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Case Study Starbucks Australia Closing

Starbucks Lessons from Australia

Danielle SpinksBrand, Campaigns & Cases, International Marketing

Starbucks opened its first store in Seattle in 1971. By 1992 it was publicly listed and had 140 stores and a growth rate of between 40 and 60% each year.

Starbucks currently has over 15,000 stores in 44 countries.

The Starbucks Concept

Right from day one, Starbucks did not see itself as a ‘coffee’ business, but a ‘service’ and experience business. Its model was built on the European coffee tradition, with which America was unfamiliar. Coffee in the States was generally a jar of percolated brew sitting on a hot plate.

The brand was built with a number of key attributes – the customer should be greeted within five seconds, there would be eye contact, their name would be remembered, and visiting the store was a place to relax, socialise, read, surf the internet and be seen.

Advertising and promotion were not to be the primary communication vehicles. Starbucks philosophy is based on the understanding that a positive emotional experience will generate word of mouth and lead to customer loyalty.

Starbucks in Asia

The first store to open outside of the USA was Tokyo in 1996. The company has been very successful in Japan and it continues to be a high performing market.

In China, its biggest growth market currently, the pastries and drinks are smaller to suit local tastes and a green tea frappuccino has been introduced. Similarly, the product items have been adjusted to cater to local tastes in Saudi Arabia and Japan.

There is growth in the large cities of Beijing, Shanghai and Guangzhou where middle-income professionals are burgeoning.

Starbucks in Australia

The coffee industry in Australia is worth $3 billion a year, with $1 billion of that consisting of takeaway cups. It was already mature when Starbucks opened its first store in Sydney in 2000. The retail market is tough with intense rivalry and returns of just 4% p.a. net profit.

Australia’s large migrant population, especially those from Greece and Italy, meant that the Australian market had adopted the routine of morning coffee many decades earlier. The European tradition was not new or novel. The local drinking palate was sophisticated, liking strength undisguised by syrups or excessive milk.

In 2008, Starbucks announced it was closing 61 out of its 87 Australian stores (73%) remaining with less than 2 percent market share of the speciality coffee market – an unwinnable formula for an economy of scale and out of step with the ‘clustering’ saturation strategy used in the rest of the world. Starbucks announced the reason for the closures was consumers’ tightening of belts due to the global financial crisis and fears of recession.

In the Australian speciality coffee market today, Gloria Jeans dominates the high-end. As a franchise, its store owners know the local area, tastes, people and communities.

Second is McCafe (servicing the economy end), as well as Coffee Club, Wild Bean (an offshoot of BP at service stations) and Hudsons. Starbucks is in sixth place with less than 2 percent share.

What went wrong?

Starbucks may have assumed that Australia had a very close ‘psychic distance’ from the USA and expected its stores to be met with the same enthusiasm as America. Its offering to Australians was the same as the US offerings.

Unlike McDonalds and Krispy Kreme, who both opened one or two stores in a slowly, slowly approach to stimulate demand and create a sense of scarcity, Starbucks saturated the Australian market with 87 stores and was soon perceived as a ‘mass brand’ not the exclusive brand position it was after.

The Starbucks team also failed to understand the psychological and socio-cultural aspects of the country it was entering.

Australia is not one homogenous market; it consists of over 235 different ethnicities and has a proud tradition of backing the underdog — in this instance, the small shop around the corner. Many consumers were found to actively dislike the ‘super-size’ high sugar/high-fat mentality of America which Starbucks was found to epitomise.

Even worse, Starbucks coffee was generally considered ‘watered down’ and inferior to what was already available at a much lower price. Ethically produced coffee and personal relationships were also important for the Australian market.

Confused Value Proposition

It may not have been these factors alone that were the undoing of Starbucks in Australia. The company was already contradicting its own value proposition when it introduced competing priorities in stores, such as the key performance target of servicing ‘x’ number of customers per hour.

With a value proposition built on friendliness and space away from work or home that can be used for relaxation and socialising, the pressure on staff to generate steady customer turnover meant that they were less able or inclined to engage in conversation or relationship-building with customers.

The use of vacuum-sealed coffee and automated machines to make coffee 40% faster, thereby reducing queue wait, also meant the augmented sensory benefits of watching the grinding and ritualistic preparations of the drink, as well as the hedonic aroma, were removed.

The in-store furnishings, magazines, music and wi-fi were imitable and being copied from stores all over the place, including Gloria Jeans, McCafe, Wild Bean and Coffee Club.

