Case Study of Starbucks

When the announcement was make in mid(prenominal) 2008 that Starbucks would be closing nearly three-quarters of its 84 Australian barge ins in that location was multiform reaction. Some multitude were shocked, anformer(a)(prenominal)s were triumphant. Journalists used e tangible pun in the disk to bring into be a sensational headline, and it bring d bafflemed everyone had a theory as to what went wrong. This eccentric person come forwardlines the astounding growth and expansion of the Starbucks soil humankindwide, including to Australia. It then shifts point to pull back the intent of the store closures in Australia, forrader offering several reasons for the likewise-ran and lessons that others dexterity learn from the case. . Background Founded in 1971, Starbucks outgrowth store was in Seattles Pike Place riget. By the eon it went public in 1992, it had cxl stores and was expanding at a breakneck dance step, with a growing store cypher of an extra 40-6 0% a year. Whilst former CEO Jim Donald claimed that we dont requisite to take oer the world, during the 1990s and early 2000s, Starbucks were spread on average at least one store a day (Palmer, 2008). In 2008 it was claimed to be opening s consequently far stores a day worldwide.Not surprisingly, Starbucks is instantaneously the largest java bean train up operator in the world, with oft(prenominal) than 15,000 stores in 44 countries, and in 2007, accounted for 39% of the worlds total specialist hot choco later(a) house sales (Euromonitor, 2008a). In northeasterly the States alone, it serves 50 million battalion a week, and is now an ineradicable give away of the urban landscape. But reasonable how did Starbucks create such a phenomenon? Firstly, it successfully Ameri toiletteised the European umber tradition to a greater extent or less thing no other drinkable chocolate berry berry bean house had done priorly.Before Starbucks, hot chocolate tree tr ee in its current form (latte, frappacino, mocha, etcetera ) was alien to most US consumers. Secondly, Starbucks did non just manage deep brown it sold an experience. As founding CEO Howard Schultz explained, We atomic number 18 not in the cocoa tree crease do people, were in the people championship serving hot chocolate (Schultz and Yang, 1997). This epitomised the emphasis on node renovation such as making eye contact and greeting distri besidesively client at heart 5 seconds, cleaning tables promptly and remembering the names of regular customers.From inception, Starbucks settle was to reinvent a commodity with a full(a) sense of romance, atmosphere, sophistication and sense of community (Schultz and Yang, 1997). Next, Starbucks created a third place in peoples lives somewhere between theatre and work where they could sit and relax. This was a novelty in the US where in galore(postnominal) small towns deep brown embarrass refining consisted of filter co ffee on a hot plate. In this way, Starbucks positioned itself to not unless sell coffee, whitewash in like manner offer an experience. It was conceived as a lifestyle coffee shop.The formment of the cafe as a social hub, with comfortable chairs and music has been just as important a realm of the Starbucks stigma as its coffee. whatever this came with a premium determine. While people were aw ar that the beverages at Starbucks were to a greater extent big-ticket(prenominal) than at many cafes, they still frequented the disc dope off allows as it was a place to find away and be run acrossn. In this way, the cross out was widely accepted and became, to an extent, a figure of status, and everyones must- lose advanceory on their way to work.So, not merely did Starbucks revolutionise how Americans drank coffee, it in like manner revolutionised how much people were prepared to pay. Consistency of ingathering across stores, and withal national boundaries, has been a ha llmark of Starbucks. Like McDonalds, Starbucks claims that a customer should be able to visit a store anywhere in the world and buy a coffee exactly to specializedation. This sentiment is echoed by Mark Ring, CEO of Starbucks Australia who rural aread harmony is existentlyly important to our customers a consistency in the increase . . . he overall experience when you walk into a cafe . . . the music . . . the lighting . . . the furniture . . . the person who is working the bar. So, whilst there might be slight remainders between Starbucks in contrary countries, they all generally look the akin and offer the same intersection assortment. One way this is ensured is by insisting that all managers and partners (employees) undergo 13 weeks of training not just to learn how to make a coffee, merely to understand the nuances of the Starbucks brand (Karolefski, 2002) and how to deliver on its promise of a military service experience.The Starbucks locution likewise dep closing curtains on location and wash room. Starbucks let worked under the supposal that people are not going to visit unless its convenient, and it is this assumption that underlies their high-pitchedly concent