Starbucks started in 1971 when three partners, Zev Siegel, Jerry Baldwin, and Gordon Bowker, opened up a shop to sell high-quality coffee beans and coffee equipment in Pike place market. Today, millions of customers walk into Starbucks to get their cup of coffee. Even though the coffee offered at Starbucks is overpriced, there are friendly and helpful staff and an upbeat environment at Starbucks that attract customers. People basically walk into Starbucks for its status symbol and what it represents. In 1985, the company expanded its operations to different US cities and Canada. It started internationalizing its operations outside North America in 1995 by entering new foreign markets, including Japan, New Zealand, UK, Spain, China, India, among other countries. Today, Starbucks Corporation of the US makes the most prominent coffee in the world as it specializes in selling coffee that is of high quality derived from Arabic coffee variety. While entering the foreign markets, Starbucks adopted its international strategy to meet each market’s needs and requirements by seeking to respect existing cultures and traditions. This essay discusses the entry modes for the UK and New Zealand, the environment analysis PESTEL of each foreign market associated with entry modes, and the strategic consideration behind entry mode choices.
Environmental analysis of entry mode/PESTEL
Starbucks expanded its international markets in the UK and New Zealand in 1998 and through different market entry modes. A foreign market entry mode creates a possibility for entry into the unfamiliar by arranging a company’s resources, products, human skills, and technology to suit that market’s needs. Many factors influence an entry mode, including the target country’s environmental factors that could impact a company.
Environmental factors are the external factors that international companies cannot control while choosing the mode of entry. The environmental factors that surround international business include the political, legal, cultural, and economic environment. Therefore, the market entry choices by multinational companies are indirectly influenced by these factors, and the companies do not have control over them.
Political environment includes governments, institutions, and the laws that influence a company’s operations at a local or international level. Political climate also consists of the political culture that defines the citizens’ involvement in political processes and the government’s acceptance by the population. Political factors like government regulations, rules, and institutions based on political philosophies can act as market barriers for international businesses. The political environment regulates global companies by requiring them to abide by the laws and regulations (Armagan & Portugal, 2005 p. 93).
The legal environment of a business is the operations and practices under the control and regulation of state, national and international law. Most multinational companies find legal factors as obstacles to internationalization in the foreign market. Legal factors are a market barrier that influences the mode of entry into an international market. The factors played a crucial role in the method of entry choice for Starbucks.
Cultural factors include; the cultural distance that is the possible differences that exist between individuals of different countries in the way they think and behave. Cultural aspects will influence the power of work methods transfer from one country to another. Therefore, the cultural differences between different countries might affect market entry into the foreign market. It is common to find firms choosing to enter the foreign markets closer to the home country because of the cultural distance. Starbucks is an American company with a culture that is utterly different from New Zealand and the United Kingdom culture.
The economic environment includes; competition, market potential, and nature, among other market factors. The nature of the foreign market, including its growth, size, and nature of competition, can influence an international company’s entry choice mode. Market competition refers to the rate at which competing firms concurrently pursue a company’s entry to a foreign market. When Starbucks ventured into the UK and New Zealand markets, the coffee stores and outlets were successful despite the high market potential and competition identified earlier before the entry (Sarkar & Cavusgil, 1996, p. 829).
Before entering a foreign market, Starbucks conducted comprehensive and rigorous research to get a marketplace’s pulse and potential. Starbucks used three different foreign market entry strategies, including licenses, joint ventures, and wholly owned subsidiaries, that enabled its success in the foreign markets. A wholly owned subsidiary is a market entry mode that means that a firm owns 1000 percent of the foreign market entity. By establishing a wholly owned subsidiary, a company enters the new market through establishing new operations with a new legal entity or acquiring another firm in the foreign market that is well established. A wholly owned subsidiary enables a firm to have tight control over strategic plans and operations and retains its competitive advantages. Wholly owned subsidiaries also allow a firm to enjoy 100 percent of acquired profits. However, wholly-owned subsidiaries bear the entire cost of investment and entire risk in the new market (Chen & Mujtaba, 2007, p. 322).