The Starbucks loyalty card was just like any other and posed no point of difference or customer motivation, who would just use the loyalty card of whichever company they happened to be using at the time.

In their favour, competing brands were also known for food. Although Starbucks does sell a range of pastries and sweet snack-foods, Starbucks owns coffee in the mind of the consumer and the brand is not perceived as a place you go to eat. McCafe (McDonald’s) means coffee and also food, as does Gloria Jeans (light food) and Coffee Club is where you can get a good coffee as well as a decent, not unhealthy lunch. With an average per visit spend of much less than its rivals, Starbucks found itself in tricky waters.

Finally, Starbucks strategy not to advertise or run promotions may have sounded good at first, but it probably needed to re-evaluate this at the earliest signs of competitive rivalry. Awareness was high, but such communications could and should have been used to convey the brand message or reason for being. The brand essence should have been reformulated for the Australian market and then communicated with clarity and simplicity as a reason to patronise its stores.

Instead, McDonald’s – well-known for its high ad spend – was able to curtail any growth of Starbucks by using subversive messages to undermine it, like this one.

Lessons from the Failure

Starbucks failure in Australia demonstrates why you need to understand your market before entering. What works in one place may not work elsewhere. While some overall methods or services will remain the same, a global strategy must always take a backseat to local needs and be adjusted accordingly.

Solid research, particularly, observational and ethnographic (such as that performed by IKEA and Tesco before they open stores in new foreign markets) is extremely important. A few months of studying and spending time with coffee-drinking Australians may have saved years and millions of dollars to Starbucks in the long-run.

Introducing the ‘Flat White’

7 Jan 2015 Update:

It seems like Starbucks has learnt a few things from the Australian experience. They have introduced the flat white, which is my favourite coffee, into American Starbucks outlets.

According to Wikipedia, the humble flat white was developed in Australia and New Zealand in the 1980s. It consists of a double shot espresso (ristretto) with microfoam of hot milk poured over the top. By microfoam, I mean milk that has been heated and jiggled to form small bubbles. Sorry, I’m not a barista.

A flat white tastes just like a coffee with milk, but far better. The consistency is velvety. It would have to be the most unpretentious and ubiquitous of coffees ordered today in Sydney.

Happy drinking!

Special thanks to the comprehensive review by Richard Fletcher and Heather Crawford upon which much of this article is based.

Richard Fletcher, Heather Crawford (2012), “International Marketing: An Asia-Pacific Perspective” 5th Edition, Pearson.

EIGHT years after one of the world’s biggest brands admitted humiliating defeat in Australia, Starbucks has begun — ever so quietly — reopening coffee shops in the country’s biggest cities.

A population starved of Frappuccinos, ignorant to what a “tall” latte is and baffled by drip coffee is about to get a double shot of Starbucks despite the global Goliath’s felling by the humble local barista.

The chain told news.com.au it had a new strategy for success and previously stated its aim was to be “the most successful coffee chain in Australia”. But a marketing expert predicts it wall fall short and would only open 10 more stores at most as the brand was still seen as “arrogant” by Australians.

In an Australian takeaway coffee market worth about $2 billion, Gloria Jeans has more than 450 branches in Australia while Coffee Club has 350 outlets. In comparison, there are a mere 22 Starbucks.

In 2002, two years after it entered Australia, Starbucks was in spitting distance of 100 stores. Then, without warning, the world’s most successful coffee chain closed scores of stores.

Racking up losses of $143 million on its Australian operations, in 2008 Starbucks sacked 700 staff and closed 66 branches leaving a rump of cafes in the CBDs of Melbourne, Sydney and Brisbane mostly serving tourists familiar with the brand.

And that’s the way it stayed until recently when, with little fanfare, Starbucks opened new stores in Sydney and Brisbane.

A Starbucks opened in Parramatta’s Westfield shopping centre last month. With a decor of “raw woods and illustrations of ‘underwater’ coffee botanicals, the new store embodies an old world nautical theme and the seafaring tradition of early coffee traders,” Starbucks colourfully boasted.

Starbucks Australia CEO Chris Garlick told news.com.au the chain’s handful of stores had a “significant and loyal customer base” but its new cafes, far from being on every street corner, would be concentrated in a limited number of areas.

“Our growth strategy is centred around our customers preferences and where they want us to be, which includes shopping centres and high traffic tourist locations,” he said.

