Benjamin Foster Physiology 10/23/2012 Case Study 1 (Too much of a good thing)) The definition of OSMOSIS is the movement of a solvent through a membrane separating two solutions of….
Case Study on Starbucks
This research paper was conducted by doing qualitative and quantitative research methods to create a case study on Starbucks. Most of the paper used a more inductive interpretive approach while especially the chapter about the coffee industries used a quantitative positivistic approach.
The intention was to find out why Starbucks was unsuccessful in Australia by looking into
the theoretical background of expansion strategies
Starbucks´ business and marketing plan in the United States
the coffee industry in the U.S. and Australia as well as
their marketing strategy for Australia.
This was done by using secondary data from articles, books, and websites. The timeframe is cross-sectional as no the researchers looked at the situation at one point in time. Because of the use of high to medium quality sources and statistics, this paper has a high reliability and validity.
Expansion to Australia
In 2007, Starbucks started to expand its business to the Australian market, after a successful expansion to Asia. But in 2008 it had to close three-quarters of its stores. As a brand experienced and successful in so many other countries, what could be the issue for the failed Australian expansion? To answer this question, the Australian and American coffee industry and Starbucks´ marketing strategy for Australia will be discussed in the next chapter.
Australian vs. American coffee industry
Worldwide, coffee is a popular beverage enjoyed by people of all ages. Its popularity can be explained by the active ingredient that is present in coffee: caffeine. Through stimulation of our nervous system it increases vigilance and decreases tiredness (Grigg, 2003). Data conducted by the International Coffee Organization (2018) shows that in the last ten years, the coffee produced by exporting countries increased by 13.4% and therefore, from 8,369,160 thousand kg to 9,513,600 thousand kg.
In terms of production, Brazil is the country will the highest amount in the world (36%), followed by Vietnam (14%) and Colombia (7%). 90% of all coffee is grown in the developing world. The majority of coffee gets produced by so-called “smallholders”, small families in developing countries that grow their crops on just a small piece of land. They are very dependent on the economic situation of coffee. An estimation by the World Bank showed that more than 20 million families fall in this category (Breger Bush, 2012).
In terms of consume, Finland has the biggest consumption per capita in the world (Padovese, 2017).
When comparing the United States and Australia in their coffee consume and culture, it is necessary to first look into some general facts:
United States |Australia
GDP (Dez. 2017) 5,206 Mio. USD | 19,390 Mio. USD
Inhabitants (2018) 25 Mio. | 328 Mio.
Size 7,692,024 km² | 9,372,610 km²
Population density 3.26 /km² 35.11 km²
Population development +1.28% +0,71%
Currency 1 AUD = 0.71 USD 1 USD = 1.42 AUD
Table 1: Adapted from World Population Review (2019a); Trading Economics (2019); World Population Review (2019b)
The table shows the huge difference between the two countries in comparison. While the countries´ sizes are not too far from each other. The number of inhabitants and the population density explain the differences in the overall consumption and revenue of coffee.
In the United States, the consumption of specialty coffee has been continuously increasing in the last two decades. Especially, the daily consume shows a considerable growth from 14% in 2001 to 41% in 2017. The number of cups Americans consume everyday lies around three cups a day since (National Coffee Association, 2017).
Graphic 1 shows that the overall coffee consumption in the U.S. between 2013/14 and 2017/18 increased to 25.84 million 60-kg bags (Statista, 2019a). This increase mostly comes from the specialty coffee consume as the consumption instant and regular coffee has been declining since 1946 (FAO, 2009).
Graphic 1: Consumption in million 60-kilogram bags (Statista, 2019a) and coffee import and price development (FAO, 2009)
Graphic 2 shows the development of US coffee imports and prices from 1998 to 2008, revealing a dramatic price increase after the second coffee crisis while imports show continues growth over time (Statista, 2019a; FAO 2009).
A study by Reuters (2018) depicted that more than every second American questioned had a coffee the day before, increasing last year´s number (62%) to 64%. The survey also showed an increasing demand for tea and bottled water while the demand for soda and juices is decreasing.
A study by McCrindle (2019) indicated that nearly every fourth Australian is not able to live through a day without coffee, while 88% stated to like coffee. The urge for coffee comes greatly from the younger generation. 75% of Australians drink a minimum of one coffee every day, but 28% of them even drink a minimum of 3 cups daily. People drinking higher amounts a day, usually have instant coffee (McCrindle, 2019).
