Business Expansion For Starbucks In Italy And Pakistan

Company Background

Starbucks Corporation is an American based company which had come into existence in 1971 in Seattle, Washington in the United States. They have their coffee shops in many countries across the globe; however, there are still a few potential countries that are still untouched. They had a unique image in their home country which other coffee shops do not have. They are unique in offering darkly roasted coffee which is tasteful and also high in quality. They have been able to create a very good customer response as well. The list of products includes the follows:

 – Whole-bean coffee

– Hot and cold drinks

– Micro ground instant coffee that is also known as VIA

– Full- and loose-leaf teas that also includes tea products of Teavana

–  Espresso and caffe latte

–  Frappuccino beverages

– Evolution Fresh juices

–  La Boulange pastries

– Snacks that include crackers & chips, Pumpkin Spice Latte

Many stores do also sell the pre-packaged products like the varied range of food items such as cold & hot sandwiches, and drinkware. Starbucks branded items like coffee, ice cream and cold coffee drinks in bottle format are also being sold at the various grocery stores.

At present, Starbucks operates in many locations in the different continent such as Africa, Europe, Asia, North America, Oceania and South America. They have their presence in most parts of the world but still, they are yet to enter a few potential locations. Such locations include but are not limited to like Italy and Pakistan. This particular study is also aimed at understanding the possibilities of operation of Starbucks in both Italy and Pakistan.  

The business model of Starbucks is majorly the wholly-owned subsidiaries. Unlike McDonald and Burger King, they mostly rely on incorporating the concept of wholly owned business when there is a plan for business expansion in different parts of the world.

The study in specific analyzes the possibility of business expansions of Starbucks in Italy and Pakistan. In course of the action, the study analyzes the existing business model of Starbucks to the company in finding the scope for business expansion. In doing so, the study examined the various challenging factors which might disrupt the plan. It also recommends a few import points which are necessary for avoiding any business failure in Italy and Pakistan.   

Starbucks is the world most renowned coffee chains. The organizational structure that the company has had helped it in past. The organizational structure motivates its leaders and managers and encourages them to explore the best in them. Starbucks follows a matrix organizational structure which consists of several other basic types of structure. Following are the features of organizational culture that Starbucks follows:

1. Functional structure: The structure means an alienation of works based on different kinds of functions. They follow a hierarchy where corporate headquarter controls the functions of major departments like the managing human resource activities, the marketing activities, and the financial activities. This means they follow a wholly owned service concept in most cases.
2. Geographic divisions: They are geographically dispersed in different locations and controls the varied activities assigned to such locations by aligning a senior vice president in the different geographical location. They are geographically based in China and Asia-Pacific, Europe, Americas, Middle East, Russia, and Africa. There are further divisions in the United States like the Western, Southeast, Northwest and Northeast. In those regions also, senior vice presidents are aligned to different regions. It means the Starbucks manager need to report to two senior heads such as the senior vice president in their geographical area and the corporate HR Manager.
3. Product-based divisions: They also make division based on products such as they have one division looking into the coffee and the related products. Product based division has been done to concentrate on particular product and take necessary actions if needed.  
4. Teams: It means setting up a team at every café center of Starbucks. The strategy behind such division is the development o a unit at the every coffee house, so that, best customer service could be delivered.

The Global Business Strategy of Starbucks

The existing global strategy of Starbucks is based on the wholly owned service model. Unlike many multinational giants such as McDonalds and Burger King, the company follows a different approach to their global entry. They have been able to manage it efficiently with its effective organizational structure that provides the corporate headquarter a firm control of its various coffee houses. They are able to manage it by following a matrix organizational structure which is a mixture of functional, geographical, product-based divisions and teams.

It is bit surprising to some that the company has not yet considered entering Italy which is popularly known as the ‘home of coffee’. There may be several reasons why Starbucks did not yet enter Italy where they could have found an excellent customer base. Italy is a home to world-renowned coffee like the espresso, the latte, and the cappuccino. The other products like coffee, milk coffee, foamy coffee, and others may not sound as big as it needs to be in Italy. Italy is indeed a globally renowned name in coffee culture. The few Italians had also objected strongly in past for seeking a ‘no entry’ for Starbucks in Italy. This is undeniable that the coffee offered from Starbucks may be inferior in quality than even the coffee being sold on the street side in Italy. However, Starbucks do not just provide a vivid range of coffee but, they also offer an engaging ambiance at their shops which may sound a really good thing for the Italians.  

