Operating in an emerging economy: a case of Starbucks in Brazil

Author: Iloka Benneth Chiemelie
Published: 8 / 12 / 2013

1.0 Introduction

The present business environment is filled with a number of uncertainties in the sense that it is increasingly becoming very difficult to predict the potential of businesses entering new markets to success. A number of factors play influential role in the case of uncertainty highlighted, but the most significant of these factors are increased competition.

Number researches (such as Ruggles, 1998; McCann and Buckner, 2004; Ciabuschi, 2005) have discussed on the influence of increased competition on business success, and such discussions have linked increased competitiveness to increase in internationalization of firms and globalization of the market. With numerous institutions such as the WTO already established to regulate the business processes conducted by member nations, it becomes very clear that the global market is fast transforming into an open sphere where the survival of the fittest is the case for companies that are “diehard fans” of increased productivity and profitability.

The business of every business has for long been described as “business” – with the implication being that companies should focus primarily on their own growth irrespective of whether such growth influences the overall social wellbeing of the country that they exist in. On that account, the view will be in the form of increased threats to both social values and the lives of people residing within such places.

However, the view of corporate social responsibility (CSR) is geared towards ensuring that these companies maintain the social value and quality of life in their new market. In any case, there is a question that has for long yielded mixed responses and feelings and that is as to whether these multinationals will be able to ensure that their business is sustainable (satisfying the needs of the present generation without compromising the potentials of the future generations to meet their own need).

On that ground, this paper is designed to present a proposal for conducting the business analysis of Starbucks in Brazil. Brazil has been grouped together with India and China as the potential super powers of the future. With continued increased in economic growth and the abundance of agricultural products, there is no refuting the fact that Brazil is one of the countries with potential for business growth (especially for restaurants and eatery businesses such as Starbucks).

2.0 A brief about Starbucks

Starbucks was formed in Seattle, Washington in 1971, with the objectives of selling only packaged coffee. Howard Schultz, CEO travelled to Italy in 1983 and visualized the Italian concept of coffee as a new potential business. In 1985, he created a café called II Giornale which used coffee grains supplied by Starbucks, and in 1987, he bought over Starbucks together with local investors. Since then, Starbucks has grown from strength to strength and now serves millions of customers in 60 countries with its 18,000 stores (Starbucks, 2012). Starbucks entered the Brazilian market in 2006; with the opening of its first two stores at Shopping Morumbi in Sao Paolo (Starbucks News, 2006).

3.0 Entry strategy adopted by Starbucks

From the above analysis, it can be seen that the entry strategy adopted by the company is foreign direct investment (FDI). The basic definition of FDI is a business strategy in which the company starts up a new business in a foreign market from the scratch. The company entered into Brazil through this means by establishing two outlets at Shopping Morumbi in Sao Paolo

4.0 PESTLE Analysis

4.1 Political factors – the Brazilian government has been working tireless to help local entrepreneurs to survive and this simulation is thought to be capable of increasing the purchasing power of customers (Animata et al., 2006). This increase in purchasing power will help Starbucks to be successful as more customers are likely to patronize their products. The political scene in Brazil is also improving on a constant base, with the government encouraging foreign investors to open coffee stores and enter its coffee industry as a way of increasing the demand and consumption of Brazilian coffee. Therefore, it can be said that the political environment creates a huge opportunity for the success of Starbucks in Brazil.

4.2 Economic factors – together with India, China, and Russia, Brazil is one of the countries the new emerging market economy. Brazil has recorded an average annual growth rate of 2.4% since 1980 (1MF, 2004), New economic policies are designed in Brazil to aid stabilization of its public debts, maintenance of current account surplus and meet inflation targets. The ability of Brazil to control its inflation has resulted in an increased confidence in the Brazilian market (Animata et al., 2006). The market is constantly gaining high surplus cash and its increasing the purchasing power of customers. Thus, the economic environment is good for the survival of Starbucks in Brazil.

4.3 Social-cultural factors – Brazil is the second largest coffee consumer after the US (Animata et al., 2006), with 93% of the population drinking coffee on a regular bases. Brazilians tend to have a similar attitude with the Americans at work, often engaging in long hours of work in order to help support their families. Consumerism is very high and there is a high demand for quality products. It was also found that coffee customers are less likely to stay in the coffee store for long period of hours (Animata et al., 2006), thus it increases the rate of turnover. This is important success factor for Starbucks as the high number of customers who seek coffee on daily based will mean increased sales and profit for the company.

4.4 Technological – most of the technologies used in Brazil are imported from the United States (Animata et al., 2006), which is the parent country of Starbucks. Thus, it is expected that the issue of technology will pose little worry to Starbucks as they can make such available through their American supply center.

