Upon closer investigation of the Starbucks dilemma in South Africa, it can be concluded that there are a multitude of reasons as to why they are not as successful as they would like to be. The following is a brief summarization of the current situation for Starbucks in South Africa. Taste Holdings, the local license holder for Starbucks in South Africa, has withdrawn from their dealings with Starbucks and their other food companies, and they have sold their 13 Starbucks locations for 7 million rand or about $464,000. They have retreated to their dealings with luxury jewelry and watches in order to focus on what they perceive as healthier and more secure markets. The reason for this shift is because their investment did not pay off. Originally, Taste Holdings wanted to open roughly 200 locations throughout South Africa, but they only managed to open 13. These alone have not been sufficient enough to provide a return on the initial investment. Even if more were opened, they would still be in the negative. Each location was coming out positive when taking annual earnings into consideration, but that was not enough to provide returns on all investments. Having to pay a portion of their earnings back to Starbucks was also a big financial hit to Taste Holdings, and it proved to be a massive source of stress for them. To summarize, the three primary reasons for Starbuck’s current situation in South Africa would be ridiculously high startup costs for each location, percentages to be paid back to Starbucks causing a financial burden for Taste Holdings, and unreasonable prices that were bested by local competitors at each location. These are only three of the more central issues with Starbucks in South Africa, and there was definitely a collection of smaller, contributing issues that were not addressed within a reasonable period of time.
Starbucks locations in South Africa cost a ridiculous amount to open and operate. According to an article on Business Insider South Africa, the investment would be about 3 to 5 million Rand on average; whereas, their one of their closest competitors, Vida e Café, builds a location for about 1.5 million Rand according to their director of business, Hitesh Patel. The difference is far too extreme, and they currently have no means to bridge that gap. In addition to the startup costs for each individual location, the menus for Starbucks are far too expensive when compared to their competitors. The following is a chart sourced from an article on Business Insider, South Africa: Sources: Seattle Coffee Co. (Online), Vida e Caffe (Sandton) & Starbucks (Melrose Arch)/Table: Business Insider SA.
Premium brands like Starbucks are expected to have a hard time conducting business in South Africa because of the inherent economic situation there. There is a massive difference in economic classes because South Africa has one of the smallest middle classes which sits at roughly twenty percent. The middle class would be Starbuck’s primary target market when entering this region, but the size is an obvious issue. Taste Holdings and Starbucks must have had some confidence in their strategy when initiating their dealings, but their efforts were in vain and full of flaws on multiple levels. The most obvious level would be the economic inequality issue in South Africa. For years, the country has suffered from an ever growing lower class and an overbearing, elite minority. Long have the people of South Africa been starved under the foot of an oppressive economic elite. The disparity here can be seen by viewing aerial photos of the South African living conditions. You can see luxurious mansions surrounded by greenery and lavish amenities, but you can also see vast fields of dingy housing swamped in the staining sludge of poverty and stagnation. According to a CNN article by Katy Scott, the richest ten percent hold seventy-one percent of the wealth, and the poorest sixty percent hold seven percent of the wealth in South Africa. The latter group is obviously not the target market for Starbucks or Taste Holdings, but they cannot be ignored. Their existence speaks to the rigidity of the barrier that exists when considering pricing. Starbucks and Taste Holdings want a target customer that can afford the elevated prices that come with the brand of Starbucks. They were able to find these consumers, but there are simply not enough people in this target market to reap a substantial profit large enough to pay back initial investment costs. It also isn’t possible to break even with this target market. By pursuing this route, Taste Holdings and Starbucks also, unknowingly, pursued stagnation. Realistically, Starbucks can target middle to upper class individuals, and they did so. The truth of the matter is that Starbucks may have to adjust their target market in order to survive in South Africa. The chaos and rigidity of South Africa also apparent in their government and political history. As stated before, the nation has long been influenced by a ruling elite that aims to selfishly pursue their own prosperity over the wellbeing of the overall population. Similarly, to the economic situation, the political situation has isolated large segments of the population. In the previously referenced CNN article by Katy Scott, the following information is stated:
“More than half of South Africa’s population (55.5%) live in poverty (making less than $83 a month. 25.2% live below the poverty line. 64.2% of those living in poverty are black, and 41.3% are mixed-race. Six percent are Indian or Asian, and one percent is white. In South Africa, the majority of the elite, the top five percent, is made up of the white population. This is according to Murray Leibbrandt, economics professor at the University of Cape Town.” (Scott 2)
This cultural segmentation puts Starbucks in a box. More revered brands tend to be tossed into the elite category and reserved for only the middle to upper classes. Lower income groups would not only be unable to afford the brand, but they would also resent Starbucks for catering to the elite. Of course, the previous statement relates back to pricing issues. These pricing issues have always been present for coffee in South Africa.
South Africa, like all of Africa, is known for its production of coffee. It is said that Africa is the birthplace of coffee, and the continent has had a long reputation for quality coffee. South Africa is a unique case in regards to Africa’s coffee culture. Coffee is not indigenous to South Africa, so South Africans have long preferred indigenous alternatives such as tea. This is why tea is much more affordable compared to coffee in South Africa. The country is still known for producing its fair share of coffee, but it is still “playing second fiddle” to tea. South Africa also has a history of accepting low quality coffee imports. Coffee Magazine’s Dylan Cumming states the following:
“South Africa did not sign into the International Coffee Agreement (ICA) due to their political position in the nineteen-sixties to eighties. This agreement aimed to keep coffee prices high and stable in the market. Because of South Africa’s lack of involvement in this agreement, they became a dumping ground for low quality coffee for years.” (Cummings 1)
Coffee has been historically consumed by South Africans through inexpensive coffee powders, mixtures of tea and coffee, and, more recently, local coffee houses that provide steeper prices but remain active due to proper price management. Examples of local coffee houses would Seattle Coffee Co. and Vida e Café. These companies stand as competition for Starbucks when it decides to try its hand at the South African market a second time.
