3BM060 – International Marketing – York St. John Business School.

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Introduction

It is primal to any business to consider transitioning from serving the local market to focusing on the more lucrative international market. According to Codita (2011), international marketing strategy is the effective and rational allocation and control of marketing resources to accomplish a firm’s objectives in product markets that are outside the domestic market boundaries. Following such, this report seeks to offer a critical analysis of Starbuck’s international marketing strategy. This is achieved by analysing the environment, the marketing mix applied and lastly the ethical issues and how they are handled. The firm under study, Starbucks, is an international coffee-roasting firm that has been reputed for being a brutal corporate in the rather laid-back world of coffee corporate. This is as evidenced by the takeovers it has had in order to grow and the edging out of competitors from the market (Coffee, 2015). As a major competitor in the production of coffee, the firm has operations under its sub-brands in over 66 countries and with over 21,000 retail outlets (Starbucks, 2015).

The international trading environment for Starbucks

Globalisation has heightened the level of competition that is being experienced worldwide. Goyat (2011) notes the result is the contemporary marketing concept of ‘change or die’ which avers that it has to be in the interest of a firm to adjust its competitive marketing strategies to modern perspectives. Further, Goyat (2011) points out that the current market has necessitated segmentation as a marketing tool. Hulten (2007) on the other hand elaborates the importance of segmentation as a modern business practice since it promotes trust, commitment and loyalty on the end of the customer and it creates leverage to customer-nderstanding on the end of the firm. Essentially, segmentation offers a synergetic force towards market concentration and eventually objective attainment. Similarly, Starbucks has managed to remain at the top of competition due to market segmentation. Mourdoukoutas (2013) for example notes that segmentation has been part of Starbucks strategy as it has chosen to focus on high end clients rather than average coffee drinkers. Their retail stores offer more of comfort and this attracts a certain clique of customers. This comfort that targets the high-end customers is tailored though a rich coffee experience – among other ready-to-drink beverages, great music that is specifically chosen due to its artistry experience and serene interiors (Starbucks Coffee Company, 2015).

According to Rafii (2013), Starbucks has concentrated its focus to individuals in prestigious areas. Specifically, the firm targets customers that are aged between 25 to 49 years and they account for over 49% of the total Starbuck sales. This category of customers is further inclined to urbanites who have relatively high incomes and who are concerned about social responsibility and environmental awareness on the part of the company. Rafii (2013) further notes that an additional 40% of Starbuck’s customers are young adults aged 18 to 24 years. On the 18-24 years front Starbucks targets high-end college campuses by offering appealing places for students to socialise and study – especially by allowing free wireless internet connections. In summary on target audience, although the firm boasts of diversity in its customer base, the main focus is the young people belonging to the middle-class to upper-class social class who are also college-educated per se.

It is factual to posit that Starbucks has had its fair of success attributing to its position in the international market; owning stores in over 66 countries (Starbucks, 2015). It is also a worthy competitor in the market; a forte that has been strengthened by proper market segmentation, execution, good leadership and continuous expansion (Mourdoukoutas, 2013). The main competitor’s Dunkin Donuts and McDonalds have similarly expanded over the US. Woolf (2014) notes Dunkin Donuts has had its expansion towards the south and west, McDonalds on the other hand has been expanding ubiquitously. Starbucks uses the same expansion strategy as McDonalds – ubiquitous – and has been predominantly expanded evenly across the US. Further, Starbucks observed the same strategy in China where Mourdoukoutas (2013) avers the fact that Chinese people live in small houses as extended families opened up an opportunity for Starbucks to explore. Besides the expansion on the geographical front, Starbucks is majoring its image as a place to go for socialising and work for the high end customers that have remained loyal to its taste (Woolf, 2014). Figure 1 below shows Starbucks dominance since the year 2010 over Dunkin.

Lim (2014) further notes that the global financial performance for Starbucks rose by 6% and there was a general trend in the rise of share prices for Starbucks in comparison to McDonalds. In 2014 Starbucks released a detailed expansion and strategic growth plan that proved the firm is a worthy investment. The basis of expansion was founded upon comparative advantages held by the firm which Tobey (2014) identifies as breadth, high quality brand recognition, desirable locations, premium products and loyal customers that would pay premium prices. The seven strategic steps include becoming the best employer, lead in coffee, diversify store portfolio, create new occasions to visit its stores, brand growth, build the recently acquired Teavana and extend digital engagement (Starbucks Newsroom, 2015).

Entry into new markets and the strategies applied

Starbucks has been intending to expand to new markets all along. One of such lucrative markets is China. Mainly China is seen by the firm as a viable market because according to a report by Euromonitor international, China has seen an increase of retail coffee consumption by 10% in the last year (Zhu, 2015). This growth was 7% above the global average and this means that China is a lucrative market. Zhu (2015) insists that the strategies used by Starbucks in its home market are the same that were used to penetrate China. This involves positioning itself as a premium brand and offering is core dishes alongside local menus. In addition, Starbucks is a company-operated chain of retail stores; thusly this is the approach they have on all markets. However, this does not imply that all of the stores are owned by Starbucks. According to a research done by Santamaria and Ni (2008), on the entry modes of Starbucks, the firm has entered most of its new markets through joint ventures and licensing with local firms. This way, the firm gets to share in the financial risks involved. The firm applied these entry modes in Spain, New Zealand and France (Santamaria and Ni, 2008). In China however, most of the stores are company owned after Starbucks bought them. Some of the stores are however franchised. Allison (2011) adds that the only joint venture Starbucks has in China is with a government agency to facilitate the farming of coffee to ease the supply process.

