CASE STUDY ANALYSIS

(STARBUCKS’ FOREIGN DIRECT INVESTMENTS)

SUBMITTED BY: (PCBET 18-401P)

ABRENICA, ROSALINDA

BACULI, RONJAY

JULIAN, STEPHANY

OCFEMIA, SHEENA MAE

TOLENTINO, ROMMEL TIMOTHY

SUBMITTED TO:

MR. ALEXANDER G. CORTEZ

Thirty years ago Starbucks was a single store in Seattle's Pike Place Market selling

premium roasted coffee. Today it is a global roaster and retailer of coffee with over

7,000 stores in U.S. and outside U.S. Starbucks Co. set out on its current course in the

1980s when the company's director of marketing came back from a trip to Italy

enchanted with the Italian coffeehouse experience. Schultz persuaded the company's

owner to experiment with the coffeehouse format-and the Starbucks' experience was

born. The basic strategy was to sell the company's own premium roasted coffee, along

with freshly brewed espresso-style coffee beverages, a variety of pastries, coffee

accessories, teas, and other products, in a tastefully designed coffeehouse setting.

The company also stressed providing superior customer service. Reasoning that

motivated employees provide the best customer service, Starbucks' executives devoted

a lot of attention to employee hiring and training programs and progressive

compensation policies that gave even part-time employees stock option grants and

medical benefits. The formula met with spectacular success in the United States, where

Starbucks went from obscurity to one of the best known brands in the country in a

decade. (Hill, 2003) The Company's objective is to establish Starbucks as the most

recognized and respected brand in the world. Starbucks purchases and roasts high-

quality whole bean coffees and sells them along with fresh, rich-brewed, Italian style

espresso beverages, a variety of pastries and confections, and coffee-related

accessories and equipment -- primarily through its company-operated retail stores. In

addition to sales through our company-operated retail stores, Starbucks sells whole

bean coffees through a specialty sales group and supermarkets. Additionally, Starbucks
produces and sells bottled Frappuccino® coffee drink and a line of premium ice creams

through its joint venture partnerships and offers a line of innovative premium teas

produced by its wholly owned subsidiary, Tazo Tea Company.

II. PROBLEM OF THE STATEMENT

The Company divides its operation into two segments, United States and

International, each of which include Company-operated retail stores and Specialty

Operations.

Company-operated Retail Stores. The Company's retail goal is to become the

leading retailer and brand of coffee in each of its target markets by selling the finest

quality coffee and related products and by providing superior customer service, thereby

building a high degree of customer loyalty. Starbucks strategy for expanding its retail

business is to increase its market share in existing markets primarily by opening

additional stores and to open stores in new markets where the opportunity exists to

become the leading specialty coffee retailer. All Starbucks stores offer a choice of

regular and decaffeinated coffee beverages, a broad selection of Italian-style espresso

beverages, cold blended beverages, iced shaken refreshment beverages and a

selection of teas and distinctively packaged roasted whole bean coffees. Starbucks

stores also offer a selection of fresh pastries and other food items, sodas, juices, coffee-

making equipment and accessories, a selection of compact discs, games and seasonal

novelty items. Each Starbucks store varies its product mix depending upon the size of

the store and its location. Larger stores carry a broad selection of the Company's whole
bean coffees in various sizes and types of packaging, as well as an assortment of

coffee and espresso-making equipment and accessories such as coffee grinders,

coffeemakers, coffee filters, storage containers, travel tumblers and mugs. Smaller

Starbucks stores and kiosks typically sell a full line of coffee beverages, a limited

selection of whole bean coffees and a few accessories such as travel tumblers and logo

mugs. Approximately 1,200 stores carry a selection of "grab and go" sandwiches and

salads. During fiscal 2003, the Company's retail sales mix by product type was

comprised of approximately 78% beverages, 12% food items, 5% whole bean coffees

and 5% coffee-making equipment and accessories.

