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Chan, Lawrence
Starbucks: Expansion to Italy
Expect More Than Coffee
We’re not just passionate purveyors of coffee, but everything else that goes with a full and rewarding
coffeehouse experience. We also offer a selection of premium teas, fine pastries and other delectable
treats to please the taste buds. And the music you hear in store is chosen for its artistry and appeal.
It’s not unusual to see people coming to Starbucks to chat, meet up or even work. We’re a
neighborhood gathering place, a part of the daily routine – and we couldn’t be happier about it. Get
to know us and you’ll see: we are so much more than what we brew.
We make sure everything we do is through the lens of humanity – from our commitment to the
highest quality coffee in the world, to the way we engage with our customers and communities to do
business responsibly.1
Like any morning, Howard Schultz likes to enjoy a cup of hot coffee while he
scanned the news. Since he left his mobile device in the other room, he decided to simply
reminisce in silence. The aromas from his brew reminded him of why he fell in love with
the company, Starbucks, and wanted to share this experience with the world.
In 1979, he was the general manager for a Swedish drip coffee maker, Hammarplast.
It was 1981 when Schultz was assigned to visit one of Hammarplast’s clients, Starbucks.
The business had a modest storefront in the busy Seattle’s Pike Place that sold high quality
coffee beans and coffee equipment. Schultz admired the passion that the owners /
connoisseurs had for coffee. He convinced the three owners of Starbucks to hire him as the
Director of Operations and Marketing when it only had four stores.2
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Two years after he joined Starbucks, Schultz made a trip to Italy for the first time. He
was instantly delighted with the coffee culture and the deep sense of community. It was
impossible to navigate the town without running into a coffee bar where patrons held
ceramic cups and gulped espressos at the counter. And the espressos were excellent. At that
point, Schultz realized an opportunity. Starbucks, at the time, was in the business of selling
coffee beans, but the real value was in a destination community experience – human
connection over finely crafted brews.3
Upon his return, he communicated the idea to the owners of Starbucks because he
believed that U.S. was a favorable market to create the same societal glue that he witnessed
in Italy’s coffee bars. After creating a successful pilot concept, the owners decided not to
proceed because they didn’t want to get into the restaurant business. 4
Frustrated, Schultz left Starbucks to try to open his own coffee shop. Without
enough capital, Jerry Baldwin (Starbucks co-owner), Godron Bowker (Starbucks co-owner),
and a doctor who was impressed with Schultz’s energy contributed to his first store. It was
called “Il Giornale.” Eventually, Starbucks management sold its retail business to Schultz
for $3.8 million. He changed Il Giornale to Starbucks and started a rapid expansion. 5
To Schultz, before Starbucks was ubiquitous, the American culture only knew of
homebrewed coffees, such as Maxwell House and Yuban, which were boiled at home. They
were neither strong nor weak. When customers first tasted a Starbucks beverage, they
found it to be too bitter. Starbucks had to educate its customers that “this is the way coffee
should taste.”6
The company took off running. Initially, Schulz did not believe in franchising, so
every retail outlet was privately owned. Because of his insight in real estate and laser focus
mentality, the company expanded quickly. In 1992, Starbucks had 165 stores and completed
an initial public offering (NASDAQ: SBUX). By 1996, it opened its first store outside of
North America. The branch in Japan was a success. In 2000, Schultz stepped down as CEO
and remained as Chief Global Strategist
During this stint when Schultz was away, Starbucks was very active in M&A and
expansion activities. In 2003, Starbucks acquired Seattle’s Best and Torrefazione Italia from
AFC Enterprises. In 2006, Diedrich Coffee sold most of its company-owned retail stores,
including Oregon-chain Coffee People, to Starbucks, which were all converted into the
mermaid brand.7
By the end of 2006, expansion had reached almost 13,000 locations.8 Despite the
success, Schultz felt that the stores were no longer the warm neighborhood destinations
that he had originally envisioned. He found them to be soulless. In a “leaked” memo he
wrote in 2007, titled, “The Commoditization of the Starbucks Experience,” Schultz
expressed his concerns about the brand.
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Over the past ten years, in order to achieve the growth, development, and scale
necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had
to make a series of decisions that, in retrospect, have lead to the watering down of
the Starbucks experience, and, what some might call the commoditization of our
brand.9
Schultz continued on how, in order to achieve higher operational effectiveness,
many aspects of the brand experience changed. For example, the installment of automatic
espresso machines allowed the business to have a higher throughput ratio. While it
increased speed, the process took away the romance of baristas carefully blending beans
and personally handcrafting beverages. Additionally, the large automatic machines blocked
the sight of the baristas and the intimate experience of seeing one’s drink being made.