Pakistan is the other country which is being selected for the business expansion of Starbucks. It is being selected because it is one of the booming nations in terms of economic growth. Additionally, Cafe Coffee Day (CCD) which is the biggest chain of coffee shops in India has already entered the country in Karachi which is known as the commercial capital of Pakistan. According to CCD, coffee should be a successful concept in Pakistan considering the fact that it is an Islamic country and also that they would love anything which is non-alcoholic.   

Italy:

Key Data (Source: Ec.europa.eu)-

Population (millions) – 60.5

Unemployment rate- 11.4%

GDP (USD billions) – 2,221

Per capita GDP (USD) – 36.3

Real growth in GDP- 0.8%

Inflation (CPI) – (-0`2%)

Current Account (GDP) – (-2.6)

The driving industries in Italy are the manufacturing sectors, in particular, the SMEs companies. This actually accounts for 90% of the total Italy exports. The economic condition was not that flourishing in Italy which also opened up doors to Canadian companies for exporting goods to Italy and also making significant investments (Ec.europa.eu).  

Initial Location Strategy

Pakistan:

Following are the key data (adb.org)–

GDP growth- 5.3% as of 2017

GDP per capita- $1,629 (nominal)

GDP growth – 5.28%

Inflation (CPI) – (-3.8%)

Unemployment rate- 5.9% as per 2015

There are various modes of entry which are used during a global expansion of the business. In this study, Starbucks has been assumed as moving to a global expansion in countries that are not yet being touched. The target countries for the business expansion are Italy and Pakistan. Following is the discussion on the modes of entry to identify better options for Starbucks:

Franchising: This is one of the modes to enter a foreign market. McDonalds and Burger King had followed the same procedure during their entry into foreign locations. McDonalds, in particular, had preferred buying a franchise in most cases. It has the following advantages and the disadvantages:

Advantages-

The risk of failure is minimal as companies approach those firms only which have proven identity in the target country. The franchise firms have their own set of the proven idea and occupied spaces which the common people know. Moreover, any foreign company will be able to get a less risky and also cost-effective launch in the foreign market. However, it then depends on the franchising party about how they decide terms in relation to branding. It is beneficial because it provides an established market share and hence, there will be no such requirement for market testing. The recognized brand name can also be utilized as this will create no such necessity for added advertisement. The advertisement from the chosen established name is sufficient only. However, it again depends on the deal between the franchising firm and the foreign company about what it decides like carrying the chosen brand name or giving preference to its own brand name. This also reduces the burden of investments as banks lend loans to franchises. Notably, franchising firms do already have a set of established suppliers. Hence, there is no burden of identifying and approaching suppliers.  

Disadvantage-

There can be some disadvantages as well like the franchisers might pose some certain restrictions on how one can run the business. Additionally, franchisers do not guarantee of a quality workforce. A communication between the parent company and the franchisers is another reason for an ineffective workforce. The franchisers may sometime prove to be costlier. The franchisers get a percentage of profit; however, the quality of work may or may not be up to the expected level. If the deal is not productive, it becomes very difficult to sell the franchising firm.

Economic Profile

Joint venturing: This is another way of entering a foreign market. Many multinational companies do prefer the same process while entering a new foreign market. Following is the list of advantages and disadvantages of going with the joint venture:

Advantages-

It helps to get a new insight and range of other experts as well. It is like an exchange of expertise between the two joint venturing firms. Better resources can be attained like the better technological advancement, advanced R&D capabilities, and much more. Loss and profits are shared between the two parties based on the agreement which decides how much shares one party will hold. Marketing & advertising expenses are shared between the two parties.

Disadvantages-

Flexibility which is a part of joint-venture can be limited and on such occasion, the individual business will be tested. It is also never guaranteed that both parties will have equal involvement in the business. There are possibilities for objectives getting hampered as one of the parties of the joint venture may not be fulfilling the expected benefits. The venture lacks in balance and it also attracts a clash of culture. Clash of culture is quite certain with the joint venture. Partners can prove to be unreliable. It is very difficult to cancel the deal and it requires a lot of legal formalities and official talks to actually get out of the venture.

Wholly owned subsidiaries: This is also being used by multinational companies and Starbucks also follows the same strategy. It means opening up the company’s own subsidiaries in the target market. It offers a lot of benefits like the operation will be in control. Quality performance could be delivered. The best of professionals can be employed in such subsidiaries. It has some disadvantages as well as it will attract huge investments required for setting up a subsidiary ranch in a target market. This may also face challenges from the political, social and the legal perspectives of the target country. An effective relation with labors is also required to be maintained.

