Group-4 MNC-report Starbucks PDF

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Summary

This report is based on theories of the Internation Business textbook...

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International Business BUS302 MNC Report Team 4 Mai Gia An --------- B1112015590 Trang Phong---------- B1112015140 Than Kim Quy --------- B1112015138 Hoang Thu Thuy --------- B1112015119 Nguyen Hoang Minh Long ---------- B1112015136

Table of Content

1. Executive Summary ..................................................................................................... 1 2. Introduction .................................................................................................................. 1 3. Current Strategy ........................................................................................................... 2 3.1. International Strategy ............................................................................................ 2 3.2. Entry Strategy & Alliances ................................................................................... 3 4. Environmental Analysis & Issues ................................................................................ 3 4.1. Key issues ............................................................................................................. 3 4.2. Environmental Analysis ........................................................................................ 4 4.2.1. Macro-environment ................................................................................... 4 4.2.2. Micro-environment ..................................................................................... 6 4.3. SWOT Table ......................................................................................................... 8 5. Recommendations ........................................................................................................ 9 5.1. Strategy recommendation ..................................................................................... 9 5.2. Macro-environment recommendation ................................................................. 10 5.3. Micro-environment recommendation ................................................................. 10 6. Conclusion ................................................................................................................. 11 7. Reference ................................................................................................................... 12

1. Executive Summary Starbucks is a well-known coffee chain for elevated goods & services (Roll, 2018), as well as a symbol of the globalization of markets (Hill & Hult, 2017). In terms of coffeehouse chain revenues globally in 2015, Starbucks were the top frontrunner (21,095 million U.S dollars), followed by Tim Hortons, Costa Coffee, and Dunkin' Brands (Statista, 2016). This report will scope how Starbucks function in Vietnam and Asia region.

The report, first, briefly introduces Starbucks Corporation’s history and then analyses the current strategy used to enter the Vietnam market. In essence, this multinational chain of coffee pursues the transnational strategy and enters the Vietnamese market by licensing and setting up wholly-owned subsidiaries. Then, the report highlights their strategic issue of no joint venture with Vietnamese companies leading to the failure in understanding Vietnamese coffee culture. Together with two main issues from the environmental analysis that Starbucks faces. The macro-environment issue relates to the significant gap between the average income of Vietnamese and the price of Starbucks drinks while the micro-environment issue comes from Vietnamese coffee preference. The study also includes a SWOT table to reflect Starbucks' operation in Vietnam. Lastly is the recommendation part, where three proposed remedies are suggested respectively: Choosing a local company from Vietnam to partner, adjusting price to the average income, and menu customization. Consequently, the reason why Starbucks are less successful in Vietnam becomes more coherent, as is a reflection of both their strengths and weaknesses in international business.

2. Introduction Starbucks was originally founded in 1971 but not until 1987 when Howard Schultz had bought out, Starbucks began to set their mission “To inspire and nurture the human spirit - one person, one cup and one neighbourhood at a time” (Starbucks, n.d.). As a result of Howard leadership , Starbucks visionary CEO, Starbucks Corporation now operate in 83 markets with nearly 33,000 stores (Knoema, 2021) and over 10,000 in the Asia region (The Manila Times, 2021). However, after eight years in Vietnam, there are only 72 stores opening in this market (Starbucks, 2021a), and this seems much lower than the number of Vietnam’s traditional stores.

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According to Pham (2020), Vietnam ranks fourth in consuming coffee per capita in Asia. Therefore, coffee seems to be an integral part of Vietnamese daily life, and Vietnam may be used as a prospective market for coffee firms. Moreover, Vietnam is the second-largest coffee importer worldwide, with a broad spectrum of coffee flavours. Not only the two pros above but both the macro-environment and micro-environment in Vietnam seem to be beneficial to Starbucks despite some issues about cultural differences between Vietnam and America. Having many opportunities and strengths that can contribute to the success of Starbucks; however, Starbucks is still struggling in Vietnam. The objective of this report is to understand the reasons behind the less success of Starbucks in Vietnam.

