In cold blended beverages, a variety of pastries and

In 2001, the International coffee
chain – Starbucks lunched their first store in Israel after declaring that they
expect to become the largest coffee chain retailer in Israel in 3 years. With successfully
opened branches in 72 countries around the world Starbucks had good reasons to
believe this will be another swift success story. But in this case, it didn’t
take more than 2 years of financial struggles for Starbucks to admit failure
and close their 6 branches, never to return.

Starbucks had difficulties in
entering new markets before, but this was the first time that Starbucks
surrendered and completely walked out from a market. The first assumption would
be that the failure was a result of the terror waves and the economic recession
occurred in Israel in 2002. But the financial growth of the local competition
in the same time frame tells a different story and requires an in-depth
research to understand the reasons for the failure.  

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The paper will approach the subject by
making a comprehensive review of Starbucks background, Israel coffee market and
a full review of Starbucks operation in Israel.

Method:

By reviewing academic
papers and media articles on the subject this paper will review and examine the
reasons behind Starbuck’s failure in Israel, looking at factors such as market strategy,
choice of local partner and main attitude towards the Israeli market.

Starbucks Overview

The story of Starbucks is undoubtedly a story of a
major success in the terms of global brand exposure. The company started as a
single whole bean coffee shop in Seattle in 1971 and only changed its course in
1987 after it was acquired by Howard Schultz. Schultz who made himself CEO, had
a wider vision for the company, he was hoping to import the Italian coffee bar
culture with Starbucks to the USA. In the early 90th the company
went public and started its meteoric expansion, when between 1991 to 2007 the
chain opened on average two new stores every day. Today the chain has 21,500
stores in 72 countries which makes Starbucks the largest coffee chain in the
world.

Starbucks
Band Positioning:

When Shultz became CEO, he aimed to make Starbucks to the”
third place” – a place where people spend their time between work and home and
form a community.

Starbucks made its brand unique by creating an
experience around the consumption of coffee, their customers came not only for
coffee but also for the satisfaction of being physically inside a Starbucks store
or carrying a coffee cup with Starbucks logo. This experience was promoted by
the welcoming environment and decoration, music, consistent quality, quick
service, and the Starbucks employees attitude.

To keep their customer
base enticed Starbucks keeps on changing the variety of their products, and
keeps on introducing new items in their menu, such as: “fresh-brewed coffee,
Italian-style espresso beverages, cold blended beverages, a variety of pastries
and confections, coffee-related accessories and equipment, and a line of
premium teas”.

 

At the early 90th
Starbucks target market was mainly the baby boomer generation, 24-44 aged,
white collar groups which Starbucks was an “affordable luxury” for them.

With time the company decided to
expand the target audience to more segments, it popularized the brand and starting
opening chains in rural areas, ethnically diverse neighbourhoods and grocery
stores.

Business Model:

Starbuck’s business model is divided to 3 parts:

• North American stores: Most of the stores in
the are owned and operated solely by Starbucks. All the stores follow the same guidelines
and keep a unified menu and design.

• International stores: In international markets Starbucks chooses to operate through licensing
or a joint venture in most cases.

• Brand extension: Branded
products that carry Starbucks brand, such as frappuccino
and premium ice creams sold in numerous outlets.

 

The company allocates a relatively low amount of budget on traditional
forms of advertising, Instead, “it relies on word of mouth and the ubiquity of
its stores.”

When Starbucks enters a new market in
North America or in an International market it normally uses a “cluster
strategy”, which means opening stores in multiple locations within a proximity, this strategy allows
Starbucks to strengthen the brand name, allocate waiting lines
between locations and expand its customer bass.

 

The company opened its first store outside of North America in 1996,
when it entered

The Japanese market, thus beginning its international
expansion. The international strategy was to expand quickly into new countries and
regions, with the help of local partners, mostly with partners with expertise in the coffee retail market. In only 5 years Starbucks
owned 244
stores overseas and licensed another 541.

 

The company gained success in numerous markets like the United Kingdom, were it opened 200 stores. But it also
had markets were the growth had been sower such as Switzerland and Austria.

 

As a strategy Starbucks works mostly with local partners under licence
in international markets, one successful example is Alshaya, a Kuwaiti retailer
that singed a 10-year licensing agreement with Starbucks. The licence gave
Alshaya the rights in Kuwait, Saudi Arabia, Qatar, Oman, Bahrain Lebanon and
the United Arab Emirates. By 2001 Starbucks had more than 30 stores in middle
east managed by Alshaya.