Furthermore, the move to flavor locked packaging of fresh beans took away the charm of
customers scooping up beans and having them grounded. Moreover, Schultz lamented on
how the new store designs, in order to improve the flow of patrons, were uniform and
lacking in distinguished characteristics. There was a disconnection.10 Finally, he pointed out
how the smell of cheese from the breakfast sandwiches interfered with the aroma of coffee,
which should be the focal point of the Starbucks experience. For those who visited a
Starbucks retail store, the first thing that hits the customer is the scent of coffee. It’s
unmistakable. Surprisingly, when Schultz tried to pull the sandwich from its menu,
customers complained, so he reformulated the recipe to make it smell less.11 Schultz’s
memo proceeded with:
[W]e desperately need to look into the mirror and realize it's time to get back to the
core and make the changes necessary to evoke the heritage, the tradition, and the
passion that we all have for the true Starbucks experience. While the current state of
affairs for the most part is self induced, that has lead to competitors of all kinds,
small and large coffee companies, fast food operators, and mom and pops, to
position themselves in a way that creates awareness, trial and loyalty of people who
previously have been Starbucks customers. This must be eradicated.12
Because of this sterile experience at Starbucks, Dunkin Donuts, McDonald’s McCafe,
among others have been making inroads with their own line of specialty coffee drinks. If
what Schultz feared were true – that the Starbucks brand was being commoditized – then it
basically paved the way for easy competition. Even though he understood that it was
critical to have growth and scalability, Schultz was determined to instill the firm with its
original heritage.
Starbucks was in a difficult position. Dunkin Donuts and McCafe were not the only
ones Starbucks had to worry about. There were other smaller chains, such as Panera Bread,
Dutch Bros., Peet’s, Caribou, The Coffee Bean & Tea Leaf, Seattle’s Best, and Tim Hortons
(Exhibit 1).
On top of it, because coffee is an esoteric item, quality is difficult to distinguish. So,
was it justifiable to pay $4 or $5 for a premium Starbucks drink? McDonald’s attacked not
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only with lower prices, but also with a stronger drip coffee flavor, a website
unsnobbycoffee.com to “help a friend kick [his/her] snobbish habit” with an online
intervention program, and an indirect slanderous espresso billboard that read, “Four bucks
is dumb.”13
According to an independent nationwide taste test with 476 adults in 10
metropolitan cities, PR Newswire reported that Dunkin’ Donuts clearly beat Starbucks in
preference. “Among all participants, 54.2% preferred Dunkin' Donuts coffee, compared to
39.3% who chose Starbucks. 6.3% expressed no preference.”14
Big-time people began to notice that this coffee business is a good business and
highly profitable. McDonald’s and Dunkin’ Donuts were on the very low end. Let’s
characterize them as willing to do anything to capture or intercept customers—free
coffee, coupons, say anything, do anything. We respect them as companies, but we
didn’t respect their practices. At the higher end were the independents who went to
school on Starbucks. And there was this feeling of “Let’s support the local
companies.” So Starbucks was being squeezed to the middle, and that is an
undesirable place for us to be. 15
Transformation
On February 26, 2007, Schultz closed over 7,100 of the American stores for barista
retraining. Each was given a handbook for “Espresso Excellence.”16 It was back to the basics
for everyone. This was not only about espresso quality, but also connection to customers.
“A store manager’s job is not to oversee millions of customer transactions a week, but one
transaction millions of times a week.”17
Starbucks’s expansion was rapid (Exhibit 2), partially because the company was
worried about shareholder prices. It needed to keep hitting growth targets. As a result,
many slip-ups happened. Schultz remembered:
We were so intent upon building more stores fast to meet each quarter’s projected
sales growth that, too often, we picked bad locations or didn’t adequately train
newly hired baristas. Sometimes we transferred a good store manager to oversee a
new store, but filled the old post by promoting a barista before he or she was
properly trained. This was the kind of operational rigor we let slip and then didn’t
attend to the subtle but negative cumulative effects, such as declining beverage
quality, because every metric we were looking at said everything was fine. For years
we were able to open new locations while sales continued to increase at the stores
we already had.18
At this crossroad, Schultz replanted himself as President and CEO in January 2008.
As he predicted, Starbucks was headed south. With share prices hitting single digits, $7.83
on November 21, 2008, Schultz had to make some radical changes.
