management strategy for Starbucks Corporation.
Global Coffee Industry
The global coffee industry has been experiencing crisis of low coffee prices and generally low profitability in the whole value chain. This has led to coffee farmers mostly small scale entrepreneurs in central and South America to incur losses yet they are supposed to be breaking-even.
The evident lesser process of coffee were as a result of high supply of coffee in the market. With this excess supply, quality of the green coffee went down. This not only posed problems to the producers but also industry players including Starbucks Corporation which is a global leader.
With cheap and low quality coffee in the market, competitors of Starbucks capitalized on this so that in the long run there were low sales on Starbucks stores. Several challenges also accompanied this internal coffee crisis; consumers felt that they had less significant benefits in the whole coffee value chain. This structural problem needed the whole industry players to put together an industry strategy to check on the glut and increased quantity of defective coffee in the market.
Starbucks Growth strategies
Starbucks being the worlds’ premier roaster and retailer of coffee has had a long term strategy of being the global leader in the coffee industry. The company’s’ growth strategy has enabled the company to spread to over 50 countries as indicated in their 2009 financial report.
The company has achieved this position as a global leader and respected coffee brands through their good business plan of the store level efficiency, being innovative in their products, strategic channels of distribution, great customer experience in the retail stores and building of strategic linkages through licensing of different stores and joint ventures.
Starbucks corporation actually appreciated the strategic management strategies for increasing the shareholders value though, like any other multinational it has experienced different challenges in several locations which in the past has even worsen to an extend of downsizing by closure of several stores both in the US and international markets including Australia.
Downsizing in a corporation is a strategic move usually designed to add value to the shareholders in the long run but mostly viewed by the customers and the other industry players as failure of an institution. With the aggressive global expansion strategy and the concept of market blanketing, Starbucks was bound to meet different challenges as much as it gained in other geographical locations.
Challenges facing Starbucks globally
Global expansion on its owned posed challenges relating to the political and legal factors, economic trends in different states, competition from local firms, consumer preferences, technological challenges and social-cultural issues. Starbucks like any other commercial corporation also do have an overriding goal of adding stockholders value through remaining profitable. This brings the strategic decision making accuracy into focus.
All strategic decisions are arrived at after a rigorous process of evaluation of internal and external environment with all strengths and weaknesses having been taken into consideration. The company strategy is mainly to take advantage of its strengths and be cautious on its weaknesses hence it usually draws a road map unto the company’s future position.
Starbuck in their strategic endeavor of being a global leader in the roasted coffee market has faced lots of challenges especially in being compliant to different political and legal environments. This is a challenge which has been achieved through their concept of strategic alliances through joint ventures and licensing of various global distributors.
The Starbucks concept of serving high quality coffee products has given the company the image of serving the economically stable members of the society. This means that with high quality at stake, the company will lock themselves out of mass market where all products are served.
The economic abilities of different countries has made Starbucks to be limited by the economic situations in different locations since some in some countries like in developing nations spending $5 on a cup of coffee is impossible. This has limited their growth strategy.
Different social-cultural background globally has been a challenge Starbucks has been facing. Different cultures have their favorite foods and drinks this puts Starbucks coffee including their concept of great store experience face a challenge of irrelevance and resistance.
Starbucks challenges in Australia
Starbucks Australia is one of the leading global segments. The Australian Starbucks has experience lots of challenges which lead to a closure of several retails stores. An analysis of the cause of the closures revealed several challenges regarding the locations of the different stores, unprofitability and low demand among other reasons. The following are some of the critical challenges facing Starbucks Australia;
Poor marketing
The Starbucks Australia did not do a lot of commercials and expected to ride on their fame on the US markets consequently leaving this critical business responsibility. Selling the high quality aspect of their coffee could have been very easy but forgoing such important strategic responsibility was a failure on the segments management.
Without aggressive marketing apart from the branding aspect, Starbucks just left the market to their competitors including Gloria coffee, Melbourne and Espresso. Also poor location of Starbucks stores contributed to their poor marking strategy. Most stores were located in non strategic areas with low number of potential customers. This is another factor which greatly contributed to the unprofitability of this stores hence had to be closed.
Employee Motivation
Starbucks Corporation worldwide had been known to be one of the good employers but the Australian segment has issues with poor staff remunerations consequently experiencing a less motivated workforce.
Maintaining a highly skilled human resource gives a competitive edge to an institution. With a scenario of having expatriates’ performing an initial local operational market penetration strategy without prior market experience in Australia while the local management is later employed with low pay, the company is bound to face lots staff turnover.
