Marketing management – Starbucks Turkey

Starbucks Turkey

On November 13, 2012, Can Ikinci, the CEO of Starbucks Turkey, looked at the latest financial report from the parent Starbucks Corporation.  Howard Schulz, the company’s CEO, had come back from semi-retirement to take back the leadership role of the company after it saw same store sales decline in 2006 and 2007.  Notwithstanding Schulz’s efforts at revitalizing the company, the report that Ikinci was reading indicated that Starbucks Corporation was not yet out of the woods. As he read the report, Ikinci thought about how the competitive landscape had changed significantly in Turkey since Starbucks’ entry in 2003.  A number of foreign players had entered the market in addition to local players. Ikinci’s plans for the Turkey market called for a significant expansion from the company’s current count of over 80 stores.  He wondered if he should temper his plans for expansion in light of the travails of the parent company. In spite of Starbucks Turkey’s success since the opening of the first store in Turkey five years ago, the direction of future growth still remained uncertain. Would rapid expansion strain the unique quality of their offering, as most would argue was the major cause of the downturn in profits in the U.S. business, or will they need to explore other paths for growth?  The expansion strategy would not only have to deliver superior results but also protect the integrity of the brand for the long-term to ensure consumer loyalty.

History of Starbucks

In 1971, three partners, English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker, opened the original store called Starbucks Coffee, Tea and Spice, in Pike Place Market in Seattle, Washington. The store did not sell coffee by the cup but freshly roasted beans in bulk.  The name Starbucks was chosen in honor of Starbuck, the coffee loving first mate in Herman Melville’s Moby Dick. The new company’s logo designed by a friend pictured a two tailed mermaid (as the siren of Greek mythology). The company slowly grew and by 1981 they had a roasting plant and four retail stores that primarily sold whole bean coffee. At that same time Howard Schultz was working for a Swedish house ware company in New York and traveled to Seattle out of curiosity as to why this small company, Starbucks Coffee, Tea and Spice, was buying large quantities of plastic cone filters from the supplier, much more than any of the other big clients. The experience turned out to be Schultz’s first encounter with specialty coffee and altered his perception, as he only knew coffee as a commodity until then.  Schultz wanted to be part of this retailer. In 1982, he found himself on board as the director of operations and marketing.  One year later, he traveled to Italy where he was captivated by the magic and romance of coffee bar culture in the country. Although each coffee bar had a personality of its own, they all had one common purpose: to provide a social experience, a place which offered community, comfort and a sense of an extended family. In the U.S., on the other hand, coffee did not offer the quality and sociability that was present in Italy¹.

Schultz dreamed of bringing this culture back to the U.S. to serve espresso by the cup. He saw an enormous potential for Starbucks, to differentiate it from the rest of the other specialty coffee suppliers. Although it took some convincing of the original owners of Starbucks, Baldwin and Bowker finally agreed to test try the idea with a sixth store opening in downtown Seattle. The concept was a hit and the store began serving 800 customers a day, almost three times more than the best-selling store. This wasn’t enough to further convince the partners though. They refused to expand the idea even further to enter what they considered was a restaurant business. In 1985, Schultz decided to venture off on his own to pursue his dreams to open his first coffee bar, Il Giornale’s¹. Just as he had expected, the business grew rapidly and the number of stores increased to 3 by 1987, two in Seattle and one store in Vancouver, with total sales of about $1.5 million². In that same year, the founders of Starbucks decided to sell the business, which Schultz took up as an opportunity to further expand his own pursuit. Finally in August 1987, Il Giornale bought the Seattle assets of Starbucks and the name for $3.8 million. Schultz and his team decided to name the new business, Starbucks Corporation. The combined enterprise consisted of 100 employees, a roasting plant and nine outlets located in Seattle and Vancouver³.

