Starbucks is considering expanding into South Africa. While South Africa has high unemployment and crime rates, its economy is growing with a GDP near the world average. South Africa also has a young population that will join the workforce. Starbucks sees potential in South Africa's growing middle class. The political risk of operating in South Africa is moderate as the country has a stable government and legal system welcoming to foreign investment. Starbucks believes its established brand and expertise position it well to succeed in South Africa if it properly understands the local context and hedges political risks.

1. Michael Korycki
Fin557
Political RiskReport
“If They Let Them Build It, Will They Come? Exploring the
Country Risk of Starbucks in South Africa”
“African Farmersproducesomeof the mostextraordinary coffeesin theworld,and Starbuckshasa long
history of purchasing coffeefromAfrica. Thismoveinto South Africa is anothersign of Starbucks’
commitmentto doing businessin Africa”1
-StarbucksSpokespersonMay2010
Intro
Soccer enthusiasts escapingthe obstreperousdrone of the SouthAfricanvuvuzela atthis
summer’s FIFA 2010 WorldCup may have beendelightedtodiscover thattheycouldunwindin the
ambiance andwelcomingenvironment of aStarbuckscoffee shopata SouthernSunor Tsogo SunHotel
uponreturningfroma match inJohannesburg,Cape Town,andDurban. For the firsttime,Seattle-
basedStarbucks,Inc,begandeliveringcoffee andteaproductsinselectedlocationsthroughalocal
partnershipwithEmpericaMarketing.2
Of course,Starbucks’overwhelmingsuccessatthe FIFA 2010
WorldCup inSouthAfricacan be much attributedtothe familiarityof the productbythe hordesof
WesterntouristswhoflockedtoAfrica’ssouthernmostcountrytocheerontheirrespectiveteamswith
theirfellow compatriots;however,whetherStarbucksstrivesinSouthAfricaintheirabsence isyettobe
seen.
Thispaperwill focusonevaluatingStarbucks’countryriskinSouthAfricaas definedasthe
potential of differenteconomicinfrastructures,governmentpolicies, geography, andsocio-political
institutionsthatwouldchange Starbucks’expectedreturnof theirnewlyengagedcross-border
1 Carey, Susan “Starbucks Strikes Deal in South Africa” WSJ.com May, 31 2010
2 Ibid

2. investment. Alsoincludedwill be bothacountry-levelcomponentoutliningthe general macro-
economicenvironmentandafirm-specificcomponentoutlyingthe political riskof doingbusinessin
SouthAfrica.
Macroeconomics
In a global studyrankingpercapitaconsumptionof coffee,SouthAfricaranksadismal 108th
withitscitizensconsumingjust0.4kgof coffee ayear.3
Comparativelyinthe U.S.,where coffee canbe
arguedas the lifebloodof the nation,we consume 4.2kg/year,whichisstillafar cry fromScandinavians
whoconsume an average of 10kg/year(perhapsbecause the lackof sun can make one feel like it’s
perpetuallymorning).4
Whatthistellsus,of course,isthat SouthAfricanscurrentlydonotdrinka whole
heckof a lotof coffee. However, coffeeis,of course,notthe onlyproductStarbuckscurrentlysellsand
whenone exploresthe country’s fledglingmacroenvironment, the potential of expansion beginstosell
itself.
SouthAfrica’scurrentpercapita PPPGDP5
is $10,505, justshyof the worldaverage of $10,725
and double the percapitaincome thatwas displayed duringthe NationalistParty’sApartheidEra.6
The
fatalisticnaysayer’spost-apartheiddecentintochaosneverdidcome intofruition,andthe African
National Congress hasdone itsbestto fostera transparentand competitive businessenvironmentvery
opento foreigndirectinvestment. Today,SouthAfricaisaproductive andindustrializedeconomythat
exhibitsmanycharacteristicsassociatedwithdevelopingcountries andmanyAmericancompanieshave
succeededinopeningbusinessesthere.7
AlthoughSouthAfricahasa sky-highunemploymentrate of
3 http://en.wikipedia.org/wiki/List_of_countries_by_coffee_consumption_per_capita Retrieved March 4, 2011
4 Ibid
5 Usinga PPP basis ismoreuseful when comparingdifferences in livingstandardsas a wholebetween nations
because PPP takes into accountthe relativecostof livingand the inflation rates of the countries.
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita Retrieved March 4, 2011
6 Ibid
7 Tradingeconomics.comRetrieved March,4 2011

