Starbucks International and the European Market

Originally the brainchild of three Seattle students, Starbucks was founded in 1971 in Seattle's Pike Place Market. Since its inception, the company has emerged as the world's leading specialty coffee house with an estimated weekly clientele of 33 million worldwide. While the American market proved to be receptive to the growth of what is now a household name, the international expansion of Starbucks held many highs and lows for the corporation. The trajectory from Starbucks corporation from a small café to the world's leading purveyor of gourmet coffee has allowed it to concentrate in the past ten years on its international division while specifically focussing on the extremely coffee-oriented culture of the European market.

Starbucks began to develop past its Pike Place location when Howard Schultz joined the company in 1982 as director of retail operations and marketing. Schultz began to promote the company by providing the already-established coffee to restaurants and espresso bars. A business trip to Milan the following year provided Schultz with insight to the popularity of Italian espresso bars and the potentiality of marketing a similar coffeehouse culture to the West coast. A year later, the coffeehouse concept was tested in downtown Seattle; its success led Schultz to found his own company, Il Giornale, in 1985. In 1987, Il Giornale acquired, with the backing of local investors, all of Starbucks' assets, changing its name to Starbucks Corporation and expanding into Chicago and Vancouver. In its 34 years of operation, Starbucks has grown into a global company with over 9,500 retail locations offering a range of products from home coffee presses to music produced on its own record label. Additionally, the company has become known for its active involvement with various environmental and charitable organizations.

The mission of Starbucks, "to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow," operates under the following six guiding principles:

Provide a great work environment and treat each other with respect and dignity.

Embrace diversity as an essential component in the way we do business.

Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee.

Develop enthusiastically satisfied customers all of the time.

Contribute positively to our communities and our environment.

Recognize that profitability is essential to our future success. (Starbucks.com)

In pursuit of this mission and these principles, Starbucks has evolved from a gourmet coffee brand to an experience. Furnished with comfortable seating, a range of music including jazz, blues, and world music, complimentary newspapers, outlets and internet ports, Starbucks creates an ambiance that offers its customers more than quality coffee. "You get more than the finest coffee when you visit a Starbucks-you get great people, first-rate music, and a comfortable and upbeat meeting place," says Howard Schultz. "We establish the value of buying a product at Starbucks by our uncompromising quality and by building a personal relationship with each of our customers. Starbucks is rekindling America's love affair with coffee, bringing romance and fresh flavour back to the brew." Moreover, Starbucks continually works towards corporate social responsibility and in 2005 was awarded the World Environment Center's 21^st Annual Gold Medal for International Corporate Achievement in Sustainable Development.

In 1995, Starbucks Coffee International entered into a joint venture with Japanese-based SAZABY Inc. and opened its first coffeehouse in Tokyo. Introducing coffee culture into Asia proved to be a success, and on a store level the Japanese have higher per-store sales than the US. Starbucks International then concentrated on development in the Asian market and opened in locations such as Singapore, Taiwan, and Beijing. The company's 300^th location opened in Japan on its fifth year anniversary of Japanese operations in 2001, and in the same year the company introduced a stock option program in Japan for eligible full and part-time partners.

From its corporate inception, the expansion of Starbucks worldwide was a no-brainer for Schultz. Through its high community involvement, corporate responsibility, and charitable work, Starbucks has established itself as a humanity-oriented company, which shows in their International Development mission "to be a global company, making a difference in peoples' lives by leveraging our brand and the coffee experience to foster human connections." The International Business Partnerships of the company are formed by very specific criteria, listed as:

Shared Values and Corporate Culture

Strong Multi-Unit Retail/Restaurant Experience

Dedicated Human Resources

Commitment to Customer Service

Quality Image

Creative Ability, Local Knowledge and Brand-building Skills

Strong Financial Resources (Starbucks.com)

While it does not franchise, Starbucks International will into another country by using one of three strategies: joint ventures, licensing agreements, and company-owned operations. Entry and operational method decisions are made based on the cultural climate of the countries they partner with. "We remain highly respectful of the culture and traditions of the countries in which we do business," says Schultz. "We recognize that our success is not an entitlement, and we must continue to earn the trust and respect of customers every day."