As established above, the major entry modes strategies for Starbucks, which were also applied in the Chinese market are, joint ventures, licensing and franchising. McDonald et al. (2002) while addressing the similarity between licensing and franchising notes that franchising is suitable for services. They also add that the owner faces the danger of losing control on the quality of the products and services that are delivered. Campbell and Netzer (2009) on the other hand notes that joint ventures face the risk of conflicts in management as well as overreliance as the effective method of international business. The solution offered by Tice (2012) for maintaining quality if to adopt unit franchisee strategy where a franchisee gets to operate several business units.

The growth into new markets path of Starbucks has not been all smooth. An example is the first problems the firm encountered in the Chinese market where the predominant practice is tea consumption. Additionally, China being a collectivist society in general, following culture is an important aspect to the consumers found there. According to the International Business Times, the reason Starbucks succeeded in China and the Asia-pacific region while other firms did not is strategy. The firm entered the market and started off with offering indigenous tea in their menu (FlorCruz, 2013). This evidences that in some instances the firm has undertaken an adaptation strategy in order to succeed. However, this has majorly been for the Asia-pacific region. The firm, as per Rein (2012), adopted local tastes of China to its Chinese store rather than pushing American menus to the Chinese market. Eventually the customers ended up seeing Starbucks as a premium brand though offering different products; the same positioning aspect as of the domestic market of the firm. Doole and Lowe (2008) identify advantages of adaptation as culture penetration and customer satisfaction. Figure 2 below shows the international product and promotion adaptation strategies.

The Marketing mix applied by Starbucks in the international market

Key elements of the International marketing mix

Albaum and Tse (2001) identify a link between international marketing strategy, a firm’s environment and the firm’s subsequent performance. Imperative to international marketing strategy is the application of core resources to create a competitive edge in foreign markets. The entails of international marketing are averred by Agnihotri and Santhanam (2003) as differing from traditional domestic strategy slightly due to their larger application. Figure 2 below shows an aspect of international marketing strategies under which a firm can choose.

The following elements are among the marketing mix that have been applied by Starbucks to further its competitiveness in the international market

Product and people

As established under the branding segment, Starbucks has strong brand that is resultant of its premium products. Brand positioning is of strategic importance as it acts as the platform that other elements of a firm ride on (Janiszewska and Insch, 2012). As such a good brand is a tool that most multinationals use in order to remain competitive in the global industry. Specifically, penetration of foreign markets is aided by brand name (Ille and Chailan, 2011). Starbucks has a reputable brand that can be considered as a competitive advantage. Rein (2012) for example notes that upon entry into the Chinese market, besides using the adaptation strategy, the firm achieved success through brand positioning. Rein (2012) further elaborates that using its brand the firm was able to position itself as desirable and customers drinking coffee at its store could do so as a sign of sophistication and class. As such the firm retains the premium nature of its brand name.

Coffee is the main product that is offered by the store and it accounts for over 70% of the income to the store (Rafil, 2014). Woolf (2014) believes that the quality of coffee at Starbucks has made a significant impact on the sales as the store accounts for over 32% of the coffee sales in the United States. The achievement of such quality is also not accidental as the store endeavours to be the best employer and selects the best baristas as employees. According to a report done by USA Today, the firm has excelled in the recruitment, retention and training of employees all over its stores. In the Asia-pacific front for example, where the industry average for employee turnover is over 30% – Starbuck has maintained its turnover at much less than this average (Rein, 2014). Rein (2014) quotes an interview of one of the baristas who acknowledges that he has been taken care of by the management and would not think of changing companies. Their service delivery is also noted to be at par or higher than that f many five star hotels especially in China.

Pricing strategies

Chintagunta and Desiraju (2005) in their study on price detailing in the international markets elaborate the significance of pricing as a strategic tool. In general they note that western markets are lesser price sensitive but still customers are looking for value for their money. In general, because of its target market, Starbucks charges premium prices across its stores in the different nations. King (2011) in his review of Starbucks as a coffee shop notes that their products a relatively higher for other coffee shops in the UK. In the Lim (2014) on the other hand demystifies the pricing strategy for Starbucks. He posits that with the economic struggle being experienced by corporate and with unemployment levels going high in the UK and US there were expectation that customers could shift from pricey Starbuck menus to competitors. However the reality is that due to premium products the sales of Starbucks remained high despite increasing prices. As such it’s factual to posit that the store does not compete on prices. A similar situation was experienced in China where the firm used price discrimination to measure up sales from China with those in the US. Rein (2014) points out that in the Asia region the firm made its products gain an aspirational value such that even when priced highly customers would still demand them as a way of showing class and sophistication. This strategy despite netting in more per-store profits, reached a lot of the upper-middle class urbanites of China.