Strategy/Business Model of Starbucks Corporation

Within nine years after buying the company, Starbucks had become the nation’s most prominent specialty coffee chain. From only 11 stores in 1987, they grew to over 900 by 1996. In 1996 alone, the company opened a total of 330 stores, almost 1 store per day⁴. The rate of stores opening every year increased thereafter and in 2007 they opened a total of 1,342 new company operated stores worldwide. During the period 1992 – 1996, the company’s annual revenues increased 650% to almost $700 million⁴. The ambitious plans for an average store in this new era were much higher than what the former Starbucks Coffee Company had achieved in its 16 years of operation. By 2007 the total number of stores increased to 6,793 in the U.S. alone⁵. The organic expansion also grew outside the boundaries of the U.S. In 2007, the total number of stores was over 15,000 in 43 countries⁶ (see Exhibit 1). The company expanded its services to include purchasing, roasting and selling high quality whole bean coffees, along with fresh brewed coffees, Italian style espresso beverages, cold beverages, a variety of complementary food items, coffee-related accessories and equipment, a selection of premium teas and a line of compact discs sold through company-operated retail stores.  In addition, the company licensed its trademark through other channels and produced and sold ready to drink beverages and a line of super premium ice creams. The company’s overall goal was to “become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffee and related products and by providing each customer a unique Starbucks Experience.” ⁶

The Starbucks Experience

The Starbucks brand had three important elements, the highest quality coffee from stringent control over the quality and processing of the beans, outstanding people that were recruited and trained on knowledge of coffee along with consumer service, and the design of the stores to create a cozy atmosphere².

Starbucks was keen on giving a unique experience to its customers by going beyond coffee. The ambience of each store offered a place of sanctuary with its aroma, lighting, music and décor².

After an impressive growth until 2007, Starbucks now reached a turning point

in its history. From the beginning of the year, customer traffic began to slow for the first time. By the end of July 2008, Starbucks reported its first loss since 1992. Third quarter net loss for three months was $6.7m compared to profits of $158.3m for the same period in 2007.  The company closed 600 stores and reported a loss of $168m as a result⁷. The unfavorable economic conditions such as oil prices, the downturn in the housing market, higher interest rates, higher unemployment rates, lower disposable income and the high food commodity inflation in the U.S. deteriorated consumer confidence and put a strain on spending⁸.  Consumers became less likely to spend $4 or more on a coffee drink. The overall business model was under strain as the company had rapidly expanded its U.S. business via company-operated stores. Exhibit 2 gives Starbucks’ financial data.

 

 

Starbucks Corporation: International Expansion

Starbucks had opened their first store outside North America on a hot and humid day on August 2, 1996 in a busy district of the prominent city of Tokyo.  After long contemplation and preparation, Starbucks opened the store with series of events to grab consumer attention and interest. Schultz recalled²:

“We had been warned that, culturally, the Japanese refuse to carry to-go food or beverages on the street. Yet many customers were walking out the door proudly carrying their Starbucks cups – with the logo showing. The Starbucks brand had the same power in Tokyo that it had in New York and Seattle. It had taken on a life of its own.”

Building on this success, they expanded into Europe, Middle East and Asia. By the beginning of the twenty-first century, they had more than 500 stores outside North America with more than 12 million visitors a week.

Starbucks’ international expansion plans were to open at least 20,000 locations worldwide, with as many as 10,000 locations in international markets². One of the strategic markets they would enter by 2003, to enhance their global expansion plans, was Turkey.

International specialty operations of licensing retail stores occurred in more than 30 countries in 2007, accounting for 7% of the total net revenues⁵. Starbucks relied upon the expertise of its local partners for its licensing operations. The partners chosen were usually the most prominent players in that market, providing access to desirable retail locations, with in depth market knowledge.  During 2007, a total of 506 international licensed stores were opened, totaling 2,615 (See Exhibit 3). The revenues from US & International licensed retail stores accounted for 47% of specialty revenues in 2007⁵.

Coffee was the second most consumed beverage in the world after water.  Total consumption of coffee in the world was estimated to be around 400 billion cups. The United States, which was considered to be the home of the new concept of coffeehouses, was one of the largest consumers of coffee with an estimated market size of $18 billion and annual consumption per capita of 4.2 kg (9.24 lbs.).  . The average annual coffee consumption in Europe is about 5-6 kg (11-13.2 lbs), which is significantly high compared to that in Turkey, 250 grams (0.5 lb.) in 2006.

