From Hill, ‘nternational Business’, 6" ed., 2007, McGraw-Hill/Irwin CLOSING CASE Thiry years ago Star bucks was a single store in Seattle's Pike Place Market selling premium roasted coffee. Today it isa global roaster and retailer of coffee with over 8,400 stores, more than 2,000 of which are to bbe found in 31 foreign countries. Starbucks Corporation set out on its current course in the 1980s when the com- pany’s director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffee house experience. Schultz, who later became CEO, per- ssuaded the company’s owners 10 experiment with the coffeehouse format—and the Starbucks experience was bom. The basic strategy was to sell the company’s own, premium roasted caffe, along with freshly brewed espresso-style coffee beverages, a variety of pastries, cof- fee accessories, teas, and other products, in a tastefully designed cofeehouse setting. The company also stressed providing superior customer service. Reasoning that mo- tivated employees provide the best customer service, Starbucks’ executives devoted a lot of attention ro em: ployee hiring and training programs and progressive compensation policies that gave even part-time employ- ces stock option grants and medical benefits. The for- mula met with spectacular success in the United States, where Starbucks went from obscurity to one of the best known brands in the councry in.a decade. In 1995, with almost 700 stores across the United States, Starbucks began exploring foreign opportunities. Ins first target market was Japan. Although Starbucks had resisted a franchising strategy in North America, where insstores are company owned, Starbucks initially decided to license its format in Japan. However, the company also realized that a pure licensing agreement would not give Starbucks the control needed to ensure that the Japanese licensees closely followed Starbucks' successful formula, So the company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50 percent stake in the venture, Starbucks Coffee of Japan, Starbucks initilly invested $10 million in this venture, its first foreign direct investment. The Star- bucks format was then licensed to the venture, which was changed wich taking over responsibility for growing Starbucks’ presence in Japan. ‘To make sure the Japanese operations replicated the “Starbucks experience” in North America, Searbucks transfered some employees to the Japanese operation. The licensing agreement required all Japanese store managers and emplayees to attend training classes simi- lar to those given to U.S. employees. The agreement also required that stores adhere to the design parameters es- tablished in the United States. In 2001, the company in- troduced stock option plan forall Japanese employees, making it the first company in Japan to do so. Skeptics doubted that Starbucks would be able co replicate its North American success overseas, but by early 2005, Starbucks had almost 550 stores in Japan and plans to continue opening them at a brisk pace. After getting its feet wet in Japan, the company em- barked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60 retail stores, or $84 million. An American cou- ple, originally from Seattle, had started Seattle Coffee with the intention of establishing a Starbucks-like chain in Britain. in the late 1990s, Starbucks opened stores in Taiwan, China, Singapore, Thailand, New Zealand, South Korea, and Malaysia. In Asia, Starbucks’ most common strategy was to license its format to a local operator in return for initial licensing fees and royalties on store revenues. Star- bbucks also sold coffee and related products to the local licensees, which then resold them to customers. As in. Japan, Starbucks insisted on an intensive employee training program and strict specifications regarding the formar snd layout of the store. However, Starbucks be- came disenchanted with some of the straight licensing arrangements and converted several into joint-venture arrangements or wholly owned subsidiaries. In Thai- land, for example, Starbucks initially entered into a li- censing agreement with Coffee Partners, a local Thai company. Under the terms of the licensing agreement, Coffee Partners was required to open at Teast 20 Star” bucks coffee stores in Thailand within five years. How- ever, Coffee Partners found it difficult to raise funds from Thai banks to finance this expansion. In July 2000, Starbucks acquired Coffee Partners for about $12 million. Its goal was to gain tighter control over the expansion strategy in Thailand. A similar development occured in South Korea, where Starbucks initially li censed its format to ESCO Korea Ltd. in 1999, Al- though ESCO soon had 10 very successful stores open, Starbucks felt that ESCO would not be able to achieve the company’s aggressive