Starbucks Foreign Direct Investment

In General, when international companies consider going into overseas markets, they adapt some strategies of entry modes such as licensing, franchising, joint venture and M&A. For example, ‘Pierre Cardin’ extended their foreign business through a pure licensing and Mcdonald’s was able to become the largest fast-food retailer on earth by taking advantage of its unique franchising strategy. Hence, the wise mix of entry modes can be regarded as a core factor for multinational enterprises to advance into new outer markets.

As you know, Starbucks Corporation (hereafter, Starbucks) is the largest coffee retailer in the world. It has succeeded in globally by carrying out wise collaborative strategies. Therefore, in this study, Starbucks’ international performance would be covered at first and it would be followed by further discussions; market issues about Indian entry and strategic comparison with the competitors ‘The Coffee Bean and Tea Leaf’ and ‘Hollys Coffee’.

Starbucks’ International Expansion

Since Starbucks established its subsidiaries, “Starbucks Coffee international” in 1995 [i] , it has applied to flexible entry strategies; licensing and joint venture and whole ownership. While it is operating its US stores directly, Starbucks is largely running its cafés outside US through joint venture and licensing with local retailers. In fiscal year of 2009, it has opened 3,439 licensed cafés on earth representing 62 percents of entire stores. The main target of international business is Asia and Starbucks has operated 2,062 cafés. [ii] (Refer to Table.1)

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Besides, Starbucks is managing some overseas stores directly by acquiring local coffee retailers. In UK, Canada and some Asian market such as Thailand and Singapore, Starbucks owns 2,068 wholly-owned cafés which account for 38 percents of entire overseas stores. [iii] 

Why Starbucks prefers direct investment to franchising and licensing?

When Starbucks expanded its business outbound, “Coffee culture” has not existed in various countries including Asian nations. Therefore, it was imperative for Starbucks to spread coffee culture and Starbucks has implemented a marketing strategy called “Cult-duct” [1] . Hence, Starbucks thought that it was more appropriate for Starbucks to have taken advantage of direct investments; joint venture and wholly-owned companies rather than licensing and franchising so as not only to offer tangible products; coffee and cookies but also to deliver a fine coffee culture represented by urban and elegant image. Through this strategy, Starbucks effectively has managed to control its core competencies such as the high quality coffee, the quarterly employee training concerning customer service and store management know-how.

Motivation of Joint Venture

As mentioned above, the main target of Starbucks international is Asia and Starbucks has adapted joint venture as a main method for Asian market, although it has entered with licensing in several Asian regions including Middle East and Philippines. (Refer to table. 2)

Above all, Starbucks could minimize risk of Asian operation by running businesses through joint venture with local retailers. At the beginning, since Starbucks did not hold both experience and expertise for Asian market, it is required for Starbucks to share local companies’ know-how and wide domestic networks to stably perform its Asian operation.

Moreover, Starbucks has properly overcome the cultural gap with Asian nations and carried out the splendid market research. To demonstrate, local companies were involved in local staffing and analysis of regional customer’s taste and preference whereas Starbucks took responsibilities for employee training, coffee roasting and quality control.

Besides, Starbucks could release localized products. For example, it is selling Korean traditional beverages such as ‘Sik-hye’ and ‘Sujungghwa’ in Insa-dong café and offering sorts of Chinese traditional teas like “Oriental Beauty Tea” and “Fancy Black tea” in Taiwan.

Motivation of Direct Operation

Starbucks is also doing its international business with company-owned operation. .

In UK, Canada and Australia, Starbucks did not have to worry about the huge gap of culture when it entered into these markets because they all belong to English language culture and there is no remarkable difference of organization culture. Whereas, Starbucks has finally acquired the entire equity of local manufacturers, Coffee Partners in Thailand and Bonstar in Singapore respectively, even if it initially entered those markets with the form of joint venture. [iv] These countries legitimately allowed the foreign capital to hold 100% equity of a company and Starbucks could not trust the marketing capabilities of these local retailers’.

A Key Growth Drive: Indian Entry

In 2006, Starbucks decided to initiate its business in India and made a joint venture contract with the Indian local retailer, RPG Enterprises [v] . However, its offer was rejected by Indian government due to issues related to technique transition and strict regulation on ‘foreign retail companies’ [vi] . To illustrate, Indian government did not allow direct control of foreign companies’ in Indian retail industry, even though foreign companies can possess up to 51% of equity. This is a big obstacle to Starbucks because strong control of business is the main principle of Starbucks’ overseas operation.