Specialty Operations. Starbucks Specialty Operations strive to develop the

Starbucks brand outside the Company-operated retail store environment through a

number of channels. Starbucks strategy is to reach customers where they work, travel,

shop and dine by establishing relationships with prominent third parties that share the

Company's values and commitment to quality. These relationships take various forms

including licensing arrangements, foodservice accounts and other initiatives related to

the Company's core businesses. In certain situations, Starbucks has an equity

ownership interest in licensee operations. During fiscal 2003, specialty revenues (which

include royalties and fees from licensees as well as product sales derived from

Specialty Operations) accounted for approximately 15% of total net revenues.

Go International. The US coffee-bar market may be reaching saturation. Further,

Starbucks' store base is also maturing, leading to a slowdown in the growth of unit

volume and firm profitability. In response, Starbucks has turned its attention to foreign

markets for continued growth.

Starbucks want for international development is to be a global company, making a

difference in peoples' lives by leveraging our brand and the coffee experience to foster

human connections. The Starbucks Experience is about passion for a quality product,

excellent customer service, and people. The Company's objective is to establish

Starbucks as the most recognized and respected brand in the world. To achieve this

goal, the company plans to continue rapid expansion of its retail operations, to grow its

Specialty Operations and to selectively pursue other opportunities to leverage the

Starbucks brand through the introduction of new products and the development of new

channels of distribution. In doing global business, Starbucks greatly consider local

culture as mentioned by Howard Schultz that Starbucks remain highly respectful of the

culture and traditions of the countries in which we do business. Starbucks also

recognizes that its success is not an entitlement, and Starbucks must continue to earn

the trust and respect of customers every day.

Entry Mode. In 1995, the firm established a subsidiary called Starbucks Coffee

International Inc. This group is responsible for all Starbucks business development

outside North America, including developing new businesses, financing and planning

stores, managing operations and logistics, merchandising, and training and developing

Starbucks' international managers. Starbucks' first non-North American store was

opened in 1996 in Tokyo. Starbucks initially used licensing agreement for its global

strategy. Because Starbucks wanted to control business strategy in Japan market, it

changed the strategy by establishing joint venture with a local retailer, Sazaby, Inc.

Then, Starbucks licensed its business format to the joint venture company.
 After entering into the Japanese market, Starbucks increased the pace of

international expansion significantly. In 1998, Starbucks acquired Seattle Coffee

Company in the United Kingdom, a chain with more than 60 retail locations. That same

year, it opened stores in Taiwan, Thailand, New Zealand, and Malaysia. In 1999,

Starbucks opened in China (Beijing), Kuwait, South Korea, and Lebanon. In 2000, it

entered another seven markets (China - Hong Kong and Shanghai, Dubai, Australia,

Qatar, Saudi Arabia, and Bahrain). It added three markets in 2001 (Switzerland, Israel,

and Austria). In 2002, another nine markets were opened (Oman, Spain, Indonesia,

Germany, Southern China - Macau and Shenzhen, Mexico, Puerto Rico, and Greece).

In Asia, the most common strategy used by Starbucks was under licensing

agreement. But due to similar reason such as in Japan, Starbucks converted licensing

format to joint venture or wholly owned subsidiaries. Thailand, for example, Starbucks

acquired its licensee operator to gain control over the expansion strategy in Thailand. In

South Korea, Starbucks chose to use joint venture. However, Starbucks development

strategy adapts to different markets addressing local needs and requirements. They

currently use three business strategies: Joint ventures, Licenses, Company-owned

operations As of At fiscal year-end 2003, the Company had a total of 1,257 licensed

retail stores in 28 countries managed by the Company's international divisions and

located as follows: Asia-Pacific (9 countries) 968, Europe/Middle East/Africa (13

countries) 176, Americas (6 countries) 113, Total - 1.257

Starbucks is well on its way to becoming a global brand. According to Business

Week The Starbucks name and image connect with millions of consumers around the

globe. It was one of the fastest-growing brands in a Business Week survey of the top

100 global brands published August 5 [2002]. But becoming a global company is not

without risks. Global expansion poses huge risks for Starbucks. For one thing, it makes

less money on each overseas store because most of them are operated with local

partners. While that makes it easier to start up on foreign turf, it reduces the company's

share of the profits to only 20% to 50%." The Company's financial performance is highly

dependent upon the retail operations of the United States operating segment. The

Company's International operating segment (excluding Canada) is not currently

profitable, and its international stores and licensees may not be successful in their

operations or in achieving expected growth. Some factors critical to the success of the

Company's international stores and licensees are different than those affecting the

United States stores and licensees. The economies of a number of the international

markets in which Starbucks and its licensees operate have been weak in recent years.