growth targets, so in Decem- ber 2000 it converted its licensing arrangement into 2 joine venture with Shinsegae, the parent company of ESCO. The joint venture enabled Starbucks to exercise ireater control over the growth strategy in South Korea and to help fund that operation, while gaining the ben- efits of a local operating partner. By Ocrober 2000, Starbucks had invested some $52 million in foreign joint ventures. By the end of 2002, Starbucks had more than 1,200 stores in 27 countries outside of North America _ —z260 Part 3 <2) Th «and was initiating aggressive expansion plans into main- land Europe. The company's plans called for opening stores in six European countries, including the coffee cultures of France and Italy. As its first entry point on the European mainland (Starbucks had 150 stores in Great Britain), Starbucks chose Switzerland. Drawing on its experience in Asis, the company entered into a joint venture wich a Swiss company, Bon Appetit Group, Switzerland's largest food service company. Bon, Appetit was to hold 2 majority stake in the venture, and Starbucks would license its formar to the Swiss company using a similar agreement to those it had used success- fully in Asia. This was followed by a joint venture in Germany with KarstadtQuelle, one of the country’s largest retailers. Under the agreement, Starbucks held 18 percent of the ejuity in the venture, and Karstadt the remainder, In early 2005, with more than 2,000 inter- national stores, Starbucks announced that it believed there was the potential for up t0 15,000 stores outside of the United States. Sources: Starbucks TOK, various ear C. MeL. cn, *Stareks Seto Invade Covfee Loving Continent,” Seale Times, Cerber 4, 200 Notes 1. United Nations, World Investment Report, 2000 (New York and Geneva: United Nations, 2001) 2. United Nations, World Investment Report, 2004, and United Nations Conference on Trade and Development, “World FDI Flows Grew an Esti- mated 6% in 2004," UNCTAD press release, January 11, 2005 3. World Trade Organization, Intemational Trade Statistics, 2004 (Geneva: WTO, 2004), and United Nations, World Investment Report, 2004 United Nations, World investment Repert, 2004 Ibid. United Nations Conference on Trade and De- velopment, “Global FDI Decline Bottoms Out in 2003." 7. United Nations Conference on Trade and De- velopment, “World FDI Flows Grew an Esti ‘mated 6% in 2004.” 8. United Nations, World Invesoment Report, 2003 (New York and Geneva: United Nations, 2004). 9. United Nations, World Investment Report, 2002 (New York and Geneva: United Nations, 2003). 10. United Nations Conference on Trade and De- velopment, “Global FDI Decline Bottoms Out in 2003." SJobal Trace and Investment nvircement p. Els}. Ordones, “Starbucks co Stat Major Expansion ia Overseas Marke," The Wall Sect Jourel, October 27, 2000, BIO. 8, Homes and D. Bennett, "Planet Seathucks," BusinesWeek, Seprember 9, 2002, pp. 99-110; and “Starhueks Cutler International Growth Strategy.” Business Wire, October 14, 2904 Case Discussion Questions 1, Initially Starbucks expanded internationally by li censing its format to foreign operators. It soon be- ‘cate disenchanted with this strategy. Why! 2. Why do you think Starbucks has now elected to ex- pand internationally primarily through local joint ventures, to whom it licenses its format, as opposed toa pure licensing strategy? 3. What are the advantages of a joint-venture entry mode for Starbucks over entering through wholly ‘owned subsidiaries? On occasion, Starbucks has chosen a wholly owned subsidiary to control its foreign expansion (e.g. in Britain and Thailand), Why? 4. Which theory of FDI best explains the intema- tional expansion strategy adopted by Starbucks? 11. United Nations, World Investment Report, 2003, and United Nations Conference on Trade and Development, “Global FDI Decline Bottoms ‘Our in 2003.” 12. United Nations Conference on ‘Trade and De- velopment, “World FDI Flows Grew an Esti- mated 6% in 2004.” 13. United Nations, World Investment Report, 2004 14, Ibid. 15. See D. J. Ravenscraft and EM. Scherer, Mergers, Selloffs and Economic Efficiency (Washington, DC: The Brookings Institution, 1987). Also A. Seth, K.P. Song, and R.R. Pettit, “Value Cre ation and Destruction in Cross Border Acquisi- tions," Strategie Management Journal 23 (2002), pp. 921-40, 16. For example, sce S. H. Hymer, The International Operations of National Firms: A Study of Dinect Foreign Invesment (Cambridge, MA: MIT Press, 1976); A. M. Rugman, Inside the Mudtinationals The Economics of Intemal Markets (New York: Columbia University Press, 1981); D. J. Teece, “Multinational Enterprise, Internal Gover nance, and Industrial Organization,” American Economic Review 75 (May 1983), pp. 233-38; and C. W. L, Hill and W. C. Kim, “Searching for