International Marketing: Starbucks Failure in Australia

Introduction

One of the main tasks of any business entering the foreign market is the analysis and correct definition of the marketing mix. The elements of the mix include price, product, location, and promotion, which can vary significantly depending on the socio-economic and cultural characteristics of the country (Powers and Loyka, 2010). Consequently, one of the most common international marketing problems that lead to the failure of many companies in foreign markets is the wrong choice of one or more elements of the mix. This paper will look at such an issue through the Starbucks Australia failure, using theories and concepts of standardization and adaptation and pricing strategies to pinpoint the source of the problem.

History of the Starbucks Failure in Australia

Starbucks is one of the most famous coffee chains for its widespread coverage in media and popular culture. Today, Starbuck has about 33,000 stores worldwide, which sell both coffee drinks by using a variety of recipes and roasted coffee beans (Bloomberg, 2020). However, most of the stores are located in the United States, although the company operates in more than 70 countries around the world (“About us,” no date). Starbucks’ success is driven by high-quality service, a wide range of products, and a chain brand that attracts customers. However, as practice shows in Australia, these features sometimes are not enough when entering a foreign market.

Starbucks works in Australia today, but its sales and store numbers are relatively low following its previous failure. The company first entered the Australian market in 2000 and began its rapid growth, increasing the number of stores to 90 by 2008 (Turner, 2018, para. 3). However, in this case, growth did not mean development as demand for Starbucks in Australia remained low while the country’s coffee culture was at a high level. Australians were reluctant to buy sugary and complex drinks for a high price because they were used to classic coffee recipes (Honack and Waikar, 2017, p. 16). For this reason, in 2008, Starbucks closed 70% of its stores in Australia after losing $ 105 million in its early years and handed over the remaining ones to the Withers Group in 2014 (Turner, 2018, para. 8; Lutz, 2014, para. 2). Today there are 57 stores in the country as the company rethought its policy and adopted a gradual expansion approach (“Store Locator,” no date). However, compared to other coffee chains and coffee houses, it lags behind in the Australian market.

Reasons for Failure Through the Prism of Standardization and Adaptation Theories

The globalization of the market and the expansion of international marketing require companies to decide strategies for doing business in different countries. Levitt, in his articles, has supported the globalization strategy for the internalization of companies, noting the impact of integration on markets (Hollensen, 2020, p.447). However, there is debate about the need to standardize or adapt the marketing mix to enter overseas markets as both approaches have drawbacks.

Standardization means applying the same approaches and elements of the mix for all markets since this way simplifies the management of departments, the transfer of competitive advantages from market to market. This way is justified by the gradual homogenization of markets (Hollensen, 2020, p.450). In other words, proponents of this approach believe that globalization and global competition have made markets more similar, allowing them to apply standardized marketing strategies and practices. At the same time, advocates of adaptation note the cultural, social, and economic differences between countries and insist on creating separate marketing mixes for all countries (Hollensen, 2020, p. 450). Nevertheless, in practice, the choice of one of the paths is problematic, since it does not meet all demands of marketing (Hollensen, 2020, p.447). Thus, the task of managers is to choose the degree of standardization and adaptation necessary for each market.

Nevertheless, Starbucks did not manage to choose the optimal way, which led to its failure in Australia. The reason for the error was probably an insufficient analysis of the market before entering, which led to the choice of the wrong way. Hollensen (2020) noted that the most significant external factors influencing the choice of standardization or adaptation are cross-cultural differences and tariff and non-tariff barriers. The US-based Starbucks looked over the Australian market and suggested that American and Australian cultures are broadly similar due to common language, origins, underlying cultural values, and even origins of coffee culture (Adams, 2012). In addition, Australia has a developed economy, and residents have a high purchasing power, which allows Starbucks to keep the price bar, which is higher than the average among coffee sellers. For this reason, the company entered the market using standardization and did not adapt the product and the price. Instead, the company has opted for aggressive expansion with core propositions such as premium coffee, superior service, and an upscale coffeehouse experience (Honack and Waikar, 2017). However, these propositions were not enough as Australia already had a mature coffee culture.

The Product Adaptation

The first mistake Starbucks made was by not examining the consumer’s consumption habits. Australia is a country with a highly developed culture of coffee consumption as a way of social interaction, and the coffee industry in 2018 reached more than 6 billion in revenue (Turner, 2018, para. 5). However, Australians prefer simple, classic coffee recipes that differ significantly from the options offered by Starbucks. Honack and Waikar (2017, p. 16) note that many buyers considered “raised on a diet of real espresso” to offer Australians “hot coffee-based smoothies” made from bitter, weak coffee. Thus, even a significant increase in the number of stores did not help the company attract customers due to the inappropriateness of their drinks to the needs of Australians, but only meant unnecessary expenses for running unprofitable restaurants.

Adaptation of the Price and Pricing Strategies

The second mistake, which also became critical for Starbucks, was the lack of price adaptation for the new market. As Kelly (2015) noted, although it is not always essential to change pricing strategies, companies often grow faster by adapting their prices to local needs. However, Starbucks relying on the experience of doing business in the United States and the economic level of development of Australia has set relatively high prices for coffee. Although the brand, quality of coffee, and service were the reasons for setting such prices, the company did not consider both consumer preferences and the competitive environment. For this reason, Australians have chosen more familiar and affordable places to drink coffee and meet friends.