straddled store coverage in many cities. Typically, clusters of outlets are unfastened, which has the yield of saturating a neighbourhood with the Starbucks brand. Inte breatheingly, until recently, they take for not prosecute in traditional advertizement, believing their large store presence and word-ofmouth to be all the advertising and promotion they expect.Starbucks way believed that a distinctive and memorable brand, a product that make people feel good and an enjoyable delivery channel would create repeat business and customer loyalty. Faced with near-saturation conditions in the US by 2007 it commanded 62% of the specialist coffee give away foodstuff in northeast America ( tabulate 1 ) the come with has increasingly looked overseas for growth opportunities.As part of this strategy, Starbucks opened its first Australian store in Sydney in 2000, before expanding elsewhere within New South Wales and then nationwide (albeit with 90% of stores concentrated in just three states NSW, Victoria and Queensland). By the end of 2007 Starbucks had 87 stores, enabling it to control 7% of the specialist coffee shop commercialize in Australasia (Table 1 ). By 2008, consumer awareness of Starbucks in Australia was 90% (Shoebridge, 2008), with all(prenominal) outlet selling, on average, double the number of coffees (270 a day) than the rest of Australias coffee shops (Lindhe, 2008). . Expansion into Asia Starbucks currently operates in 44 marts and correct has a small presence in Paris birthplace and inviolatehold of European cafe culture. Beyond North America, it has a very significant dowery of the specialist coffee shop securities industry in Western Europe, Asia Pacific and Latin America (Table 1) and these regions make strong revenue contribu tions (Table 2). It is in Asia that they see the most potential for growth as they face increasing militant pressure in their to a greater extent(prenominal) traditional markets.Half the international stores Starbucks plans to operate in the next decade pull up stakes be in Asia (Euromonitor, 2006 Browning, 2008). Indeed, Starbucks has done comfortably in international markets where there has not traditionally been a coffee drinking culture, namely japan, Thailand, Indonesia and mainland mainland china. In effect it has been responsible for growing the syndicate in these markets. The first Starbucks outside the US opened in capital of Japan in 1996, and since then, Starbucks Japanese stores guard become twice as moneymaking as the US stores.Unsurprisingly then, Japan is Starbucks best performing overseas market outside North America. More than 100 invigorated stores open each year in Japan, and coffee is now to a greater extent popular than tea leaf in wrong of some(preno minal) volume and grade (Lee, 2003 see alike Uncles, 2008). As opposed to their entry into the Australian market, Starbucks made small changes to its formula for the Japanese market for example, the invention of a green tea frappucino, and the supplying of small drinks and pastries to conform to local tastes.Starbucks get alongd in China in 1998 and by 2002 had 50 outlets, and 165 outlets by 2006 (BBC News, 2006), pronto becoming the nations leading coffee stove. Starbucks now sees China as its separate growth market out-of-pocket to the size and preferences of the emerging middle class. In the Asia-Pacific region, Starbucks command of the specialist coffee shop market grew from 15% in 2002 to 19% in 2007 (refer to Table 2). The total market for cafes in China grew by over one hundred thirty-five% between 1999 and 2004 to reach US$2. 6 cardinal.It is projected to grow some other 144% by 2008 to reach US$6. 4 billion in sales. More specialty coffee shops are opening acros s China as a middle class with strong purchasing military group emerges, although this rise in coffee consumption is highly concentrated in large cities such as Beijing, Shanghai and Guangzhou. Starbucks has said that it expects China to become its biggest market after the US and the plan is to open 100 stores a year (Euromonitor, 2006). Significantly, certain Western brands are valued by Chinese consumers and Starbucks appears to be one of them.A growing number of Chinas 500 million urbanites prefer Starbucks for its ambience, which is seen as an important signal of service quality, and Starbucks design invention rests slow with Chinas consumers, who tend to lounge with friends while sipping coffee. Its outlets in China frequently suffer larger seating areas than average outlets in other countries, and plush chairs and davenports are provided to accommodate crowds that linger. However, success for Starbucks in China is not a effrontery, and they go forth face several challe nges in the coming years.Chinas accession to the WTO has led to the dance stepwise relaxation of the policy governing foreign-owned sell outlets, and this go forth lead to more foreign investment and thereby competition (Lee, 2004). Several multinationals are claimd in selling coffee (including KFC, McDonalds, Yoshinoya, and Manabe), and a number of