This study aims to evaluate the business prospect of Starbucks in the market of Czech Republic. The organisation already exists in the capital of the country and in some of its prime locations. Therefore, this study aims to evaluate the expansion prospect of the company in the said country. Utilising industry and environmental analytical frameworks the potential of the market for Starbucks has been analysed.
Starbucks is a US based company of coffee and chain of coffee houses that started with a store in Seattle, Washington and grew into a multinational chain of coffee houses that operates through around 21,500 stores in over 64 countries across the globe (Marshal, 2015). The organisation is a market leader in the United States with 14% share of the hot drink market, while in the global market the organisation despite its high spread has not reached a leading market position due to the presence of market giants like nestle (Duggan, 2018). The company has the market value of around $71.4 billion which might be compared to its nearest competitors like McDonald’s with $121.7 billion and Dunkin Brands with $5.9 billion to acquire an understanding of its position in the market (Thomas, 2018).
Despite its strong market position the organisation has been identified as losing market growth in USA due to market saturation. The company has announced its decision of closing 150 of its company-operated stores in 2019 that have underperformed in multiple quarters in recent past which adheres to its recent history of closing 50 stores a year (Wolf, 2018). Bhati and Verma (2017) identified market saturation as one of the key consequences of exhaustive marketing. While it increases the market share it also leads to the treat of becoming irrelevant to the market after saturation.
Along with its practice of withdrawing from the US market the organisation has also been observed to venture into the overseas market. Since 2008, with the opening of its first store in Prague, Czech Republic, Starbucks has been observed to shift its focus to the unsaturated and largely unexplored coffee market of the Eastern Europe (Starbucks Coffee, no date). With the initial success of first 18 months in Prague, through its 9 shops in the capital of Czech Republic and a few more in Poland, Warsaw and Wroclaw, the organisation announced to double the number of its stores in the region (Konviser. 2010). It indicates a change in its business expansion plan in favour of European countries like Czech Republic. Currently the organisation operated in the said market through its subsidiary AmRest Coffee (U.S. Securities and Exchange Commission, no date and Lunakova, 2009). As of 2018 the company has 33 stores in Czech Republic and has been observed as growing its grasp on the market (STATISTA, no date).
Czech Republic is identified as one of the strongest economies in the European Union with its 2.4% annual growth rate. Its unemployment at 3.3% is identified by the International Monetary Fund as the lowest in the European Union (International Monetary Fund, 2017). This when observed in combination with the low government debts marks the high level of living for its citizens indicating their high purchase ability, making it one of the preferred choices for the market expansion of multinational corporations like Starbucks. The following table avails an insight to the GDP per capita, nominal GDP and population growth of the country since 2013 till 2017 and the IMF projection of the same from 2018 till 2023.
|
Years |
GDP per capita (USD) |
Nominal GDP (USD billions) |
Population growth (millions) |
|
|
2013 |
19,913 |
209.4 |
10.5 |
|
|
2014 |
19,769 |
207.8 |
10.5 |
|
|
2015 |
17,729 |
186.8 |
10.5 |
|
|
2016 |
18,506 |
195.3 |
10.6 |
|
|
2017 |
20,201 |
213.7 |
10.6 |
|
|
2018 |
Projected growth by IMF |
23,690 |
250.9 |
10.6 |
|
2019 |
26,106 |
276.9 |
10.6 |
|
|
2020 |
27,860 |
295.8 |
10.6 |
|
|
2012 |
29,571 |
314.4 |
10.6 |
|
|
2022 |
31,288 |
333.0 |
10.6 |
Table 1: Economic condition of Czech Republic
(Source: International Monetary Fund 2018)
The table presented above avails an insight to the consistent growth of the Czech Republic’s economy between the years 2013 and 2017. It also marks the potential economic growth of the country which is indicative of the growth of tis attractiveness as a market for the international business corporations. The high GDP per capita and nominal GDP while marks the ability of the market to spend on premium coffee products and consumption experience that Starbucks offers. Tokunaga and Iwasaki (2017) stated that the nominal GDP indicates towards the overall economic performance of a country or region which marks its investment attractiveness. On the other hand, the consistency in the growth rate of the population marks the potential growth in the consumer market which is also a key component that attracted the brand to explore Czech Republic for the business expansion. The potential of Czech Republic as a market for the chain of coffeehouses might be understood better based on the growth of the real GDP and real GDP per capita of the country in last five years as presented in the following table.