Theoretically, one might note that Starbucks used a skimming pricing strategy that was probably based on some facts and assumptions. First, as Hollensen (2020, p. 517) indicated, the product demand and its uniqueness are some of the features that help implement the strategy successfully. A review of the Australian market demonstrates a strong consumer demand for coffee, and complex multicomponent drinks options are virtually underrepresented in the market. At the same time, Hollensen (2020, p.157) emphasizes, “Products should be designed to appeal to affluent and demanding consumers, offering extra features, greater comfort, variability or ease of operation”. All of these features describe Starbucks in the US and make the strategy effective. However, since Starbucks did not estimate the demand for sophisticated sugary drinks in Australia, all the additional features were of no interest to buyers. Consequently, the skimming pricing strategy has been ineffective in Australia due to the lack of demand for the product.

A more appropriate strategy would be market pricing, which would allow the company to adapt prices and attract a new segment of buyers. The penetration pricing strategy is inappropriate in this case, as it diminishes the Starbucks brand as a premium coffee seller and negatively affects its profit (Hollensen, 2020, p.158). However, since there were enough competitors in the Australian market, Starbucks could target their price to start a business and attract customers. Since competitors’ prices are also relatively high due to the high purchasing power of Australians, the difference for the company would not be noticeable but not detrimental. At the same time, its advantage is a high-quality service and a brand that, over time, could bring the company to an advantageous position. In addition, lower prices for sweeter, complex, and caffeine-free drinks could also attract audiences unfamiliar with coffee consumption, such as teens or children. By attracting buyers and defining the interests of Australians, Starbucks could increase the sales and value of drinks. However, in this case, the company needed to focus not on opening new stores but on adapting the range of products.

Thus, the theory and strategies demonstrate that Starbucks needed to focus on product and price adaptation in the Australian market. While standardization might seem like the right choice, it should be less significant in scope, for example, be used only in distribution and promotion. A more detailed analysis of the market segment and customer preferences, which would show the need for a shift in emphasis on product and price adaptation, would contribute to the correct choice of the way to enter the Australian market.

Disadvantages of Theories and Concepts

While theories and concepts provide many benefits for strategic marketing planning, they also have some drawbacks. Most of these shortcomings can be eliminated by using several approaches that explore the issue from different angles, but this requires an accurate understanding of their features. For example, a disadvantage in choosing a way for the internationalization of a company and entering new markets is the lack of precise boundaries that define one or another approach. Starbucks’ example partially demonstrates this flaw. While the company’s main problem is a lack of Australian buyers’ preferences understanding, their choice approach also had a sound basis.

For example, standardization of management, promotion, or selection of a location for a company in Australia is appropriate as a whole due to similarities with the American market. Moreover, although the product requires adaptation, the label and brand are standardized (Akgün, Keskin, and Ayar, 2014). In addition, the concept of the effectiveness of approaches is also relative, since it can be measured in terms of economic outcomes, achievement of strategic goals, or acceptance of the product by buyers (Ryans, Griffinth, and White, 2003, p. 592). Consequently, the main problem with this concept is the lack of accurate measurements or indicators that could determine the relationship between standardization and adaptation of the marketing mix.

Pricing strategies also have shortcomings in the process of determining the most suitable one and in their direct application in practice. For example, choosing between skimming and market pricing requires an accurate assessment of product uniqueness, the level of competition in the sector, and price differentials. If only a part of the products that the company offers is unique, while the other part is necessary to meet the customers’ needs, the definition of the strategy is more difficult. In addition, a marketing strategy that is more appropriate for Starbucks in Australia also has its drawbacks in practice. For example, a competitive price may not be high enough for unique drinks, which will force the company to reduce their range. At the same time, this price may not correspond to the proposition of premium and exclusive coffee. In both cases, these flaws will affect Starbucks’ brand and positioning. However, appropriate promotion and emphasis on quality and service can offset this impact. Nevertheless, these features demonstrate that the choice of a pricing strategy requires an integrated approach and timely amendments.

Conclusion

Therefore, Starbucks’ example demonstrates the importance of accurate analysis and selection of degrees of adaptation and standardization when entering the international market. To this end, a company can use adaptation and standardization theories as well as pricing strategies that are useful for determining direction. However, while the company’s failure is justified mainly by a lack of analysis, the application of theories also has difficulties, since they do not have definitions and numbers that can accurately indicate the right choice. Consequently, while theoretical models, approaches, and concepts are essential tools for research in marketing, their application requires critical analysis and attention to detail.

Reference List

About us (no date).

Adams, J. (2013) ‘Australia’s American coffee culture’, Australasian Journal of Popular Culture, 2(1), pp. 23-36.

Akgün, A. E., Keskin, H., and Ayar, H. (2014) ‘Standardization and adaptation of international marketing mix activities: a case study’, Procedia – Social and Behavioral Sciences, 150, pp. 609–618.

Bloomberg (2020) ‘Starbucks outlines vision for the future and reaffirms strategy for continued growth at scale, updates ongoing growth model’.

Hollensen, S. (2020) Global marketing. 8th edn. New York: Pearson.

Honack, R. and Waikar, S. (2017) ‘Growing big while staying small: Starbucks harvests international growth’, Kellogg School of Management Cases, pp.1-22.

Kelly, N. (2015) ‘The most common mistakes companies make with global marketing’, Harvard Business Review.

Lutz, A. (2014) ‘Starbucks has failed in Australia’, Insider.

Powers, T.L. and Loyka, J.J. (2010) ‘Adaptation of marketing mix elements in international markets’, Journal of Global Marketing, 23(1), pp.65-79.

Ryans, J.K., Griffith, D. and White, D. (2003). ‘Standardization/adaptation of international marketing strategy: necessary conditions for the advancement of knowledge’, International Marketing Review, 20(6), pp. 588-603.

Store locator (no date).

Turner, A. (2018) ‘Why there are almost no Starbucks in Australia’, CNBC.

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