local brands fork up recently emerged, some even imitating Starbucks distinctive green and white logo and its in-store ambience (notably Xingbake in Shanghai). Furthermore, the reduction of import tariffs on coffee testament also encourage foreign investment in coffee. . The Australian retail coffee industry Australias taste for coffee is a by-product of the waves of immigrants arriving on the countrys shores following World War II. European migrants, predominantly Greeks and Italians, were the first to establish the coffee culture, which was later embraced more widely in the 1 980s. For decades Australians enjoyed a variation of the lifestyle coffee experience that Starbucks created from scratch in the US. Australians did not engage to be introduced to the concept of coffee as many other countries did.Savouring a morning cup of coffee was already a ritual for many consumers. It is fair to describe Australias coffee culture as mature and sophisticated, so when Starbucks entered Australia in 2000, a thriving urban cafe culture was already in place. This established culture saw Australians typically patronise smaller boutique style coffee shops, with people willing to travel out of their way for a favoured cup of coffee, especially in Melbourne where coffee has authentic an nearly cult-like following.For Australians, coffee is as much just nigh relationships as it is about the product, suggesting that an impersonal, globular chain experience would come apprehension replicating the intimacy, personalisation and familiarity of a suburban boutique cafe. Furthermore, through years of coffee drinking, ma ny Australians, unlike American or Asian consumers, have developed a sophisticated palate, enjoying their coffee straighter and stronger, and without the need to disguise the taste with flavoured, syrupy shots. This love of coffee is good quantified. The Australian market is worth $3 billion, of which $1. billion relates to the coffee sell market. For every cup of coffee consumed out of home, two cups are consumed at home (AustraIAsian Specialty umber Association, 2006). Per capita consumption is now estimated at 2. 3 kg-twice as much as 30 years ago. Whilst Australians are among the highest consumers of flare coffee in the world, they are increasingly buying coffee out of the home (Euromonitor, 2008c). More than 1 billion cups of coffee are consumed in cafes, restaurants and other outlets each year, representing an increase of 65% over the perish 10 years.Even between 2000 and 2005, trade sales of coffee have increased about 18%. In 2007, the growth in popularity of the cafe cu lture resulted in trade volume sales growing at an annual rate of 5%. Some 31% of the coffee sold through foodservice is takeaway, and it is eyeshot that fast coffee will be a growth area in future years (Euromonitor, 2008d). There is also a trend towards larger takeaway sizes, with 400 ml cups increasing in popularity (Euromonitor, 2008d). One might argue that Starbucks drove these trends, especially in regards to larger sizes.There are about 14,000 cafes and restaurants serving a variation of coffee types in Australia, and during 2006/07, they generated $9. 7 billion in income (Australian Bureau of Statistics, 2008). However, despite these statistics, the coffee business does not vouch success. As Paul Irvine, co-founder of Gloria Jeans notes, Australia is a tough retail market and coffee retailing is particularly tough. According to official statistics, the cafe business is not always profitable, with the net profitability of cafes falling to about 4%.For a cafe to be success ful, it has to offer marginally infract coffee than local competitors, and do so consistently. umber drinkers in Australia are discerning, and they will go out of their way to purchase a good cup of coffee. They are not as easily persuaded as people from other countries just now to visit their nearest cafe. Secondly, for a cafe to make a profit, it needs to turn over 15 kg of coffee a week The national average is 11 kg, so a cafe has to be above average to begin with to even make a profit. Any invigoratedcomer needs to understand this before entering the market.The other significant constraint on profitability is the cost of hiring baristas, with a good one costing between $1000 and $1500 a week (Charles, 2007). However, it seems that this is a necessary cost in order to deliver a professional product. The foreland that then begs to be asked is How well did Starbucks understand this existing coffee culture? Did they under-estimate the relational aspect of coffee purchasing in A ustralia, as well as the importance of the quality of ingrethents and the skills of the person making each cup?Did they overestimate the value consumers attach to the in-store experience and the third place concept? Or did they just look at the statistics regarding coffee consumption and pixilated that operating in Australia was a license to print money? Did they only when see Australia as the next logical step to global mastery? Starbucks has 87% of the US specialty coffee shop market, and only now is it beginning to feel pressure from non-traditional competitors such as Dunkin Donut, 7 Eleven, McCafe and Krispy Kreme (Burritt, 2007).However, in Australia, the competitive landscape is different. Gloria Jeans dominates the high-street part of the coffee retailing market and McCafe dominates the gismo end (Shoebridge, 2008). Other significant competitors include The cocoa Club and tearing Bean Cafe (an add-on to BP petrol stations) and Hudsons Coffee (see Table 3). All offer a similar in-store experience to Starbucks, with McCafe from 2007 onwards refurbishing many McDonalds stores to chase the Starbucks experience, albeit at the saving end of the market. 