The Turkey Coffee Market

Since the days of the Ottoman Empire, coffee had played a significant role in Turkish lifestyle and culture, as the Empire’s denizens were the major coffee consumers in the world, famous with their Turkish coffee. Brought to Istanbul by two Syrian traders, in the very same year of the fall of “Constantinople” to Turks in 1453, coffee became known as the “milk of chess players and thinkers”. In 1475, the world’s first coffee shop, Kiva Han, opened in Constantinople. By the 16^th century, coffee became part of the elaborate ceremonies of the Ottoman court. The chief coffee maker of the Sultan (‘Kahveciusta’ in Turkish) had over forty assistants to ceremoniously prepare and serve coffee for the sultan. Women received intensive training on the proper techniques of preparing Turkish coffee. Young girls tried to master their coffee preparation skills before marriage. When the prospective husband arrived with his family to ask the hand of the girl, she was expected to serve the guests Turkish coffee, boasting her skills of expertise in the preparation. She would be judged on her merits and whether she would make a good wife, based on the taste and look of her coffee. As coffee became a major platform for social interaction, families built special rooms that were used only for socializing while having coffee.  This black liquid drink affected the Turkish culture so much that the Turkish word for breakfast, “kahvalti”, literally means, “before coffee”. ¹⁰

For Turks, drinking coffee has never been a casual experience but one of sharing and socializing. The process of consuming coffee was a lengthy social ritual: invitation of friends over coffee, preparation, having a conversation over it, followed by the famous and extremely common practice of reading each others’ fortunes from the leftover sludgy grounds. Turkish coffee was consumed slowly and the thick layer of sludgy grounds was left at the bottom of the cup, which was then flipped over on to the saucer to cool, and when flipped back the patterns of the coffee grounds showed one’s fortune.

Ottoman Turks, being the heart of the Muslim world, introduced coffee to the European region through Venetian merchants. Despite the long tradition of coffee in Turkey, coffee trees are not cultivated in the country and therefore almost all was imported. The first coffee company established under a corporate identity in the country was legally founded in 1871 – “Kurukahveci Mehmet Efendi” still operated in the local market as the leader of the traditional Turkish coffee segment.

By the 16^th century, coffee houses had sprung up in all the major cities of the Orient –Cairo, Baghdad, Damascus Mecca, Medina and Istanbul all saw mushrooming coffee houses in every corner. Finally there was a place for people to socialize and discuss religion, philosophy, politics or simply personal matters¹¹. In the 15^th century the Ottoman Sultans, for various reasons, made numerous attempts to ban coffee and especially coffeehouses but all efforts were unsuccessful, creating a fierce backlash. It was apparent that coffee and the coffeehouses were there to stay¹².

Thus, coffee made its way into the hearts and “cups” of Turkish society permanently. During the early to mid-1970s, what the Sultans tried relentlessly and were all but successful was achieved easily by what historians would call a small blip in the long history of the country. In July 1974, Turkey invaded the northern part of Cyprus citing atrocities against its people there. The invasion was followed by an embargo on the country, bringing strict import regulations that were imposed on goods until the 1980s. Unfortunately at that time, coffee was imported and, the ruling government officials decided that the country’s scarce foreign currency reserves could be spent on more useful items. Under those times of severe scarcity of coffee, tastes that were genetically coded through generations suddenly started to change. Tea became the beverage of choice in Turkey.

The embargo was lifted in the early 1980s, and in 1983 the liberal new government took a dramatic decision to open Turkey’s economy to imported goods. Coffee made a comeback. Although tea had become the most consumed hot drink, coffee still held its emphasis in society. Historically and culturally, the perception of coffee drinking in Turkey remained as a significant medium for socializing, during house visits, in Coffeehouses (called ‘kahvehane’), as well as in tea gardens (called ‘cay bahcesi’ albeit also serving coffee extensively) ¹³.