3. 24%, it isa vastimprovementfromthe 32% rate lastseensince 2003, whichshowsthatthe government
istakingthe matterveryseriouslybymaking large investmentsineducation ,vocational training, and
businessincubatorswhilealso welcomingforeigncompanieslookingtohire local SouthAfricanlabor.8
What iswelcomingforStarbucksisthat SouthAfrica’s macroenvironment isshowingsignsof
improvementsince droppingtoitsnadirin 2009. In 2011, SouthAfrica’sGDPis on an annualizedpace to
see growthof around 4.4%, whichexceedsthe 3.27% growthrate achievedduringthe lastdecade.9
SouthAfrica’srapidrise ingrowthin 2010 can mainlybe attributedtoitsrobustcommoditiesexport
market, exportingeverythingfromore andgold to,of course,diamonds. Strongcommoditypricesare
likelytobe a newnormal andSouthAfricahas much to continue togain. Also,as the world’swealthhas
risenfromthe abyss,SouthAfrica’stourismindustryhasseenalarge uptickoverthe past year. This has
helpedbringinagood flowof foreigncurrencyintothe country, increasingitscurrentaccountbalance,
and will alsodrawinmore touriststo future Starbucksstores. Consumerconfidenceandbusiness
confidence have bothrisensteadilysince January2009 and SouthAfrica’scurrency,the Rand,has held
steadysince floppingin2008 due to the rapid dropin commoditypricesduringthatperiod,all factors
makinga $2 cup of coffee verymuch affordable.
Lastly,inadditiontostrong macro-economicindicators,perhapsthe mosttellingsignof South
Africa’sfuture growthpotential isitsdemographicdividend. With30% of the populationunderthe age
of 14, South Africayieldsafuture work force of millionsof young,educated,andambitiouscitizensto
propel the countryforward. Like inIndia, thiscompetitive,productive,andefficientworkforce will
provide the returnoninvestmentforpensionfundsoverlookingthe retirementof the Westernworld’s
agingpopulationbase. Starbucks,of course,recognizes the potential on marketingtothisyoungbase as
newlyurban,educated,andmiddle-classSouthAfricanswillbegintolookforplacestodebate and
8 Ibid
9 Ibid

4. discusseverythingfromgeopoliticsto rugby. In India,local firmCafé Coffee Dayhasmade huge inroads
targetingtothis verysame demographicandStarbuckswishestomodel their same successinSouth
Africa. It’s a success,of course,that can onlybe achievedif the governmentof SouthAfricagivesthe
greenmermaidthe greenlight.
Political Risk
From March of 2010 to September2010, SouthAfricaascended from53rd
to 44th
intheiroverall
worldrankingintermsof Political Riskiness. Thoughanaccomplishmentworthrecognition,thismay
pose as a caveat forthe managementteamof Starbuckswhen consideringalarge investmentinthe
country. A numberof studiescanbe performed togatheran accurate assessmentof the true risk
imposedonthisoverseasventure. The first,of course,wouldbe toconducta Grand Tour Approachof
the country. Thisapproachcan assuage the biasupwardthat managementmaycurrentlybe
experiencing.
Giventhe headline riskof highcrime,highunemployment,andintermittentimmigration
troublespouringfromZimbabweandMozambique,the managementof Starbuckscan tendto perceive
a lot more political riskthan there actuallyiswithoutactuallyputtingsome bootsonthe ground,soto
speak,todetermine if these are accurate assessmentsorif theyare overblown. By bringinglocal
expertsfromgovernmentofficialstobusinessleaders,however,Starbucksmightexperience abias
downwardasthe expertsmaywishtooversell theircountryinhopesof bringinginnew business. To
modifythe biasdownward,Starbucksmayconsiderafeasibility studythrough furtherforecasting
analysisperformedbyathird partyconsultinggroupsuchas McKinsey& Co, whocurrentlyoperate in
SouthAfrica,to a numberof otherthirdparty expertswhowouldapproachthe analysiswithahighly
informative,unbiasedperspective.

5. Starbucks’ change inexpectedreturnon investmentscanbe attributedtoSouthAfrica’s
economicinfrastructure,governmentpolicies,socio-political institutions,andgeography. Pankaj
Ghemawat,inhis article “Distance Still Matters”laysoutthe distance frameworkandhow managerscan
applyitto Starbucksin SouthAfrica10
. Lookingat the Economic Distance,there are differencesin
consumerincomesbetweenSouthAfricansandStarbucks’clientbase in NorthAmericaandEurope. As
mentionedearlier,SouthAfrica’spercapitaGDPis justshyof the worldaverage andcertainlyfarless
than that of your average Starbuckscustomer. Thiscan be attributedtothe fact that SouthAfricahas
such staggeringunemploymentandahighlyskeweddistributionof wealthasadirectconsequence of its
draconianpolicyof Apartheidthatprohibitedmillionsfromreachingtheirfull economicpotential. Yet,
todaySouthAfricastill hasa robustmiddle classwithaverage incomesclosertothose in the U.S.and
Europe.
A numberof othereconomicmeasureswithinthe frameworkpointtosome positive indications
for Starbucksas well. SouthAfricahasa strong and mature financial base andishome to quality
bankinginstitutionssuchasStandardBank. It isalsowell endowedwithnatural resourcesand alsohas
worldclassinfrastructure,witheasyaccessibilitytoports,highways,andtrains. Labor costsare lower
than those inthe U.S. and Europe and Starbuckscan take advantage of thislabor arbitrage tohire a
wide range of youngand educatedemployees andmanagers.
Analyzingthe AdministrativeDistance,SouthAfricaboastsastrong institutional infrastructure
that increasestrade andinvestmentsince the governmentisheldaccountable forcorruption and
paralysis throughthe democraticpoliticalprocess. SouthAfricaisattractive to outside investment
because ithas a well-functioninglegalsystemanditalsodoesnotexperience the social conflictsthat
10 Ghemawat, Pankaj “Distance Still Matters: The Hard Reality of Global Expansion” Harvard Business School
PublishingCorporation. September, 2001.