“We’re confident these locations will help us create destinations for customers who want to come to our stores and relax, spend time catching up with friends, or some quiet time alone.”

This is perhaps most evident with its next big move into Sydney’s northern beaches, a prime tourist destination, by Christmas. The chain will straddle both Manly beachside and the famous Corso, in what is described as “the jewel in the crown” of commercial real estate.

Professor Paul Patterson, from the University of New South Wales’ Business School, said Starbucks’ main problem first time round was that it fundamentally misjudged Australia.

“I don’t think it was much to do with the coffee, the problem was the brand,” he told news.com.au.

“The Americans assumed that Australians would fall in love with an American brand and that just didn’t happen. Australians are not anti-American but they are anti arrogant American brands.”

The plan seemed to be open the doors and wait for the customers to flock in.

After all, it had worked in the UK where 800 Starbucks dot British high streets and in China where locals have gone gaga for “grande” cappuccinos at more than 2000 outlets.

The big difference? Prof Patterson said in the UK and China, Starbucks were partly responsible for introducing coffee culture in countries where a nice cup of tea was the hot beverage of choice.

But in Australia independent coffee shops were already part of the fabric.

“Starbucks failed to realise people were brand loyal to their local coffee shops because they know their barista and people weren’t going to leave that to go to a global brand.”

More than that, Starbucks charged a premium price. Even today a Starbucks tall latte at one of the few Sydney outlets costs $4.40 while a large flat white can be bought at funky holes in the wall nearby for $3.50.

The menu, heavy on US-style creamy sweet drinks and black coffee, only had a handful of milk-based coffees so beloved by Australians.

In 2014, the Withers — one of the country’s richest families — bought the rights to the chain in Australia.

They already own the local arm of Japanese global convenience store franchise 7-Eleven — which also sells coffee but for just $1.

Withers Group’s then chief executive Warren Wilmot said the company had lofty ambitions for its new buy.

“Growing store numbers will be one of our primary opportunities,” he said at the time. “Our aim will be to make Starbucks the most successful coffee chain in Australia.”

But it’s not been a smooth transition to its new Australian franchisee. The Withers became embroiled in the 7-Eleven underpayment of wages scandal that consumed the company and saw chairman Russell Withers step down along with Mr Wilmot.

While its new expansion has been quiet it’s not gone completely under the radar. Residents in the Sydney beachside suburb of Manly almost spat out their chai lattes, so appalled were they at the idea of the US chain taking up residence.

Earlier this week, Mr Garlick told the Manly Daily the company had changed and was now true blue.

“No doubt it’s going to take a little bit of time for people to understand it’s a global brand run by Australians in Australia.”

Adriano Vieira, owner of Manly’s Silo coffee shop was far from convinced.

“Starbucks, they’re not a coffee shop that embraces the Australian way. Coffee drinkers won’t go to the shop, it will be kids who like to have a Frappuccino.”

President of the Cafe Owners and Baristas Association of Australia, David Barnham, said Starbucks’ success would hinge on whether they had learnt the lesson from their drubbing Down Under.

Chief among them would be that only seven per cent of Australian drink their brew black.

“The previous model of push button coffee didn’t work because Australians expect a full barista service,” Mr Barnham said. “I think a new model focusing on speciality coffees will have some success.

The Withers family were “savvy,” Mr Barnham said. The brand was well recognised and if they could balance its US roots while tweaking the concept to Australian tastes Starbucks could be a second-time-round success.

Will an expansionist Starbucks spell doom for the local coffee shop?

“Independent cafes make up two thirds of total cafes so even if Starbucks had 1000 cafes, it still wouldn’t make a dent, ” he said.

But Prof Paterson doubted Starbucks would get anywhere near that number of stores and were doomed to remain an also-ran, wedged between established chains and local independents.

“The Withers said they were going to make Starbucks the coffee brand of choice.

“Well that’s not going to happen because the competition is so well entrenched with independent coffee shops.”

He was also doubtful attempts to Australianise the brand would be able to go far enough to make a difference.

“The only way they can have some small growth is picking locations where there are many international tourists, such as Manly and CBDs, but fundamentally Starbucks has no point of difference.”

Nevertheless, he said Starbucks would stick around saying the company had to have outlets in Australia’s major cities to cement its global presence.

But he was sceptical Australians were going to embrace the joys of a double-tall latte with caramel.

“Do you want to get a good coffee down the road from a barista you know or from a global brand where no one knows you and you pay an extra dollar? It’s a no-brainer.”


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