A Glimpse of Modern Turkey: Post 1980

Turkey was the only country in the world spanning two continents. About the size of Texas, the country’s population was 72 million as of July 2008¹⁴. The economic capital, Istanbul was one of the most densely populated cities in the world with 14 million residents.

The country’s population was young, thanks to birthrates that had been persistently high until recent years. 25 percent of the population is below 15 years of age and people over 65 make up only 7 percent of the population. The median age of the population was 28¹⁴.

The country was fairly industrialized and boosted a competitive economy with a highly successful export oriented manufacturing base. Since the devastating economic meltdown in 2001, the country had been undergoing a continuous structural change and redefining and reconstructing its social, economic, political as well as cultural pillars¹³.

The country had overcome the 2001 crisis quickly and achieved a remarkable rise to become a regional economic superpower. The impact of the crisis on demographics was the elimination of the excesses in the inefficient and unproductive farming sector, which pushed hundreds of thousands of people to leave their lands to migrate to urban areas to join the industrial work force, opening the way to agricultural consolidation.

The country’s urbanization rate was high — approximately 75%-80% of the population now lived in urban areas¹⁴. However, a big majority of these urban areas was a far cry from the glamorous and wealthy look of Istanbul. By 2008 the country was being invaded by shopping malls that were mushrooming in even the smallest cities, fundamentally changing the retail landscape of the country.

The GDP in the years following the 2001 crisis skyrocketed and reached $888 billion in 2007, implying a GDP per capita of circa $13,000 ¹³.

However, not everything was as rosy as it seemed. The thorny issue of income inequality was persistently high and much higher than the European average. The richest 20% of the families remained the receivers of over 50% of the income generated in the country. Income distribution was also unequal between and within regions¹³. Urban households constituted only about half of the population, but received nearly 75% of the income, while the other half in rural areas received the remaining 25%¹³. See Exhibit 4 for a map of Turkey.

What Did 70 Million People Mean for Retailers?

Due to the country’s culturally conservative social structure (mainly being the case in rural areas and smaller cities) that frowned upon socializing of young people in public places, lack of capital, and historically closed economic system (till 1980s), the western style restaurant-bar-café culture was not successful in penetrating deep into central and eastern parts of the country. However, the recent changes underpinned by a new generation, increasing wealth, liberal economic policies, rapid urbanization, multinational’s relentless search for untapped markets already started to change the food and retail landscape of the country and in all likelihood would continue to do so.

There were several big challenges confronting the restaurant and café chains. Being part of the Mediterranean culture, Turks lived in large and tightly knitted social communities and very much liked social interaction. The act of eating and drinking was considered an opportunity for a relaxed and prolonged conversation. It was also an opportunity for young people of opposite sex to mingle with each other. All this portrayed a culture that was fond of spending time in social places. Companies with a global strategy of delivery/take away were finding it difficult to crack the Turkish market. Of the two pizza chains that entered the country, Pizza Hut became more successful than its archrival Domino’s Pizza in establishing presence in places outside of the top five cities. Industry experts linked Pizza Hut’s comparative success to its sit-down restaurant style vs. Dominos’ strictly take-away style¹⁵.

Although Turkey’s GDP per capita was over $13,000 per annum, income distribution was highly distorted. Many millions living in the less developed parts of the country were making less than $5,000 per annum, translating into $12 per day. Under these harsh conditions, people tended to hoard cash and prioritize expenses¹³. Many global fast food chains that tried to move into relatively poorer parts of the country had disappointing results. It seemed that there was a minimum threshold income-level above which people started to spend a little on extras – and dining and drinking out was considered a big treat in Turkey. Hence, many global food chains opened their first batch of branches in larger cities and took a long breather before even contemplating to expand further into the remaining parts of the country.

Starbucks Turkey

Regardless of the cultural and economic factors that might have been challenging for a global company to enter Turkey, Starbucks entered in 2003. Within five years, they overcame the challenges and were the most rapidly expanding coffeehouse chain in the Turkey. The total number of stores reached 105 in 8 cities, employing over 1,000 people and serving 30,000 customers on average per week, by 2008¹⁶. Behind this growth was Can Ikinci, the young CEO of Starbucks, Turkey.

