Emerging Cultures And Economies: Starbucks

The extract below will explain how Starbucks will enter into emerging economies and influence on its cultures, eg. India and China. Further I will analyze the cultural difference compared to the US with India using the Geert Hofstede theory to support my arguments.

1.0 What is Starbucks?

Starbucks Corporation is a multinational coffee company and cafe chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, currently in 58 countries with 19,555 stores, including 12,811 in the United States, 1,248 in Canada, 965 in Japan, 766 in Great Britain, 580 in China and 420 in South Korea and not forgetting the expansion to India as well. Starbucks is a listed company in the NASDAQ (SBUX) Stock Exchange currently trading at $53 per share (Yahoo Finance), Over the years Starbucks has grown to become a well know ‘stop by spot’ for the working population as well as the teenagers. According the mission statement Starbucks is striving to become THE global coffee brand, and it has definitely reached its market as they only sell their offerings to countries that already have dedicated coffee or tea drinkers. Above is an introduction to who Starbucks is, below will consist of what they sell and to whom?

1.1 What do they Sell and to whom?

Starbucks purchases and roasts high-quality whole bean coffees and sells them along with fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections, and coffee-related accessories and equipment primarily through its company-operated retail stores. In addition to sales through the company-operated retail stores, Starbucks sells whole bean coffees through a specialty sales group and supermarkets. Further Starbucks produces and sells bottled Frappuccino® coffee drink and a line of premium ice creams through its joint venture partnerships and offers a line of innovative premium teas produced by its wholly owned subsidiary, Tazo Tea Company. (Starbucks) What is being sold need to be bought by ones in the population, who are they?

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Starbucks’ primary target market is men and women aged 25 to 40. It’s almost half (49 percent) of its total business. Starbucks’ attracts the consumers through hip, contemporary design that goes along well with the advertising and decor, and working to keep its current status symbols for its products. This target audience grows at a rate of 3 percent annually.

The secondary market is a Young adult including Kids and teens, aged below 24, approx. 40% of Starbucks’ sales. It creates and environment where college students can hang out, study, write term papers and meet people. SB attracts this segment of the market by introducing latest technology when it is available and also on social networking and actively cultivating a “cool” image. This market segment grows 4.6 percent each year.

Above consists of to whom Starbucks plans to sell their products to, explaining which generation of the working or non-working population are they targeting to. Having above laid as to which market to target, in the US there have been developments of problems they have been facing after 41 years of service for Starbucks.

1.2 What is the current situation in the US?

Market Saturation

Starbucks currently faces the challenges of the US market being saturated. For example, in a locality where there are many SB Coffee shops, and there is no choice for consumers with regards to which shop they could go to. Its definitely a local dominance strategy to keep away competitors, however the draw back for this is, it will start eating in to the other stores profits (SB, same area) and indirectly reducing sales for that region. This is better known as the self-cannibalizing effect. However Starbucks is still opening new stores in order increase total revenue despite of this. Furthermore, some might call it unethical when it comes to acquisition of real estate for shops to run on but SB tends to pay above the prevailing market rent rates, and successfully tries to keep competitors out of location.

Company Image

Starbucks relies on word-of-mouth advertising as a result saves expenses on unnecessary marketing costs. It spends only 1% (US$ 30 million) of revenues on marketing annually as compared to firms like McDonalds etcs…, which easily have a marketing budget of more than US$ 300 million a year. This further relates to brand maturity in the US, the power of recommendation from an individual to another is very strong here, but image the benefits if the advertising budget was increased to create more awareness.

Brand Maturity

Starbucks is at a point of brand maturity in the US, but they cannot stop growing. SB has to start expanding the coffee business and diversifying into new undiscovered markets, specially the emerging markets of the world. Considering the fact SB is currently available in many countries around the world listed under “what starbucks is?” they can expand and meet increasing customer demand, and increase total revenues, however only if they set up shops on their own, failing to do so join ventures, strategic alliances, franchising or even licensing agreements can be set up but will have to share profits with other local party as well.

In conclusion as above states Starbucks will need to expand outside of the US to enjoy much high profits and to increase its global market share in the coffee business.