In February 2009, Indian government made a decision to boost foreign investment owing to late contraction of FDI and then it has finally permitted outer retailers to own its business in case of holding 51% shares of a joint venture company. [vii] As a result, Starbucks reconsidered Indian entry and has begun a talk with ‘Jubiliant Group’ about the alliance. [viii] 

However, while Starbucks adheres to joint venture in the entry of India, competitors like Mcdonald’s have already launched in India throug franchising and local brands “Barista” and “Coffee day” have been rapidly growing. In March 2010, the world largest PEF “KKR” also determined to invest 200 million US dollar in “Coffee Day” to compete with Starbucks. [ix] 

Comparison with the competitors

The Coffee Bean & Tea Leaf

Some competitors of Starbucks have taken the different way in terms of international business. The representative example is “The Coffee Bean & Tea Leaf” (hereafter, The Coffee Bean). The Coffee Bean has adapted franchising strategy for overseas expansion.

As of 2008, The Coffee Bean has opened approximately 750 cafés in 22 nations. Specifically, it has 288 cafés under direct control while 444 cafés are being operated by franchisees [x] . (Refer to Table. 3)

When a company makes a licensing contract with licensor, it is able to use licensor’s patent, know-how, trade mark and technology. By comparison, franchising enables franchisee to get support from franchisor concerning operation and management, working principle and marketing. In other words, franchisor could be strongly involved in franchisee’s operation.

Motivation of Franchising

The first reason that The Coffee Bean chose franchising is to expand its business into the outer market quickly. Since it began expanding far later than its competitors, it strived to take faster entry mode than FDI. By doing its international operation with franchising, The Coffee Bean could enter more than 20 countries including India without big trouble. In the meanwhile, Starbucks has struggled to enter India market by governmental and political intervention as we discussed above.

Second, as mention above, while Starbucks wanted to provide customers with not only just coffee but also coffee culture at its foreign market entry, The Coffee Bean has more focused on the quality of coffee. As its strategy is to serve tasteful coffee to as many customers as it can, it is essential to motivate franchisee to serve more people. Franchising can provide high motivation to franchisees as they just need to pay fixed royalty. It means that more customers they serve customers, the more profit they can expect.

The last reason is cost saving. If it had entered the overseas market as FDI, it would have born more cost such as rent and operating cost. By franchising, extra cost could be avoidable.

Disadvantage of franchising

One remarkable problem which franchisor could face is that it can lose control of operation. As franchisor doesn’t have authority on operating, it might be difficult to keep high quality of service and exerts a bad influence on its brand and image.

For example, the coffee bean was uncovered by Korea Food and Drug Administration because it had used unsuitable ingredient. In addition to this, it did not implement a regular staff heath inspection program. The incident damaged the company’s image and it can be referred to as a typical example of the disadvantage.

Hollys Coffee

Hollys Coffee is a well-known Korean coffee retailer founded in 1998 and it has developed into one of the domestic competitors of foreign coffee retailers such as Starbucks and The Coffee Bean & Tea Leaf in Korea. Since 1998, Hollys Coffee has steadily increased its stores and the number of them has amounted to more than 200 recently. Not satisfied with the huge success in Korean domestic market, Hollys Coffee decided to go abroad and opened stores in Malaysia and Los Angeles in US in 2007.

A few months ago, in December 2009, Hollys Coffee launched the third international store in Peru, one of the coffee bean-producing nations. Hollys Coffee announced it would achieve two goals in Peru; operating eight stores and sales up to 7 billion Korean won within a year. In order to realize these goals, Hollys Coffee entered into the Peru through ‘master franchising’ method that allows individuals or corporations to buy the rights to sub-franchise within some specific countries. [xi] The company usually adapts master franchising method so as to minimize risk when it enters the country where its brand is seldom familiar to the local community as well as it is difficult to attract investments. In Peru, There are a lot of its own domestic coffee retailers and Hollys Coffee is rarely well-known to local people. Thus, it is very important to make Peruvians aware of its brand and Hollys Coffee might be exposed to the financial risk linked with heavy marketing expenditure such as brand promotion and advertisement in the course of spreading its brand.

