How Local Coffee Shops Defeated Starbucks in Australia

What happened?

It was one of the most shocking news when Starbucks announced the closure of 61 of its 84 Australian branches with cutting 700 employees in the middle of 2008. Many journalists made this astounding announcement as a top news headline and a theory to find the reason what went wrong.

Background

A coffee culture in Australia

Unlike the other countries where Starbucks distributed their products around the world, the Australian retail coffee industry was much richer than Starbucks’ expectations. Since the coffee industry in the Australian market had started much earlier from the immigrants such as Italian and Greek arriving the country, Australian became one of the highest coffee consumers around the world. The coffee sales were growing for 10 years and 65% of sales increased. Moreover, Starbucks made 18% profit of the trade sales in the market between 2000 and 2005 (Patterson et al., 2010).

Since the retail coffee business was not always profitable, newcomers like Starbucks needed to understand about the Australian market. Unlike the competitors in the US such as Wild Bean Cafe, 7-eleven, McCafé, and Krispy Kreme, the Australian market had only two main retailers dominating the market. One is Gloria Jean’s, take the high-street part of the coffee retailing, and the other one is McCafe, takes the convenience end (Burritt, 2007; Shoebridge, 2008).

Because of these facts, Starbucks earnings started losing as consumers and rising interest rates, means they had to pull back on thier luxuries products from the menu. The sales dropped down by 50%, the share price in U.S dropped more than 40%, and its profits dropped 28% (Bawden, 2008; Coleman-Lochner and Stanford, 2008; Mintz, 2008). As a result, Howard Schultz, CEO at Starbucks, had to revitalize to overcome this situation by slowing the pace opening the branches, introducing employee reward system, strengthening the employees training, and providing an additional food for customers. However, these instant strategies were too late for the Australian Market. By July 2008, Starbucks announced that they needed to close 61 out of 84 stores on Australia. They closed the underperforming branches and kept the only main 23 branches in the main cities. By the end of the store closure, Starbucks already had $143 million of accumulated loss, $36 million loss for the financial year, and $72.3 million loans in the US. This crisis made the loss of 685 jobs as well (Edwards and Sainsbury, 2008; Shoebridge, 2008).

Problems

Unlike American coffee consumers, coffee was not a luxury for Australians. It should be a reasonable price as their daily drink. In order to diagnose the problems, there are some evidences that lead to the Starbucks’ crisis.

  1. Starbucks overestimated the customer demand and the culture value for serving. Australian coffee drinkers and media criticized Starbucks because they thought that Starbucks coffee has a weak taste with an uncompetitive over price.
  2. The poor quality of baristas and inexperienced employees such as high school students led poor services in stores. Because the other competitors had already offered stronger brews, lower prices and better hospitality such as free Wi-Fi, there were no points to distinguish the difference between Starbucks and other competitors. Moreover, because Starbucks started to make coffees with automated espresso machines with vacuum packaged coffee to make it fast, Starbucks’ image became less about the quality of coffee but more about the instant coffee service.
  3. Starbucks ignored the golden rules of global marketing. When Starbucks started to make branches around the world, they had the ability to adjust the market culture and needs in European or Asian market. Because of the experiences, Starbucks thought that their business model could work in the Australian market as well. However, the model did not adjust the way of dealing with the Australian market since the coffee culture was very different from Europe or Asia.
  4. They expanded too fast to force themselves on unwilling community. They opened multiple stores in the beginning of business in Australia before they tested the new area if it works their business or not.
  5. They entered the competitive market in late time. The market was already matured and full of strong retail companies for the coffee market.
  6. They failed to build the Starbucks’ brand in the new marker because they thought that the brand value was already established well worldwide. Therefore, they did not promote and advertise in the market although those marketing are essential to send Starbucks’ message to their customers.
  7. Finally, the business model for the Australian market failed. Unlike the other countries, Australian coffee consumers did not enjoy Starbucks’ new products such as Frappucino because they only wanted coffee in the Starbucks and purchase food elsewhere. As a result, the transaction value of Starbucks was lower than any other competitors.

Causal Links

1.  Cultural Differences

Starbucks was over estimating their power to make an influence on any culture they entered such as Chinese or Europe where they made a big success. The way that Australians enjoy coffee was different from the other countries because they have a long history with coffee retail from the 1980s. The lack of customer services such as non-professional and immature baristas made unhappy experience to Australian coffee drinkers. This difference between the original Starbucks culture and Australian customers’ culture brought the problem into Starbucks. Making a long line to wait for a coffee was not familiar to many Australian although the U.S customers do not care to wait in line and change your position until getting the order. All these differences made it as an uncomfortable experience for the coffee drinkers in Australia (Bernson, 2015).