 

But in some cases where it was more difficult to attract suitable
partners, Starbucks had to fully own stores in some places, such as Singapore and
Australia or took ownership stakes for example, In Japan where Starbucks teamed
up with a local retailer called Sazaby Inc and formed a 50-50 joint venture.

 

In a few single cases only, Starbucks decided to buy its partners full
shares and gain full control, one prominent example was China, where they had
severe disagreements with the local partner that caused this radical move.

 

Israeli Market

Like many
other aspects of the Israeli culture also the coffee culture was imported from
other countries. The first immigrants that brought the coffee culture to Israel
came from west Europe, namely Germany and Austria back in 30th, Yet
the dominant influence came from Othman coffee culture, thus making the “Turkish
Coffee” or as Israelis would call it “café botz” (Mud Coffee) the most popular cup
of coffee in Israel.

Until the
80th the coffee market in Israel was static and although coffee consumption
was popular at the time the quality was medium to even low. During the late 80th
the social economic status of many Israelis started to improve, the first shopping
malls started to appear, and Israelis started to travel more around the world.
These changes led to the entrance of many western retailers to open their branches
in Israel and in the same time Israelis started to change their coffee habits
at and imported more western brands mainly from Italy, such as – Lavazza, Illy,
and Segafredo.

Wasn’t long before that also small coffee chains that offered Italian-made high-quality
coffee started to appear, local customers
visited coffee shops more frequently than ever
before and remained longer for socializing. In the mid 1990’s international brands like
Arcaffe from Italy and Coffee Bean from the US entered the local
market. For Israelis in these years every big international brand that open his branches
in Israel was a reason for pride as the Arab embargo kept many companies such
as Pepsi selling their products in Israel. Only after the Oslo peace accords in
1992 that large foreign companies such as McDonald’s started to enter the
Israeli market. Until these day every large international brand that opens its
stores in Israel is accepted as form of validation.

By the time Starbucks was planning to enter
Israel had 750 coffee houses, mainly in Tel Aviv for it’s constantly filled
coffee houses, where people sit for hours.
There were two main established coffee chains at the time Starbucks had to
compete with:

Aroma Espresso Bar: A local company which
was established in 1994, Aroma offered a wide
selection of hot coffee and cold coffee drinks, as well as light meals the most know product was the “ice Aroma” frozen coffee slush.

Arcaffe: Established in 1995 Arcaffe was the first company that
successfully introduced the Italian espresso bar culture to Israel. Compared to
Aroma, Arcaffe is considered to be more of an upscale coffee chain with its reputation
of having the is the ability to serve high quality Italian coffee with variety
of food and high service standards. mostly located in high-tech centers and
more affluent neighbourhoods.

The planed arrival of Starbucks didn’t concern the
traditional local coffee chains, as Israeli food critic Esther Salomon
predicted that “Starbucks’ bitter coffee would find no place with the
discerning” and described their coffee as “simply mediocre”.

Entering the Israeli
Market

 

Events prior to opening:

The idea of
entering the Israeli market began with a trip Howard Schultz made to Israel in
1998. Schultz feels highly connect to his Jewish heritage, and his first trip
to Israel left a major impression on him, he was recorded saying “I am blown away, I had a sensory
overload,” and on another occasion “I don’t think
I’ll ever be the same after this” (Klein 1998).

But other than the personal experience Schultz also observed what he
considered to be a business opportunity, while dining at the King David Hotel he declared that “the coffee was not so good” (Klein 1998). Later he also argued that “People will taste the difference in
Starbucks’ coffee,”

 

Some
reports are saying that during the trip the Israeli prime minister Netanyahu
met with Schultz and asked him personally to open his stores in Israel and help
the sates economy. (https://tlv1.fm/business/2016/08/15/why-starbucks-failed-in-israel/)

Immediately after the trip Schultz He announced
that in 2 years, Starbucks would set up ten
stores in Israel.

 

 

 

 

2.      Looking for a partner:

 

Just like in other in international markets, Starbucks had to find a local partner first, immediately after Schultz’s
visit, Howard Behar – Starbucks
international
general manager at the time, visited Israel in order to find a partner who could fit Starbucks vision.
Behar struggled finding a suitable partner and had to delay the planed opening.
“We have not
yet found the ‘match’ we’re looking for, the partner who is
right for us,” said Behar in an April 2000.

 

After couple of failed negotiations Starbucks closed a deal with with DIFC Group (Delek Israel Fuel Corporation), the agreement stats that DIFC will hold 80.5 percent of the joint venture, and Starbucks would hold
19.5 percent at first but they will keep the option to increase
its share to 50% percent if they choose so.

