Starbucks Lessons from Australia

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.