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MANAGING ACROSS CULTURES TEAM STARBUCKS CASE STUDY Lessons from Success and Failure for the Future

Truong Nguyen Thanh Vy s3462020 Kim Kyeong Beom s3653049 Yu Chun Chen s3635541 Sean Caricola s3690145

Your team is to act as a consulting organisation that specializes in intercultural management; provide expertise on how the organisation can better facilitate communication, management and effective interactions across borders with other organisations (suppliers, collaborators, subsidiary) or customers. Your team has been asked to improve the performance of the case study organisation or provide a solution to a problematic situation (such a situation may have been reported on in the press). You will create a 4000 word report outlining the background to the case, analyzing the case (particularly from the perspective of intercultural management) and finally highlighting 4-5 key recommendations that you argue will improve the organisations performance in this area. Your research will analyse factors that have led to any issues or difficulties in the past, and provide a structured argument leading to recommendations for changes to practice in the future. Referencing of peer review materials is required to provide evidence for your claims and recommendations, and to inform your analysis and discussion throughout.

Table of Contents STARBUCKS CASE STUDY ............................................................................................................................. 1 EXECUTIVE SUMMARY .................................................................................................................................. 2 INTRODUCTION ............................................................................................................................................ 3 Company Background ............................................................................................................................. 3 Competitive Advantage .......................................................................................................................... 3 SUCCESS IN VIETNAM .................................................................................................................................. 5 Winning Formula ........................................................................................................................................ 5 FAILURE IN AUSTRALIA ................................................................................................................................. 7 Australian Consumer Culture Overview ................................................................................................. 7 Marketing Failures ...................................................................................................................................... 8 Strategic Failures ........................................................................................................................................ 9 NEW MARKET: ITALY ..................................................................................................................................... 9 PEST Analysis ............................................................................................................................................. 11 Recommendations .................................................................................................................................. 12 REFERENCES ................................................................................................................................................ 12

EXECUTIVE SUMMARY Starbucks is one of the world’s leading global coffee brands and has been changing the way the world drinks coffee outside of home and work. The global expansion of this brand has been increasing rapidly, and it has opened stores in many countries such as Japan, Latin America, Russia, Australia and Vietnam. The brand’s footprint has grown to reach more than 75 countries worldwide and is expected to continue to grow significantly in 2018. The purpose of this report is to analyse how cultural differences have affected Starbucks’s way of doing business in Vietnam and Australia. By demonstrating how it achieved success in Vietnam’s nuanced coffee market, the report focuses on statistical and empirical research to extrapolate how Starbucks adapted and localised itself to be aligned with Vietnam’s cultural heritage and consumer preferences. Meanwhile, the report explores how brand arrogance and lack of cultural awareness led to its dramatic retreat from Australia, another country with an equally nuanced and famous coffee culture. The inherent lessons supplied by Starbucks’ Vietnamese and Australian forays serve as a basis for analysis and caution when entering a new market, such as Italy. This report will iterate why Starbucks and other global business must not neglect cultural differences when attempting to enter foreign markets, and that international expansion is not a one-size-fits-all scenario. What works in one place may not necessarily work in another. Large corporations must endure to think global and act local - observation, cultural awareness and ethnography may save years and generate profit for Starbucks in the future.

INTRODUCTION Company Background Starbucks is one of the world’s most recognisable brands – the American global coffee company from Seattle, Washington, has more than 24,000 retail stores across 70 countries with nearly 15,000 of them in United States. As of 2016, the number of stores reached more than 25,000 (Successstory, 2017). In 2012, Starbucks’ s revenue reached over 13 billion USD with more than 149,000 employees worldwide (Successstory, 2017). The company was established in 1971 and rapidly became one of the largest coffee houses in the world. The company’s main product is coffee which has more than 30 blends and single-origin premium coffees. Besides that, Starbucks offers handcrafted beverages such as freshly brewed coffee, hot or iced espresso beverages, smoothies, juice and teas. Starbucks is also not only popular for offering fresh food such as sandwiches, pastries and snacks but also offers local cultural-inspired products such as books, music, gifts and accessories based on local availability.

Figure 1. Number of Starbucks stores worldwide from 2003 to 2016. Competitive Advantage Brand Identity It is believed that Starbucks has changed the way the world drinks coffee. Starbucks strives to be known as the “third place” between work and home where people can go to relax, listen to music and enjoy a cup of coffee as well as to experience the inviting ambience. In additional, the company has a holistic approach to gathering customer insights by engaging in casual and informal chats with customers in order to capture their mood, experience with the store and receive feedback from customers. The company’s mission “To inspire and nurture the human spirit- one person, one cup and one neighbourhood at a time” clearly focuses on the customers’ experience across all its stores and its products. Moreover, Starbucks has a unique brand promotion strategy. Unlike most other competitors which advertise their products on billboard, newspaper, magazines or by means of celebrity endorsements, Starbucks launched a global brand campaign called “Meet me at Starbucks”. The campaign captured a day at Starbucks through a mini documentary format, occurring in 59 different stores in 28 different countries by coordinating with all the customers involved. The campaign was very successful by aligning the core values and philosophy of the customer with those of the company.