While Starbucks expanded significantly into the Asian market, it began to look for an opening in the European market. What Europe had that Asia lacked was a long-standing tradition of the kaffehaus and café; something which Schultz was well aware of since it was this European theory that spurred the creation of Starbucks itself. Capitals such as Vienna and Paris would be especially hard to penetrate, as they boasted some of the most famous cafés in the world, whose histories spanned back to the French Revolution and Hapsburg rule. In order to create a viable business in one of the most viable aspects of European social life, Starbucks would have to find a definitive way to market not only their coffee, which would be more expensive than what was to be found in European coffeehouses, but (more importantly) the Starbucks Experience.

In 1998 Starbucks dipped its toe into the European market by acquiring the Seattle Coffee Company-with more than 60 retail locations-in the United Kingdom. London proved to be a good starting-point for Starbucks, as it was not so readily associated with the kaffehaus culture of the other European capitals. Bolstered by their success there, Starbucks International then targeted Austria and Switzerland in 2001. In a joint venture with its Swiss partner, the Bon Appetit Group AG, Starbucks first opened in March 2001 to success in Zurich. Plans to expand to Austria, also with the Bon Appetit Group, were then initiated sooner than anticipated. This was a calculated risk for Starbucks, who went from perhaps the lowest coffee culture capital of Europe to one of the highest. "We approached it with a great deal of trepidation," Peer Maslen, head of Starbucks' international operations explained. However, the reception was warm and led to the goal of expanding into the majority of EU countries before targeting the rest of Europe.

Starbucks then formed a joint venture with department store chain KarstadtQuelle Group of Berlin to open in Germany. The first store opened in Berlin in 2002. In the same year, Starbucks opened in Greece-in order to take advantage of the 2004 Athens Olympic Games-in conjunction with Marinopoulos Brothers, a Greek retail, commercial and industrial group. In 2002 it also established the Seattle Coffee Trading Company in the Canton of Vaud, Lausanne, Switzerland. The next year, it opened a new state-of-the-art roasting facility in Amsterdam. It also joined with majority shareholder Grupo Vips, a Madrid-based restaurant and retail company, and El Moli Vell, a retail operator of cafes and pastry shops in Barcelona, and opened in Madrid and Barcelona. In 2004, Starbucks Coffee France EURL, a wholly owned subsidiary, opened its first location in Paris.

Optimism towards the European market remained high, yet the period of fiscal years 2001-2003 was less than profitable for the international subsidiary. Problems ranging from high startup costs to stiff competition to resistance to the Starbucks experience impeded upon profits not only in Europe, but worldwide. Starbucks gained an unfavourable image as corporate colonial imperialists and was often seen abroad, especially by European café-goers, as an overpriced imitation of the real thing. In the first half of 2003, domestic net earnings increased 31% to $130 million, while sales jumped 23% to $2 billion. By that point in time, however, international experience became more of a necessity to the company as they anticipated running out of room for expansion in their US market. Schultz continually countered the concerns of analysts, stating: "When I hear concerns about the international business, it reminds me of the concerns years back that New York and Philadelphia wouldn't drink Starbucks-that it would only be a West Coast brand. We've determined that the Starbucks experience we've created in the US is as relevant and compelling in other countries, whether it's Asia, Europe, or the Middle East. We think we have a strong foundation to expand into additional countries" (Tice).