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First, he shut down 800 stores, laid off 4,000 employees, and stripped most of the top
executives. Next, to reinvigorate store managers, he spent $30 million to send them to New
Orleans to recharge the team morale.19
I still believe that the most sincere, lasting powers of human connection come from
looking directly into someone else’s eyes, with no screen in between. And at this
tenuous juncture, our partners needed to connect with me, with other Starbucks
leaders, and with one another not online, but in New Orleans.20
“[W]e would not allow the stock price to define the company, our brand, and our
long-term performance," Schultz wrote in a companywide email.21 He was determined to
stick with the core product, coffee, and introduce complementary goods and adjust them
when necessary. However, “at the end of the day, we were never in the coffee business
serving people; we were in the people business serving coffee.”22 As part of this mission in
solidifying the Starbucks Experience, Schultz created Starbucks’s Transformation Agenda
with seven points, which led to continuous growth.
1. “Being the undisputed coffee authority.”
Schultz’s goal was to improve the quality of the top-selling whole-bean Pike Place
Roast coffee. Instead of sending pre-ground coffee to the stores, whole beans were blended
at the location right before brewing, so that each serving tastes fresher and the aroma
pervades the store.
The Mastrena espresso machine, a masterpiece that gives baristas more control over
each shot of espresso and the steaming of milk, is in almost 70% of US-owned stores. This
increased the consistency of beverages and allowed for higher efficiency. This not only
saves money and time, but also allows baristas to engage with customers.
The last part of being the coffee authority meant that the company exercised lean
techniques to achieve operational excellence. Baristas shared best practices to improve cycle
time. Similar to the goal with installation of the high quality Mastrena, this strategy yields
more time for baristas to interact with customers.
2. “Engage and inspire our partners.”
Schultz believed in creating evangelists from within the company. He aimed to
inspire partners (employees) about coffee, the brand, and the mission. He also worked to
improve training and career development opportunities. By offering generous
compensations, benefits, stock options, and incentive packages, the love for Starbucks from
internally will, hopefully, ripple to its customers.
3. “Ignite the emotional attachment with our customers.”
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The core of any evangelist movement meant that Starbucks puts its customers as the
center of the experience. From the moment they enter the store to the enjoyment of the very
last sip, Starbucks wants every contact point to be emotional.
When Schultz was bringing the ax to the hundreds of stores, patrons and Starbucks
employees felt unsure of the future. Customers began to make appeals to headquarters. The
pleas reaffirm his “belief that Starbucks was about so much more than coffee had never
been stronger.”
PLEASE PLEASE PLEASE DO NOT close the Starbucks here in Portage, Indiana, on
Rt. 6!!!! This is the BEST Starbucks we have EVER been to. Not only is it clean and
the staff, ALL the staff, is always friendly but they seem to take pride in the
store....We ALWAYS go to this location....We love everyone who works there. They
really go the extra mile to make everyone happy....PLEASE reconsider!!!!!!!!23
“Our partners’ attitude and actions have such great potential to make our customers feel
something.”24 Despite the connection that the clients felt, the oversaturation made many
stores unsustainable. However, during the transformation, the attachment with customers
was maintained as a top priority. It’s very common for baristas to not only know frequent
customers by name, but to also write personal messages to them (Exhibit 3). Igniting that
emotional attachment with customers creates an unshakable patronage.
4.
“Expanding the global presence – while making each store the heart of local
neighborhoods.”
Without a doubt, global expansion is the only way for the company to grow beyond
a mature market. Even though Starbucks had to maintain certain best practices, each retail
presence would reflect local tastes and culture rather than cookie-cutter stores. In Exhibit 4,
it’s clearly noticeable that Starbucks customized each store to the local surroundings –
Shanghai, Amsterdam, and Dubai. This was particularly evident in many of the
international outlets.25 Where it didn’t adapt, many stores led to closure, such as those in
Australia.
5.
“Being a leader in ethical coffee sourcing and sustainability.”
Because Starbucks’s influence over the coffee trade is so immense, Schultz found
that it is the company’s responsibility to govern the best and safest practices for its raw
material sourcing. Majority of Starbucks’s coffee was purchased with C.A.F.E and Fairtrade
certifications. While Starbucks is making numerous changes without the suggestions of
customers, many patrons are still wanting more. In 2014, a petition went around to urge
Starbucks to use organic milk.26 As of October 2014, there were more than 150,000
consumers who signed the petition.27
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Since Starbucks is about sponsoring the community, it is only natural that the coffee
business serves local districts around the world and to donate funds to revitalize cities. In
May 2014, Starbucks worked on “1,691 projects in one month. Together they spent more
than 232,244 hours volunteering on projects that impacted an estimated 1.4 million
people.”28 This ranged from domestic cities to regions around the world, such as Arlington,
Oso, Houston, Denver, Atlanta, Shanghai, Beijing, Seoul, Puerto Rico, and many more.