3. Current Strategy

3.1. International Strategy Starbucks have adopted the multidomestic company approach, which is prioritising local responsiveness (Nyandat, 2019). The author also mentioned that Starbucks adopted local cultural practices in order to be visible within other coffee chain competitors. Therefore, when Starbucks entered Vietnam, it needed to follow Vietnamese culture. For instance, in Vietnam, people can find in Starbucks stores that resemble Vietnamese familiar coffee store demand: Electrical plugs, WI-FI, and comfy space, since Vietnamese people like to chat at coffee shops, rather than come for coffee (Nyandat, 2019). Moreover, Starbucks customize the menu and service to the local customers but balance to maintain their core competencies and the western coffee style. “The comfy chairs, the music, the aromas, the hissing steam from the espresso machine” (Robbin, 2018) were what the Starbucks CEO wanted to inspire. Starbucks offer their core menu such as Frappuccino, alongside with the local products like Vietnamese milk coffee and even start to sell Vietnamese coffee beans as their products with Starbucks Reserve Vietnam Da Lat (Starbucks, 2015).

On the other hand, Vietnam has a strong coffee culture and local Vietnamese chains begin to perform and develop stronger than their international counterparts (Haigh, 2019). These competitors are faster to adapt (VIR, 2020) which can offer more familiar and cheaper priced coffee. Thus, Starbucks may face huge pressure for cost reduction from the locals in order to attract customers’ attention. For instance, according to Son (2020), “Starbucks source their 2

coffee from the U.S. to ensure the same quality globally”, while local people can find the beans in their own country.

3.2. Entry Strategy & Alliances The joint venture, licensing, and wholly-owned subsidiaries are the three main entry modes that Starbucks used when they enter a new market (Santamaria & Ni, 2008). However, Starbucks did not have a joint venture in Vietnam since Vietnam’s chain management ability was still incapable at that time according to Doanh Nhan Sai Gon (2013). Alternatively, they partnered with the Hong Kong Maxim’s Group (Starbucks, 2013), which has operated in Vietnam before. They have had a partnership since 2000 and expanded their portfolio in southeast Asia (Maxim, n.d.). These two partners established Coffee Concepts (Vietnam) Limited, which is a wholly-owned subsidiary and served as a licensee to operate in the dynamic market as Vietnam (Starbucks, 2013).

Licensing can benefit in cost reduction and help them to minimize the threat from the uncertainty, politics, and economics, in the new market. However, since Maxim group is not a Vietnam-based company, and Starbucks did not have a joint venture, there may be possibilities that Starbucks cannot deeply explore and understand the strong Vietnam coffee culture. This can lead Starbucks to less engagement and some disadvantages with other local competitors, such as preference and culture.

4. Environmental Analysis & Issues

4.1. Key issues

Firstly, Starbucks’ entry strategy was lack of joint ventures or Vietnam-based company partnership. Although Starbucks applied a transnational strategy, they have somewhat failed to achieve the local demand, which contradict to many other markets such as China. In terms of each factor in strategy identification, high pressure of cost reduction is another problem that Starbucks have to deal with. The noticeable gap between Vietnam’s average income and Starbucks’ products price lead to the infrequency of purchasing. Moreover, the failure in local responsiveness with product offerings may become an obstacle for Starbucks to engage local 3

customers. The choice in using Arabica instead of Robusta beans made a contradiction in the flavour and style of local coffee habits. To analyse in detail, macro and micro-environment factors will be elaborated below with valid statements.

4.2. Environmental Analysis

4.2.1. Macro-environment

Political & Legal Factors

Vietnam is a socialist republic ruled by its Communist Party. Due to the one-party state, policies and regulations in the country are strongly aligned, leading to the high consistency between the legal system and sub-law documents. Consequently, Vietnam is considered as the country with a stable political system in Southeast Asia (Department for International Trade, 2016) for Starbucks to invest in.

In terms of the legal, to catch up and maintain the FDI wave, the Vietnamese Government has provided many special investment incentives. The fundamental one is adjusting the Corporate Income Tax to 20% since 2016 (KPMG, 2021). This helps Starbucks Corporation save operation expenses. However, in terms of the tariff, Starbucks must suffer from value-added tax at 5% when importing coffee from the Parent Company based on the fact that Vietnam is an agricultural country following the law 219/2013/TT-BTC (Government Portal, 2013).