While expansion possibilities were greater in Europe, European competition remained (and continues to remain) a problem. Chief Financial Officer Michael Casey points out that in London, a Starbucks tall latte sells for $2.93, while the same drink sells for $2.12 at rival Caffe Nero Group PLC. Additionally, German imitators in Frankfurt and Berlin have undersold their Seattle counterpart. Another reason for the lack of anticipated success in Europe was caused by the complex series of joint ventures Schultz agreed to in order to expand quickly. In 2003, Schultz explained that the company "made a conscious decision over the past two years to invest in international infrastructure. This has caused the company's [then] 7-year-old foreign operations-which had turned profitable by 2001-to run in the red in the short term" (Tice). While Starbucks continued to head toward its stated goal of 10,000 domestic and 15,000 international stores, international sales in 2003 made up less than 10% of the company's $3.29 billion in total revenue (Holmes). Starbucks International took another major fall in 2003 when it closed its six stores in Tel Aviv due to the continuing conflict between Israelis and Palestinians and the increase of anti-American sentiment. Yet 2003 was anticipated by all parties concerned to be a break-even year, with overseas profits anticipated for 2004, and so pans for international expansion continued.

The gamble paid off; on November 17^th 2005, Starbucks announced revenues and earnings for its fourth quarter and fiscal year (which ended October 2^nd, 2005). For the fourth quarter ended October 2^nd, 2005, consolidated net revenues increased to a record $1.7 billion from fiscal 2004's fourth quarter earnings of $1.5 billion. Net earnings increased 21% over the year from $103 million to $124 million. For the fiscal year, consolidated net revenues rose to a record $6.4 billion from fiscal 2004's $5.3 billion. "Starbucks record results in fiscal 2005 reflect the exciting momentum that we continue to see throughout our business, and demonstrate the underlying power of the Starbucks brand," Shultz said in a press release. "We are particularly encouraged by the early success and the continuously expanding development potential of our International business....Starbucks is appealing to a broad and diverse global consumer base" (Finanzen).

In May 2005, Starbucks began to supply its coffee to the Renaissance Moscow Hotel (under the International Mariott network), and in June 2005 the corporation opened its first café in Russia. The expansion outside of the EU is increasing confidence in Starbuck's international-particularly European-division. Yet the building of a coffeehouse culture in Russia will prove to be a greater challenge, as Russia is host to a mere 1,000 coffee houses, less than one outlet per 100,000 people. Starbucks has held negotiations with prospective Russian partners, including the Arcady Novikov and Arpikom restaurants (Drujinina). As Starbucks continues to meet its quarterly and annual goals, its expansion into the European market increases in not only quantity, but also quality. Despite the unpopularity of its corporate image, it remains popular both as an experience and a brand name. The rate at which it has grown, and continues to grow, allows Starbucks to explore new market opportunities as well as to further its opportunity to become the prime coffee retailer worldwide.

Works Cited

Drujinina, Angela. "Starbucks Targets Russia After Trademark Win." CEE-Food Industry; August 18, 2005. http://www.cee-foodindustry.com/news/ng.asp?id=62002-starbucks-russia-trademark

Holmes, Stanley. "For Starbucks, There's No Place Like Home." BusinessWeek Online; June 9, 2003.

http://www.businessweek.com/magazine/content/03_23/b3836056.htm

Weber, Gretchen. "What's Brewing Overseas." Workforce Management; February 2005.

http://www.workforce.com/section/06/feature/23/94/44/239446.html

Finanzen.net/Aktiencheck.de. "Starbucks Announces Record Fourth Quarter and Fiscal Year End 2005 Results." Finanzen.net; November 17, 2005.

http://finanzen.net/news/news_detail_drucken.asp?pkNewsNr=352272

Tice, Carol. "Bumps Abroad: Starbucks Chief Sees Overseas Profit in '04." Puget Sound Business Journal; May 23, 2003. http://www.bizjournals.com/seattle/stories/2003/05/26/story1.html

Starbucks.com "About Us." November 20, 2005. http://www.starbucks.com/aboutus/overview.asp

Starbucks.com "Starbucks International." November 20, 2005. http://www.starbucks.com/aboutus/international.asp