In addition to procuring the best supplies in the most responsible way, Starbucks
also aimed to reduce the environmental impact through recycling and the use of recycled
goods. For example, Starbucks bags the used coffee grounds for home gardeners to use for
soil and composting. Moreover, Starbucks tries to build all of its new company-owned
stores with LEED green certification. These attempts, coupled with others, are ways
Starbucks is trying to leave a smaller carbon footprint for its communities worldwide.
6. “Creative innovative growth platforms worthy of our coffee.”
Innovation is part of Starbucks’s hallmark. Beyond coffee, Starbucks features
complementary goods, such as teas, instant coffee, ready to drink beverages, and foods that,
more and more, come to reflect the health and wellness market.
These items are not only complementary to the store’s theme, but they also drive
growth for the company. Combining carefully selected items with Starbucks’s use of
technology to track the demand for orders, the company can easily monitor which items do
well in specific regions. As a result, Starbucks can intelligently decide which products to
market harder and which lukewarm items to potentially terminate.
7. “Delivering a sustainable economical model.”
As with any business, long-term sustainability is crucial. Therefore, there are
ongoing cost reductions and improvements with the business. This includes improved
supply chain management and safety performances.
One of the biggest improvements is the integration of store technologies. This
includes a heavy focus on technologies that are relevant to customers’ lifestyles, such as
rewards, transaction history, digital payment, and automatic fund replenishments. These
efforts reduce wait-in-line time. Starbucks also installed intuitive POS systems and mobile
order and pay methods to help with data management.
In order to constantly innovate, Schultz implemented a form of creative destruction
within the ranks of the senior leadership team.29 This forces management to think of ways
to improve the business without jeopardizing its core values.
Schultz’s agenda started with reformation from within the company and moved
outwards. In the ensuing years, his plans and executions proved to be extremely effectual.
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The aforementioned points, coupled with high brand awareness and access to capital, make
Starbucks’s core competencies, especially when it came to international expansion.
In its efforts to create sustainable long-term growth, Starbucks honed in on the
digital frontier. Although Starbucks had a lot of brand equity already, it was able to
increase its intimacy with customers with the launch of digital services, such as an
advanced IT system, starbucks.com website in 1998, Starbucks Card in 2001, involvement on
Twitter and Facebook online communities in 2008, and embarkation of a loyalty program
and mobile payments via Starbucks Card program.30 The IT system coupled with the
Starbucks Mobile Card system proved to be very helpful in not only tracking big data for
customer preferences, but also building customer adherence to the brand because of the
convenience and rewards given. This gave Starbucks insights on what products to keep and
what products to discontinue.
One important innovation Starbucks did was create a website that was not onedirectional. Schultz valued interaction with customers. In his book Onward, he emphasized
the importance of the My Starbucks Idea site, which was modeled off of his friend’s
(Michael Dell) IdeaStorm.com site, where customers can communicate ideas directly to
Starbucks’s partners.
Each idea was a door, an opening line for conversations on topics our customers
cared about, like recycling or low-fat food. By using suggestions as opportunities to
learn from and inform our customers, the new website would be more than a oneway suggestion box; instead, it would be a genuine opportunity to connect.31
Fast-forward some years and Starbucks was as strong as ever. It was capitalizing on
emerging and foreign markets. Starbucks also had a laterally expanding product mix that
was constantly evolving to fit the ever-changing consumer preferences. It leveraged mobile
technology to allow customers to pay (7 million mobile transactions each week) with their
phones and pre-order products to skip the queues.32 Since the first store in Tokyo in 1996,
Starbucks now boasts 21,000 stores in over 65 countries.33 However, despite having been
inspired by the Italian coffee scene, Schultz has yet to open a store in Italy, even though he
has expanded throughout Western Europe and even parts of the Middle East.
Expansion and Coffee Cultures
Starbucks opened its first store outside of North America in 1996. Tokyo was a big
success. Following Japan, Starbucks continued to expand to China and Asia Pacific (CAP),
Europe, Middle East, and Africa (EMEA), and other territories. By 2014, CAP consisted of
4,624 stores (21.6% of all stores) and EMEA consisted of 2,140 stores (10% of all stores). CAP
contributed to 6.9% of total net revenues and EMEA 7.9% of total net revenues.34
During Starbucks’s financial crisis, the business was “undisciplined.” Schultz noted
that he wouldn’t repeat the strategy of “growth for growth’s sake.”35 This time around, he’s
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practicing prudence, but do not mistake it for reservation. According to John Culver’s 2015
Annual Meeting of Shareholders, “[t]oday approaching 1,100 stores in Japan and will soon
assume full ownership of the market.”36
So far, Starbucks tests its market carefully and will invest heavily if successful or
divest if fruitless. The very first target was China because of its obviously large market for
beverage consumption. It’s a market that many multinational businesses consider, but are
not always successful penetrating because of the intricate policies for foreign businesses.