Ikinci became the General Manager of Starbucks when he was only 30 years old with no prior experience in the coffee industry. Armed with a Master’s in Industrial Engineering from Columbia University and an MBA from Wharton, he started his career at McKinsey Consulting, where he got transferred to London for a European exposure. During his tenure at McKinsey London, Ikinci got exposure in consulting to top management in various sectors and various disciplines including finance, strategy, sales and marketing. He was unaware that his expertise and strategic thinking skills that he had acquired at McKinsey would prepare him for the future role to lead the most rapidly expanding coffeehouse chain in the country. In London, he met the Al Shaya family, who was holding Starbucks’ Middle Eastern franchise rights, and subsequently traveled to Kuwait to meet the top managers of the Middle Eastern conglomerate. After six months, he was hired as the CEO of Starbucks, Turkey¹⁷.

Starbucks entered the Turkish market in 2003 under the operations of its regional franchise holder, Al Shaya Group. The conglomerate was one of the leading names in international franchise retailing and trading with more than 750 stores across the broader region of Middle East and East Europe and selling many well-known brands such as Topshop, Evans, Dorothy Perkins, The Body Shop, River Island, Debenhams and others. The Al Shaya Group was founded in 1890, initially operating in Kuwait and Saudi Arabia, and expanding throughout Middle East, Turkey, Cyprus, Russia, Poland, Egypt, Czech Republic and Slovakia. Operating more than 40 international retail brands across 15 countries, the group leveraged its regional expertise and local market knowledge¹⁸.

Starbucks’ first store in Istanbul was opened on one of the busiest, top-end streets of Istanbul, the Bagdat Street, which was the ‘in’ place for the trendy and wealthy ‘Istanbulites’. Within a short span of five years, the street turned out to have the highest Starbucks density in the country. The expansion ramp up continued throughout the country, where 29 stores were opened in 2006 and 30 stores in 2007¹⁹. Ikinci admitted that there were a lot of factors undermining the expansion plans, such as macroeconomic volatility and weaknesses in the housing market, forcing the Starbucks team to continuously monitor and revise business plans. Istanbul was a city of opportunities, advancing in a rapid rate each day, with young and dynamic population that had an affinity to Western culture, which meant a larger addressable potential market for Starbucks. The strategy was to offer the best quality coffee in the ‘third place after home and work’, an environment where people could enjoy the unique Starbucks experience.

Offering more than 30 varieties of drinks, including espresso based coffee drinks, teas, iced coffees, made from up to 15 types of coffee beans, food items, and merchandise goods, the only difference compared to all other Starbucks’ in the world was Turkish Coffee on their menu²⁰. They strategically decided to adapt to local environments when entering the market. Turkish coffee having a major role in the culture meant that they needed to adapt to the customers’ needs and wants.

When entering a new city, a series of public relations, marketing and sales events would take place to build awareness in the community. For example, free coffees were distributed on the opening day and the newest drinks were presented for tasting. The philosophy of Starbucks was explained to the consumers, emphasizing the ‘Starbucks experience’.

The focus in all the stores was continuous innovation to offer the greatest variety to their customers. They found the world’s best coffee and brought it to the local market through socially responsible ways. Meanwhile, western style coffee culture was rapidly evolving in Turkey, primarily thanks to tens of thousands of western educated young people that got exposed to take-away style drinking habits as in the U.S. or Europe.

According to Ikinci, the recent closing of 600 stores in the US, by no means deterred the expansion plans in Turkey. In fact, he noted in a 4^th July 2008 press release that they continued successful operations and were determined to grow by offering ‘great coffee, in a great environment, serving with passion’ He also noted:

“The big idea behind Starbucks Turkey was that we trusted and followed Turkey with great interest. We wanted to spread the ‘Starbucks experience’ to an even greater population and therefore our plans were long-term and we were here to stay!”