1.3 What’s Starbucks Growth Strategy?

As profitable growth is one of the many keys to success, Starbucks plans to move fast to BRIC nations (Brazil, Russia, India, China) to capitalize on the growing customer demand and base of SB internationally, also they will be expanding their product range (products in grocers stores), BRIC are currently worlds emerging economies. It will further help the economy as a whole creating new job opportunities to the unemployed population in these countries. Growing into new economies are easier said than done, as there are many limitations to this as well, I will be analyzing mainly the cultural accepts of Starbucks expanding to India. Further I will be using the Hofstede theory in differentiating the cultural aspects of this move.

2.0 What are emerging markets?

An emerging market economy (EME) is defined as an economy with middle to low per capita income. Approximately 80% of the global population constitutes to EME, and represent about 20% of the world’s economies. Economies known as emerging is because of their developments and reforms. For example Brazil, Russia, India and China belong to this category because all 4 countries have embarked on economic development and reform programs, and have begun to open up their markets and “emerge” onto the global scene. EMEs are considered to be fast-growing economies; some of its benefits and limitations are listed below.

Benefits

First-Mover Advantages – this is when you’re the first to start business up in the market and capture it before any of your competitors enter, you may create a good supplier chain in the economy it self

Access to capital – Investment in emerging economies will help domestic grow of this company, and will help indirectly to reduce unemployment in each of these economies to an extent.

Limitations

Cultural Risk – A disadvantage of trying to do business in emerging economies is the challenge in overcoming cultural risks. Cultural perspectives, rituals and product usage vary around the world and when new economies emerge, they may have different expectations than ones in which a business is established. A U.S. business, for instance, may struggle with understanding how to do business in China and India, among the faster-developing markets in the early 21st century. (Emerging Markets – SmallBusiness)

Limited Protection – When a foreign company comes in to set up business, there is no proper protection against any kind of corruption. Emerging countries often have less evolved legal and ethical protections, forcing businesses to risk encounters with criminals or crooked law enforcement agents. Stealing or scrupulous business transactions are common, but violence and even murder can happen in some countries.

Above are the main limitations and benefits of SB investing in emerging markets for expansion. In my final section I will elaborate more using the Hofsteffs theory on cultural differences that SB might face when moving business in to India and China.

3.0 Starbucks Expanding to India?

India has a population of nearly 1.2 billion people and a majority of this falls into the age bracket of 15-60 years of age, making it one of the youngest countries in the world with a median age of just above 25 years. Compared to US and China is 37 years and in Japan it is 45 years. The Indian consumer market holds immense potential for most businesses. Also India is too lucrative a market for any international firm to overlook, especially for Starbucks when it has been successful in establishing itself in other traditionally tea-drinking nations like China and Japan. After agreeing a Joint venture with Tata Alliance, SB decided with their local know-how chose to have their first two proposed locations for Starbucks Coffee shops in Mumbai and New Delhi. All home to many call centers where these younger spenders work, and many colleges and Universities are also located here. This will allow Starbucks to target the younger consumer generation with support with an aggressive advertisement campaign. These two cities are also major hot spots for tourists, who recognize a multinational brand such as Starbucks. Once the perfect location was found to start with, they have to replicate the SB experience in India as well, they will need to hire the right people with the right background as barista’s, maintain a smooth logistical operations of bring the coffee beans to India until such time a suppler in the local market is developed at a cheaper price. Not forgetting to maintain the atmosphere, service, the quality of the product and last but not least the affordable prices. One of the most important aspects of this move will be, SB needs to cater to the requirements of the Indian population, respect their cultural beliefs when a menu is being done, it has to have the Indian taste, mixing traditional menu items with those that a customized for the Indian tastes.

When establishing the business in India the main factor you needs to look upon is the Cultural differences between consumers from India (what they needs) and ones from US, their perception. Failing to understand this will lead to bad choices in terms of what’s being sold at each other store (coffee customized to the Indian market) For this I have taken into consideration the 5 sections that make up Hofstede theory in cultural diversity, its being listed below

Power distance (GEERT HOFSTEDE)

Power distance means with the fact that all individuals in societies are not equal – it expresses the attitude of the culture towards these inequalities amongst us. Also is defines as the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed in equally.