It is indeed very difficult to decide the best feasible mode of entry for Starbucks in Italy and Pakistan. Both the modes of entry have certain advantages and disadvantages. It is bit confusing and challenging also. It depends on the strategic management team of the Starbucks Company and their decision on selecting the best entry mode. However, it again looks apparent that a wholly owned service format will help Starbucks a lot in both Italy and Pakistan. This is advisable also because the company has certain concerns in regards to business. Starbucks will never compromise on those concerns like skilled workforce, product quality, dependable labor workers, operating cost, product quality and a long-term operational steadiness. Undoubtedly, a skilled workforce and a quality service may not be assured with the franchising strategy. On the other hand, sustainability is always in doubts with joint ventures. It looks like as if the business model which Starbucks follows is suitable for both Italy and Pakistan. The wholly owned service will probably be the best mode of entry for Starbucks.

Mode of Entry

Pakistan-

Muslims are in majority in Pakistan. Most of them are against alcoholic beverages. Hence, they may respond to non-alcoholic drinks like tea and coffee. Caffe Coffee Day (CCD), the largest coffee chain in India, has already entered the commercial capital of Pakistan. They are planning for more such chains in Pakistan. Being a Muslim dominated country, most people will prefer having coffee or tea instead of alcoholic beverages. Hence, the culture is growing in offices, colleges or many other places of social gatherings. People love being in places where they can spend a few time and can also have a few snacks & coffee or tea also. The concept as such of Starbucks will provide the opportunity of being in the attractive ambiance and spent a few time with some coffee.

Italy-

The country is known as the home of coffee. The people living here are carrying with them the historical background for their addiction to coffee. Choices are very limited in this country like espresso, cappuccino and others. This is indeed good from the perspective of Starbucks as they will not require much of innovation to perform. The Americans are habituated of getting espresso being served to them in 3 minutes in Barista. On the other hand, Italians will not tolerate waiting for three minutes time. There is a different culture being practiced in Italy and that is to serve coffee on highways to drivers, so that, they do not fall asleep.

Italy-

The political situation in Italy is not so good, especially after the Brexit. Companies operating in the country need to pay a 3% tax on their gross revenues as per the policy of European Union. Further, the existing Prime Minister has been criticized for the budget which was expected to lower down the structural deficit by 0.3%. Italy stands at the second spot after Greece which is in high debts in Europe. On the other hand, the government is being doubted over its capability to reduce the debt. Companies operating in the country may be required to pay more than their expected amount of tax.

Despite the challenges highlighted in the section, there are still prospects for the business. The Gentiloni Government has keen interest in implementing the political reforms framework of the predecessor government. The move will work or not is also doubtful due to the next general elections which are scheduled for 2018. The present government has actually a very less time. The certainty of implementation will only be ensured if the present government is voted the winner again in the 2018 election. If the current government stays another few years then this may establish a favourable political condition for business in Italy.

Pakistan-

The political condition in Pakistan is pretty unstable. Political conflicts are very common and that affects the performance of share market. The stock exchange in Pakistan is not an easy place to invest. A less than quarter of the listed companies had been benefitted. However, the Nawaz Shariff’s government had made things easier for investors to buy shares easily. Consequently, it resulted in a larger flow of international funds since 2012. It has also been identified as one of the best-performing stock markets in the world in between 2011-2012.  

Despite the political instability in Pakistan, there are possibilities for political reforms. A delegation of ICAP (Institute of Chartered Accountants of Pakistan) has presented the proposal document for budget (2018-19) to the current prime minister of Pakistan Mr. Shahid Khaqan Abbasi emphasising on the needs for tax reforms. The delegation has recommended the prime minister urging the government for incrementing the tax base with the help of some bold decisions. It is required to improve the economy and augment the tax to GDP ratio.  

Pakistan-

Investment transparency is governed with the help of few acts like Foreign Private Investment (Promotion & Protection) Act, 1976 and Protection of Economic Reforms Act, 1992. Five percent customs duty is charged on imports of products which are not being manufactured locally. Both foreign and local investors will bear the incentive. Sales tax and customs duties are payable at every import of goods that also include the locally manufactured goods.

Italy-

Foreign business remains burdened with a lot of political and legal complexity. There are interferences like political interruptions, corruption, bureaucracy, a rigid labor market, an unproductive judicial system, a high level of taxation and the high cost of conducting business. Despite these challenging situations Italy offers ample of opportunities to foreign businesses. There are prospects in few industries like the high-class consumer goods. In fact, the North American companies do take interest in Italy; however, they are also skeptical about the future due to few uncertainties like the business prospect in the country, the culture, and the legal & regulatory guidelines.