 

The goal was to launch ten shops in its first year and reach eighty
stores within four years. This would make Starbucks the largest
coffee shop chain in Israel, for a total investment of $20
million.

 

3.     
Delek Israel
Fuel Corporation (DIFC)

 

As the name suggests, Delek Israel Fuel Corporation is not a coffee retailer
but a fuel distributor.

With 227 stations, DIFC was the second
largest distributor of fuel in Israel.
In addition, DIFC operated 40
convenience stores that were located beside their gasoline
stations. 

 

Close to the Starbucks deal DIFC also acquired Mepco Express, which had 234
filling stations and convenience stores, mostly in Virginia and
Tennessee, for $234 million (“Delek Completes Acquisition”
2001).

 

The investment in Starbucks was a part of the new strategy of DIFC new management that took
over in 1998 (Haoun 1998).

 

One of the main goals of DIFC was to
place a Starbucks store next to their gasoline stations. Starbucks management
feared that this move will hurt the brand and both side agreed to make no
connections between Starbucks and DIFC gas stations until the Starbucks
brand was established in Israel

 

4.      Market Strategy

As usual, Starbucks would mostly rely on its brand name and word of
mouth to attract customers. Starbucks also counted on the
Israeli adulation for American brands.

 

Sarig explained, “We are bringing the romance of
coffee to Israel and we’ll educate the Israeli public in coffee
drinking” (Kaye and Bloomberg 2001).

 

Which wasn’t wrong, for many
Israelis the arrival of Starbucks, a leading global brand,
was another illustration that Israel was becoming a
country attractive to global corporations.

 

Starbucks’
coffee pricing would be positioned at the high end of the market.

 

Prior to entering the market, Starbucks made a market resreach, the main
points were as follows:

(http://www.aradcomm.co.il,

The “coffee
culture” in Israel had been growing
for the past 10 years: 38% of the population said that they visited a
coffee shop at least once a
week. A higher percentage, 55%, mentioned that they had learned to appreciate quality
coffee.
The awareness
of Starbucks brand was very high: Over 60% of the Israelis had heard about it and perceived
it as the highest quality
coffee chain in the world.

 

 

 

 

 

5.    Start of
operation:

In May 2001 Starbucks Israel was officially launched, with two stores
that were opened in Tel Aviv, Israel’s main business and culture centre.

 

At the starting point Starbucks Israel looked like success story the
mangers hoped for, as the two stores were filled with customers asking to get a
taste from the famous Starbucks cup of coffee. (http://style.nana.co.il,
2006). The launch was almost a national event as a result of the intense and positive coverage by the local media (http://www.haaretz.co.il, 2003).

Yet it didn’t take long for the things to
turn around, many of the Starbucks customers reported that the Starbucks coffee
didn’t match their expectations, they are not satisfied with both the coffee
and service and the existing brands served better coffee. Mostly they felt that
the coffee quality didn’t deserve the high price, customers also complained
about the the lack of food options and lack of sitting places.

 

There was a notion among customers that Starbucks didn’t try to listen to the Israeli customers and adjust to their needs,
but instead it was trying to dictate its system. “perhaps they were being arrogant,
assuming that Israelis not understand the real meaning of
first class coffee” (http://style.nana.co.il,
2006).

 

In the meanwhile, Starbucks Israel management failed in observing the
dissatisfaction and reported a very high degree of satisfaction from the
progress of it’s stores. The company opened another store in Tel Aviv and aimed
to open 20 more stores in the next 3 years. (http://www.ynet.co.il, 2001).

6.    End of things

The Starbucks store in Tel Aviv became quickly empty and the company suffered
from heavy operating losses. As a result
In 2002 The DIFC group decided to fire the entire local management
team and unsuccessfully tried to share it’s shares to different companies.

By 2003, only six shops were opened
(rather than the planned eighty) and the company
amounted $6 million loss. In a last attempt to decrease their losses the DIFC group demanded from
Starbucks to increase its stake to 50% instead of the 19.5% they had when Starbucks refused their joint venture came to an
end. 

 

In 2003, after a two-year activity only, Starbucks Israel closed it’s 6
stores.

Reasons
for failure

 

The official Starbucks statement for closing
their store was: “market challenges: economy and Middle East turmoil”. The problem with this statement was that the other coffee chops in
Israel had very successful period in business.

