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Page 1: Term Paper - Starbucks · PDF fileTerm Paper Starbucks ... Starbucks International ... to pay a premium price for quality brews still remains a big challenge for Starbucks. Starbucks’

MBA 630, International Business

Prepared by: Radoslav Petrov

Course Instructor: Dr. Jamal Nahavandi, Ph.D.

Pfeiffer University at RTP, Fall 2008

December 2, 2008

Term Paper

Starbucks Expands into Bulgaria.

Challenges and Strategies.

Starbucks International has increased its already strong presence in Europe by

opening its first coffee house in Bulgaria last month, November 2008. This is a part of the

company’s strategy to develop business cultures and expand worldwide, that could offset

the slower sales in the oversaturated U.S. market. The goal is to create a rich network of

coffee shops in Bulgaria in order to take advantage of the growing incomes of the 7.6

million population, after the country’s EU accession in 2007. However, entering this new

market in Eastern Europe poses both challenges and opportunities for Starbucks.

The main challenge for the coffee giant is the tough competition with the already

well-established local players, who offer coffee drinks at lower prices. Currently, there

are about 10 – mainly Bulgarian and fewer foreign chains on the market, including Costa

Coffee and McCoffee, also being the biggest Starbucks’ competitors in Europe. The

reason for the increase in the number of specialty coffee shop outlets was that these

places became more popular as meeting places for young people, and because the sub-

sector was previously underdeveloped. Chained coffee shops still only account for a

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small percentage of the Bulgarian market with independent local stores dominating the

sector.

Another challenge for Starbucks is the possible initial resistance and acceptance

of the American brand by the Bulgarian customers due to cultural differences and tastes.

Coffee in general, is an important part of Bulgarian culture, and the consumption of

coffee goes far ahead of tea. Starbucks is planning on attracting younger people since

they are more willing to imitate the American culture. For many young professionals, the

famous coffee brand will be looked as a status symbol. However, the number of

Bulgarians who have visited the U.S. is not so great, therefore the brand is still unknown

by many.

As anywhere in the world, in Bulgaria Starbucks is offering the same menu of

basic coffee drinks, a smoking-free environment, and a free wireless internet. However,

in order to better serve the Bulgarian tastes, the food menu – sandwiches and pastries are

adapted to the local preferences. Prices are also adapted to Bulgarian market to reflect the

local economy, and they are relatively lower compared to other countries in Europe and

the U.S.

Another difference is that Starbucks has not implemented the drive-through

concept, which is unpopular for the Bulgarian market. The company correctly reasoned

that this concept won’t be successful in Bulgaria, since local people prefer to sit down for

hours and enjoy their coffee with friends, instead of drinking it in a paper cup on the go.

Additional challenges and risks exist for Starbucks in the new Bulgarian market.

For example, the company may face operational difficulties and problems due to lack of

trained workforce. In terms of political risk and religious beliefs, Starbucks will enjoy the

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political stability in the country, and the same Christian values shared by 90% of the

population. American brands are usually very well accepted in Bulgaria. Despite this,

convincing Bulgarian consumers, who are used to drinking sugary, weak instant coffee,

to pay a premium price for quality brews still remains a big challenge for Starbucks.

Starbucks’ entry strategy into Bulgaria is in the form of a joint venture. The

company is relying on its already (five years) successful partner - the Athens-based

Marinopoulos Group, which spans on six markets around Europe, including Greece,

Cyprus, Romania, Switzerland, Austria, and now Bulgaria. This joint venture partner is

responsible for the day-to-day operations of the business. The main strategy is to continue

the focus on growth. The first coffee house is opened in the capital – Sofia, and a second

one is on schedule to open also there, by the end of this year. From there, the company is

planning to expand in other big cities around the country. More, Starbucks is not

excluding the possibility to further continue its growth through acquisition of domestic

competitors.

Entering the market through a joint venture has its advantages and disadvantages.

A benefit for Starbucks is the reduction of the financial risk. With the development of the

50/50 partnership with Marinopoulos Group, the coffee giant cut its financial risk in half.

The greatest advantage however, is that a joint venture helps in so called “local

adaptation”. Starbucks benefited from its partner’s knowledge of Bulgarian competitive

conditions, culture, language, political and business systems. Local adaptation looks at

how well a US product will sell in the foreign market. A partnership allows for the

collaboration between foreign and US partners to develop a product that will functionally

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be similar to the original US product, yet also appeals to the consumers of the foreign

market.

Despite these advantages, joint ventures have also major disadvantages. First, a

firm that enters into a joint venture risks giving control of its technology to its partner.

Starbucks may worry about its core competences and its well-established business model.

Second, a joint venture does not give a firm the tight control over subsidiaries that it

might need to realize location and experience economies. A third disadvantage with joint

ventures is that they may lead to conflicts of interest over strategies and objectives. In this

respect, Starbucks may experience difficulties when trying to further pursue its business

goals. Despite these disadvantages, I think that Starbucks’ selection of a joint venture was

the best choice for an entry strategy into the Bulgarian market.

Starbucks expansion into Bulgaria will lead to increasing competition among

local coffee retailers. This will have a dual impact. First, Starbucks will take some of the

market share of the current coffee chains. Second, with its presence Starbucks will

positively contribute to the development of the Bulgarian coffee industry by stimulating

other coffee chains. The famous “Starbucks experience” is now part of Bulgaria.

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Works cited:

Company Overview. 2008. 2 December 2008 <http://www.starbucks.com/

/aboutus/overview.asp>.

Dutta, Sanjib, and K. Subhadra. “Starbucks’ International Operations”. International

Issues in Strategic Management, 2008

Hill, Charles W. L., International Business. 7th ed: McGraw-Hill/Irwin, 2007.

Kostadinov, Petar. "Starbucks opens first Bulgarian coffee shop in November."

www.sofiaecho.com. 2 Dec 2008 <http://www.sofiaecho.com/article/starbucks-

opens-first-bulgarian-coffee-shop-in-november/id_32486/catid_67>.