Nevertheless, Starbucks is committed to strengthen its coffee authority in international
markets.
China’s Tea Culture
Similar to its initial expansion abroad, Starbucks cautiously moved into China, a
country steeped in the tea culture. While it did run into some complications at first with
consumers and the government, such as opening a store near Beijing’s historical Forbidden
City, executives quickly learned and adapted. After months of controversy, that specific
location was ultimately closed out of respect. 37
We have to be thoughtful, highly disciplined, and extremely respectful of Chinese
customs, food preferences, and consumer behavior. To do that, we have to see the
world through a Chinese lens … China is an extremely complicated place to build a
relevant consumer brand. We will get it right.38
Indeed, Starbucks did get it right. In 2012, the multinational firm had over 700 stores in
Mainland China.39 By 2015, Starbucks plans to expand to 1,500 stores.40 There is still a lot of
room for growth because there are 1.357 billion Chinese citizens and “the average Chinese
person consumes just four cups of coffee annually.” 41
As it expands its footprint in China, Starbucks will also continue its efforts to
connect directly with its customers and understand their needs with respect to the
local culture … focus[ing] on the balance of the Starbucks heritage and coffee
expertise with that of the local environment and cultural heritage.42
As mentioned earlier, Starbucks cultivates the Starbucks Experience philosophy
from within the company first. Therefore, an essential ingredient for the success of this
strategy is attracting the right pool of talent. All partners go through The Starbucks China
University to learn about the mission, skills, and everything that encompass the Starbucks
brand. These functions are taught in person and virtually. 43
Staying true to its mission in serving the community, in 2011, Starbucks and its
partners contributed close to 25,000 community service hours. 44
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In addition to retail outlets, Starbucks is moving up the value chain with
procurement of coffee from China. Starbucks is sharing best farming practices with Chinese
farmers in the Yunnan Province to rear the best quality beans. 45 This completes the entire
value chain from seed to the Starbucks Experience.
Australia’s Coffee Culture
Not all expansions were as successful. Starbucks attempted to penetrate the
Australian market in 2000. Because of many missteps, Starbucks had to close almost all of
its 84 stores in 2013. This was due to poor location selections and relatively higher menu
prices compared to Gloria Jean’s, McCafe, and other local establishments.46
From personal experience, my Aussie friends proudly considered themselves to be
“coffee snobs.” During my 3-month stint, I found that the coffee environment to be
comparable to that of Italy. Coffees were small and almost always an espresso. Personally, I
like iced Americanos (espresso diluted with water and poured over ice). No one in
Australia had heard of it, so I had to describe the recipe every time. Twice, Australian
baristas brought me a double shot of espresso, a separate cup with ice, and a separate cup
with water. Out of curiosity, on the second round, I asked the reason why he didn’t just mix
the ingredients together. To put simply, “I don’t want to wreck it for ya, mate.” Apparently,
coffee was like religion and adding water and ice was blasphemous.
A lot of Starbucks’s success was attributed to bringing Americanized European style
coffee to a market that didn’t have it, such as the Americas, Asia, and so forth. However,
Australia is a saturated market entrenched with quality European style cafes. Therefore,
this strategy did not translate as easily to Australia.
According to Nick Wailes, Associate Professor of Economics and Business at the
University of Sydney, “[u]nfortunately, Starbucks failed to truly understand Australia’s
cafe culture and has become an example of the big corporate machine it originally tried to
differentiate itself from.”47 In Starbucks’s defense, it could have made an attempt to adopt
the local culture, but that would interfere with its global brand. Imagine an American
seeking refuge at a Starbucks finds the coffee to be stronger than what he or she was used
to. Adapting to the myriad number of markets that Starbucks services can multiply this
inconsistency.
Italy’s Coffee Culture
Italians take great pride in their coffee culture. It makes a lot of sense considering
that the espresso machine was invented and patented in Italy in 1884 by Angelo
Moriondo.48 With this in mind, the coffee market in Italy was a mature one with
“penetration reaching almost 100%.”49 According to the USDA, “Italy is the 7th largest
coffee consumer in Europe [with] 5.8 kilograms per capita or … approximately 600 cups of
coffee per capita per year.”50 That is an enormous market. For comparison, the “average
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American consumes an estimated 441 cups yearly, while the Finns and Norwegians both
consume over 1,000 cups annually.”51
The primary coffee market was dominated by Lavazza, Kjs / Kraft, Segafredo,
Illycaffee, Café do Brasil, and Suchard. The secondary market consisted of private labels,
such as supermarket brands. According to the International Coffee Organization, in 2009,
Italy imported 7.6 million bags of green coffee to be processed, an increase from the
previous year. While a lot of the final product was exported, many go to the ubiquitous
coffee bars on the streets of Italy.52
Italians mainly consume coffee in the form of espresso at coffee bars at 10 a.m.