2.  Business Plan

Starbucks also had to deal with some golden rules of international marketing. They used to have the ability to adjust their plans to meet market demands such as minor changes to adjust the local taste when they entered the Japan and Saudi Arabia market. However they tried to use the traditional Starbucks style that was successful in the US. They opened multiple branches in every city with the “American” offering with the slogan “That’s not how you drink coffee. This is how you drink coffee.” This strategy unfortunately did not work for Australian coffee drinkers because it made consumers to feel that Starbucks was more a mass brand rather than a warm feeling of a neighborhood coffee store.

From this case study, Starbucks learned several keys that should have been applying to both domestic and global markets.

  1. Crossing international borders is risky
  2. Think global but act local
  3. Establish a differential advantage and the strive to sustain it
  4. Do not lose sight of what made you successful in the first place
  5. Consider the viability of the business model

Conclusion

In sum, this case study shows that Starbucks did not only misjudge the coffee couture in Australia but also misjudged the competitors, failed to adjust the local demands and produce the competitive products, and lost the global golden rules. Moreover, an advanced training for new baristas for supplementary services could have made Starbucks stronger to beat up the viable competitor. Also Starbucks failed the market because of the latest entry and emerging the strong competitors such as Gloria Jean’s, the Coffee Club, and McCafé. Lastly, proving the unsustainable business model led the company to fade out the Australian market. From these failures, there are five important keys that Starbucks learned; the risk of globalization, thinking globally but acting locally, providing differential advantages, reminding sight of what made you successful in the first place, and focusing on the viability of the business model (Paul et al, 2010).

After humiliating defeat in Australia, there are now only 23 stores left in Australia. The major change of Starbucks’ strategy after crisis is that they decided to share the ownership with Withers Group, owns the local arm of Japanese global convenience store franchise 7-Eleven, instead of running the business by its own. Because the previous business model did not work due to less knowledge of Australian consumer’s needs, they believed that Withers, a local Australian company, could make better profits for Starbucks (Brook, 2016). After changing the ownership, Starbucks, owned by Withers, adjusted their strategies as a local coffee company. First, they changed the price range for tall latte from $4.40 to $3.50 since their price range was pricy in the Australian market. The menu, largely on American style such as creamy sweet coffee, was arranged to handful of milk-based coffee to be loved by Australian drinkers. Also Starbucks picked location where many international tourists visit such Gold Coast (Brook, 2016). In 2016, Starbucks reminds the same as one of the biggest coffee company in the world. Jeff Hansberry, CEO of Starbucks in China and Asia Pacific, stated that Starbucks is just focusing on providing the best quality coffee and experience for Starbucks’ customers in the world (Hernandez, 2014).


References
  • Bawden, T. (2008). Starbucks reports first loss in 16 years. Times Online, 31 July. http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_ goods/article4436398.ece
  • Bernson, A, (2015). The Difference Between Australian & US Coffee Service Retrieved from https://baristahustle.com/the-difference-between-australian-us-coffee-service/(11-7-2016)
  • Burritt, C, (2007). McDonald’s challenges Starbucks with cheaper lattes. Bloomberg, 11 September. http://www.bloomberg.com/apps/news?pid=20670001&refer&sid=a08JuUP7J6RY
  • Brook, B. (2016). Would you leave your local barista for the joys of a Starbucks double shot Frappuccino? Retrieved December 12, 2016, from http://www.news.com.au/finance/business/retail/starbucks-coffee-is-quietly-expanding-in-australia-after-humiliating-retreat-eight-years-ago/news-story/b7f136c4d78f24aaa600a3822b1e31b4
  • Edwards, V., Sainsbury, M., 2008. Weak coffee and large debt stir Starbucks’ troubles in Australia. The Australian, 31 July.
  • Hernandez, V. (2014). Starbucks Sells 24 Stores in Australia to 7-Eleven Owner, The Withers Group. Retrieved December 12, 2016, from http://www.ibtimes.com.au/starbucks-sells-24-stores-australia-7-eleven-owner-withers-group-1342087
  • Patterson, P. G., Scott, J., & Uncles, M. D. (2010). How the local competition defeated a global brand: The case of starbucks. Australasian Marketing Journal, 18(1), 41-47. Retrieved from http://search.proquest.com.ezp-02.lirn.net/docview/734593400?accountid=151051
  • Shoebridge, N. (2008). Local palate bucks another US retailer. The Australian Financial Review, 4 August, www.afr.com