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Resuming Internalization at Starbucks

Essay by   •  February 4, 2019  •  Case Study  •  3,224 Words (13 Pages)  •  15 Views

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Resuming Internationalization at Starbucks

1. Company background

It was in the year 1971 that Starbuck’s story began with a single store in Seattle. Coffee beans and coffee-making equipment were the only products marketed by Starbucks at that moment. However, Howard Schultz, the current CEO, joined the company in 1982 and after a vacation to Italy he brought from there the idea of selling coffee and espresso products, but the Starbucks owners was not convinced by his idea. That was when Schultz opened his own coffee bar, named I1 Giornale but 5 years later on, Schultz became the owner of Starbucks store and all his I1 Giornale stores had their names changed to Starbucks. It was from that point that Starbucks also started becoming international, with the opening of new stores in United States and Canada (Resuming Internationalization at Starbucks, 2010).

By 2009, Starbucks was present across 50 countries with approximately 17,000 stores. Up to 2007, the coffee consumption was growing in high and middle-income countries, which means Schultz’s interpretation was correct (Resuming Internationalization at Starbucks, 2010). However, between 2007 and 2009 Starbucks suffered a hard time due to increasingly intense competition, the rising of coffee bean prices and a global economic recession. At that time, Schultz demonstrated his concern saying that “it was the first time that Starbucks was seeing traffic in stores falling” (Starbucks corporation, 2009).

To sustain its profitability, the company elaborated strategic initiatives, such as balance global store growth, focus on customer experience in the stores, execute a multi-channel advertising and marketing campaign and focus on relevant innovation and profitable growth platforms (Starbucks corporation, 2009).

2. Analyze the case according to the main 3 questions

2.1. How did the pace, rhythm and scope of Starbuck's internationalization in the coffee industry affect its performance?

As shown in case study, Starbucks’ performance was affected by its internationalization expansion strategy. From 1993 to 2009, Starbucks’ revenue growth was in direct relationship with the expansion in terms of pace, rhythm, and scope; however, the performance was growing in reverse direction. It can be explained by increasing stores numbers led to increasing in assets, thus ROA (Return on Assets) decreased. Particularly, the effect was emphasized in the internationalization approach. Having said that, internationalization was an essential strategic move as U.S. market – main market of Starbucks’ – started to be saturated in early 1990s. Therefore, looking at ROA of Starbucks along the timeline gives insight into long-term profitability. According to Alkema, et.al (2010), between 1996 and 2000, Starbucks had a period of high international growth, which was accompanied by moderate performance (ROA ranged between 7 per cent and 10 per cent). On those years, the growth and number of stores had increased around 70%. Whereas, between 2003 and 2008, the company lowered the expansion (approximately 20% of growth) which resulted in higher ROA (reached 15 per cent). Furthermore, beside expansion activities relating to operating costs and assets, there were many other factors that affected the company’s performance in positive and negative ways, so that it fluctuated up and down slightly instead of going in smooth direction. First, it was strategic approach of Starbucks, even it heavily operated by company-owned stores, the company adopted various modes of entry into international markets such as using local partners, licensed joint ventures, or acquisition. For example, in 1997 and 1998, the pace of internationalization was high, however ROA remained moderate. It was explained that in this period, Starbucks acquired Seattle Coffee Company in the United Kingdom, which included 65 stores already generating revenues. The acquisition enabled Starbucks to expand at a faster pace without loss of performance. Second, as mentioned, Starbucks’ expansion was to reach new market where they could explore new opportunity to increase their sales, to become the leading specialty coffee retailer as their positioning. When entering a foreign market, Starbucks’ strategy was to retain its core service and products while adapting to local demands in the host country, where appropriate. For example, there was additional tea serving in Japan and China. Third, the affecting factor could be obviously the economics condition. In the years of 2008 and 2009, even Starbucks had relatively low new country growth, the performance was suppressed due to the economic recession as well as intensifying competition, etc. In conclusion, it was obvious that internationalization affected Starbucks’ performance a lot, generally it was positive in increasing revenues and profits. Although performance is potentially more sensitive to the rhythm of foreign expansion than to domestic expansion, internationalization helped bring Starbucks to the world, and foremost proved the company’s strategies and leading positioning.

2.2. Was Starbucks too aggressive in its internationalization?

According to Alkema, et.al (2010), in terms of internationalization, in 2007, Starbucks worldwide presence in 56 countries through approximately 17,000 stores would make the company’s performance sensitive to the world as well as local countries’ economics conditions and cultures. The Starbucks’ aggressive expansion can be demonstrated at the Exhibition 1 which shows its presence worldwide according to the internationalization timeline. As mentioned in previous section, it can be considered that Starbucks had a positive move in its internationalization process, however, the company also received criticism for growing too fast considering the opposite relationship between pace and performance shown by Alkema, et.al (2010) at the Exhibition 11.

The company best performance years can be considered when the company took a slower pace of expansion between 2004 and 2007 while the opposite which means an aggressive expansion approach between 1993 and 1997 didn’t work with the same performance effects. The revenues increased from $160 million in 1993 to $10 billion in 2009 demonstrating the positive effect of the internationalization according to Alkema, et.al (2010). Starbucks’ internationalization move was too aggressive regarding the pace of opening stores per year considering the consequences and effects associated of it.

Expanding closely located stores could cannibalize the turnover, also the operating costs and assets increased respectively. In fact, at the end of fiscal 2009, Starbucks took the decision to rationalize

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