Human Resource Management Starbucks has an effective human resource policy for its employees as it considers them as partners. According to Martinrol (2017), Starbucks has a training program for their baristas and employees. A barista is required to be friendly and remember the name of the customer and their favourite drink for the next visit. Furthermore, the employees are required not to wear perfume or cologne. As De Wit and Meyer (2010) highlighted, Starbucks not only offers stock options for its employees, it also provide free healthcare insurance for full time and part-time employees. Additionally, the company also offers opportunities for their US employees to complete an online bachelor’s degree. This ensures their employees are empowered, satisfied and reduces the level of employee turnover at Starbucks. Differentiation strategy Backed by its access to vast resources and capacities, the company employs a focus on differentiation in a niche market segment in order to deliver high value and high quality of their products, by charging a premium price to the customers. This strategy differentiated Starbucks from other competitors and helped leverage a competitive advantage, as per figure 2 below:

SUCCESS IN VIETNAM Overview Starbucks entered the Vietnamese market in 2013 by opening one store in the city centre of Ho Chi Minh City. After three years, its market share has soared to being number two among chain cafes in Vietnam with 9.1% market share. (Table 1) In 2017, the number of Starbucks stores in Vietnam (Starbucks 2017) reached twentyeight and is still growing.

Vietnam is the largest Robusta coffee producer and number two coffee exporter worldwide (Workman 2017). Moreover, Vietnam already had its own coffee culture and cafes prior to the arrival of Starbucks. However, due to an influx in western culture, Vietnamese young people’s needs for western culture experiences and engagement has increased. Starbucks was able to set the stage for success by meeting their needs. From now on, we will scrutinize the factors which made Starbucks successful in Vietnam. Winning Formula First, Starbucks brings a Western atmosphere as well as high quality products. Especially, Vietnam has many young people who have been influenced by western culture and are receptive to new experiences. (Figure 3) Starbucks knew that leveraging its international appeal would engage successfully with the large young population of Vietnam.

Second, Starbucks showed respect towards the local culture by selling localized coffee and goods. Vietnamese coffee is very specific, in that it has strong flavour and a creamy taste. Starbucks launched Vietnamese coffee which is called Café sua da in Vietnam and Asian Dolce latte. This exclusive menu shows its adaptability and humble attitude, which led to Vietnamese people feeling as though their needs are respected by the company. Also, Starbucks developed special cups adorned with the Ao Dai, a Vietnamese traditional symbol, which subsequently became a popular souvenir for tourists. Third, Starbucks entered the market slowly with just one store in Ho Chi Minh City. Typically, Starbucks employs a saturation strategy by entering new markets with hundreds of stores to choke out competition. However, Starbucks entered the Vietnamese market in partnership with a Hong-Kong-based investment company, Maxim Group, and prioritized market research into location and distribution strategies before entering the market. (Reuters 2013) Starbucks targets young people in Vietnam and generated demand by means of scarcity. With large queues in their flagship store, Starbucks slowly began increasing its number of cafes. Lastly, Starbucks did not neglect training baristas. Usually, Vietnamese local coffee chain’s baristas are unskilled ones, but Starbucks trained them to maintain their international quality standards. This was possible because it increased stores slowly, not spreading itself too thin by growing too fast. Also, it showed a clear long-term vision and it lowered the employee turnover rate. In conclusion, the success of Starbucks in Vietnam was possible because of the respect for the local culture and market research as well as cultivating international atmosphere and quality standards.

FAILURE IN AUSTRALIA Australian Consumer Culture Overview Coffee is deeply rooted in Australian culture, as a result of immigration that has shaped the nation over the last century and brought flavours and rituals from abroad. This is a profound contrast to Asian markets where consumers generally drink tea, and where cafes are a relative novelty. In the 1950s, Italian and Greek immigrants arrived in Australia and brought their stove-top coffee makers with them in their luggage. As a result of community demand, they began roasting beans and birthing Italian-style coffee shops where immigrants could meet and socialize (Wheeler, 2010). Australia’s coffee culture was so deeply established and mature, that Italy’s world-famous Lavazza coffee company decided to export to Australia over a decade before considering the US and UK markets. Culturally, Australia has very intermediate uncertainty avoidance as per Hofstede’s cultural dimensions – this relatively high figure (when compared with the US), provides a basis for understanding the Australian coffee palate. Australians are less likely to be open to new experiences when compared to their American counterparts, which explains why Australians tend to drink three types of coffee, as per figure 1: As can be deduced from the image, the majority of Australians have two clear preferences when drinking coffee: the Latte and the Flat White. Whereas the primary drink of choice in the United States pre- Starbucks was the bitter, drip-style ‘Americano’, coffee culture in Australia is nuanced, deeply rooted, and culturally difficult to uproot. The Australian palate, and the Australian relationship with coffee, would be difficult to shake up for any corporation. The result today is that there are over 6500 independent cafes across Australia generating about $4 billion annually mainly from coffee sales. These independent cafes act as community hubs, each adapting their product offering and culture to match the suburb or neighbourhood in which they are situated. The following figure outlines Australia’s consumer preferences:

Figure 4. Coffee sold per state according to Inside Small Business

Marketing Failures The above section clearly demonstrates the nuances and idiosyncrasies of the Australian coffee culture, especially when compared to the less mature coffee markets in Asia where Starbucks has found greater success. With regards to the marketing mix, Starbucks relied too heavily on brand perception and awareness and primarily failed to consider the implications of a well-established consumer culture. Their failure to innovate and localize their offering is what ultimately led to their great retreat (Mescall, 2010) Distribution: Starbucks entered the market with a saturation strategy, by opening an immense quantity of locations at once in order to choke out small competition and monopolize the market quickly. Whereas it generated demand by scarcity in Vietnam, it adopted a fundamentally opposite strategy in Australia – which led to a failure to create enthusiasm around the brand. Additionally, this ‘invasion’ on the Australian community was perceived as boisterous and overly American. Australia, as per Trompenaars’ dimensions, is an achievement based society rather than ascription based, and therefore does not react well to large corporations “banging their chest” (Trompenaars, 1997). Price & Product: The specialty micro-roasting coffee industry in Australia set the bar extremely high prior to Starbucks’ arrival. At a moderately high price point, Starbucks failed to position itself against its competitors by demonstrating that their unique selling point isn’t the coffee, it’s the experience. Consumers simply couldn’t rationalize why they were spending more on a product that was perceived as inferior.” Starbucks customers failed to identify the “difference” in Starbucks experience and couldn’t justify paying a premium price compared to the other brands” (UNSW, 2010). In addition, unlike in Asian markets, Starbucks did not localize its product offering to match the preferences of Australians, who generally prefer Lattes, and whom subsequently failed to appreciate the convoluted vocabulary and offering provided by Starbucks (i.e. “grande skinny mocha Frappuccino”). Promotion: Starbucks relied on brand awareness and didn’t pursue any above-the-line advertisement strategies in Australia. At the time, it was the fastest growing coffee chain in the world and perhaps this led to complacency and arrogance. As such, their promotion strategy was to “build it and they will come”, by bringing in nearly 100 cafes with large and imposing signage: which further cemented Australian disdain for their perceived American presumptuousness. Service: By expanding too rapidly, Starbucks spread itself too thin and subsequently didn’t pay enough attention to the hiring process. In order to keep costs low, it hired students and low-skilled workers rather than people who culturally fit the company and are passionate about coffee. Whereas by contrast, many independent café owners work behind the bar as well, thus providing passion and expertise in every cup. Starbucks failed to create the sense of artisanship which Australians have become accustomed to in their café experience.

Strategic Failures Strategically, Starbucks made a wide range of errors that, when compounded with its marketing failings, led to its stunning retreat from the land down under. First and foremost, it relied on brand power and implicit consumer perceptions. Abroad, it has enjoyed its status as the epitome of American coffee culture. However, not all societies respond or engage with American culture as positively as others. Therefore, Starbucks was fairly unknown in Australia at the time of its arrival, and its overreliance on brand power led to it slipping through the cracks into anonymity. By failing to research the market and gauge consumer perceptions, they demonstrated a lack of respect for cultural differences. In addition to completely overestimating their brand strength, they also made mistakes in identifying their market segment. “They targeted premium coffee drinkers but their product failed to impress the very market segment they targeted” (UNSW, 2010). Secondly, their rapid expansion caused them to spread themselves too thin. The resulting overhead costs meant that they had very little time to become profitable, and as such were forced into the hugely embarrassing closing of over 60 cafes in recent years. The implication in terms of HR is also massive, because the unsustainable expansion also meant that the hiring process didn’t receive the delicate attention it required. In a country of coffee connoisseurs, Starbucks failed to hire the correct people and train their baristas into being knowledgeable professionals, further hindering their strength in Australia. The impact of their expansion also harmed their reputation, as many Australians also took a “moral stance against the American mega-chain's invasion” (Mescall, 2010). Thirdly, Starbucks relied on an ownership model rather than a franchise model. This meant that it became responsible for enormous overhead costs, and while it allowed for more management control, decisions were being made entirely in Seattle. Local franchisees would’ve shared the cost burden and also helped create a more Australian coffee experience at Starbucks. Finally, it can be surmised that by underestimating the impact and implications of local culture, Starbucks failed to understand its target market and embarrassed itself in Australia. The result today is that they have accumulated losses of $143 million, closed 60 cafes and let go of 700 employees.

NEW MARKET: ITALY So far, the report has examined two countries with similarly nuanced coffee cultures, Vietnam and Australia, and Starbucks’ subsequent performances in both nations, with strikingly polarised outcomes. Moving forward, Starbucks should carefully draw on lessons from previous experiences, both negative and positive. These are very important case studies for Starbucks when deciding to enter another coffee giant: Italy. In 2016, Starbucks announced that they are going to open first Starbucks in Milan, Italy. Entering into a new country should be a routine process for Starbucks;...