5. Growth grinds to a halt . . . store closuresIn recent times however things have started to go wrong for Starbucks. Internationally, confederation earnings cut backd as cashstrapped consumers faced record petrol prices and rising fill rates meaning they have had to pull back on gourmet coffee and other luxuries. Sales fell 50% in the last 2 years, the US plow price fell more than 40% over the past year and profits dropped 28% (Bawden, 2008 Coleman-Lochner and Stanford, 2008 Mintz, 2008). Consequently, Howard Schultz, the founder and chairman of Starbucks, resumed the position of CEO in 2008 with the aim of revitalising the business.He slowed the pace at which stores were opened (and in fact closed more stores than he will open in the coming year), introduced key performance targets (KPTs) and an employee rewards system in the US, and simultaneously shut down every store in America for three and a half hours of round training (Muthukumar and Jain, 2008). Customer-oriented initiatives have include the addition of more food, the launch of the Starbucks card and Starbucks express, and the provision of high-speed wi-fi net profit access (Hota, 2008).Notably, Schultz acknowledges that the companys focus has been more on expansion than on customer service the very thing that was at the heart of its singular value proposition. However, it seems that these measures were too late for the Australian operation. On 29th July 2008, Starbucks announced that it would be closing 61 of its 84 Australian stores (i. e. , 73%) by majestic 2008, resulting in a loss of 685 jobs. All of these stores had been under-performing (8 were in SA, ACT and Tasmania, 28 in NSW, 17 in Victoria and 8 in Queensland).This decline of Starbucks in Australia was not as sudden as many would have us believe and in fact some reports (Edwards and Sainsbury, 2008 Shoebridge, 2008) indicated that by late 2007 Starbucks already had * accumulated losses of $143 million * a loss of $36 million for that financial year * lost $27. 6 million the previous financial year * loans of $72. 3 million from Starbucks in the US * was only surviving because of its US parents support. These closures saw 23 stores kept open in prime locations in Sydney, Melbourne and Brisbane. But this begs the question can a 23-store chain be viable for the brand in the long-term?Based on the approximate numbers in Table 3, Starbucks had a 6% share of stores in Australia before the closures this has now fallen to a share infra 2%. Even before the closures, Australasia represented only 1% of company sales (Table 2) and now the figure is expected to be much lower. This may not make much mercenary sense as it will be difficult to achieve economies of scale in terms of selling and purchasing, and such small numbers are to tally out of step with the clustering strategy adopted in its strongest markets -the US, Japan and China.However, it could also be argued that with Starbucks strategy of global domination, it is unlikely that it will ever close its Australian business entirely. Whilst Starbucks management have been keen to suggest that this decision represents business challenges singular to the Australian market and in no way reflects the state of the Starbucks business in countries outside of the United States, the US market has also suffered. By September 2008, 600 stores had closed (or were due for closure), with about 12,000 workers, or 7% of Starbucks global workforce affected (Mintz, 2008).It should be noted that the situation in the US has only worsened as a result of the global financial crisis. 6. So what went wrong? Opinions abound as to why Starbucks failed in Australia. Our research suggests there is some truth to many of these opinions. Whilst the troubled economy might seem an easy s capegoat, with people tightening their belts and eating out less, it is unlikely that this was the core problem as evidenced by the continuing growth of their competitors. Indeed, coffee is no longer considered a luxury relic by many Australians, but rather an affordable part of their perfunctory routine.Instead, there is substantial evidence to suggest a number of factors unite to bring about Starbucks demise. 6. 