during their coffee break, and once more after lunch, with the exception of a cappuccino or
macchiato for breakfast.53 Coffee bars are exactly what they sound like – a bar where
consumers line up to shoot a shot of espresso, maybe have a quick word with the barista,
and leave. The concept of cushy chairs and patrons lounging around is foreign, except for a
few locations that I will expound later. Therefore, to add the idea of a sweet Frappuccino
beverage that would be sipped slowly was almost unfathomable. To curb this century-old
habit would be difficult.
However, if you think about it, the U.S. was a lot like Italy in terms of coffee habits.
Before Starbucks, coffee was drunken in a similar fashion, except as a brewed cup in the
U.S. opposed to an espresso shot in Italy. Dunkin Donuts and McDonald’s blanketed the
U.S. market. At the time, coffee was just coffee. There was no differentiation. And most
importantly, there was no mainstream place to just hang out in a comfortable setting.
Starbucks’s value proposition was not only providing high-quality coffee, but also a
destination to commune. In fact, Starbucks has a name for it, “third place between work
and home … a place for conversation and a sense of community.”54 It was part of
Starbucks’s heritage. Looking through these frames, there’s potential value to capture in
Italy, but Starbucks needs to be prudent in its approach.
Because it’s worth repeating, Schultz emphasized that “we were never in the coffee
business serving people; we were in the people business serving coffee.”55 Therefore, can
the near 140,000 coffee bars56 in Italy make room for comfortable lounges where patrons can
hang out for a chat?
Since 1996, McDonald’s has been exploiting that very opportunity. The fast-food
behemoth offered oxymoronically slow-paced coffee restaurants with its McCafes. Of the
411 McDonald’s locations in the country, 116 have the Italian-style coffee bars that served
the same menu items as other shops, but they included pastries, pies, and, of course, room
for clients to stick around. In fact, they encouraged people to relax.57
If coffee is intimately woven into Italy’s culture, why not enjoy it leisurely?
Contradictory to the Italian fast-paced espresso culture, locals value enjoyment in an
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unhurried fashion. According to a local, “it’s important to visit Rome in slow motion …
Absolutely.”58
A homegrown coffee company thought so as well. Arnold Coffee’s founders Andrea
Comelli and Alfio Bardolla replicated Starbucks’s vibe down to the logo with their
company’s name encircled by two rings, which was an infringement on Starbucks’s
trademark. Starbucks’s attorneys ironed out the issue. Arnold Coffee is a comfortable coffee
shop that targeted Millennials who go to read, check their emails, and relax with friends.
There are currently six locations, five in Milan and one in Verona. “ ‘We don’t see any
competition,’ says Comelli. ‘When the other bars are empty, that’s when we’re full.’ The
two partners plan to open another 44 locations in the next five years and then sell.”59
Options in Italy
Schultz believed that “[p]eople around the world, they want the authentic Starbucks
experience.” 60 Apparently, that wasn’t always the case.
If Starbucks decides to expand to Italy, it faces a number of issues. First, if it fails,
Starbucks could damage its corporate image because Starbucks was supposed to have been
inspired by Italy’s coffee culture. On the occasion that Italians reject Starbucks’s coffee, then
there’s the question of whether it would adversely affect the brand globally. Second,
Starbucks needs to keep in mind that Italy’s economy has been shrinking continuously and
that the country faces roughly 12.2% unemployment. Plus, the market is mature and
saturated with local competition.61 The data looks dismal.
Regardless of its decision, Starbucks is trying to be more global; it is driving success
by adopting a “lens of humanity.”62 But can it see eye-to-eye with Italians? While there are
countless options, I have narrowed it down to three very feasible ones. Which would be the
best option for the future of Starbucks’s Italy expansion?
Option 1: Gradually Enter with Strategic Locations
First, Starbucks could gradually enter with a few stores in strategic locations visited
most frequently by tourists and travelers; basically, anyone who might be familiar with the
Starbucks brand and would feel at ease when found, especially in a foreign place. After all,
in 2013, there were 47.7 million international tourists who visited Italy, and the numbers are
only increasing.63 Even to capture a percentage of this staggering amount of people can be
profitable.
Potential locations might include tourist sites, airports, and/or train stations. Since
Starbucks already serves espresso shots in paper cups, it could service Italians who find
convenience with the store locations, but Starbucks should make no attempt to be a
substitute for the mainstream culture.
