When Paul Patterson was in a shopping centre recently, and his wife announced she was keen to peruse the stores, he decided to sit it out. Instead, he slipped into a Starbucks outlet, ordered a coffee, took a seat and enjoyed reading the newspaper. After an hour, he felt slightly guilty about sitting there for so long, so he ordered another drink.

“They made $6 from me during the 90 minutes that I took up a chair and table in their café,” says Patterson, a Professor in the School of Marketing at UNSW Business School. “They have quite large stores, and their model is that they charge a slight premium, but you can sit there for an hour on one coffee. With the rent on those premises, that business model is not sustainable. It doesn’t surprise me that they lost so much money in Australia.”

The story of Starbucks in Australia is a salutary lesson in business. It’s the tale of an organisation seeking world domination in its field that stepped into a new market without first testing the waters. What went wrong for the company down under has been analysed in a research paper, How the local competition defeated a global brand: The case of Starbucks, co-authored by Patterson and fellow marketing professor Mark Uncles with Jane Scott, also from UNSW Business School. 

When Starbucks entered the Australian market in 2000, it was one of the biggest coffee chains globally, opening one new store somewhere in the world every day, notes Patterson. Its success in the US, which had not previously had a strong coffee-drinking culture, gave the brand the confidence to enter other markets, including Japan (1996) and China (1998). The company now has more than 15,000 stores in 44 territories.

But in mid-2008, Starbucks’ management announced that it would close 61 of its 84 Australian stores. The closures took place swiftly – within one month. Losses were enormous, including 685 jobs and A$143 million. Just 23 Australian stores were left operating in prime locations. What went so wrong?

Avoidable errors

Patterson can identify several major problem areas that, in combination, caused Starbucks' decline in Australia. They begin by noting that the brand overestimates its points of difference and the customer-perceived value of its services. After giving Starbucks a try, many Australians – who, in the majority, lived in cities with already thriving café cultures and experienced, world-class baristas – failed to understand why Starbucks charged more for its coffee.

The second serious problem was that service at Starbucks suffered as the number of stores grew rapidly and the company began employing younger, less experienced staff. Issue three was the mistake of failing to adjust its product to suit Australians’ coffee tastes, which lean more towards Europe.

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Instead, the company introduced its American offering. And that helped to create the fourth glitch – a perception that the brand, due to its rapid expansion over just a few years, was forcing itself onto an unwilling public. In contrast to Asian territories where coffee houses previously didn’t exist, Starbucks entered an extremely competitive and mature café market in Australia. Not only that, but as Starbucks did not advertise in the mass media – relying instead on its reputation – it failed to communicate its brand.

“It is probably against their corporate ethos, but I would have done some above-the-line advertising to promote the brand,” Patterson suggests. “I am sure the majority of the Australian public did not know much about them.” Above-the-line advertising refers to advertisements aimed at mass audiences on platforms such as television, cinema, radio, newspapers, magazines and the internet.

Finally, Starbucks’ business model was simply unsustainable. Leasing a large, expensive shop space and inviting customers to sit around for as long as they like while spending very little was never a good idea in a highly competitive and mature market, asserts Patterson. In addition, he points out, the company owned its stores rather than using a franchise model, which not only added to its financial pressures but also meant it lacked local knowledge.

Lessons in decline

Business specialist Hunter Leonard, founder of Melbourne-based BlueFrog Marketing and author of the book Marketing Has No Off Switch, says the Starbucks case offers three major business lessons. “First, research is the key to statistics,” he says. “If you don’t research, then you can’t grow a business. That’s a golden rule. If you’re not surveying customers regularly, you may do well despite yourself, but you won’t unlock potential growth.

“The second lesson involves the importance of identifying a target market. Starbucks was going for everyone. They claimed to offer a premium coffee and therefore charged premium prices, but that did not wash with Australian coffee drinkers. They should have been targeting young people who care less about coffee quality and more about the experience. They should have marketed their big, sugary coffees to people aged 14 to 25.

“Thirdly, a very valuable tip for businesses launching a new product or entering a new market is to lose the ego. Just because you say you’re after global domination doesn’t mean customers will allow it. Australians react very badly to people banging their chests.”

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While Patterson upholds the success of the Starbucks model elsewhere in the world and credits the company with growing the coffee category internationally, he says the brand’s major mistake was failing to create any barriers to entry. “There was nothing to stop a competitor coming in and setting up against Starbucks,” he says.

“I don’t necessarily mean a global chain. Look at the number of independent coffee shops around. You can just buy a high-quality coffee machine, get a trained barista on board, lease a shop and design a good atmosphere – that’s all anyone needs to do to compete. Starbucks did not create a sustainable, credible advantage for itself.”

The original advantage Starbucks had was its level of personal service. Staff made eye contact with customers as soon as they entered the store, remembered the names of regular customers, and were happy to make drinks according to specific requests. But even that advantage was easily replicated, and it was completely lost when the head office began using key performance indicators to measure frontline staff's sales.

“Not only did staff have customer service targets around engaging people and ensuring customer satisfaction, but the bosses said they had to sell a certain number of coffees and cakes each day. Staff were saying they could make the sales, but they couldn’t engage the customers at the same time,” Patterson says.

According to Patterson’s report, the major takeaways from the Starbucks Australia experience are:

• Crossing international borders is risky, so in-depth research is absolutely vital.
• Think global, but act local. Even well-known and well-liked brands must adapt their products for local tastes.
• Establish a differential advantage, then strive to sustain it, ensuring your product is unique enough to stand out amongst its competitors, and that it always will.
• Keep sight of what first generated the business’s success. At Starbucks, sales targets destroyed the high-quality service the brand had been built on, and it was its only competitive advantage.
• Consider the viability of the business model. If your model relies on charging a premium price, for instance, ensure the product on offer will be recognised as premium.

Seven learning lessons for industry professionals

1. Executives entering a new market: Test demand through a limited launch before committing to premises, staffing and expansion across several locations.
2. Marketing leaders: Research how local customers define value rather than assuming that recognition of a global brand will support demand or pricing.
3. Product leaders: Identify which parts of the product should remain consistent and which should change to reflect local habits and expectations.
4. Strategy teams: Assess whether the proposed competitive advantage is difficult for local operators to reproduce and whether customers recognise it.
5. Finance leaders: Model rent, labour, customer dwell time, transaction value and store ownership before approving an expansion plan.
6. Operations leaders: Measure sales and service separately so revenue targets do not remove the customer experience that supports the brand proposition.
7. Board directors: Require evidence of demand, local adaptation and unit economics before approving the next phase of international expansion.