1. Starbucks overestimated their points of differentiation and customer perceived value of their adjunct services I just think the whole system, the way they serve, just didnt appeal to the culture we have here Andrew Mackay, VP of the Australian Coffee Traders Association, in Martin (2008) Whilst there was initial curiosity and hype about Starbucks, after trying it, many Australians quickly found that it failed to offer a particularly unique experience that was not offered by other chains or cafes.Given the strong established coffee culture and discerning palates of Australians, the core product coffee was not seen as particularly different from, say, a latte or short b leave out from a good suburban barista, Gloria Jeans or Coffee Club. Its point of difference in Australia, where a coffee culture already existed, had to be in its supplementary or value-adding services i. e. , its unique servicescape, pleasant customer service, brand image and so on (Lovelock et al. , 2007).But was this worth a premium price, especially as the competition began replicating Starbucks in-store experience? Starbucks has since been harshly criticised by Australian consumers and the media. Their coffee has been heterogeneously described as a moire down product, gimmicky, and consisting of buckets of milk. These are not the labels you would choose to describe a coffee that aspires to be seen as a gourmet product. It has also been criticised for its uncompetitive pricing, even being described as one of the most over-priced products the world has ever seen (Marti n, 2008).Even the thinking of the third place has come under criticism why would you want to sit roughly a pretend lounge room drinking a weak and expensive coffee when you can go around the corner and have the real thing? (Wailes, 2008). It seems that Starbucks rapid expansion, its omnipresence, somewhat valuate store design and recent insistence on staff achieving various sales KPTs (key performance targets) such as serving x customers per hour, all unite to diminish the instore experience. The introduction of sales targets for front-line employees, for example, meant staff and baristas had less time to engage with customers.It began to stray too far from its roots and the very values upon which the brand was built. Some of these actions were forced upon Starbucks by emerging competitors seeking to imitate the brand, and thus gain a slice of the ever growing lifestyle coffee market. Starbucks points of differentiation were systematically being eroded and, in a sense, the bran d that taught the world that coffee is not a commodity was itself becoming one. 6. 2. Declining service quality The brand has also come under fire for declining customer service as it continued to expand.For example, the quality of baristas is said to have declined as Starbucks widened its pool of applicants in order to meet demand at new stores. Can a 17 year old high work student really compete with a boutique trained barista with a passion for coffee? By not offering a cleanse experience and product than emerging direct competitors, Starbucks found itself undermined by infinite high street cafes and other chains that were selling stronger brews at lower prices and often offering better or equal hospitality.Whilst they may have pioneered the idea of a third place, it was an easy idea to copy, and even easier to better by offering superior coffee, ambience and service. Now, with so many coffee chains around, Starbucks have little point of differentiation, even wi-fi internet acc ess has become commonplace across all types of cafe. Furthermore, while customers were offered promotional rewards for travel to Starbucks, the card-based scheme is no more sophisticated than equivalent me-too cards at Gloria Jeans, Coffee Club, Hudsons and many independent cafes.And as noted primitively, one of the things that set Starbucks apart from the competition i. e. , acknowledging customers (often by name for regulars) within a a few(prenominal) seconds of entering the store and earnestly engaging with them, began to unravel when Starbucks imposed both customer service and sales targets for its cafes. The imposition of these targets plus an ever sidetrack set and complexity of coffees to remember and make to perfection, meant staff morale and unavoidably customer service levels declined. In fact in the USA some staff were so disillusioned with the imposition of sales targets because it meant they plainly didnt have time to engage with customers) they posted blogs o penly stating that Starbucks had lost its way. Finally, it appears that Starbucks were not even delivering on their core promise of serving superior coffee in comfortable surroundings, thus justifying its premium price. By switching to vacuum box coffee, consumers are denied the store-filling aroma of the coffee beans. The switching of traditional coffee machines to automatise espresso machines (which can make coffees 40% faster and move customers through the lines more quickly), has also resulted in a loss of theatre (Grove et al. 2000) for people wanting to see their coffee made that way and has also had implications for taste. In-store, it has been noted that there are fewer soft chairs and less carpeting, and Starbucks recently lost ground in the service and surroundings category of the Brand Keys 2007 Customer Loyalty Engagement big businessman (Cebrzynski, 2008). It seems that Starbucks is now less about the quality of the coffee, and is more about the convenience of faster service and being on every corner whilst still charging a premium. 