Licensing involves two parties: a licensor and a licensee, that sign an agreement for mutual benefit. The licensor sells company copyrights, processes, and patent rights to the licensee, who in turn pays a royalty to validate the deal with the licensor. Licensing can help an international firm expand its operations quickly and steadily with decreased expansion costs. Licensing also eases market barriers and enables a foreign licensor to improve the chance of a successful patent. However, licensing does not give an international firm central and tight control of operations (Belin & Pham, 2007, p. 41).
Starbucks entered the UK market by acquiring 65 stores of Seattle Coffee Company in exchange for 1.8 million Starbucks stock shares. In New Zealand, Starbucks opened its first store in 1998 in Restaurant Brands New Zealand Ltd, a licensee of Starbucks.
Entry mode for the United Kingdom
There was a vast cultural distance between the US and the UK when Starbucks decided to venture into the new market. The UK people had opposed the American products and concepts; hence Starbucks needed to choose a strategic entry mode. However, according to Starbucks coffee international, they believed in a global brand that would benefit the UK population. Starbucks used the acquisition method to reduce the cultural distance between the two countries’ coffee concepts. When Starbucks entered the UK in 1998, it acquired the Seattle Coffee Company stores for about £50.8 million. This was followed by a rebranding of purchased Seattle Coffee Company stores into Starbucks Coffee Company Ltd (UK), a wholly owned subsidiary of Starbucks Corporation US, a year later. This allowed time for the British to become aware of the Starbucks coffee concept before rebranding. Being the first European market that Starbucks entered, UK became the springboard for internationalizing business in Europe. The acquisition in the UK by Starbucks has been growing ever since in terms of operations and size. In 1999, Starbucks formed a business alliance with Sainsbury’s and acquired Madisons Coffee in 2001 for £1.4 million. The following year, Starbucks formed an alliance with Borders bookshops which enabled Starbucks to purchase 13 coffee bars from the Coffee Republic at £2 million.
In 2005, Starbucks had at least 30 business franchises in UK supermarkets and, by 2006, ranked position 34 on the “UK Top 50 Best Places to Work” awarded by the Financial Times in partnership with Great Places to Work Institute. As of 2007, Starbucks recorded success in the UK market, boasting of more than 500 opened shops. Starbucks has remained the most familiar coffee shop in the UK, with about 27 percent of the population rating the stores as their favorite. Currently, there are more than 600 branches of Starbucks stores spread across the UK and Ireland. The Euromonitor retail analyst positions Starbucks Coffee Company Ltd (UK) with a 16.7 percent market share index (Starbucks, 2008).
Entry mode for new Zealand
In 1997, the New Zealand stock exchange authorized Restaurant Brands New Zealand Ltd as the licensee of Starbucks. The restaurant shared the Starbucks vision of bringing the Starbucks experience to New Zealand. As a result, Starbucks opened its first Starbucks retail shop in New Zealand at the Restaurant Brands New Zealand Ltd at Parnell Road, Auckland, a year later. The Restaurant Brands New Zealand Ltd operated the Starbucks stores offering the same quality coffee as the other international Starbucks stores. Restaurant Brands New Zealand Ltd was more than delighted to keep the Starbucks coffee culture essence by offering coffee beverages of various varieties of Arabic coffee beans serving with local pastries and desserts. Starbucks chose to partner with Restaurant Brands New Zealand Ltd as it was advantageous in terms of opportunities. In the 1990s, the competition in the coffee industry in New Zealand was low as the industry was still at an early stage. Starbucks saw this as an opportunity to gain recognition of their brand image by forming a licensing agreement with the restaurant and venture into the un-mature New Zealand coffee market. In 2001, Starbucks, in accord with Restaurant Brands New Zealand Ltd, opened 50 outlets.
Since the licensing agreement with Restaurant Brands New Zealand Ltd, Starbucks has increased its total sales to a high of $27.9 million by 2006. The same-store sales in the Restaurant Brands New Zealand Ltd branches grew by 2.6 percent for the same year, and the store earnings grew by 6.3 percent. Starbucks has become the foremost international coffee brand in the New Zealand local market. Currently, Starbucks is growing continuously and steadily in terms of store expansion and development (Li, 2007, p. 21).