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As a potential disadvantage, out of default and without intentions, because of
Starbucks’s sweeter drinks and wide selection of pastries, it could appear to be a dessert
shop. Add gelato to the product mix and children might host birthday parties there.
Starbucks could position itself that way, but there would be international brand
inconsistencies, which isn’t a good thing.
In any event, Starbucks could stage its investment. If the businesses prove to be
thriving successes, then it could invest more capital. If the responses are just lukewarm, the
locations might be sustainable enough for international travelers. At the very worst
scenario, Starbucks could pull out without losing too much capital. With the right
management, Starbucks could mitigate any public relations fiascos. Another option is to
simply float it by corporate as a test location.
One large item that Starbucks needs to keep in mind is that the cost for a quick shot
of espresso doesn’t generate as high of a margin as some of Starbucks’s more expensive
sugary drinks. It will need to compensate with higher volume or some other means to make
the same revenue per square foot since Starbucks generally has large lounge spaces to
promote community.
Option 2: Starbucks Adopts Local Italian Coffee Culture
Another option is for Starbucks to enter Italy and adopt the local coffee culture. This
means strong bitter espresso and small bars. This approach might be very appealing for
Italians, but might come as a shock for an international traveler who is expecting a
consistent Starbucks taste and a place to relax.
For example, Americans fancy cappuccinos and lattes because of the coffee art aspect
and milder flavors. However, the idea is foreign in Italy where the different values are
entrenched for generations. According to a local, “Cappuccino is like a coffee. You drink [it]
only during the morning. Please do not drink [a] cappuccino after 11am. It sounds strange
and [you] definitely become a tourist.”64
If what happened in Australia replays in Italy, it can be attributed to the quality of
the coffees. However, since then, Starbucks has shifted to focus more on the community
experience rather than the commoditized product. Starbucks is about the emotional
connection. The only question is whether or not that philosophy can be translated to Italy.
Thus far, it was successful in tea drinking countries like China and Japan, but there was a
caveat in those places – Chinese and Japanese people embrace the Western culture. It’s
questionable if Italians would do the same.
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Option 3: Starbucks Does Not Expand to Italy
Lastly, Starbucks could stay out [for now], which is a perfectly valid strategy. It
could wait for existing businesses to pave the way before it comes in as the superior slow
coffee-culture choice. Many companies utilize this strategy. In America, McCafe and
Dunkin Donuts rode the coattails of Starbucks’s culture changing initiatives. Starbucks did
the heavy lifting by creating a premium coffee culture and the other two came in later with
differentiated price targeting.
Similarly, Apple was never the first to design the MP3 player, tablet, smartphone, or
smart watch, but it always came later with top-grade products. It’s not always best to be
first, even though that violates the 22 Immutable Laws of Marketing by Ries and Trout. When
the timing is ripe, with the right capital, Starbucks could blanket the market with a blitz
campaign … or not at all.
Suggestions
Whatever the choice is, Starbucks should be vigilant about its decision. There are
many other places in the world it could expand to before Italy, but, if Starbucks waits too
long, the market may soon be saturated with copycats or, worse, McCafes, an opponent
with comparable capital and brand equity.
My suggestion is wait until the European economy recovers (Option3), then to
expand (Option 1) immediately after. Right now, certain parts of the European Union is
facing high unemployment because of inhibiting policies, high debt-to-GDP ratio, such as
Ireland and Greece, and shrinking economies. In fact, this is the case for many parts of the
world too, including the United States. I would not expand at this moment.
When the opportunity is ripe, I definitely suggest moving into Italy after validating
the successes of McCafe and Arnold Coffee’s. Starbucks should start with strategic locations
where the traffic from tourists would certainly draw in enough business. However, keep
detailed data on the visits and purchases from everybody, especially locals. This can easily
be done with technology and friendships built between baristas and customers. Target
younger crowds since they might not be set in their Italian coffee ways. For example, an
Italian food blogger Joshua Lawrence noted the quick acceptance of the Frappuccino drink by
Emily, a young girl. She was 11 when she had her first Mocha Frappuccino at the Louvre
and fell in love with it instantly. Since then, her fixation led her to drink it whenever she is
outside of Italy, such as when Emily visited Geneva or Chicago.65
As always, contribute to the local community. Make sure that the storefront reflects
the Italian culture. There is possible resistance with bringing in a foreign brand, so make the
transition as palatable as possible.
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At the very end, if Italians do not take a liking to the brand, Starbucks would have
hedged its investment by positioning the store in a place that can be supported by traveling
visitors, which, hopefully is a sustainable economic model. This way, Starbucks wouldn’t
have to deal with public relations if the business failed.