|
Years |
Real GDP |
Real GDP per capita |
|
2013 |
-0.5 |
-0.6 |
|
2014 |
2.7 |
2.8 |
|
2015 |
5.3 |
5.1 |
|
2016 |
2.6 |
2.4 |
|
2017 |
4.4 |
4.2 |
Table 2: Real GDP per capita and Real GDP of Czech Republic as per IMF
(Source: International Monetary Fund 2018)
In addition the staffs of the international monetary fund have forecasted a growth of 3.7% and 3.2% of real GDP for Czech Republic for 2018 and 2019. Its analysis also indicates that the country would see a growth of 3.6% and 3.1% of real GDP per capital in 2018 and 2019 respectively (International Monetary Fund 2018). This justifies the attractiveness of Czech Republic as a preferred market for business expansion for the Starbucks.
From the chart presented above it is evident that Czech Republic has been successful in ensuring significant GDP growth in its past few years which is considered one of the if not the best in the European Union making attractive for multinational business venture. The country has succeeded in bringing down the unemployment rate to 2.3% in the April of 2018. It has also been able to increase the rate of wage growth to 6.5%, which consequentially increases the consumption ability of its citizens (International Monetary Fund 2018). Therefore, the country can be identified as suitable for further expansion of Starbucks.
In terms of Foreign Direct Investment (FDI), Czech Republic has been recognised as the most attractive country by the Vienna Institute for the International Economic Studies. The country has been subjected to FDI worth US$173 billion in 2015 marking it as the most preferred country for FDI (Czech Economic and Cultural Office Taipei, 2016).
The exponential growth of the demand of premium coffee and coffee house experience is another factor that has contributed to the attractiveness of the Czech Republic for the coffee retailers. By 2015, brands such as Green Caffe Nero already had been serving around 800,000 customers every month through their 58 stores which increased by 12 each year indicating the rapid growth in the demand of coffee in the Eastern European market. Czech Republic has already proven to be a strong market for coffee brands with its mammoth increase in demand for the green coffee (de Sousa, 2017). The stable political environment of Czech Republic and its strong trade and business relations with the US are also crucial factors inviting business from this country.
Starbucks already possesses an advantageous position in the Czech Republic due to tis high brand image as a supplier of premium coffee products. However, several different brands such as Polish Coffee Heaven, British Costa Coffee, Switzerland’s Nescafe, Australia’s Gloria Jean’s and Italy’s Segafredo compete to acquire the preference customers of Czech Republic which makes it difficult for the brand to acquire a significant market share with its premium prices. However with the increasing GDP of the country the citizens have grown a taste for premium coffee which might be realised from the price of smallest coffee of Starbucks in Czech Republic, which is 50 Koruna, an equivalent to almost US$3 (Konviser, 2010).
|
Market forces |
Position in Czech Republic |
|
Bargaining power of customer |
High |
|
Bargaining power of suppliers |
Moderate |
|
Threat of substitution |
High |
|
Threat of new entrants |
Moderate |
|
Industry rivalry |
High |
Table 3: Five force analysis for Czech Republic coffee market
(Source: Created by student)
The presence of a number of high end as well as economic brands of coffee in the Czech Republic market avails the customers multiple options to choose from. This availability of multiple options increases the bargaining power of the customers. Although the in-store environment offered by Starbucks is projected as a part of the consumption experience, it rarely reduces the bargaining power of buyers. Presence of a number of multiple suppliers in the market limits their bargaining power, however the premium quality requirement of the coffee beans, and additional raw material also limits the options for companies like Starbucks.
Existence of strong competitions like Costa Coffee or global market leaders like Nescafe increases the level of industry rivalry due to which the organisation might need to focus on increasing consumer loyalty through loyalty programmes as it also increases the threat of substitute products (Kumar and Reinartz, 2018). Finally, due to the moderate need of resources for entering the market there is considerable threat of new entrants. However, the strong competition in the market and increasing brand consciousness among the customers makes it difficult for the newer and smaller brands to survive for long in the market.
Through the evaluation above, it is evident that Starbucks for its expansion in the Czech Republic market would have to overcome significant barriers of competition and substitution. However, its brand image and existing popularity in the target market provides it an upper hand, in its potential expansion in the market.