Location aspects

In term of location, Oh (2009) notes that location refers to the proximity of a firm to the customers in terms of logistics involved in manufacturing and distribution to reach the final customer. In retail businesses the accessibility and condition of stores is a factor of location (Oh, 2009). Firstly, being a multinational firm, Starbucks has locations in over 66 countries which make it reach a wide market. A report by the Huffington Post showed that in the US alone as per September in 2014 there were 12, 937 Starbuck stores which analysts took that a Starbucks store is never further than 170 miles from any place in the US. According to Isidore (2015), the store intended to increase its outlets by 3,000 meaning by 2017 there would be an 11 % increase of stores in the US. The same increase is expected in China which means the store will be accessible to over 70 cities in the Asia pacific region. In term of store environment, Starbucks has appealing interiors one of which King (2011) described as prominently placed with big floor space and high ceilings. Rein (2014) also notes that in China the same concept of space and ample interiors is observed.

General Marketing and promotional strategies

Lastly, it is imperative to note that in general Starbucks has positioned itself as a premium brand; a forte that has enabled it to charge premium prices in the market while at the same time enjoying differentiation. This also can be attributed to provision of superior coffee that cannot be matched up by competitors. Leaning more on the adaptation strategy, the firm has also been able to enter and survive in rather dreaded markets such as China. The same adaptation strategy is being used by the firm in Europe – especially France – in a bid to net in profits for the region. Alderman (2012) says that the firm is adapting a cafe approach as a strategy to winning its customers in France. Further, like in China, native menus are being adopted alongside mainstream Starbucks menus in France.

Ethical considerations and criticism at Starbucks

In the website of Starbucks there is an elaborate expression of ethics; “Starbucks believes that conducting business ethically and striving to do the right thing are vital to the success of the company” (Starbucks Coffee, 2015). Evidently, the firm is concern about the manner in which it conducts business and the impact this has in third parties. Ethical business behaviour and the observance of corporate social responsibility (CSR) are seen by Mohtsham Saeed and Arshad (2012) as instrumental in the success of any business. Specifically, CSR helps to engrave positive company image in the minds of all stakeholders and to improve performance through deliberate concern for the society and the environment. Further, Mohtsham Saeed and Arshad (2012) perceives ethical behaviour as a form of social  and reputational capital that falls under the strategic resources for a firm. It is thusly accurate to note that international strategy can be further streamlined through ethical behaviour. Dimitriades (2009) identifies the ends of ethical behaviour and social responsibility as legal, ethical, economic and voluntary. The following figure summarise the advantages accrued with the different options of channelling resources.

In 2008 when Starbucks was faced with challenges in its general performance, the firm undertook a transformative agenda aimed at turning around its perspectives. It is from this end that Starbucks laid entire focus on the environment, people and community (Ritter, 2014). One of the major goals was to ensure 100% ethical sourcing of coffee and by 2012 Ritter (2014) notes that at least 95% of this was achieved. The store further advocated for recycling of waste products with at least each store having the ability to recycle one item. In some of the stores a 10% discount is offered to commuters who bring along this own travel cups as a way of minimising wastage (Harnrungchalotorn and Phayonlerd, n.d.). Other measures the store has taken to practically save the environment include energy reduction through adoption of LED lighting across its stores and the installation of hand-guided water meters that save over 150 gallons of water every day. They also use dishwashers that generally use less water (Harnrungchalotorn and Phayonlerd, n.d.). In their 2015 corporate social responsibility report the firm indicates the existence of a charity foundation – Starbucks Foundation – aimed at reaching out to the socially disadvantaged, it has a loan investment frontal that empowers farmers economically and advocates to renewable energy application. These environmental efforts have seen Starbucks awarded as the most ethical firm in Europe two times in a row (Ferrell, Fraedrich and Ferrell, 2012).

Conclusion

It is apparent that competing on a global platform has been an intensifying phenomenon curbed with endless blockades to transcend. Firms have the platforms to catapult them to the global scale readily available and this has intensified competitiveness. Thusly, rational application of marketing strategies is important to ensure that a firm performs well on a multinational scale. This report intended to establish a critical position on the international marketing strategies applied by Starbucks in the general international arena it operates in. As evidenced by the extant literature, the firm firstly operate in a culturally and politically dynamic environment. However, it is also notable that the firm has established itself as a strong brand that serves the high-end consumers – a strategy that has cushioned it against price woes attributed to slowing economies in the Western and Asia economies. Further the adaptation strategies have buoyed the firm in the Chinese market and the Europe market as standardisation continues netting profits in the US. The firm has also scored excellently in the ethical front and being the most ethical firm in Europe it has managed to attract environmentally aware customers. Conclusively, these elements have contributed to the international success of Starbucks alongside the marketing mix which includes pricing, location, product and people.

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