4.5 Environmental factors – in Brazil, energy supply is very stable and this increases the success of companies as they will not be investing on energy production. However, what supply is not as efficient as the energy as most of the waters are contaminated and undrinkable (Animata et al., 2006), and most companies invest hugely on production of waters for undertaking their daily business activities. Additionally, the coffee industry is becoming congested with little road side retailers who offer low priced coffee with quality taste and feel. Thus, the environmental factors pose a threat to the success of Starbucks in Brazil as the issue of water will mean added production cost, while the high competition will make gaining of more customer shares very difficult for Starbucks.

4.6 Legal factors - Animata et al, (2006) stated that there are well established laws designed to protect both employees and companies in the Brazilian market. such laws also monitor value chains and supply network in order to ensure quality of distribution in the Brazilian markets. Many law firms exist in the market for consultation and advices. Thus, the legal system of Brazil is good for the survival of Starbucks as they operate in a system where everything is expected to move according to the law, and this means protection of their corporate images, properties and rights while operating in the Brazilian market.

5.0 Evaluation of organizational strategies

5.1 Entry strategy – from the earlier discussions, it was made known that the strategy adopted by the company is FDI. This strategy can be considered a success because following their initial two outlets in Sau Paulo; the company had enjoyed tremendous success since 2006 and now has 26 coffee outlets in Brazil (MyStore411.com, 2013).

6.0 Critical success factors for operating in the Brazilian coffee industry

It has been identified from the above analysis that in order for Starbucks to successfully operate in the Brazilian market coffee industry; certain factors must be taken into consideration if they are to be successful in the market.

6.1 Marketing – due to the high competition that exists in the Brazilian coffee industry, marketing is crucial for success as it will help in communicating the value or Starbucks products to the market, creating awareness and persuading customers to patronize as well as be loyal to Starbucks brands.

6.2 Distribution network – with Brazil being a big country with high spending power and passion for coffee, it is important that a quality distribution network be designed to make Starbucks’s products available to the market. The availability of their products in all segments of the market will ensure increased sales and high profitability.

6.3 Quality customer services  and product offerings -  it was discussed in the customer’s bargaining power above that Brazilian customers seek quality coffee in a comfortable environment as they seek to escape from their daily hustles and bustles. Therefore, a quality customer services is important as it will make customers fell relaxed and increase their loyalty towards the brand. The products are also expected to be high in quality as it will increase demand and aid in differentiation as well as added product values.

7.0 Strategic Analysis of Starbucks in Brazil

The success of Starbucks in Brazil is high as the company has numerous resource, competences and financial support to back such. These resources can be further analysed below.

7.1 Tangible Resources

Starbucks have different assets such as retail stores, warehouses, coffee farms, brewing and roasting machines, inventories and transportation equipment in Brazil. The company also recorded huge financial gains in 2011 at the value of $11.7 billion as announced in their 2012 annual report (Starbucks, 2012). These resources will without a doubt help Starbucks to quickly make a stand in Brazil and operate at such ease as compared with their competitors who are not endowed with these resources.

7.2 Intangible Resources

Starbucks maintains huge global presence and the company have gained high number of customer bases in Brazil during their short period of operation of about 6 years now. The company maintains high quality image, skilled staff and management expertise that are amongst the best in the industry and also invest heavily in marketing and public relationship. Since the company has been in operation since 1871, they have gained huge management expertise and experience that will ensure strategic management of its customers and assets in Brazil towards a path of increased productivity and growth.

8.0 Conclusion

The focus of this conclusion will be on the increase of Starbuck’s stores from just 2 in 2006 to 26 in a space of 7 years which can be used to represent an increase in two stores per annum. Although Brazil is well known for the production of quality coffee as a result of the vast coffee bean present in the country; and the availability of high quality coffee at lower price – Starbucks still managed to see off these threats and took advantage of its opportunities in establishing itself as one of the preferred brand in the Brazilian market.

References

Aminata O., Daniele A., Melissa B., and Matvey K. (2006), “Starbuck Brazil.” Available at http://pierre.benain.free.fr/MBA698%20Starbucks%20in%20Brazil%20Report.pdf [Accessed on: 28/11/2012].

Ciabuschi, F. (2005), “On IT systems and knowledge sharing in MNCs: a lesson from Siemens AG”, Knowledge Management Research & Practice, Vol. 3 No. 2, pp. 87-96.

McCann, J. III and Buckner, M. (2004), “Strategically integrating knowledge management initiatives”, Journal of Knowledge Management, Vol. 8 No. 1, pp. 47-63.

Ruggles, R. (1998), “The state of the notion: knowledge management in practice”, California Management Review, Vol. 40 No. 3, pp. 80-9.

Starbucks (2012), “About Us: From the Official Starbucks’s US Website.” Available at: http://globalassets.starbucks.com/assets/9a6616b98dc64271ac8c910fbee47884.pdf [Accessed on: 11/11/12].

Starbucks Brazil (2012), About Starbucks in Brazil. Available at: http://www.starbucks.com.br [Accessed on: 28/11/2012].

Starbucks News (2006), Starbucks opens door in Brazil. Available at: http://news.starbucks.com/article_display.cfm?article_id=125 [Accessed on: 28/11/2012].