Strategic analysis of entry mode
Acquisition in the UK
When Starbucks developed an interest in the UK market, it recognized the significant cultural differences between the UK and the US. The company looked for the entry mode that would establish a local company that would adapt to the British culture. Market barriers like government regulations, political factors, legal factors, tariff barriers, and other restrictive rules were not distinctive in Britain. The UK market’s market potential was an essential consideration for Starbucks’ internationalization as it identified Europe as an enormous potential for expansion (Starbucks, 2008).
Starbucks chose the wholly owned subsidiary in the UK, allowing it to own 100 percent of the stocks. The environmental factors played a crucial role in selecting this particular entry mode. The critical factor influencing this entry mode is the scarce knowledge that Starbucks had on the business market, legal and political characteristics. There was also a cultural distance between the US-owned company and the UK market population. These created many uncertainties in the new market. The perfect mode of entry choice for Starbucks was, therefore, one that could get rid of these limitations and enable a successful business venture. The Seattle Coffee Company already existed in the UK market, and acquiring the company would allow Starbucks to gain knowledge in the new market. Starbucks was already large with resources and could afford the huge capital needed for the purchase. This was high risk, so Starbucks chose an operating coffee company in the UK operating in an American style. The economic factors like market potential and competition also affected the mode of entry choice for Starbucks. Starbucks decided to acquire Seattle Coffee Company with the benefit of eliminating the competitor and also with the promise of selling coffee in its first European market that was yet to mature (Tihanyi, Griffith & Russell, 2005, p. 218).
Licensing in New Zealand
The environmental factors in New Zealand also played a vital role in choosing the mode of entry by Starbucks. First, New Zealand and the US’s cultural distance was not as vast and did not influence the entry mode choice. The New Zealand political and legal factors were favorable for foreign investors. In New Zealand, there were no market barriers like government regulations, tariff barriers, or strict legal requirements that influenced Starbucks ‘ mode of entry. In the early 1990s, New Zealand had a promising market for Starbucks as the coffee industry was just in the initial stages. The market potential was therefore enormous and encouraging, and the competition was comparatively low for Starbucks. Starbucks chose an early entry into the coffee industry and did not need to use a high control mode of entry to achieve market competitiveness (Sarkar & Cavusgil, 1996, p. 839).
Starbucks’ main reason to choose licensing as a perfect entry mode into New Zealand was the environmental factors. The new market’s business environment was unfamiliar to Starbucks, so it lacked knowledge regarding the market. A licensing agreement with Restaurant Brands New Zealand Ltd that was an established firm that was also a franchisee of KFC and Pizza Hut brands paved the way for Starbucks to gather market knowledge from the local partner. The Restaurant Brands New Zealand Ltd was also big enough to commit resources in the agreement. Starbucks needed this commitment as the internationalization process of the 1990s, and its fast growth required the company to use a low-risk mode of entry. The market potential was enormous, and there were minimum market barriers from the political and legal factors in New Zealand. The low competition in the New Zealand market also enabled Starbucks to choose a low-risk entry mode like licensing instead of a high-risk method of entry like acquisition.
Businesses that develop an interest in international markets may face many complications. These businesses have to change their way of thinking and a more complex and constantly changing global market. Starbucks is one such business that developed an interest in international markets and has expanded its operations into many different markets. The strategic obligations that Starbucks has used in its internationalization process have enabled it to succeed as an international market. When a company starts internationalizing its operations, it must choose the most suitable entry mode into that particular market. This can be a joint venture, acquisition, franchise, licensing, exporting, or a wholly-owned business (Belin & Pham, 2007, p. 44).
Starbucks chose a different mode of entry choices for different foreign markets to adapt to the different needs, specific factors, and requirements for each market. The political, legal, cultural, and economic factors played a key role in Starbucks’ mode of entry choices. Each choice for the mode of entry suited each of the foreign markets. This shows that Starbucks was aware of international business’s nature and wanted to avoid the difficulties encountered during expansion into foreign markets. The company was also aware of the implications of an entry mode choice hence the need to seek the most suitable entry mode for each market. Each of the foreign markets that Starbucks has ventured into has its own culture and practices. Starbucks has therefore adapted international strategies that allow the company to satisfy the needs and requirements of these unique cultures and practices of the foreign markets. This essay analyzes the mode of entry choices for Starbucks in the UK and New Zealand and how these countries evaluate them. It also analyzes how appropriate the modes of entry are. The essay also discusses the strategic considerations by Starbucks for each mode of entry choice.