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Starbucks: Expanding Into India, Case Study

This is a case study conducted for a Strategic Management course.

This plan follows Starbucks Coffee Company's decision to expand into India. Examples of Environmental Scanning, Strategy Formulation, Strategy Implementation, and Evaluation & Control are included in this document, along with an ultimate recommendation to Starbucks.

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Starbucks: Expanding Into India, Case Study

  1. 1. Starbucks Coffee CompanyExpanding into IndiaBRENDAN CRONININSIDE:This document contains an environmental analysis of Starbucks Coffee Company,strategic decision options, an action plan to implement those strategic decisions anda recommendation on Starbucks expanding into India.
  2. 2. 2Current Situation: Starbucks is a provider of high-end coffee products and more importantly, arelaxed experience. Starbucks as it is known today was purchased in 1987 and hasseen tremendous amounts of growth over the years. The company is known globallyand does business internationally, although it’s headquartered in the United States.Starbucks has historically had a differentiation strategy, with prices comparablyhigh and uniquely high-quality products, service and environment for the consumer.This differentiation strategy is used with a horizontal growth strategyinternationally. Starbucks currently has a market expansion strategy focusedaround Asia, and has recently seen both problems and great sales figures arise fromthis market in China and Japan. The objective of this strategic campaign is tocapitalize on the highly dense Asian market, with its high population and growingwealth. In 2002, Starbucks announced that it intended on breaking into the Indianmarket, however has failed to do so four years later. The problem facing Starbucksright now is whether or not to expand into India and if the company were to expand,how it would go about doing so. If Starbucks does decide to expand into India with apromising strategy, there is still the problem of finding a suitable partner currentlyin India to form a partnership with.Environmental Scanning The external factor analysis summary (Table 1) shows the externalopportunities and threats that face Starbucks. These will later be addressed in termsof how they can be taken advantage of, or avoided. The opportunities that Starbucks
  3. 3. 3may take advantage of are the Indian interest in Western brands, the geographicpopularity of coffee, the characteristics of the Indian population, and the market forthe product. Threats to Starbucks include the obesity and obesity related diseaserate in India, the beverage habits in India, barriers to entry, the conflict seen withinglobal policies, and established competition. The internal factor analysis summary (Table 2) shows the internal strengthsand weaknesses that Starbucks has and will either use to an advantage or try tominimize. Starbucks’ strengths include its strong company mission, vision andvalues, the company’s brand awareness, the experience Starbucks has in expandinginto global markets, high buying power and high quality products. Weaknesses ofStarbucks include the lack of a presence in India, which is a highly populatedcountry, Starbucks’ premium priced products, small product breadth and thecompany’s corporate structure. These external and internal factors are then combined in the strategic factoranalysis summary (Table 3) to show the most influential factors of a company’senvironment. The internal factors chosen by a weighted score include theexperience in expanding into global markets, the strong company mission, visionand values, the small product breadth and the premium priced products. Theexternal factors chosen based on a weighted score include the Indian population, thegeographic popularity of coffee, established competition and beverage habits inIndia. These factors are also given a time range in regard to when they effect thecompany, such as Starbucks’ experience in expanding into global markets will helpthem in the long run rather than immediately in the short run.
  4. 4. 4 These important factors of the environment are then used in a TOWS Matrix(Table 4) to show different business strategies that can be used based on thesefactors. One SO strategy that can be used is to examine past successful globalexpansions in Starbucks’ history and imitate the methods used there and the lessonslearned in these countries. An example of a ST strategy is to acquire the best Indianingredients for local Indian tea for use in Indian Starbucks. One WO strategy withinthe TOWS Matrix is to increase product breadth by adding more varieties of coffeebeverages, snacks, etc. This is more likely to appeal to a broader range of thepopulation and will make it easier for Starbucks to penetrate into the Indian market.A WT strategy that Starbucks may wish to use is to set a price penetration strategywhen first expanding into India. It has been stated that Starbucks will adjust itsprices for India, but these prices should be lower than the competitors’ in order togain immediate customers.Recommendation: It is recommended that Starbucks expand into India immediately, as to avoidletting its current competition expand. Starbucks cannot carry over its samebusiness operations as it had in other countries however, and must instead adaptand change as it did in Japan. Recommendations for the expansion of Starbucks intoIndia include: Contact Pantaloon Retail in regards to forming a partnership in India. This possible partner has over 100 stores in Indian cities, where the target market of Starbucks lives. The partner also owns Big Bazaar, Food Bazaar, and
  5. 5. 5Pantaloon, which have comparably high sales and would be good start-offlocations for Starbucks outlets. The group has revenues of $10.73 billion, asof 2005.Advertise heavily in urban areas. This is where Starbucks’ target marketlives, so this should be where the Starbucks’ brand is recognized the most.Use the challenges faced when expanding into China and Japan as examplesto adapt quickly to the customer need. Certain needs can be met to satisfy thenew customer base while still maintaining the same vision, mission andvalues.Adjust Starbucks positioning’ to reflect its differentiation strategy. The localcompetition already has a dominating amount of market share and providesthe service in India that Starbucks is known for in the U.S., onlybetter thanStarbucks does. Instead of being known as the place to get gourmet coffee inIndia, position Starbucks to be the place to relax in style with a coffee.Continuously analyze the competition’s expansion methods. Starbucks hasvast experience expanding and can capitalize on any mistakes made by thecompetition.Consider expanding product breadth in the future to include a larger varietyof tea-based products, primarily iced teas, and preferably using Indian-growningredients. This larger product line should also include spices that may mixwell with tea, coffee, or other Starbucks products.
