STARBUCKS' RARE FAILURE

 

                                                                                                                                                                   "We can never reach a stage where we can say, "I know everything, and I have nothing more left to learn".

Above quote from Pooja Agnihotri's book "17 Reasons Why Businesses Fail" appropriately suits a brand that has rejuvenated the refreshment behavior and destination of people worldwide with its excellent customer-satisfaction policy, innovative products, and bulls-eye marketing strategy. The brand spread across more than 75 countries and 28000 locations with annual revenue of approximately 23.51 billion USD (wall street journal). The brand is covering the world from Shanghai to Guantanamo Bay. According to CNBC, brand growth is so rapid that it opens one store every fifteen hours in China.

We are talking about Seattle, the USA, based on the largest coffee chain globally, "Starbucks Coffee". The brand is growing strength to strength worldwide and provides some very innovative strategy to the business world, which will work as a cornerstone for brands that are planning to thrive in the market and their customer segment; if everything about Starbucks is so impressive, then why I have used the quote as mentioned above, let me solve this enigma.

Yes, there is a large part of the world for Starbucks becoming a part of their lifestyle. Still, one continent seems uninteresting towards the world's most attractive and biggest coffee brand, and that continent is Australia. A continent that consumes 37 million kilograms of coffee in a year. A brand that is known for its consumer satisfaction, market STP (Segmentation, Targeting, positioning) method and market growth strategy how failed itself in geography where 75% of the population (around 19 Million) drinks coffee and 28% of those have three or more cups of coffee in a day. Let us decode a rare failure of a global brand with the below-mentioned points.

· The need and want determination failure.

The Australian coffee market industry has grown-up with a CAGR of 11% in the last 20 year, and in 2018 revenue generated from the sector was 5.5 billion USD. In 2017 the consumption of coffee per capita was 1.91 kg. The data has shown exhilarating figures and can attract a significant player like "Starbucks". Starbucks opened its first outlet in Australia in the year 2000, and in its first seven years brand accumulated 105 million dollars in losses with its more than 70+ (a big mistake that we will discuss in further points) stores. The root cause behind this is the strategic failure of management in understanding the consumers' needs and desires. If you ask any random person on the Australian street "Why Starbucks failed", they will tell you- we have taste sprouts; after ordering a coffee, we expect a delicious black coffee or creamy latte, not a half-liter of flavoured quaff. The consumers were already formed due to a century-long coffee culture of the country, and most of them are prefer small cafes; this hit hard the Starbucks as they could not be able to compete with local vendor due to consumers taste and preference which also works as an entry barrier for the brand.

· A needless aggressive expansion policy

Scarcity enhances the value of any brand or resource. Starbucks' biggest strategic mistake in Australia is that they never keep itself scarce in the region and opened too many outlets in no time. Though the southern hemisphere continent was known for its affection for coffee, the Coffee giant did not allow consumers to develop their brand's appetite by its rapid expansion policy. Its growth strategy backfires since the brand cannot exhibit any difference from local coffee shops by making itself readily available for consumers. Ultimately, due to severe losses, they had to shut down 61 out of 87 outlets in 2008.

· Competitive Rivalry

As already mentioned, Australia is one of the biggest Coffee markets in the world with 5.5 billion USD revenue and fully engulfed with café culture since 1900. The continent has many players who have grown exceptional Australian brand coffee, such as Australian macchiato or flat white. The local vendor acquainted with the Australian business model and is very much loyal amongst consumers; on the other hand, Starbucks started its operation in Australia with the same business model as the American continent. Starbucks' rival in the region has a competitive advantage over the brand since they understand the consumer psyche and deliver a consumer-oriented menu in which Starbucks failed. Also, to create a point of difference, the coffee chain brand keeps its product price higher than available brands in the market, which worked adversely for the brand.

There might be some more reason for "Starbucks failure" in the Australian continent, such as the "2008 Financial crisis", "Smart consumers", and "Australian people sentiment towards their products". And it is also correct that marketing relies on gut instincts. Still, it is vital for the organizations, before implementing any strategy, they need to understand the most crucial aspect of business--- Customer.

To know more strategic implications, follow our blog until next time.

About the Writer

                                                                              

Piyush Ranjan Jha

PGDM, IMT Hyderabad

A constant learner, interested in equity research, business research, and market intelligence.

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IS APPLE ON THE RIGHT PATH?

Apple Inc, the technology giant from the USA, warned its investors in February that the company is set to miss its revenue forecast and a drop in sales is expected because of the Global Pandemic. The company said the pandemic affected its manufacturing processes, and with a decline in people's disposable income, sales will be well short of the target. Apple gave a similar warning last year before the pandemic. Then the company issued a statement saying that it would cut its profit forecast by $9 billion because of a sales drop attributed to the pricey iPhones. Indeed, the decline in revenues and profit cannot only be attributed to the pandemic. There is more to the story.