If Starbucks exercises its expansion plans with good judgment, the Starbucks
Experience should prevail, since I’m certain that Italians like to relax just as any other
American. Schultz believes that “[s]uccess is not sustainable if it’s defined by how big you
become. Large numbers that once captivated me – 40,000 stores! – are not what matter. The
only number that matters is ‘one.’ One cup. One customer. One partner. One experience at a
time.”66
Key Takeaways
With international expansion, the takeaways are universal. First, Starbucks needs to
be sensitive of the local cultures and expectations. It can’t taint historical sites like what it
did in China. The brand needs to understand what the local consumers value and make
sure to create the most variance in those areas.
Growth should be justified. It cannot grow for the sake of growing. Executives
should plan for the long haul. If decision-makers acted to meet quarterly goals, then the
company could tumble back beyond where it started or, worse, completely shut down.
Growth can be rapid, but there should be legitimate reasons.
Starbucks should manage the change of its product mix as consumer tastes change.
For example, the company is shifting more towards health and fitness foods as a result of
the change in American lifestyles. Right now, it’s being pressured to switch to organic
milk.67 Another example of Starbucks’s changing product line is the introduction of VIA –
an instant coffee mix. That product was designed to keep up with Americans’ fast-paced
lifestyles.
Companies need to utilize technology to make smarter decisions. Starbucks has
successfully done so with its smartphone app and integrated POS system. This allowed
Starbucks to know which products are more or less in demand by tracking customer
purchases. This not only helps the company understand consumer tastes, but also to
streamline its supply chain process. The smartphone app also improved operations because
it takes less time to pay and customers could order on their phones and skip the queue. The
loyalty program attached with the Starbucks membership card/app incentivizes customers
to purchase more and consistently with Starbucks because of the rewards.
Lastly, Starbucks utilizes social media and its website to turn customers into
evangelists through brand engagement. These vehicles give customers outlets to share their
passion for Starbucks products with their peers. Social media is also a great way to share
changing products, new promotions, and sustainable efforts.
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Everything goes back in full circle with creating the Starbucks Experience. Even
though there are many extensions of the brand, it all starts with one store, one cup, and one
customer at a time.
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Exhibit 1: Flowing Data’s Coffee Place Geography68
The maps show the coffee chains’ penetration in the U.S. market in 2004.
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Chan, Lawrence
Exhibit 2: Starbucks’s Company Timeline69
Starbucks Company Timeline
1971 Starbucks opens first store in Seattle’s Pike Place Market.
1982 Howard Schultz joins Starbucks as director of retail operations and marketing. Starbucks begins
providing coffee to fine restaurants and espresso bars.
1983 Howard travels to Italy, where he’s impressed with the popularity of espresso bars in Milan. He sees the
potential to develop a similar coffeehouse culture in Seattle.
1984 Howard convinces the founders of Starbucks to test the coffeehouse concept in downtown Seattle,
where the first Starbucks® Caffè Latte is served. This successful experiment is the genesis for a company
that Schultz founds in 1985.
1985 Howard founds Il Giornale, offering brewed coffee and espresso beverages made from Starbucks® coffee
beans.
1987 Il Giornale acquires Starbucks assets with the backing of local investors and changes its name to Starbucks
Corporation. Opens in Chicago and Vancouver, Canada.
Total stores*: 17
1988 Offers full health benefits to eligible full- and part-time employees.
Total stores: 33
1989 Total stores: 55
1990 Starbucks expands headquarters in Seattle.
Total stores: 84
1991 Becomes the first privately owned U.S. company to offer a stock option program that includes parttime employees.
Opens first licensed airport store at Seattle’s Sea-Tac International Airport.
Total stores: 116
1992 Completes initial public offering (IPO).
Total stores: 165
1993 Opens roasting plant in Kent, Wash.
Announces first two-for-one stock split.
Total stores: 272
1994 Opens first drive-thru location.
Total stores: 425
1995 Begins serving Frappuccino® blended beverages.
Announces second two-for-one stock split.
Opens roasting facility in York, Pa.
Total stores: 677
1996 Begins selling bottled Frappuccino® coffee drink through North American Coffee Partnership.
© 2014 STARBUCKS COFFEE COMPANY. ALL RIGHTS RESERVED.
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Exhibit 3: Starbucks’s Connection to Customers70
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Exhibit 4: Photos of Starbucks Stores that were Customized for Local Decor
Shanghai, China71
Amsterdam, Netherlands72
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Ibn Battuta Mall, Dubai73
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Endnotes
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18
25
Chan, Lawrence
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26
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27
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28
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34
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37
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26
Chan, Lawrence
38
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39
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40
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41
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27
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29

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