6. plague otherpartsof Africa.11
Accordingto Ghemawat,atarget country’sgovernmentraisesbarriersto
foreigncompetition inthe formof tariffs,trade quotas,andrestrictionsonforeigndirectinvestment
and favorsdomesticcompetitorsif theyare a large employer,are seenasanational champion,are vital
to national security,exploitsnational resources,andinvolve highsunk-costcommitments.12
Starbucks
doesnotmeetany of the mentionedcriteriaandtherefore warrantsnointerventionorother
impedimentstoentryfromthe SouthAfricangovernment.
StudyingCultural Distance,SouthAfrica,likethe U.S.,ishome tomany differentlanguages,
religions,andsocial norms. Yet,like inthe U.S.,Englishisthe linguafrancaindoingbusinessinSouth
Africaand isalsothe primarylanguage taughtinschools. AccordingtoGhemawat,all otherthings
beingequal,trade betweencountriesthatshare alanguage will be three timesgreaterthanbetween
countrieswithoutacommonlanguage.13
Social normsare quite similaraswell. SouthAfricaisacloser
model of a Westerncountrythan anyof itsneighborswithayoungerpopulationthatenjoysAmerican
cinema,music,andfastfood. Of course,Starbuckscannot expecttoestablishanexactreplicaof its
existingU.S.model of operationandmuststudythe cultural attributesthatcreate distance by
influencingthe choicesthatconsumersmake betweensubstitute productsbecause of theirpreferences
to specificfeatures.14
EventhoughSouthAfricais aboutas far as one can getfromthe UnitedStatesintermsof
distance,Starbucksmustconsiderotherattributesintermsof measuringGeographicDistance.15
For
one,Starbuckscan take immediate advantage of SouthAfrica’sworldclassinfrastructure for
transportingitsproductsfromport to store. Starbucksalreadybuyscoffee inbulkfroma numberof
Africanproducersandcan evenimplementa“buylocal”campaignthat will furtherstrengthen its
11 Ibid
12 Ibid
13 Ibid
14 Ibid
15 Ibid

7. positionwiththe people of SouthAfrica. SouthAfricaalsohasa worldclasscommunication
infrastructure withanumberof cell phone companiesandbroadbandinternetfirmscompetingfor
business. Asmore customersuse the internet,Starbuckscan reach outto many of SouthAfrica’s
middle andupperclassthroughFacebook,Twitter,andGroupontoadvertise andmarketdealsand
promotions. Geography,inthiscase,will notbe abarrierto trade inSouthAfricaand will have less of
an influence onStarbuckswhenconsideringacross-borderinvestmentintoSouthAfrica.
Hedging Risk
Of course,unforeseeableeventswithStarbucks’cross-borderinvestmentcanoccur in the future
and itwouldbe advisable forStarbuckstoprotecttheir investmentinanumberof ways. Althoughthe
riskof expropriationislowinSouthAfrica,Starbuckscanhedge thisriskbypartneringwithlocal
investorsandshareholderstomake Starbucksbe seenasa local partnerwithSouthAfrica’slocal
businessesinsteadof asan outsider. Also,Starbuckscanincrease theirsocial contributionstothe local
communitiesinwhichtheyengageinbydonatingtoschoolsandrelief programs,essentiallypursuinga
‘goodneighbor’policy. Thiswill inturnincrease theircommitmenttothe regionandwill be favorableto
local politicianswhomaybecome abrasivetoa foreignfirmshouldSouthAfrica’seconomyfalterinthe
future. Most importantly,Starbuckscaninsure theirstoresagainstexpropriationorlootingtoprotect
againstunforeseeablefuture political risk.
Operatingover16,000 storesin more than55 countrieswithrevenuesexceeding$10 billion
annually,Starbucksiswell positionedwiththe capital,experience,andexpertise neededtoexpandinto
SouthArica. GivenSouth Africa’sliberalizedfree market,entrenchedlegalsystem,robustgrowth,and
large youthful population,Starbucks’forayintothe country isa boldmove forthe companyyetitshould
yieldsome positive results. The Political Riskof the operationisrelativelymildandStarbucksshouldnot
feara hostile impediment toentry bythe governmentof SouthAfricafromoperatinginthe countrynor

8. shoulditfeargovernmentexpropriation. The future successof StarbucksinSouthAfricawill be
somethingworth celebrating,perhapsevenwithavuvuzela.