According to the analysis of the International Monetary Fund of the economy of Czech Republic, the country poses considerable potential of FDI and business expansion of Starbucks. Its high GDP and stable socio-political environment invites multinational corporations for business operations. This might be better understood through PESTLE analysis of the market of Czech Republic which has been provided through the following table.
|
Environmental factors |
Details |
|
Political |
Strong business relations between Czech Republic and USA Stable political environment Member of European Union since 2004 Open investment climate (Czech Economic and Cultural Office Taipei, 2016) Strategic location |
|
Economic |
Consistent economic growth GDP growth of 4.4% in 2017 (International Monetary Fund 2018) CzechInvest’s Support High consumption rate of coffee Most preferred country for FDI (Czech Economic and Cultural Office Taipei, 2016) Low unemployment rate 6.5% growth in wages (International Monetary Fund 2018) |
|
Social |
Growing number of working class people Dense population of the capital, Prague Growing preference to premium coffee brands over the previously available Turkish-style coffee Educated workforce (Consulate General of the Czech Republic in Chengdu, 2018) Growing coffee culture |
|
Technological |
Acceptance and adaptability of advanced technology |
|
Legal |
Fair trade agreements Less legal barrier Consistent and predictable economic policy (Czech Economic and Cultural Office Taipei, 2016) |
|
Environmental |
Easy accessibility to water Less threat to environment hence triggering less environmental obligations |
Table 4: Environmental analysis of business potential of Starbucks in Czech Republic
(Source: Created by student)
As presented in the table above Czech Republic has exhibited political stability in recent past which has contributed to its economic development. In addition, to its economic condition it has also been observed that the location of the country makes it a preferred location for international companies to access the market of other countries of the Eastern Europe. The bilateral treaty of investment between the United States and the Czech Republic has eased the process of investment and business initiatives for the US based business corporations in Czech Republic, making it easier for the companies like Starbucks to operate in the Czech Republic market (U.S. Department of State, 2018). Its membership in the European Union also makes it easier to access its market for US companies due to the relations of US government and EU. Finally the open and inviting investment climate of the country merged with the investment support measures introduced by the government makes it an attractive option for business expansion of Starbucks.
As observed in the earlier section, the record of the tremendous economic growth of Czech Republic in last five years indicates towards further development of tis consumer market making it an attractive choice for strategic expansion of the retailers of consumer products like coffee. It has also been identified as the most preferred country for FDI, which speaks a volume about its attractiveness as a potential market. The dense and ever growing population of tis capital and other parts indicates towards the potential demand for premium coffee in future wile, 2.3% unemployment by April, 2018 coupled with 6.5% growth in average wages indicates increased ability to purchase. The educated population caters to the need of skilled labour required to hoist technological advancement in terms of equipment used during the operations. Finally simple economic policies and reduced legal barriers though bilateral treaty makes Czech Republic a preferred target market for Starbucks.
The demand of premium coffee and speciality roasters has increased considerably in the last decade in Czech Republic keeping Prague in its centre due to the growing coffee culture in the city (CBI – Centre for the Promotion of Imports from developing countries, no date). This enthusiasm regarding coffee has been spread outside Prague in recent past in cities such as Brno. The coffee culture has been identified as a consequence of the effort of Coffee Embassy of the country to educate its citizens about coffee which undertook initiatives like the Prague coffee festival (DRWakefield, no date). This along with the overall economic development of the country has contributed to the increase in the demand of premium quality coffee and specialised coffee-boutiques. Starbucks with its high range of products and unique in store environment might cater to such market demand, which might be the key to its expansion in the Czech Republic market.
Conclusion
Through the discussion above it is evident that Czech Republic has the potential of availing Starbucks a strong market base outside the United States due to its economic environment, coffee culture and strategic location in the Europe. Therefore the organisation might consider further expansion of its branches in the cities of Czech Republic like Prague and Brno. However the strong market competition calls for generating consumer loyalty through effective loyalty programmes.
Evaluation of the industry and environment of Czech Republic has provided the understanding that cultural marketing might help the organisation to acquire preference of its customer base. Therefore, the organisation might profit from contributing to or participating in its coffee culture. It will give the organisation a competitive advantage in Czech Republic market.
References
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International Monetary Fund (2018) 2018 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Czech Republic [online]. Available from: https://www.imf.org/en/Publications/CR/Issues/2018/06/26/Czech-Republic-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-46019 [Accessed 20 November 2018]
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