Pricing policy
The Starbucks pricing policy should have been restructured to suite Australian market. The Starbucks prices of the different coffee products were perceived too high and products were only purchased for leisure treat and not as a necessity drink. The pricing concept should have been made even very local backed up by an aggressive marketing.
Coffee products
The Starbucks products were perceived as international and this gave the local market an illusion that the products were not theirs hence unnecessary. Starbucks though with a very nice corporate social responsibility did not build attachment with the local community.
Rapid expansion
With expansion as their corporate strategy Starbuck Australia should have had a localized approach which would have allowed for a market testing. It was not necessary for more than fifty stores to be closed yet the local management should have known that a particular number of stores could have been optimum for the Australian market. Uncontrolled expansion always can cause erosion of the shareholders funds which makes the overall objective of expansion a futile exercise.
Recommended strategy for Australia
The Starbucks Australia’s challenges are all strategic management problems with little business policy problems. Strategic managements entails decisions which are unstructured and affecting the going concern aspects of the business entity (Choo, 2002). It is the role of the top management to make decision after assessing their internal environment and also the external environment which is usually to some extent very unpredictable.
According to Harley (2004) strategic management decisions for global corporations will always aim at maximizing the profitability consequently the shareholders value. These decisions will always include expansions and where necessary downsizing of operations.
Starbucks Australia segment would scale up its operations again if proper marketing, strategic alliances, proper analysis of the industrial and general environment for the corporation is done Australia. The following proposed solutions based on porters’ competitive forces model would most likely work for Starbucks Australia.
Marketing
For the case of Starbucks Australia, it is a common fact that Starbucks marketing concept of blanketing a location did not work for the Australian segment showing that some unique Australian marketing is required. The blanketing marketing idea has been the key to market penetration by Starbuck especially in the US market but it is always good to appreciate that different environments require different solutions.
For the Australian segment it will be a nice idea if Starbuck will give it a try to the concept of commercial advertising since most of its competitors have been doing the same. Australian awareness of the Starbucks products should be increased through a more effective promotion, advertising and marketing.
Marketing through networking and customer experiences will only be supportive for the case of Australian segment unlike the US segment. Starbuck marketing should be as creative as ever, localizing its brand does not necessary mean losing the original brand concept. Even a localized packaging concept should be able to allow them a market penetration opportunity.
Strategic Alliances
Starbucks has been entering into strategic alliances in other countries. For the case of Australia, it will be much strategic to do the same. There are a lot of local coffee stores and firms which Starbuck can make a joint venture offer or a takeover bid where necessary. This will make the competitors strategic partners of Starbucks.
Trading under a locally registered wholly owned subsidiary for Starbuck not only can allow a local attachment and market but it also spreads the business risks for the corporation. With the culture of Australian having more attachments to their own cultures, foods and enterprises coupled with the human tendencies of ‘appreciating their own’, it will be necessary that Starbucks should have any form of strategic alliance with a local firm.
Financial Aspects
Most of Starbucks stores closed in Australia have not been able to break-even in the business showing that costs management might also have contributed to the loss making scenario. Starbucks Australia should also have a management change so as to align the financial management and cost control with the corporate Strategy of expansion.
The financial management aspect will enable Starbucks Australia an opportunity to develop a product mix that will allow the company experience increased sales with a low cost production.
Financial management Strategy is always underlying every corporate strategy hence for an efficient and successful project implementation, it necessary to ensure that the company’s financial management strategy and team is in place (Vernon, 2008). This team should have the relevant capacity and experience in the market segment where the project will be implemented.
Industry environment
This is the environment under which Starbucks Corporation operates globally and even locally in Australia. This environment will constitute; suppliers, competitors, substitute products and new entrants. Porters’ competitive forces model is founded on the view of the firm within its industrial environment.
Competitive forces faced by firms include; supplier bargaining power, customer bargaining power, substitute’s threats, and fresh entrants threats (Mellahi, 2000). Starbucks Australia has faces almost all of these competitive forces in their Australian market hence necessary actions are required to counter. With these forces resulting in the downsizing of Starbucks Australia’s Segment, the following remedial actions will be necessary;
Bargaining power of suppliers
Starbucks supply chain globally is well established and efficient. Failure to for a corporation like Starbuck to maintain on its quality standards and fair pricing of its coffee will allow competitors an upper hand in the market. Starbucks Australia should consider an option for local suppliers so as to reduce on their costs of importing from the US.
It will be much cheaper if Starbucks can be strategic and negotiate with a local coffee supplier for branding in Australia. It should also used technology to build a value chain relationship with local suppliers. This will give an upper hand in the competition and can even play a role as a major distributor other than retailing after all its major objective is profitability. With the global presence of Starbuck, building proper linkages with supplier can in fact give them strategic advantage in the coffee business. Since the retail business has faced enough challenges, Starbuck should give it a try to compete at the distribution line, a higher level competition.