Australia also produces coffee itself, but the production is relatively small compared to the developing countries. The coffee market had a revenue of more than 1.4 billion U.S. Dollars (data of 2017) and is, therefore, one of the world´s largest. Annually, Australians consume around 1.71 (in million 60-kilo), leaving each person with 1.92 kg. Of this, around 0,5 kg is instant coffee. In 2018, Australia´s cafes were expected to make 4.7 billion Australian Dollars (Statista, 2019b).
In the USA, most people still have their usual cup of coffee at home (79%). The consumption of espresso coffee is increasing, boosted mostly by the younger generation. The market is shifting from regular and instant coffee to their gourmet and specialty versions, which count for more than 50% of the market share.
Graphic 2: Comparison of industry revenue and average volume per capita in kilogram (Statista, 2019c; Statista, 2019d)
The graphics above show on the left, the American coffee industry revenue and the average volume per capita in kg. The graphics on the right show the same for Australia. They reveal that instant coffee is far more popular in Australia then it is in the United States when comparing it to the amount of roast coffee consumed. While the consumption of instant coffee is stable in the US, it is declining in Australia though a fast increasing consume of roast coffee (Statista, 2019c; Statista 2019d).
Americans also have the option to order coffee through online delivery services, but this is still a niche market although Americans emphasize on more convenience in their fast-paced lifestyle (Reuters, 2018).
Australia´s coffee culture can be described as vibrant and high in quality. Most of the cafés (95%) are independent shops. Only in the bigger cities, chains still survive the competitive environment. Consumers tend to be curious about taste and origin of their coffee. Therefore, sustainable, fair-trade and organic beans are part of the strategy of many cafés (Mordor Intelligence, 2019).
The number of specialty café is growing, making it a competitive environment while entry barriers are low. This makes it important for owners to differentiate themselves by selling high-quality products and having an extensive service (e.g. quality baristas). Additionally, to increase profit, food and other beverages get added to the product portfolio (Gargano, 2015).
Australian usually tend to travel to get their favorite coffee, while most Americans just go to the nearest place. They also like to have a personal and intimate experience. Therefore, they prefer small cafés over the big chains. Australian consumers like their coffee stronger and straighter and tend to not use any syrups (Patterson, Scott and Uncles, 2010).
Data shows that 86% of Australians make their coffee by themselves in their homes on a normal day. But mostly the younger generation, more than every second, tends to go to cafés more often compared to the older generation where just about every third does so.
Also, the kind of coffee determines the buying behavior. Australians mostly buy espresso coffee drinks from cafés, compared to instant coffee which can easily made at home. But even people with a preference to espresso tend to make their own coffee on a normal day in the week. Generally, preferences are quiet even with 39% favoring espresso coffee drinks and 39% favoring instant coffee.
There is a dependency between preference and age existing. The younger generation (Generation Y and Z) favor espresso coffee while the older generation tends to buy instant coffee. An exception are the so-called “Builders”. 42% favor espresso coffee as well (McCrindle, 2019).
The best-selling coffee beverage in Australia is the latte with 32%.
While the flat white is constant in its sales, there was an increase of sales for the cappuccino (19%) in the last two years. Data shows that cappuccino sales are going to be higher than the flat whites in 2019. Another popular drink are flavor-infused brews with tastes like chai and matcha. Not only are caffeine product popular in the morning, but they see a second pike around 1pm (Squareup, 2018).
Because people are always in a rush and enjoy convenience, to-go beverages make up for nearly a third of orders, not only in Australia, but also in the United States (Statista, 2019b).
In the 17th century, British immigrants brought the first coffee to America. Its popularity increased massively after the Boston Tea Party in 1773. In the time of the California gold rush, pioneers sold coffee to the workers. Also, Starbucks has a big stake in the American coffee culture bringing and popularizing the traditional Italian beverages. Coffee houses became a favored spot to meet friends and hang out (Wolinsky, 2019).
Beginning in the 1950s, immigrants from Europe started to move to Australia. Immigrants from Italy and Greece opened first cafés. Today, coffee is an obsession for Australians and included in their cultural identity (Statista, 2019b). Today, most coffee shops are located on the east coast of Australia. This is due to the higher number and concentration of inhabitants as well as to higher income and demand levels (Gargano, 2015).
Picture 1: Coffee establishment Australia (Gargano, 2015)
The price for coffee is deeply affected in the short-term by a high volatility and is decreasing in the long-term, making the coffee production less profitable. The volatility is often connected to a demand-supply mismatch and/ or the weather conditions. While demand grows slowly, the supply is increasing much faster which results in decreasing prices. Therefore, a constant oversupply on coffee has to be handled.