6. 3. Starbucks can some golden rules of international marketIronically, it seems that the very thing that made Starbucks successful in the first place, its ability to adjust the cowcatcher (European) business ride and coffee tradition to local (US) conditions, is the thing that let it down. Whilst Starbucks has made minor changes to its menu in countries such as Japan and Saudi Arabia, it generally offers the same products all around the world. When the company came to Australia, it brought its American offering, simply bringing what worked in the US and applying it here, without really understanding the local market.But with more than 235 ethnicities speaking more than 270 languages and dialects, companies wanting to get ahead in Australia need to be aware that they are not dealing with one homogenised market. Unfortunately what worked in the US was bitter, weak coffee augmented by huge quantities of milk an d sweet flavoured syrups. Not so much coffee, as hot coffee-based smoothies. For the Australian consumer raised on a diet of real espresso, this was always going to be a tough sell (Mescall, 2008) As McDonalds Australia chief executive Peter Bush noted, US retailers that have had trouble making it work in Australia (e. . , Starbucks, Dennys, Arbys, Taco Bell) are those that have introduced formulae developed for US palates and for the US way of doing business . . . These formulae have, at best, minor relevance in Australia. Peter Irvine, co-founder of Gloria Jeans, also noted that US retailers often arrive in Australia thinking the size of their overseas chains and the strength of their brands in other markets will make it easy for them to crack the local market. Their focus is on global domination rather than the needs of the local consumers.Further, there is a strong sense in Australia of buying local, supporting the community, having relationships with the people you buy from, and supporting ethically-minded businesses. Starbucks clashed completely with that, whereas local stores can differentiate themselves as being local and non-corporate. Furthermore, some would argue that Starbucks has become a personation of the American way of life and many Australians reject that iconography. Many are simply not interested in the super-size culture of the extra-large cups, nor want to be associated with a product that is constantly in the hands of movie stars. 6. 4.Expanding too quickly and forcing themselves upon an unwilling public In the US, Starbucks started in Seattle as a single store. In a nation bereft of a genuine cafe culture, that single store captured peoples imagination, and soon became a second store, quickly followed by a third. Before long, Starbucks had become a demand-driven phenomenon, with everyone wanting a Starbucks in their local area. McDonalds grew exactly the same way in Australia, opening just one or two stores in each metropolis nowher e near enough to meet demand thus creating an almost artificial scarceness, which created huge buzz around the brand experience.Krispy Kreme did the same. But when Starbucks opened in Australia, they immediately tried to impose themselves with multiple store openings in every city adopting the US-model of expansion through store clusters. Australians were not given a chance to discover it. As Mescali (2008) points out they took key sites, hung huge signs, made us order coffee in sizes and gave the coffees weird names. Starbucks said to us thats not how you drink coffee. This is how you drink coffee.They took the Coca-Cola strategy of being available wherever people looked, but this quickly led to market saturation. Their expansion did not hurt their competitors so much as themselves, and they found themselves cannibalising their own stores. Furthermore, by becoming too common, the company violated the economic principles of cultural scarcity and the novelty wore off. By having too many outlets, becoming too commercial and too widely used, it began to lose its initial appeal of status and exclusivity. It began to have a mass brand feel, certainly not the warm ghost of a neighbourhood cafe.Furthermore, they became more reliant on less pixilated consumers who now, with a worsening economy, are spending less, making Starbucks more vulnerable to economic fluctuations. 6. 5. Entering late into a highly competitive market In America, Starbucks is a state of mind. In Australia, it was simply another player. Barry Urquhart, quoted in Delaney (2008) From Day I1 Starbucks got off on the back foot. They lacked the first-mover advantage they had in the US and Asia, finding themselves the late entrant in an already very developed, sophisticated and competitive market.Indeed, the competitive landscape in the Australian retail coffee market is very different to that of other countries. Here, Starbucks found themselves competing with hundreds of independent cafes and metier coffee chains (see Table 3), where the coffee was generally better and the staff knew their customers by name. Significantly, they were also the last of the major chains to gain a presence in Australia. 