  6. 6. 6It is believed that if Starbucks uses this strategy with these guidelines, then it will beable to effectively expand into India.Strategy Implementation Plan: Starbucks must contact Pantaloon Retail to form a partnership with thiscompany. In doing so, Starbucks will have its foot in the door in India. PantaloonRetail also operates several chains of retail stores, which Starbucks could set upsmall outlets inside of, or in cooperation with. It is also likely that the experiencethis partner has with the food industry (Food Bazaar) in India will be beneficial tothe initial Starbucks development team. It can only be assumed through thecompany’s current fiscal situation and its projected sales that Pantaloon Retail hashigh brand name recognition and a good reputation in its field, which is essential ina partnership with Starbucks. Starbucks will be implementing a market expansionstrategy, focused around horizontal growth through differentiation.Action Plan: CEO, Howard Schultz, must contact CEO of Pantaloon Retail about forming a partnership in India. This is the first step in forming a partnership with the firm, so this action must be taken immediately. In three months, plans for the installation of Starbucks outlets in Pantaloon Retail owned centers must be underway. If partnership is agreed upon, nine months is the cut off date in which one Starbucks outlet is to begin construction within a Pantaloon Retail
  7. 7. 7 store. As a precaution, Howard Schultz should remain in contact with another possible partner, the K Raheja Group. Operations managers should inquire with third party manufactures in India about the local supply of raw materials, and focusing on acquiring locally grown ingredients for spices and teas. This action must start immediately, at least six months prior to the first opening of a Starbucks branch in Mumbai, India. The CEO will be directly responsible for overseeing the timeliness and effectiveness of this action. This is expected to lower variable costs due to non-international shipping, with a contingency plan of shipping raw materials from Starbucks’ prior roasting facility in Kent. An international advertising team will be sent to Mumbai, India, two months prior to the installation of the new Starbucks branch to ensure proper advertisements are in place for the incoming store. This team will stay abroad for one year until a localized advertising team can be trained in India. The CMO will be responsible for overseeing the timeliness and effectiveness of this team. This action is in an attempt to increase sales, but requires a high rate of fixed costs in terms of advertising expenses and salaries. The contingency plan for this action is to hire a local advertising consultant firm located in India. This may drastically modify the general message of the marketing mix of Starbucks in India, and may be more expensive, but may be more effective in reaching the target audience due to cultural familiarity.Evaluation and Control:
  8. 8. 8Starbucks encountered several problems when expanding into China and Japan, asseen below, which need to be avoided when expanding into India.Japan: Starbucks locations too close in proximity Lacked enough food options for Japanese culture No-smoking policy conflicts with Japanese societal habits High rent, High cost of labor Starbucks didn’t have a roasting facility in JapanChina: Many opposed a Western coffee chain in China- traditionally a tea country Dominance of instant coffee Intense competitionThese concerns will be assessed and adjusted if needed, every quarter, using thebalanced scorecard approach as follows:Financial: How are Starbucks sales figures progressing compared to the projected sales for the year in India? Are any locations of Starbucks gaining/losing profitability? Is this due to close proximity to another Starbucks? Is Starbucks in India keeping up with the growing market trends towards coffee in India? If not, compare to competition and instant coffee manufacturers.
  9. 9. 9 How does the contribution margin of Starbucks in India compare to other international markets? Is there a higher fixed cost/variable cost rate that needs to be allocated for and if need be, used to readjust pricing?Customer: Conduct in-store surveys bi-annually to get customer feedback and suggestions. This will give insight into any problems like lack of variety in food or problems with Starbucks policy like the no-smoking policy. Conduct geographical surveys to see if any region is less likely to have Starbucks consumers in it. This may be due to cultural opinions towards Western business expansion.Internal Business Perspective: Examine weak points within the new Starbucks outlets in India on an individual basis. Are there any outlets that do not reflect the differentiation strategy used by Starbucks? How can this be adjusted?Innovation and Learning: Are sales and brand awareness increasing at a rate in India that would warrant further expansion? Are there opportunities that are not being taken advantage of?After these evaluations are assessed, control can be implemented on anorganizational level. After every financial quarter, these factors must be recognizedand adjusted to maximize Starbucks’ market expansion growth strategy and ensurea solid future for Starbucks in India.