India has a larger Power Distance compared to the US, indicating an appreciation for hierarchy and a Top – Down Structure in society and Organizations, They are depended on each other and needs direction and cannot do it on their own, whilst in the US they are independent. Based on this the employees will not know any business plans, since they wont be told about this, also when the top management makes decision they will not involve the bottom layer, For example, in this case when a promotion is to happen on the shop floor the employees will not know about it till the last minutes, by that time all decision have been made with regards to the promotions and employees will have no say in it basically they will not get a chance to exchange ideas or propose them. Another example, If the manager wasn’t multicultural he/she might not be able to communicate clearly to the employees on the direction of work, since they are not sure how to tackle it with an Indian, the best solution to that would be to have individuals in management positions from the local labor carder, plus it will cheaper than flying someone from the US

Individualism (GEERT HOFSTEDE)

The fundamental issue addressed by this dimension is the degree of interdependence a society maintains among its members. It has to do with whether people´s self-image is defined in terms of “I” or “We”. In Individualist societies people are supposed to look after themselves and their direct family only. In Collectivist societies people belong to ‘in groups’ that take care of them in exchange for loyalty.

India has many collectivistic traits. This means that there is a high preference for belonging to a larger social framework in which individuals are expected to act in accordance to the greater good of one’s defined in-group(s). In such situations, the actions of the individual are influenced by various concepts such as the opinion of one’s family, extended family, neighbors, work group and other such wider social networks that one has some affiliation toward. For a collectivist, to be rejected by one’s peers or to be thought lowly of by one’s extended and immediate in-groups, leaves him or her rudderless and with a sense of intense emptiness. The employer/employee relationship is one of expectations based on expectations – Loyalty by the employee and almost familial protection by the Employer. Hiring and promotion decisions are often made based on relationships, which are the key to everything in a Collectivist society.

Masculinity / Feminity (GEERT HOFSTEDE)

A high score (masculine) on this dimension indicates that the society will be driven by competition, achievement and success, with success being defined by the winner / best in field – a value system that starts in school and continues throughout organizational behavior.

A low score (feminine) on the dimension means that the dominant values in society are caring for others and quality of life. A feminine society is one where quality of life is the sign of success and standing out from the crowd is not admirable. The fundamental issue here is what motivates people, wanting to be the best (masculine) or liking what you do (feminine).

India is actually very masculine in terms of visual display of success and power. The designer brand label, the flash and bling that goes with advertising one’s success, is widely practiced. However, India is also a spiritual country with millions of deities and various religious philosophies. It is also an ancient country with one of the longest surviving cultures, which gives it ample lessons in the value of humility and abstinence. In more Masculine countries the focus is on success and achievements, validated by material gains. Work is the center of one’s life and visible symbols of success in the work place are very important.

Uncertainty avoidance (GEERT HOFSTEDE)

Uncertainty Avoidance has to do with the way that a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? This ambiguity brings with it anxiety and different cultures have learnt to deal with this anxiety in different ways. The extent to which the members of a culture feel threatened by ambiguous or unknown situations and have created beliefs and institutions that try to avoid these is reflected in the UAI score.

India as a medium low preference for avoiding uncertainty. In India there is acceptance of imperfection; nothing has to be perfect nor has to go exactly as planned. India is traditionally a patient country where tolerance for the unexpected is high; People generally do not feel driven and compelled to take action-initiatives and comfortably settle into established rolls and routines without questioning. Rules are often in place just to be circumvented and one relies on innovative methods to “bypass the system”. A word used often is “adjust” and means a wide range of things, from turning a blind eye to rules being flouted to finding a unique and inventive solution to a seemingly unresolvable problem. It is this attitude that is both the cause of misery as well as the most empowering aspect of the country. There is a saying that “nothing is impossible” in India, so long as one knows how to “adjust”.

Long-term orientation (GEERT HOFSTEDE)

The long-term orientation is closely related to the teachings of Confucius and can be interpreted as dealing with society’s search for virtue, the extent to which a society shows a pragmatic future-oriented perspective rather than a conventional historical short-term point of view.

In India the concept of “karma” dominates religious and philosophical thought. Countries like India have a great tolerance for religious views from all over the world – Hinduism is often considered a philosophy more than even a religion; an amalgamation of ideas, views, practices and esoteric beliefs. Societies that have a high score on Long Term Orientation, typically forgive lack of punctuality.

In conclusion, moving to India yet being a fantastic strategic move for Starbucks, however the cultural aspects of India needs to be taken in to great consideration. Not respecting the local culture in implementing new products or even treating people will result in a negative impact to Starbucks image and name leading to it not succeeding in Indian market. Capturing almost 90% of the market share here in India will give Starbucks a good run for the money in terms of profits and growth of the business here in India.