Tastes naturally vary by region, and consumers in the new international markets into

which Starbucks and its licensees expand may not embrace products and services to

the same extent as consumers in the Company's existing United States markets.

Occupancy costs and store operating expenses are sometimes higher internationally

than in the United States due to higher rents for prime, inner-city store locations or due

to local laws that make it more expensive to retain or terminate employees. The

Company's International operations are also subject to the inherent risks of foreign
currency fluctuations and changes in economic, social and political conditions. Because

the Company's International operations are in an early phase of development and have

country-specific regulatory requirements, they require a more comprehensive field

organization, compared to the United States, to provide resources and respond to the

business needs in each region.

Though international total net revenues increased by $142.4 million, or 30.9%, to

International specialty revenues increased $26.1 million, or 28.1%, to $119.1million in

fiscal 2003, excluding Canadian operations, operating losses increased by 11.1% to

$18.5 million in fiscal 2003, compared to an operating loss of $16.7 million in fiscal

2002.
 V. RECOMMENDATIONS

Starbucks can simply choose licensing for all international expansion. This method will

reduce possibility that company absorbs operating loss from business partners. By

licensing its format, Starbucks gain license fees and royalty from licensee. Another

benefit is that license agreement requires relatively low initial investment for company.

This will greatly improve company cash flow. However, behind the some benefits,

licensing also has disadvantages. Company cannot hope tight control over licensee for

business strategy or marketing. For company like Starbucks which has aggressive

business passion, license agreement doesn't provide sufficient freedom to develop

potential market. Another reason is that company know-how need to be delivered.

Starbucks has competitive advantage in valuable management knowledge related to

branding and operations of retail coffee stores. The other reason is that licensing opens

possibility for potential foreign company's competitors to learn about company's

knowhow.

Though Starbucks triumphed in North American, the other international segment

hasn't significantly contributed to Starbucks' income yet. This was partially contributed

by International's proportionate share of net losses in Starbucks Japan reporting an

annual net loss of $3.87 million. Japan market is a good example. With 486 stores, it is

easy to find Starbucks logo in Japan, the site of its biggest expansion outside the US.

The issue worrying investors is over saturation. Starbucks are vying for too few

customers in Japan were also has so many coffee shops. Starbucks should consider

about its strategy for international market. In U.S. and Canada market, the strategy to
blanket an area completely, even if the stores cannibalize one another's business, might

be applicable. But for each international market, which has unique regional and

community acceptance, the strategy shouldn't be so aggressive. Furthermore,

Starbucks should address local taste in every region. For example, in Asia country such

in Japan and China, people have more long experience to drink tea rather than coffee.

Therefore, demands on coffee beverages in those regions are different from market in

North America. Starbucks should also setup a standardized methodology to select

markets for entry or further expansion. In addition, Starbucks should investigate further

to identify which investment approach is the best in the intended market because the

market environment is changing. A certain investment approach maybe is not suitable

for a market anymore. By joint venture as an investment approach, Starbucks has tight

control over business strategy in a certain country. In other hand, the consequence of

joint venture approach is that Starbucks has to absorb proportionately when the joint

venture company suffers loss.

Starbucks website. www.starbucks.com

Charles W. L. Hill. International Business: Competing in the Global Marketplace - 4th

Edition. New York: McGraw Hill/Irwin, 2003

"Starbucks Corporation: Competing in a Global Market". UW Business School. April 7,

2003

Starbucks 10-K Report. SEC Fillings. September 28, 2003.

"Planet Starbucks." Business Week. September 9, 2002. p.102

"Trouble brewing for Starbucks in Japan". Bloomberg. June 11 2003.

http://www.theage.com.au

Ian Messer."Japan's coffee shops spill over". Bloomberg News. May 21, 2003

Caroline Wyatt. "Starbucks invades Parisian cafe culture". January 15, 2004.

http://news.bbc.co.uk.