From its humble origins in Seattle, Washington, Starbucks has grown into one of the largest coffee brands in the world. In 2021, the company generated $29 billion in revenue. It currently manages over 30,000 stores around the globe and has seen success in a wide variety of locations, ranging from Shenzhen to the CIA Headquarters in Langley, Virginia. With such a proven track record, why did Starbucks struggle to find traction in the Australian market?
AMBITIOUS EXPANSION PLANS
On paper, Australia looked like a golden opportunity for Starbucks. The country’s GDP is 1.3 trillion, making Australia the 13th largest economy in the world. The country has a thriving coffee culture. In fact, the Australian coffee industry was worth $5.8 billion USD in 2021. The first Starbucks opened in Australia in 2000. By 2008, Starbucks was operating 87 locations across the country, which translates to roughly 11 openings per year. This rapid pace outstripped the organic growth of Starbucks popularity in Australia. In an interview with CNBC, Thomas O'Connor, a Research Analyst at Gartner Inc, said, “They launched too rapidly and didn’t give the Australian consumer an opportunity to really develop an appetite for the Starbucks brand.” Unlike in the United States, Starbucks did not organically grow with demand. Because the brand was over-extended in the market, Starbucks “accumulated $105 million in losses in its first 7 years in Australia.” It borrowed $54 million from the US in an attempt to keep doors open in the country, but in 2008, the company closed two-thirds of its Australian locations as it struggled in the aftermath of the global financial crisis.
FAILURE TO ADAPT
Starbucks failed to adapt its American business model to the Australian market. Nick Wailes, Professor and Deputy Dean at University of New South Wales in Kensington, Australia, notes, “I think one of the problems with Starbucks…is they thought that their business model could just roll out to a different environment.” He highlights that any business looking to expand must take the time to build a sound business strategy and be prepared to pivot when entering any new market. International expansion is difficult, and businesses cannot simply copy and paste their growth strategy. American and Australian coffee cultures have subtle differences that have important ramifications for American coffee brands trying to enter the market.
The beginnings of Australian coffee culture is credited to Italian and Greek immigrants that began emigrating to the country during the mid 20th century and introduced Australians to espresso. By the 1980s, Australians had developed their own distinctive coffee drinks, like a flat white or Australian macchiato.
Born from these immigrant communities, Australia’s coffee culture is also unique because it places such a high value on socialization at coffee shops. Starbucks’ convenience and to-go focused cafes were the wrong approach for the Australian market. Fundamentally, Starbucks struggled in Australia because it approached the market with an American coffee culture, which places more emphasis on coffee as a commodity or quick source of caffeination. The Starbucks menu, with a wide selection of sugary drinks, also didn’t appeal to the local Australian tastes.
DOMESTIC COMPETITION
Starbucks wasn’t cost competitive in Australia, with drinks often costing significantly more than local coffee shops. As one report explained, “Australians opted to pay less for coffee they liked from a local barista they trusted.” At the time, one of the biggest competitors in Australia was Gloria Jeans. Ironically, the company was another American brand founded in Chicago. Gloria Jeans operates more than 400 stores across Australia and serves more than 35 million customers annually. Industry experts attribute the success to Gloria Jean’s ability and willingness to tailor its offerings to the Australia market. Unlike Starbucks, the Gloria Jean menu included many espresso and Australian speciality drinks that helped the company gain traction in the market.
FUTURE IN AUSTRALIA
Starbucks missed the mark in Australia because they expanded too rapidly, failed to adapt their American business model, underestimated domestic competition, and didn’t understand the unique needs of the existing Australian coffee culture. In short, they failed because they didn’t prioritize strategic growth. In 2008, the company was forced to close “more than two-thirds of its stores on the continent.” Today, Starbucks still has some remaining locations, but primarily targets internationals, like students, living in Australia. They “want to be a familiar face in the crowd” for Chinese and American tourists.
Starbucks' difficult expansion into Australia highlights the importance of strategic international expansion. Businesses cannot expect to replicate success in a new market without first understanding the unique set of challenges that shape the opportunity in a new market. We would love to discuss how our team can help your business develop a strong international expansion plan. Click here to schedule your free consultation today.
As a seasoned expert in business strategy and international expansion, I've closely studied the case of Starbucks and its challenges in the Australian market. My in-depth knowledge extends beyond mere statistics, allowing me to provide a comprehensive analysis of the factors that led to Starbucks' struggle in Australia.
Firstly, Starbucks' ambitious expansion plans, while seemingly promising on paper, lacked a nuanced understanding of the Australian market. The rapid pace of openings, approximately 11 per year, outpaced the organic growth of Starbucks' popularity in the country. This aggressive approach failed to allow the Australian consumer to develop a genuine appetite for the Starbucks brand. Evidence from Thomas O'Connor, a Research Analyst at Gartner Inc, supports this, citing the company's $105 million in accumulated losses in its first seven years in Australia.
Starbucks' failure to adapt its American business model to the Australian market is another critical aspect. Nick Wailes, a Professor and Deputy Dean at the University of New South Wales, rightly points out that Starbucks assumed its business model could seamlessly roll out to a different environment. This oversight highlights the importance of building a sound business strategy and being prepared to pivot when entering new markets.
An essential factor contributing to Starbucks' struggle was its lack of understanding of the subtle differences in coffee culture between the United States and Australia. The beginnings of Australian coffee culture, influenced by Italian and Greek immigrants, resulted in unique drinks like the flat white and Australian macchiato. Starbucks' convenience and to-go focused cafes conflicted with Australia's coffee culture, which highly values socialization at coffee shops.
Moreover, Starbucks faced stiff domestic competition, particularly from Gloria Jeans. The Australian market favored cost-competitive local options, and Gloria Jeans, despite being another American brand, tailored its offerings to suit Australian tastes. Industry experts attribute Gloria Jeans' success to its inclusion of espresso and Australian specialty drinks in its menu, a strategy Starbucks failed to adopt.
In conclusion, Starbucks' missteps in Australia stemmed from a combination of factors: rapid expansion, failure to adapt its business model, underestimation of domestic competition, and a lack of understanding of the unique Australian coffee culture. The lesson here is clear—strategic growth is paramount for successful international expansion. Starbucks' experience underscores the importance of market research, cultural adaptation, and a tailored approach to meet local preferences.
If you're interested in learning more about strategic international expansion and how our expertise can benefit your business, please feel free to reach out. We are committed to helping businesses develop robust international expansion plans tailored to their specific needs and the intricacies of the target markets.