Pakistan-

The human resource management in Pakistan has some serious challenges which may or may not be resolvable. The labor market needs to have a framework of governance which could take an attempt to reduce the challenges both in the formal and the informal kind of market. The formal kind of market is not being able to retain the workforce. They are not getting better opportunities and hence, they are looking for some better options. In course of the action, they are also moving to foreign locations like the abroad countries and also the Middle East countries. The human resource management in Pakistan needs to come up with a strategy, so that; an improved platform is being made available to the employees. This indeed looks challenging indeed considering the political instability and a poor legal framework.

On the other hand, the informal labors are also in poor condition. An announcement has been made regarding the increment in wages by 1000 rupees but, a question still persists whether that will be a sufficient improvement. Despite the low wages, the government of Pakistan has failed to manage its informal labors. The condition still is the same. The initiatives are not working as there are issues at the basic level which needs to be repaired. The budget structure needs to be a good one. Additionally, the debt amount should be reduced by a considerable percentage in the nearing future.  

Italy-

Italy has one of the worst labor markets in Europe. Analysts and labor market experts often make this speculation. This may be sound untrue; however, it has remained a fact for years. The statistics suggest the very same trend. Italy like many other Southern European countries possess some negative records like highest rate of long-term unemployment, the lowest participation rate of women, the highest unemployment rate of youths and the older workers. The employment rate is even below than 70% of the working-age set by the European Union.

There are two other important facts of the Italian labor market. The first is the distribution of secretive work in the underground economy and the other is the regional disparities of the larger the state of affairs of the labour market. The difference in the employment rate is much higher. In Italy, there are people who can work and have potential to become a good worker; however, those people are far away from the realization. They are least bothered for employment because they have interest in some other activities. Thus, they are not revealed in the official list of employed workers. The population is aging much quicker than the other parts of Europe. A target has been set for the employment rate; however, Italy seems to be staying far away from the fact. The fact which is making the much of difference is the participation of female, young and the older workers. The employment rate is worse than any other European countries due to the facts highlighted. The adult males have performed well. They are in employment and are close to other European countries in regards to being employed.  

However, there have been quite a few developments in recent times. Private Job placement agencies have played important roles in the fact. It has encouraged young fresh workers for part-time employment, apprenticeship contracts and fixed-term training. This has produced significant job creation in recent times. Policies have been made strict with a special focus on strike regulations. The contract type is now modified which will assist the new workers.  Additionally, they will also be protected from invalid firing. The use of temporary acts is also a boost to the labour market. The act will support the entrance of significant young workers on a temporary basis. The earnings on a per hour basis are also being revised. The introduction of Job Act and the provision of monetary values for newly hired professionals on a temporary basis have not produced effective results. It has proved ineffective in regards to bettering the quality, quantity and duration of new jobs.  

Starbucks may find ample of opportunities in both Italy and Pakistan. Italy is known as the coffee country. Hence, localization of products will be recommended to Starbucks. Starbucks may not be able to sell their exclusive products. They need to understand the taste of Italian coffee consuming customers. They had done so in past when they entered China. However, they failed to deliver the same in Australia. Being popular as a coffee country, Starbucks will find customers provided that, it takes care of localization of product. Starbucks may face challenges in regards to the skilled workforce. The new Job Act for attracting young workers on a temporary basis has not proved to be successful. Job participation from older workers, young and the women have been quite low than any other European countries. Customers are shaping the country as a popular destination for Coffee; however, the labor market is detaining potential workers from work. The political scenario is not also supportive. The country is in high debt. The business operating in the country needs to pay 3% tax on the revenues as per the European Union policy. Despite the challenges, North American countries take full interest in doing business in Italy.

Pakistan is another potential market for coffee because of the cultural shift towards a Western culture. The lifestyle, especially in youngsters, is going through radical changes. Western cultures such as going to coffee shops and spend few times with family or friends is now a growing trend in Pakistan. Caffe Coffee Day (CCD) which is the largest coffee chain in India has already entered Pakistan. Starbucks may probably find potential coffee customers; however, they need to make a balance between tea and coffee. They cannot select coffee as their primary offering to customers who predominantly prefer tea. Starbucks may also face challenges in the face of an unstable political condition. The labor cost is cheaper and hence, Starbucks will be able to reduce the cost of operation.

Conclusion: 

Therefore, both Italy and Pakistan have challenges as well as opportunities for Starbucks. However, the cultural background is much supportive. In Italy, Starbucks needs to be careful while offering the products. The key to success in Italy will be to adopt the localization of product. The key to success in Pakistan will be to cash on the emerging trend for coffee. Labor cost is the other advantage for Starbucks in Pakistan provided that if it effectively handles the legal and political challenges.

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