 

 

Competitive Landscape in 2012

Entering the Turkish specialty coffeehouse market, companies faced numerous factors to consider before making their move. Not only were cultural aspects in question but also the competitive landscape as Starbucks’ did not have the first-mover advantage. Once they entered, Starbucks’ success also prompted many rivals to enter the specialty coffee business as well, increasing the competition.

Global Competitors

Gloria Jean’s was considered to be one of the biggest competitors of Starbucks in Turkey, as they entered the Turkish market in 1999 and had 56 coffeehouses in 8 cities by the end of 2007. They were considered the co-leader of the market after Starbucks. Gloria Jean’s was established in Chicago as a small coffee and gift shop. In 1995, two businessmen from Australia acquired the franchising rights and opened the first store in Australia. Present in 28 countries, the company aimed to reach 40 countries by the end of 2008. Gloria Jean’s had around 800 stores worldwide, serving about 8.5 million guests each day with 50 million cups being served in 2006.  Following the economic crisis of 2001, the company re-launched their growth plan, which was to aim for a strong presence with high brand recognition by opening stores in only the profitable locations in a controlled manner, only 15 stores per year. By mid 2008, Gloria Jean’s had 64 coffeehouses in Turkey. For the long-term, the plans were to expand to other major cities to keep up with the competition. In addition, the company sought to gain strategic partners for store specific activities, to increase profitability and to decrease costs. They needed to continue differentiating amongst rivals, by opening smaller stores and kiosks, to encourage the take-away concept, which would reduce overall costs²¹.

The main distinction between Gloria Jeans and Starbucks was the service concept of Gloria Jeans, serving their consumers at the table rather than a self-service system, which appealed to the Turkish population. Other global chains that entered the coffeehouse market competition since 1999 are shown in Exhibit 5.

Local Competition

The growing coffee market in Turkey and the increasing penetration of global coffeehouse chains influenced the local competition to develop as well. By 2007, Starbucks faced about 8 other local players that offered specialty coffee to their consumers.  For example, once a popular ice cream chain, MADO, began to alter its strategy to accommodate the changing preference of the local customers to Café Latte, Cappuccino, Macchiato and Espresso, a growing influence of the global chains. Although all local players still offered Turkish coffee in their menu, a major adaptation had to take place to accommodate the changing customer needs. In order to keep up with the competition, local chains also began to acquire the most popular locations in the main cities, often beside the big competitors. For example, MADO had recently acquired a new location on one of the most ‘in’ spots on the European side of Istanbul, Nispetiye Street, next to Starbucks and Gloria Jean’s. This new venue often attracted more Turkish customers than the two big global competitors¹⁵.  Especially since the rapid expansion of Starbucks in major neighborhoods, forums had become common amongst those who protested against the Starbucks ‘invasion’ in their neighborhood. They argued that closing down shops that made the streets so unique to replace with a Starbucks coffeehouse was unacceptable²².

Kahve Evi and Café Crown were the next two biggest local competitors in Turkey, who were affiliated with the big Turkish food conglomerate, Ulker Group. The strategy of these two chains was to gain a significant share in the market with a price-based competition strategy to target the low-income to mid-income segments.  By increasing the number of stores at a rapid rate, they were able to gain a strong presence amongst the global chains²³.

Discussion Questions

 

1. Has Starbucks has done well in Turkey? What are some of the common growth drivers in terms of consumer characteristics, market characteristics, and entry strategies across USA and Turkey that might account for Starbucks’ success?

 

1. What are the core, actual and augmented product benefits offered by Starbucks in Turkey?

 

1. Is Starbucks using a standardization, localization or hybrid marketing strategy in Turkey?

 

1. Using the product/market expansion grid shown in Figure 2, apply the growth opportunities available to managers in Starbucks Turkey.

 

1. What marketing recommendations would you make to Starbucks in Turkey to help them sustain and/or improve sales growth, and remain competitive as they look towards thefuture?

 

Figure 1: Three Levels of Product

 

 

 

Existing Products         New Products

Existing Markets	Market Penetration	Product Development
New Markets	Market Development	Diversification

Figure 2: Product/Market Growth/Expansion Strategies