Between 1989-1992 and 1998-2002 the coffee price crises happened. Some farmers tried to compensate the falling prices through higher productivity which not always worked. Other issues were the speculations in the markets of coffee derivates, letting coffee prices decrease. All this had an effect on income and employment, also beyond the farming process (Breger Bush, 2012).
This is one reason why today Fairtrade gets more and more popular. After the second crises, coffee prices started to increase again with their high in 2008 (FAO, 2009). These days, prices are falling again (Gargano, 2015).
The SCA survey of 2018 revealed that the latte is the most favored drink in the US. Prices differ a lot between countries. North Dakota has the most expensive latte with 4.45 USD while in Idaho a latte costs only 3.49 USD. The average price in the United States for a latte is 4.16 USD (SCA News, 2018).
Coffee prices in Australia vary a lot depending on the state. The prices are affected by consumer price sensitivity and demand. So is the coffee about 1 AUD more expansive in the Northern Territory than it is in New South Wales. From 2017 to 2018, prices increased only slightly. Australians trend to spend more on sweeter coffees. With just a bit under 4 AUD, the long black is the most inexpensive coffee in Australia (Squareup, 2018). There while, the popular latte costs up to 5 AUD in the Northern Territory (Statista, 2019b).
The American coffee market is shaped by chains. The three biggest competitors in terms of market share are Starbucks, McDonalds and Dunkin Donuts (Forbes, 2016). Starbucks owns around 87% market share of the specialty coffee market.
In Australia, there are many specialized and small café houses that prevail the market (Gargano, 2015). Additionally, companies like Starbucks, Nestle, Dunkin Donuts and Luigi Lavazza are trying to be successful. Nestle Australia Ltd. leads the market of retail coffee sales and coffee pods. Most of it comes from their brand Nescafé and Nespresso. Through product development and innovations, the company is able to create new flavors that fit the taste and trends in Australia (Euromonitor, 2019; Mordor Intelligence, 2019).
The Retail Food Group Limited that owns several coffee chain brands like Gloria Jean’s Coffees, BB’s Café, Esquires Coffee and Michel’s Patisserie had a market share of 7.2% (in 2015). Therefore, it can be counted as a major competitor in the market (Gargano, 2015).
A recent trend in the US are non-dairy milks. The consumption of oat milk for example increase by 425% from 2017 to 2018. The most popular milks are almond, soy and oat. Additionally, the consumption of cold brew surpassed iced coffee, while both are increasing in consumption, foremost in the summer months. The third trend are customized coffees. In average, US consumers have two add-ons.
Trends in the Australian coffee industry involve cold-drip coffee. This kind of coffee is low in bitterness and acid by making it drop by drop. Its demand is steadily growing. Another trend is nitro coffee. It has similarities with beer and comes from the tap. It is a healthier version as less sugar and milk are needed. Cafés add it to their portfolio to have a competitive advantage and attract a different cliental (Mordor Intelligence, 2019).
The consume of sustainable products is going to be growing further as well. Being Fairtrade is a coffee feature that more and more consumers are interested in (Euromonitor, 2019). Additionally, different milk alternatives are getting popular. The most purchased kind is soy, while nut-based milks like coconut, cashew and almond milk are winning in consumer approval (Squareup, 2018). This all adds to the trend of ethical and healthy consume, especially younger people are interested in (Gargano, 2015).
Forecast – Conclusion
The espresso coffee culture in both Australia and the United States is expected to growth further (Mordor Intelligence, 2019). A growth in consumption and revenue is expected for the next year in the USA. Between 2019 and 2023, an increase by 4.5% per year for the American coffee market can be expected (Statista, 2019c).
Compared to that, the considerably smaller Australian market is will be growing by just 4.3% in the same timeframe. The consume per capita is forecasted to be 2 kg (compare to 3.7kg in the United States). The revenue per capita for Australia is about 15 USD smaller. While Australian´s largest market segment is Instant Coffee, Roast Coffee is the largest one in the US (Statista, 2019c; Statista, 2019d).
Conclusion – possible consequences for Starbucks (positive and negative)
After looking into several expansion strategies, Starbucks´ business concept, the coffee industry in Australia and America and the marketing concept for the Australian expansion, it can be said that the biggest issues that lead to the failure were:
These days, Starbucks is working together with the Withers Group (which own the 7-Eleven stores), to relaunch into the Australian market. As there are many 7-Eleven stores already existing in Australia, Starbucks hopes to create small or combined stores with the brand.
Generally, coffee chains are expected to get a boost from the latest acquisition of the Retail Food Group: Gloria Jean´s Coffee. The group is present in malls and shopping centers where quality expectations are lower and traffic is higher (Gargano, 2015).