Inception of the Deception – Failure of Starbucks in Australia and Entry in Milan

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The Sophisticated Coffee Culture was successful in taking the winds out of the sails

The first thought that instinctively strikes one’s mind when they read/listen about Starbuck’s failure somewhere- that people must have a distaste for coffee in that particular region. If we actually flip through its golden lineage coupled with its business strategies one gets startled to discover that one of the main ingredients in its recipe of serial success is actually introducing the premium coffee café culture in countries. The three co-founders Gordon Bowker, Zev Siegl and Jerry Baldwin along with the manager, Howard Schultz (bought out the owners in 1987) did the same thing in the USA, and is currently doing the same in Emerging Economies such as China and India where tea is still the preferred beverage over its counterparts.

Starbucks with its sugary syrup drink was able to devise a lite version of the craftsmanship involved in brewing and roasting.

Australia Diaries of Starbucks

Entry in Australia

When Starbucks opened its 1st store in Sydney in July 2001, it had expected its Australian Operations to be a herculean Cash Cow in making. Aussies in General, are prodigious coffee connoisseurs who drink 3-4 cups a day. The Australian coffee market is one of the biggest in the world with the industry expected to hit the 6 billion USD mark alone in 2018. (source CNBC)

In 2018 alone, the coffee industry is expected to generate over 6 Billion USD in revenues

No Strategy = Poor Performance

The public opinion and the management were of the opinion was that due to the strong Coffee Culture in Australia which was primarily built due to immigrants from Europe after the 2nd world war; Since people already loved coffee their workload was cut to half and they thought that if they just open stores and lay out the “green Carpet” people would coming running to the stores in hordes. This lead to a wild series of Starbucks café popping up at every nook and corner of the major cities along with some outlets even in the rural areas which spoke volumes of their overconfidence.

The overconfidence did not end there. They assumed that since the brand was already known to the masses, they refrained from spending on traditional marketing avenues-Bill Boards, Pamphlets etc.  They didn’t even try to integrate their product with the Australian Culture. The management had also assumed that the things that worked in the US would work there too and they were ready to battle head on the 8000 odd stores in the country which offered similar products.

The Shortsightedness led to 105 million USD in losses and 54 million USD in debt by 2007. From 87 stores they were cut short to just 26 stores.

There were several reasons that came to the fore. Firstly, People didn’t like the Sweet drinks along with their fancy name. Due to the hasty expansions, Starbucks couldn’t provide the rich experience they are known for. The Staff wasn’t professional enough due to the lack of training. Aussies love to chat about their cup of coffee and they didn’t know anything about the process. Moreover, the customers were paying a premium when the switching cost was negligible which is proofed by the fact that no major player holds more than 5% of the market. The Gloria Jeans chain has the largest market share, but that is only an estimated 4%, followed closely by Michel’s Patisserie (3.5%) and the coffee club (3%). All these factors were perfect ingredients for the inevitable doom.

The Coffee Culture is so Sophisticated that there is no major Player, hence zero Switching Costs

Starbucks Exit from Australia

The situation didn’t improve at all even after the downsizing. After multiple failed attempts to capture the golden goose, Starbucks Australia admitted defeat – “in a very sophisticated coffee culture; where simply not enough people had walked into the stores “were forced to sell their Australian operations to the Withers Group in 2014. Even after 4 years; since the transfer, there are only 36 stores in the continent. The strategies have been revamped to cater to the tourists who fly from places where Starbucks has been successful and are happy to dine in at a familiar place rather than the Aussies.

Never Give Up on Your… Coffee – Starbucks Enters Milan 

Australia has been a clear example of how consumer’s taste, experiences and cultural difference if not taken into account can ruin even the biggest of corporate giants to ashes. The rich coffee culture which was supposed to peg its Meteoric rise and fill its coffers eventually led to its demise. A litmus test awaits for them in Milan, home of the espresso which shares similar values where Starbucks opened its 1st ever store on Sept 6, 2018, in the form of a roastery. Time will only tell what they have learned from their bitter Australian experience.