Bargaining power of customers
Customers are very critical for the success of any corporate business. They are the greatest test of products quality. With no grouping of customers to fight for their interest, they will only express themselves in terms of low and high demand (Slack, 2009). If the customers demand for a product is high it indicates high quality and a very fair price.
For the low demand of Starbucks products the pricing and preferences qualities have been the most contributing factors. Starbucks should therefore head the customers’ feedback and try to meet their needs hence they got no business being in the market.
Substitutes and other products
Substitute products in the Starbucks Australia segment posed a major threat to the Starbucks brand in Australia. Even though known to be an international brand with high quality, Starbucks products couldn’t compete effectively to beat Gloria and Melbourne coffee brand.
It is now necessary that Starbucks if it still requires regaining the Australian market should engage in an innovative product differentiation exercise. It should be able to penetrate the market with wide ranging products in varying prices. This product mix should be able to cover the whole market clusters from the low income to the high end market. Substitutes of Starbucks products mainly tea and cocoa are not their main threat but their impact should only be checked through rigorous marketing and promotions.
Competitors’ actions
With the entrance of Starbucks in to the Australian market, its competitors definitely didn’t like it. The competition for customers has gone up and to some extend Starbucks is giving in some market share to its competitors. Starbucks has faced a serious price challenge where it has been perceived as dealing with overpriced products.
Though this branding is relevant to the high end market usually other potential customers would be denied a chance to be part of the clientele. Starbucks should be able to practice price and product differentiation or develop innovative products to fit to the low end market. It is necessary that Starbucks should develop products that are low cost that are able to compete effectively in the local market.
These products should have an image of being locally processed products and it should actually have an Australian concept in its processing. With the local sourcing of inputs and low cost local concept products by a local brand or firm, I do believe that Starbucks will successfully beat competition in Australia and definitely achieve its global expansion strategy
With the firm grip on the worldwide industry, Starbucks should be able to be much profitable and competitors will not benefit from the economies of scale. The Gloria jean coffee, Espresso and local Melbourne coffee will be local and small scale but they are taking a share of the coffee market in Australia consequently Starbucks should be careful of their actions. Starbucks policy on great customer experience should be used in this market so as to retain customers.
New entrants
The coffee industry is very competitive and lucrative therefore new investors into the industry are bound to get in. Starbucks Australia needs to be maintaining their market share and profitability. In order for this threat to be countered, Starbucks should therefore maintain high level customer retention and high quality products.
General Environment
This is an environment which is outside the industry. This will include the Political, population, social, global and economic environment. Starbuck Australia is affected by the Australian government corporate tax rates and other regulations but the major challenge of the institution has not been political.
Starbucks Australia should take advantage of the high percentage of the young population since most coffee consumers are the youth. The demographic spread initially did not favor the initial locations of the Starbucks stores therefore various stores had to be closed due to low population in their customer catchment area. Population spread therefore is a necessary consideration in the location establishment of the Australian Starbucks stores.
The social tie between the Starbucks products and the local community is a necessary. This is because the Australians perception of Starbucks as a foreign coffee brand should be curtailed so as to improve on their demand. The economic environment is one challenge that usually poses threat to demand of industrial products but for our case this challenge is not the cause of Starbucks Australia’s problems.
Conclusion
Starbucks Corporation Australia has downsized because of a wrong market penetration strategy coupled with operational inefficiencies. With a clear global corporate strategy of being the market leader, store level operational efficiency and great customer experience which could not work for Starbucks Australia.
This calls for a more localized operational strategy which will include effective marketing and promotion plans, proper financial management strategy, product differentiation and necessary supply chain management.
Global strategy needs leverage on cutting edge technology, compliance to the regulatory authorities and employee welfare among other issues so as to have successful execution. Starbucks Australia can turn around and this turn around need not be based on blanketing marketing strategy but a relevant Australian segment operational strategy.
References
Choo, W., & Bontis, N., 2002. The Strategic Management of Intellectual Capital And Organizational Knowledge. 1st ed. London: Oxford University Press.
Harley, W., 2004. Global strategic management. 1st ed. Texas: Wiley.
Mellahi, K., 2000. Strategic management: an introduction to business and corporate strategy. 2nd ed. New York: Pearson Education.
Slack, N., 2009. Operations and process management: principles and practice for strategic impact. 2nd ed. California: Prentice Hall.
Vernon, H., 2008. Global strategic management: the essentials. 2nd ed. Texas: Wiley.