Economic Factors Vietnam has one of the strongest growth rates in the world and deep integration with the global economy. KPMG (2021) wrote that the average consumer price index (CPI) in 2019 expanded by 2.8 percent over 2018, (165.82 percent) the slowest pace in 2017-2019. According to the World Bank (2021), GDP growth in 2019 was 7.02%, reaching over 261.9 billion US dollars, which is one of the impressive rapid growths since 2011, as a result of the globalization process. This data attracted Starbucks, as they can ensure the safety of investing and provide a potential business market.

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World Bank (2021) also further described that despite the Covid-19, Vietnam managed to keep the GDP growth positive, one of the very few countries that can do so, with 2.9% growth in 2020. This can enable the store to keep working smoothly after the effect of Covid-19.

However, GDP per capita for Vietnam and the PPP per capita in 2020 were around 2,785 and 8,650 dollars respectively (World Bank, 2020), illustrating the lower cost of living in Vietnam based on the purchasing power parity. These numbers may result in lower frequency of purchase for Starbucks.

Social & Demographic Factors

The noticeable social and demographic factors in Vietnam to Starbucks are the labour and consumer market. Firstly, Vietnam is enjoying the ‘golden population structure’, which includes the ratio 2:1 for working and dependent people respectively (KPMG, 2021). Therefore, labour costs that Starbucks spend in Vietnam could be reduced, compared to investing in the developed countries.

Secondly, the Nielsen survey (2021) recorded that 47% of Vietnamese consumers tend to purchase for experiences. This consumer trend is fit to Starbucks’ main core mission publicized on its website “To inspire and nurture the human spirit - one person, one cup and one neighbourhood at a time”. Thus, Vietnam can be considered as the next potential market in Asia for Starbucks’ long-term profits.

Technological Factors Social media are interactive which are ideal for communicating with customers and receiving feedback (Kotler & Armstrong, 2018, p.523). With the increasing number of people using social media, it has helped Starbucks make it easier to interact with customers and get recognized through the Internet, which can be utilized for marketing. Additionally, in 2020, Starbucks opened an e-store for their consumers through the fan page (Starbucks Vietnam, 2020).

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The rapid growth of food delivery apps (Grabfood, Baemin, Now), also helps increase the opportunities for restaurant players to promote the brand to new customers and boost revenue (Chotigo & Kadono, 2021). According to a survey from Q&Me (2020), 80% of people use food apps at least once per week and 38% use more than three times per week. Starbucks now can benefit from getting more orders through food apps.

Figure 1. Food ordering frequency (Q&Me, 2020)

Natural Environment The repercussions of the Covid-19 epidemic have impacted the global economy since late 2019, and while Vietnam remains one of the top countries with positive economic growth, it is obvious that Starbucks’s function is disturbed. Due to the strict social distancing announcement which came from the government, Vietnamese people had to limit their frequency of movement on the street and stay home as much as possible. Because of this pandemic, there were 5 million people losing their jobs as of mid-April 2020 (General Statistics Office of Vietnam, 2020). Hence, it can be seen that a lot of people have to struggle to sustain their normal life and cannot afford such luxury items as Starbucks’ goods. All in all, it is understandable that Starbucks have to find their ways to deal with this phenomenon for their better future benefit in Vietnam.

4.2.2. Micro-environment

Company

Starbucks Corporation have a substantially unlevered capital structure. They have a debt-toequity ratio of 4.62% based on market prices which was the lowest market ratio among their 6

nearest competitors (Mayer, 2018). When investing overseas, Starbucks chose M&A and expanded company-operated and licensed stores. In 2021, the distribution of stores in China and Asia Pacific accounted for 17% over the Americas, and the Middle East and Africa markets (Knoema, 2021). Moreover, Starbucks have a strong sense of humanity in their culture. In Vietnam, they show their concern for employees via providing vocational training, career advice, and job placement to disadvantaged youth (Starbucks, 2016).