6. 6. Failing to communicate the brand Worldwide, Starbucks rarely employs above-the-Iine promotion, and this was also the case in Australia.Instead, they maintained that their stores are the core of the business and that they do not need to build the brand through advertising or promotion. Howard Shultz often preached, Build the (Starbucks) brand one cup at a time, that is, rely on the customer experience to generate word-of-mouth, loyalty and new business. But in a market as competitive as Australia, with a consumer whose palate is discerning and whose loyalty often lies with a specific barista, advertising and promotion was essential to communicate the Starbucks message.The issue is not so much about building awareness which, at 90%, is high but to communicate what the br and means and to give consumers reasons for patronising Starbucks. Their lack of advertising made this branding issue even worse, with many people unable to articulate why they should be loyal to Starbucks. At the same time, competitors were communicating their messages very effectively McDonalds, for instance, is a heavy spending, award-winning, advertiser in the Australian market.Added to which, more subversive counter-messages were coming from those who saw in Starbucks a brand bully riding rough shod over the nuanced tastes and preferences of local cultures (Klein, 2000 Clark, 2008). In other words, a range of strong contrary messages were undermining Starbucks own very limited communications. 6. 7. Unsustainable business model Starbucks product line is limited originally to coffee. Sometimes a new product idea will be developed, such as the Frappucino, but these tend to have limited product life cycles and/or are seasonal.For example, the Frappucino has traditionally made up 15% of (summer) sales, but recently sales have been down, suggesting that customers are already tire with it (Kiviat, 2008). Furthermore, in the instance where other products were offered, people failed to purchase them as they only really associate Starbucks with coffee and generally seek food elsewhere. This is a very different model to The Coffee Club which has much more of a cafe feel to it, or McDonalds which has a full range of breakfast and lunch/dinner items that can be complemented by a McCafe latte.Hence the average transaction value at Starbucks is lower than its competitors, and therefore more customers must pass through its doors to reach the sales and profit levels of its competitors. It also creates conflict with the Starbucks ethos of the third place (and allowing people to sit around for 30 minutes sipping lattes and reading, talking or surfing) versus the need to get people in and out quickly and not take up valuable real estate (which in itself means that the ave rage Starbucks store needs to be much bigger than the average cafe).Unlike most of the other retail coffee chains, Starbucks does not use a franchise model, preferring to lease and fit-out its own outlets. This means more cash is being spent upfront, and in Starbucks case, more debt accrued. But adopting a franchise model would have numerous other advantages than just minimising this. It would mean that local investors, with a good sense of the local market, put their own money into the business and take an active role in zip it and shaping its direction. 7.What are the main lessons from this case study? Several key lessons emerge that should be of interest to both domestic and international marketers. 7. 1. crossroad international borders is risky and intelligibly Starbucks did not do their homework, or ignored their homework Well conceived market research involving both primary and substitute data, including qualitative and quantitative approaches, would have uncovered the ext ent of the coffee culture that existed in 2000 when Starbucks entered the Australian market.It seems inconceivable that Starbucks management, or at least its Australian representatives, were not sufficiently apprised of the extent to which many consumers were already well acculturated in terms of buying and consuming European styles of coffees such as short black, lattes and cappuccinos, nor the extent to which many customers were in fact loyal to their suburban cafe or competitive brands such as Gloria Jeans. As a late market entrant, Starbucks clearly failed to do thorough homework on the market before entry this is a failure in terms of due diligence.Alternatively, they chose to ignore the messages that were coming from any due diligence that they had undertaken. This may or may not have been due to some arrogance on the part of Starbucks, or due to the fact that they considered they had a strong global brand which would meet with universal acceptance. An example of where Starbu cks did do its homework, and act on it, was in France when it entered that market in 2006, establishing a cafe in the middle of Paris.Research had clearly shown the American way of consuming and socialising over a coffee was an anathema to many French, so Starbucks held back from entering the French market and when they finally entered it was with great trepidation, expanding at a very slow pace and testing the market at every step. 7. 