When examining the coffee market in South Africa and Starbuck’s involvement in it, secondary research is being performed on my part. I am able to access a vast network of researchers online that have already committed themselves to fleshing out my selected research topic. In taking advantage of existing information and research to supplement my own research, I am acting as a secondary researcher. If I were “on the ground” in South Africa on a mission to compile coffee consumption data and report my findings, I would be performing primary research. If I were compiling new information and reporting it in a way that hasn’t been done before, I would also be acting as a primary researcher. In conducting secondary research, there are both advantages and disadvantages. Firstly, I am able to pick and choose which information I think is most appropriate for my research. I can better compare and contrast researchers and their studies in order to formulate a more unique and all-encompassing report. The disadvantages involved in secondary research is that I, as an individual researcher, have much less knowledge on any specific subject. In outsourcing my data, I am forced to take on a more general understanding of the subject because I am collecting bits and pieces of information from each researcher that I use as a reference. In drawing from secondary sources to create a multi-faceted research report, I am unable to deeply dive into any singular facet. To conclude, a secondary researcher like myself must opt for a more general understanding of a topic in order to make a report more well-rounded and less “laser focused” on any particular bit of information.
Entry Mode Selection
When entering South African, Starbucks chose to grant a License to Taste Holdings to open 200 locations. By choosing Licensing as their international market entry method, Starbucks was able to avoid some unnecessary risk. Starbucks knew that South Africa was a risky market, and they were naturally hesitant to rush into things themselves. By giving Taste Holdings a license to open locations, Starbucks could attempt to make a big move into South Africa without incurring full responsibility. Starbucks may have also had some degree of confidence in Taste Holding’s ability to understand and cater to the native market. Taste Holdings was supposed to be the entity that would work to understand the place and promotion aspects of the marketing mix. Ideally, Taste Holdings would have been able to work with Starbucks to better address the product and price aspects of the marketing mix. Together, these entities made the effort to go forth with these roles. Unfortunately, things did not work out as they had hoped. While Starbucks suffered an embarrassing defeat in South Africa, Taste Holdings stands as the primary failure in the expansion effort because they failed to collaborate with Starbucks and adjust to the market constraints in South Africa.
Market Segmentation and Target Market
When Starbucks and Taste Holdings first decided on an STP strategy, they were didn’t exactly miss the mark entirely. Starbucks provides premium coffee products, and the only market segmentation that can afford this is the lower middle class and above. With coffee still being a niche product in South Africa, it would still require a guiding hand to nurture its development into the mainstream. If anything, new products could have been introduced to bridge the gap between coffee and tea. This could lead to more regular customers. To attain consistent customers that can support each location and spread the normalization of coffee consumption, Starbucks would require the targeting of the middle class and above market, and Starbucks set out to do just that in South Africa. While this market could afford to regularly purchase Starbucks products, they would still be likely to choose cheaper alternatives that retain a similar standard of quality. If Starbucks and Taste Holdings could have found a way to lower product costs to a competitive level, the results would be at least satisfactory. The task of lowering prices of individual products would fall to those involved in supply and production logistics. If great minds worked together, a creative solution could be achieved. A more important problem with cost would be the cost of opening a new location. As stated above, each location was costing between three to seven rand while a competitor was opening locations for 1.5 Rand per location. The difference is painful to see and must be eliminated if investments are ever to be returned. The thirteen locations that had been opened by Taste Holdings were generating a profit, but the profit gained was not enough to make up for the absurd startup costs. In order to avoid making this mistake again, Starbucks is going to need a lower startup costs going forward. A Starbucks in South Africa is going to have to look very different from a Starbucks anywhere else in the world because it must evolve to its environment. Failure to lower startup costs is failure to evolve. Starbucks knew that South Africa was going to be a difficult environment to succeed in, but they never prepared for an evolution of their storefronts. To state yet again, most of the blame lies on Taste Holdings for their failure to manage the license appropriately. If Taste had realized what changes needed to occur, they may have been able to communicate with Starbucks in order to make the changes happen, but they failed in this respect. Once storefronts evolve to lower startup costs, Starbucks will be able to generate profitable business with their original target market. Lower cost locations will also appeal to the lower classes of South Africa, and there will likely be less resentment towards the brand. Lower pricing overall also contributes to mass brand appeal in the region because of the economic disparity that exists there.
When assessing what happened with Starbucks in South Africa, we can see that they did not adequately assess the market that they aimed to enter. When deciding to grant a license Taste Holdings to operate their business in the country, they failed to catch that Taste would be likely to retreat from the food industry entirely. Taste proved to be a bad manager of the Starbucks brand, and the local ecosystem was not properly adapted to. Of course, Starbucks knew very well of the coffee culture present in South Africa. They knew of the history of coffee and how often the population consumed it. An ideal target market was selected, the middle class. Unfortunately, this segment was very small and unable to provide the revenue that would have returned the investment that Taste had made. Ultimately, Taste was forced to leave the market entirely because of their failure to deal with economic complications. Everything narrowed down to costs. Startup costs for new locations exceeded what the competition payed by nearly double, and individual product prices were bested by every local competitor. Regardless of economic disparity between classes of South Africans or the history of culture in the region, costs adjustments could have remedied the situation. It seems that Starbucks was unyielding in their commitment to branding; they didn’t think to adjust ingredients, storefronts, suppliers, or products. Starbucks is a premium brand in South Africa, and the usual company image would help to enforce this premium status. Nonetheless, maintaining rigidity of brand is not worth suffering losses. If some adjustments had been made, Starbucks could have lowered costs and maintained operations in South Africa.