Despite a drop in sales, Apple is not a company in crisis. The company's current valuation is more than $2 trillion, which is more than the GDP of Italy, Brazil, Canada, South Korea, Russia, Australia, and Saudi Arabia, to name a few. Its revenue stood at $64.7 billion at the end of September Quarter last year with $38.02 billion cash in hand. With such strong financials, the company is the technology space leader and holds a strong market standing and competitive advantage. The drop in sales and revenue has not affected the company much, but this must be rectified soon, or the company could quickly follow Nokia's way, from being a market leader to a company struggling for survival.

What is Apple doing wrong?

To start with, the sales of the iPhone is constantly falling for the last few years. For the past few years, Apple had to cut down its Sales Target frequently. iPhone sales are dropping at a greater pace in China than in the rest of the world, which is alarming since China is the biggest market for Apple. Even Tim Cook, the Apple CEO, acknowledged this fact and wrote in a letter, "In fact, most of our revenue shortfall to our guidance, & over 100% of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, MAC, and iPad." Apple's revenue in China declined by 29% in October last year, the lowest since 2014. A similar pattern is observed across the globe for Apple.

According to many experts, this was bound to happen and was a long way coming. There are many reasons for this. Customers are holding up their phones for more extended periods, and the replacement rate has fallen. People do not find any incentive to upgrade their devices regularly as often the subsequent generation of the devices is more of an evolution than a revolution. With prices rising with each new generation, customers do not find any value in regularly upgrading as they would get caught in the vicious circle of EMIs whereby they are paying for a device whose value would depreciate fast. Even with luring bank offers and online schemes, there is hardly any value in upgrading to the next generation when the older one is more than capable for daily usage. Most people prefer to upgrade with an alternate generation to feel a more revolutionary upgrade and a mere evolutionary one.

People now prefer to repair than replace their devices. Tim Cook told the investors in 2020," That people bought fewer new iPhones because they fixed their old ones." With people holding onto their devices, the sales are bound to drop.

Apple's focus has been to defend its turf, not to conquer new lands.

"I skate to where the puck is going to be. Not where it has been"-Wayne Gretzky. Steve Jobs loved this quote, but somehow after his demise, Apple has diverted from this philosophy. Apple also lacks innovation. It has been more than a decade since Apple launched a new business vertical. The iPhone, iPad, App Store were ground-breaking innovations that expanded Apple's business and lured people towards it. These devices created a solid fan base for Apple that has remained loyal to them since then. Ever since Tim Cook has been at the helm of affairs at Apple, it has followed the evolutionary path, not the revolutionary one it was once famous for. The company makes minor incremental changes to the devices in each new generation. The improvement is more of a technical increment which is not noticed by the public at first glance. Under Tim Cook's leadership, the company as focussed more on the computing power of the devices. Apple has made good fundamental changes in its software and improved the processing capabilities. With the launch of the M1 chips, the company has started making processors for its laptops and desktops. All these efforts have given Apple a technical competitive advantage but have raised its devices' prices, causing a fall in sales. With Samsung launching foldable devices, notch free displays, and flagship devices having cameras equally good as iPhone, Apple is facing the heat in the market. To validate this fact, here are some of the numbers

·       According to figures released in Q2 2020, Apple spent nearly $4.8 billion on R&D compared to Microsoft's $5.2 billion and Alphabet's $6.2 billion.

·       Apple has only spent 2% of its cash flow on mergers and acquisitions, which is less than industry standards.

Since both mergers & Acquisitions and R&D are integral to a company's growth and prospects, it is more important that Apple focuses more on these aspects.

Lastly, Apple's move to remove charging brick from the iPhone boxes has not helped the companies cause. Apple charges high prices for its devices which is referred to as Apple Tax, and despite this, if it does not provide the essential accessories, the customer's satisfaction is bound to get a hit. The competition is offering fast chargers at no additional cost. The Verge magazine, along with other industry experts, have criticized this move by Apple. Even the customers are annoyed.

To improve its sales, Apple should focus on providing value to customers by reducing the prices and making value money package. Lastly, Apple should get back to its roots of making ground-making innovations for which once it was famous. The earlier Apple does this, the better it will be for it; otherwise, it would get lost in the crowd of Korean and Chinese tech giants.

See you next soon with some more exciting content.

                                                          About the Writer

                                                         

Ashwik Sharma 

Pursuing PGDM at IMT Hyderabad.

An Automobile enthusiast and Cricket fanatic, intending to make a career in Finance explains the reasons behind the dwindling sales of Apple in this blog.