MBA 630, International Business Prepared by: Radoslav Petrov Course Instructor: Dr. Jamal Nahavandi, Ph.D. Pfeiffer University at RTP, Fall 2008 December 2, 2008 Term Paper Starbucks Expands into Bulgaria. Challenges and Strategies. Starbucks International has increased its already strong presence in Europe by opening its first coffee house in Bulgaria last month, November 2008. This is a part of the company s strategy to develop business cultures and expand worldwide, that could offset the slower sales in the oversaturated U.S. market. The goal is to create a rich network of coffee shops in Bulgaria in order to take advantage of the growing incomes of the 7.6 million population, after the country s EU accession in 2007. However, entering this new market in Eastern Europe poses both challenges and opportunities for Starbucks. The main challenge for the coffee giant is the tough competition with the already well-established local players, who offer coffee drinks at lower prices. Currently, there are about 10 mainly Bulgarian and fewer foreign chains on the market, including Costa Coffee and McCoffee, also being the biggest Starbucks competitors in Europe. The reason for the increase in the number of specialty coffee shop outlets was that these places became more popular as meeting places for young people, and because the subsector was previously underdeveloped. Chained coffee shops still only account for a
Petrov, 2 small percentage of the Bulgarian market with independent local stores dominating the sector. Another challenge for Starbucks is the possible initial resistance and acceptance of the American brand by the Bulgarian customers due to cultural differences and tastes. Coffee in general, is an important part of Bulgarian culture, and the consumption of coffee goes far ahead of tea. Starbucks is planning on attracting younger people since they are more willing to imitate the American culture. For many young professionals, the famous coffee brand will be looked as a status symbol. However, the number of Bulgarians who have visited the U.S. is not so great, therefore the brand is still unknown by many. As anywhere in the world, in Bulgaria Starbucks is offering the same menu of basic coffee drinks, a smoking-free environment, and a free wireless internet. However, in order to better serve the Bulgarian tastes, the food menu sandwiches and pastries are adapted to the local preferences. Prices are also adapted to Bulgarian market to reflect the local economy, and they are relatively lower compared to other countries in Europe and the U.S. Another difference is that Starbucks has not implemented the drive-through concept, which is unpopular for the Bulgarian market. The company correctly reasoned that this concept won t be successful in Bulgaria, since local people prefer to sit down for hours and enjoy their coffee with friends, instead of drinking it in a paper cup on the go. Additional challenges and risks exist for Starbucks in the new Bulgarian market. For example, the company may face operational difficulties and problems due to lack of trained workforce. In terms of political risk and religious beliefs, Starbucks will enjoy the
Petrov, 3 political stability in the country, and the same Christian values shared by 90% of the population. American brands are usually very well accepted in Bulgaria. Despite this, convincing Bulgarian consumers, who are used to drinking sugary, weak instant coffee, to pay a premium price for quality brews still remains a big challenge for Starbucks. Starbucks entry strategy into Bulgaria is in the form of a joint venture. The company is relying on its already (five years) successful partner - the Athens-based Marinopoulos Group, which spans on six markets around Europe, including Greece, Cyprus, Romania, Switzerland, Austria, and now Bulgaria. This joint venture partner is responsible for the day-to-day operations of the business. The main strategy is to continue the focus on growth. The first coffee house is opened in the capital Sofia, and a second one is on schedule to open also there, by the end of this year. From there, the company is planning to expand in other big cities around the country. More, Starbucks is not excluding the possibility to further continue its growth through acquisition of domestic competitors. Entering the market through a joint venture has its advantages and disadvantages. A benefit for Starbucks is the reduction of the financial risk. With the development of the 50/50 partnership with Marinopoulos Group, the coffee giant cut its financial risk in half. The greatest advantage however, is that a joint venture helps in so called local adaptation. Starbucks benefited from its partner s knowledge of Bulgarian competitive conditions, culture, language, political and business systems. Local adaptation looks at how well a US product will sell in the foreign market. A partnership allows for the collaboration between foreign and US partners to develop a product that will functionally
Petrov, 4 be similar to the original US product, yet also appeals to the consumers of the foreign market. Despite these advantages, joint ventures have also major disadvantages. First, a firm that enters into a joint venture risks giving control of its technology to its partner. Starbucks may worry about its core competences and its well-established business model. Second, a joint venture does not give a firm the tight control over subsidiaries that it might need to realize location and experience economies. A third disadvantage with joint ventures is that they may lead to conflicts of interest over strategies and objectives. In this respect, Starbucks may experience difficulties when trying to further pursue its business goals. Despite these disadvantages, I think that Starbucks selection of a joint venture was the best choice for an entry strategy into the Bulgarian market. Starbucks expansion into Bulgaria will lead to increasing competition among local coffee retailers. This will have a dual impact. First, Starbucks will take some of the market share of the current coffee chains. Second, with its presence Starbucks will positively contribute to the development of the Bulgarian coffee industry by stimulating other coffee chains. The famous Starbucks experience is now part of Bulgaria.
Petrov, 5 Works cited: Company Overview. 2008. 2 December 2008 <http://www.starbucks.com/ /aboutus/overview.asp>. Dutta, Sanjib, and K. Subhadra. Starbucks International Operations. International Issues in Strategic Management, 2008 Hill, Charles W. L., International Business. 7th ed: McGraw-Hill/Irwin, 2007. Kostadinov, Petar. "Starbucks opens first Bulgarian coffee shop in November." www.sofiaecho.com. 2 Dec 2008 <http://www.sofiaecho.com/article/starbucksopens-first-bulgarian-coffee-shop-in-november/id_32486/catid_67>.