  10. 10. 10Appendix:Table 1.) External Factor Analysis Summary Weighted External Factors Weight Rating Comments Score Opportunities There is a growing curiosity Indian Interest in 0.08 3.1 0.25 and interest in Western Western Brands Brands in India Coffee is popular in urban Geographic Popularity 0.14 3.7 0.52 areas, where Starbucks of Coffee usually targets first Immense, rapidly growing, Indian Population 0.11 5.0 0.55 highly condensed, young population Well-defined in India and Market for Product 0.11 3.2 0.35 growing Threats Increasing rate, and which Obesity and Obesity Starbucks is already a Related Diseases in 0.09 3.4 0.31 critic of aiding the growth India of in other cultures Beverage Habits in Coffee is a secondary drink 0.13 4.1 0.53 India next to tea High in India, Starbucks Barriers to Entry 0.07 2.7 0.19 must acquire joint ventures Starbucks has strong policies that often do not Global Policy Conflicts 0.11 2.9 0.32 work in other areas (non- smoking, lack of enough food products) Large competition already Established 0.16 3.6 0.58 established in same market Competition in India Total 1.00 3.59
  11. 11. 11Table 2.) Internal Factor Analysis Summary Weighted Internal Factors Weight Rating Comments Score Strengths Strong Company Starbucks has a consistent Mission, Vision, 0.13 5.0 0.65 global policy in terms of Values how it operates Brand Awareness 0.11 4.3 0.47 High globally Starbucks has already Experience expanded into several Expanding into 0.14 4.7 0.66 global markets including Global Markets China and Japan Starbucks can afford to be High Buying Power 0.09 3.4 0.31 specific about who it does joint ventures with Starbucks products are High quality considered of higher quality 0.07 3.0 0.21 products than other big brand coffee houses Weaknesses Starbucks currently has no Zero Presence in presence in one of the 0.08 5.0 0.40 India biggest markets in the world Premium Priced Starbucks is recognized for 0.12 3.5 0.42 Products its high prices Small Product Starbucks offers few things 0.17 2.9 0.49 Breadth of interests besides coffee Large, has hindered the Corporate 0.09 4.2 0.38 expansion into India for Structure several years already Total 1.00 3.99
  12. 12. 12Table 3.) Strategic Factor Analysis Summary Strategic Weighted Weight Rating Short Intermediate Long Comments Factors Score Starbucks has Experience already expanded Expanding 0.13 4.7 0.61 X into several global into Global markets including Markets China and Japan Strong Starbucks has a Company consistent global Mission, 0.13 5.0 0.65 X policy in terms of Vision, how it operates Values Small Starbucks offers few Product 0.12 2.9 0.35 X things of interests Breadth besides coffee Premium Starbucks is Priced 0.08 3.5 0.28 X recognized for its Products high prices Immense, rapidly Indian growing, highly 0.14 5.0 0.70 X Population condensed, young population Coffee is popular in Geographic urban areas, where Popularity of 0.11 3.7 0.41 X Starbucks usually Coffee targets first Large competition Established already established 0.17 3.6 0.61 X Competition in same market in India Beverage Coffee is a Habits in 0.12 4.1 0.49 X secondary drink India next to tea Total 1.00 4.1
  13. 13. 13Table 4.) TOWS Matrix Internal Strengths- Experience Weaknesses- Small Product Expanding into Global Breadth, Premium Priced Markets, Strong Company Products Vision, Mission, Values 1.) Examine past successful 1.) Increase product breadth global expansions in by adding more varieties of Starbucks history (China, coffee beverages, snacks, etc. Japan) and imitate the This is more likely to appeal to methods used there and the a broader range of the lessons learned in these population, and will make it countries. India is a country easier for Starbucks to similar to China in population penetrate into the Indian size and to Japan in market. Opportunities- population density, so these 2.) Adjust prices of products Indian two experiences should be based on geographic location. Population, imitated in order to grow in Areas of high-traffic like the Geographic Indias population. urban areas, which are Popularity of 2.) Advertise Starbucks interested in companies like Coffee vision, mission, and values Starbucks, can pay marginally heavily in urban areas of less for products than rural India. This will help to reach communities. This will the dense population that encourage the majority of Starbucks is trying to market users to perceive Starbucks as to and will also build brand a lower priced company while awareness in India alongside allowing rural areas to still seeExternal a friendly rapport. this as an exclusive brand, which should warrant their business. 1.) Use Starbucks 1.) Set a price penetration experience expanding into strategy when first expanding global markets to analyze the into India. It has been stated competition and find any that Starbucks will adjust its faults with their expansion prices for India, but they methods. This strategy is should be lower than the focused on capitalizing on competitors in order to gain the successful aspects of immediate customers. Coffee is Threats- expansion that the less a instinct purchase, which Established experienced companies may means the price is elastic. Competition, be missing. People will be willing to buy Beverage 2.) Starbucks is dedicated to Starbucks coffee over the Habits in serving the highest quality competitions if the premium India products to its customers, so prices are reduced. acquire the best Indian 2.) Increase product breadth to ingredients for local Indian include different types of tea tea for use in Indian and cold tea beverages. These Starbucks. This reflects the beverages may not work in companys vision and other markets, but India is satisfies the populations concerned with tea, so need for tea along with Starbucks should meet that coffee. need.
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