2. Think global but act local This familiar maxim in international marketing should be well understood. While Starbucks had brand awareness as a major global brand, it failed to adapt the product and the customer experience to many mature coffee drinkers in Australia.As noted earlier, all the evidence suggests that it simply tried to transplant the American experience into the Australian market without any adaptation. In particular, it failed to adapt either its core product or its supplementary services to create the intimacy, personalisation and fam iliarity that is associated with established boutique cafes in Australia. 7. 3. Establish a differential advantage and then strive to sustain it A question of strategy that Starbucks perhaps failed to address was, Is our product differentiation sustainable in the long term and does it ontinue to justify a price premium? As noted earlier, it can be argued that the core product in this case, that is the coffee itself, is essentially a commodity, and that Starbucks coffee, according to many consumers, was no different to the competition, and in some cases inferior. Then Starbucks points of difference clearly revolved around its brand image and supplementary services. It was these supplementary services, such as its unique servicescape and sharp customer service, that they used to justify a premium price. However, as competitors (e. g. The Coffee Club) quickly imitated the Starbucks experience (i. e. , their supplementary services, ambiance, etc. ), by providing premium coffee and an point casual experience, Starbucks value proposition began to fade. In other words, their key points of difference could be easily imitated and were not sustainable. Faced with this scenario, the onus was on management to re-fresh and evolve any lingering differential advantage that Starbucks might have had or, at the very least, give customers reasons to continue patronising Starbucks through its communications. 7. 4.Dont lose sight of what made you successful in the first place As more and more competitors emerged, both individual cafes and chains such as Gloria Jeans and The Coffee Club, competitive pressures forced Starbucks to impose rigid sales targets on their frontline staff including baristas to increase store productivity. However, the imposition of these KPTs and the pressure to serve more customers more quickly meant that Starbucks forgot the very thing that made it unique in the early days, namely, to provide a customer experience in an snug casual setting that set it aside from competitors.As more pressure was located on staff to have higher throughput, this meant that baristas and other employees had little time to engage with customers. In other words, Starbucks forgot about the very things that made it unique in the first place. This is akin to the Wheel of Retailing hypothesis (Hollander, 1960) where a no-frills retailer piecemeal moves upmarket in terms of variety of product, price and more services and within several years finds itself competing with the more established premium supermarkets that were the very competitors that they tried to distance themselves from in the first place.The only difference with Starbucks is that it reversed the direction of the Wheel by gradually moving downmarket it brought itself into direct competition with cheaper operators and lost sight of what made it successful in the first place. 7. 5. Consider the viability of the business model It has to be questioned whether the Starbucks business model is via ble in the long term, or even the medium term. A business model that uses a premium price to justify the excessive floor space and elaborate servicescape, and allows customers to sit in this environment for an hour sipping one latte, has to be questioned.Given that Starbucks do not have the array of products that, say, a McDonalds might have and, as documented earlier in this case, therefore do not generate the same sales volumes and revenues, it is hard to see how the Starbucks model is financially viable. 8. Conclusion In summary, it appears on all the evidence that Starbucks not only misjudged the Australian coffee culture but also misjudged the extent of the competition, and failed to adapt its offering to the local market.Furthermore, with the sexual climax of high quality barista training, the availability of premium coffee beans and the technology to come a high quality cup of coffee (at a modest cost), sole operators who knew their customers by name, were able to set up bu siness as viable competitors. 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