There are two entry strategies of Hollys Coffee in Peru – one is to introduce products that have Korean own characteristic, another is to differentiate with other coffee brands by focusing on side menus like waffle or patisserie. The Point is that it is hard to make certain whether these strategies are effective enough in Peruvian coffee market or not. Since it is tough to control operation when a company takes franchising, it appears to be difficult to introduce Korean traditional teas and foods properly.

Conclusion

We have discussed about several entry modes regarding international business. We have looked into Starbucks’ choice, The Coffee bean’s strategy as well as Hollys Coffee’s one. Before completing our study, we would like to discuss two points of contention.

Firstly, should Starbucks stick to FDI for India? As discussed above, it has struggled from red tapes. In the end, they still cannot enter Indian market whereas its competitors have expanded their business in India.

Secondly, was it a good idea for Hollys Coffee to take franchising entry mode along with a strategy of providing Korean traditional beverages? Since it is not well known and not familiar with local environment, it is understandable not to take FDI entry mode. However, doesn’t it seem to go well with two ill-assorted strategies?

All entry modes have advantages and disadvantages. Hence, it is absolutely important to apply an entry mode appropriately according to each business format. However, it could be dangerous to enter every region with the single entry mode even though it is the same industry. Both the problem that Starbucks faced in India and the pitfall Hollys Coffee is likely to face can explain how risky it is.

Therefore, even though a company wants to expand its identical business abroad, it is recommended to take different entry modes in accordance with each nation’s regulations, culture, politics, economic and social environment.

Appendix

The composition of retailers of Starbucks (2009.9)

Entry mode

Total

U.S

% in US

Overseas

% in overseas

Company Owned

8,832

6,764

61%

2,068

38%

Licensed Stores

(Joint Venture)

7,803

4,364

39%

3,439

62%

Total

16,635

11,128

100%

5,507

100%

The Major Overseas Performance of Starbucks (Non- North America)

Strategy

Region

Year

Nation

Local Partner

# of stores

Joint Venture

Asia

1996

Japan

Sazaby Inc.

875

1998

Taiwan

President Chain Store

222

2000

S.Korea

Shinsegae Department store

288

2000

China

Cayman Holdings

283

2002

Mei-xin International

2005

Coffee Concepts

2004

Malaysia

Berjaya Group

118

Europe

2002

Spain

Sigla, S.A

76

2002

Greece

Marinopoulos Bros.

69

2003

Switzerland

Marinopoulos Bros.

47

2003

Austria

Marinopoulos Bros.

N/A

2003

Cyprus

Marinopoulos Bros.

N/A

2004

France

Sigla, S.A

52

2007

Romania

Marinopoulos Bros.

N/A

2008

Czech

AmRest

N/A

2008

Portugal

Grupo VIPS

N/A

Direct Operation

Asia

2000

Thailand

Coffee Partners

131

2002

Australia

Local Entrepreneur

23

2004

Singapore

Bonstar

64

2005

China

Qingdao American Starbucks

191

2006

Mei Da Coffee

Europe

1996

UK

Seattle Coffee

666

2004

Germany

KarlstadtQulle

144

Licensing

Asia

1997

Philippines

Rustan

160

1998

New Zealand

Restaurant Brand

42

2002

Indonesia

PT Mitra Adiperkasa

74

Middle East

1999

Kuwait

M.H. Alshaya

62

1999

Lebanon

M.H. Alshaya

N/A

2000

U.A.E

M.H. Alshaya

91

2000

Qatar

M.H. Alshaya

N/A

2000

Saudi Arabia

M.H. Alshaya

68

2000

Bahrain

M.H. Alshaya

N/A

2002

Oman

M.H. Alshaya

N/A

2005

Jordan

M.H. Alshaya

N/A

Europe

2003

Turkey

M.H. Alshaya

123

2006

UK

N/A

46

2007

Russia

M.H. Alshaya

N/A

The Coffee Bean and Tea Leaf’s International Expansion (2008)

Year

2002

2003

2004

2005

2006

2007

2008

Company-Owned

177

191

217

241

270

288

278

Franchise

46

68

87

137

230

347

444

Total

223

259

304

378

500

625

722