Competitors

In the Vietnam market, Starbucks have to roughly compete with a number of famous local coffee shop chains, such as The Coffee House, Phuc Long, Trung Nguyen Cafe, and Highlands Coffee with more affordable prices (Statista, 2021). Milk tea shop chains are not new but they have been developing vigorously in recent decades (VIR, 2017). Thus, Starbucks should consider the high threat of substitutes, especially milk tea drinks. Additionally, a number of small and independent coffee shops are arising strongly in Vietnam (Nguyen, Jiminez, Nguyen, Bui & Than, 2020). That shows a high threat of new entries because there are no switching costs for the consumers and low initial expenditures for small enterprises (Sakal, 2018).

Customers

Recently, consumers have changed to be health conscious. Hence, Starbucks frequently innovate the menu and changes to use sustainable packaging (Starbucks, 2021b). Vietnamese people prefer their traditional milk coffee from Robusta beans. Although Starbucks do offer this drink in their menu, it is unattractive for customers to buy them with a premium price (Morante & Roma, 2020). However, the boom of milk tea brands in Vietnam illustrates a significant change in customers’ preferences (VIR, 2017).

The buyers’ power in Asian specialty and eateries industry continuously increases due to the low switching cost. Meanwhile Starbucks offer high prices with high quality; local brands such as Highlands and Coffee House offer moderate-high prices with moderate-high quality in Vietnam. As a result, there is high moderate buyers’ power (Morante & Roma, 2020).

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Suppliers & Distributors Besides their key global suppliers, Starbucks in Asia are focusing on seeking out local suppliers who are a constant source of inspiration to innovating tea experiences that fit customers’ lifestyles (Starbucks, 2021c). Furthermore, Starbucks maintain a good relationship with suppliers through responsible purchasing practices, developing forest conservation programs and supporting farmer loans (Robbins & Coulter, 2019, pp. 283–285). However, in Vietnam, Starbucks just source Arabica beans from Dalat to sell roast coffee which are available in limited supply in selected stores (Starbucks, 2015), whereas a majority of coffee beans are imported from the U.S. Overall, the suppliers’ power is moderate.

4.3. SWOT Table

STRENGTH

WEAKNESS

1. Good financing and company structure

1. The taste of drinks does not fit with

(Mayer, 2018). 2. Good corporate culture: care for employee development (Starbucks, 2016). 3. Good relationship with supplier sources (Robbins & Coulter, 2019, pp. 283–285).

Vietnamese culture (VIR, 2017). 2. The high price (Morante & Roma, 2020) compared to the low cost of living. (The World Bank, 2020). 3. The high cost (Son, 2020).

OPPORTUNITIES

THREATS

1. The core value matches with the consumer

1. High level of new entries with an affordable

behaviour trend (Nielsen, 2021). 2. Delivery apps help to promote the brand (Chotigo & Kadono, 2021). 3. Vietnam enjoys the ‘golden population structure’ (KPMG, 2021) → The potential

price (Statista, 2021). 2. High level of substitutes (VIR, 2017). 3. 5 million people lost jobs in the first quarter of the year 2020 (General Statistics Office, 2020).

labour force - The long-term benefit (Hill & Hult, 2017).

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5. Recommendations

5.1. Strategy As mentioned above, Starbucks did not have a joint venture or a Vietnam partner when they entered Vietnam, which made an exception compared to other countries' markets. This may be a possible explanation why Starbucks failed to adapt to Vietnamese culture. A case in point, Starbucks joint venture with Sazaby when they entered Japanese, and what they got from this partnership is Japanese cultural practice and advice on market penetration (Nyandat, 2019). For China, Starbucks joint venture with Beijing Mei Da coffee company and partners with others such as Shanghai Unified and Maxim’s Caterer, with each partner giving insight of local and prevent Starbucks from doing wrong to the culture. (Ling, 2017).

Starbucks in Vietnam also adapts to the people's culture as mentioned, furnishing the store with Wi-Fi, comfy space for Vietnamese customers to hang out and chat. Despite that, many other coffee chains like Highland, Coffee House, or Phuc Long also have it, which still makes Starbuck have no differentiation. Furthermore, they still have many cultural issues that need to be adapted and fixed, from pricing to Vietnamese coffee culture and preference. Working with the right partners can support the learning process and help the brand to be more effective in reaching local customers and expanding the business (Forbes, 2012). Therefore, having a joint ventu...