That means that to the blame for the
fauilre can’t be put on extranl things, but on the management and strategic
paln when entring the market:

 

We can divide the causes to the failure to 5 main reasons:

Emotional Investment:

The entire operation in Israel was thought off and pushed by the CEO –
Howard Schultz. The comments made by Schultz suggest that he made a very strong
connection with the country and when he decided to enter the market he didn’t
think only rational but also emotionally. Yair Aharoni studies show that many
of the Investments that are made by members of the Jewish American community
are significantly influenced by strong psychological and emotional ties to
Israel (Yair Aharoni)

1966 book, The Foreign Investment Decision Process

 

After making the decision to the enter the market is was hard to
backdown although the difficulties in finding a partner which ended in finding
the working partner. “I think a large part of it was because Howard Schultz
wanted so badly to succeed in Israel.” “Kalnins argues that Schultz was so
emotionally committed to the idea of opening up shop in Israel, that he ignored
the signs when things started going wrong. Despite mounting evidence, Schultz
kept moving full steam ahead.”

 

Overconfidence:

Starbucks successful venture in the international market, such as the
joint venture with Alshaya in the Middle East and with Sazaby Inc in Japan
increased their confidence when entering into new markets. This overconfidence
was shown by their comments before entering the Israeli market about “how they
will bring the coffee culture to Israel” in addition they made a statement that
they are planning to become the largest coffee chain in the country for the
even opened their first store.

 

The over confidence lead Starbucks to bad management decisions such as
not trying to learn and to adjust to the Israeli market Starbucks and instead
trying to adjust the Israeli market to their brand. In addition the
overconfidence caused them to choose a partner that didn’t have any significant
experience in retail, as Startbucks management thought that if their partner
can supply the distribution the Startbucks brand is all that needed for the
rest.

 

That study found that companies that announced the most ambitious plans when entering a foreign market, such as building one hundred shops or being the biggest in a country, were the most likely to fail.

Local Partner:

To succeed in international markets Starbucks has to rely on their local
partner, for this reason they invested almost two years to find a partner that
they believe will share the same values as theirs. Starbucks ignored DFIC lack
of experience in retail because of their economic power and distribution experience.
But once the financial results weren’t satisfying DIFC’s lack of experience and lack of incompatibility with Starbucks cultures was obvious.

 

“DIFC focused
mostly on increasing efficiency, this action ran entirely contrary to the
Starbucks culture, which is focused on developing and supporting its employees.”

This business cultural differences were highlighted when DFIC decided to
fire the management staff in Israel all at once after the bad operational
results, this move is completely opposed to Starbucks business culture that
always tries to give the employees the best treatment. These differences were
also noted by the lack of patience and vision by the DFIC group, Starbucks
believed that they had to reach around 30 stores to achieve the needed mass to
stabilize the brand. While the DFIC group were not prepared to give this
project time to learn and improve along time.

Marketing Strategy:

When entering the Israeli market Starbucks Strategy decided to position itself
as an international brand with high prices and premium coffee. They didn’t make
adjustment to the local market in their menu or store structure. In their
vision the Starbucks brand name would be enough to attract customers, and the
Israeli coffee enthusiasts that were a growing market at the time will
appreciate the premium international coffee brand and choose them over the
competition.

 

Starbucks probably wouldn’t have taken this approach if they paid more
attention to the local competition, as an example they would have seen that all
competitors offered small or even large meals and put special emphasis on
comfortable sitting places. These are important elements as Tel Aviv residence
are known for their ability for sit inside coffee houses for hours, the entire
“coffee to go” culture didn’t exist in Israel at this point of time.

 

But unlike Starbucks the competitors prepared themselves well for Starbucks
entry, by improving their menu, adding new coffee flavours, improving the
seating places and the service.

 

Although the Starbucks brand was able to attract the customers at the
start it only led to bitter disappointment for the Israeli customers as they
simply found the competitors coffee experience better than Starbucks. (http://www.ynet.co.il, 2004).

 

 

 

Conclusion:

 

Starbucks goal was to become the largest coffee chain in Israel in a few
years, by relying on their brand and chain standardization solely. Starbucks
didn’t feel they need to learn about the Israeli market needs and the
competition, they expected the customer to adapt them self to the Starbucks
global culture.

 

This strategy failed quickly as Starbucks didn’t manage to offer a
better customer experience than the competition.

 

Ashwin Joshi, Professor in
Marketing from York University, Canada, was quoted saying:

“I was not surprised by the
failure of Starbucks in Israel. This is the
Middle East where the culture of coffee was born and Starbucks had tried to import a culture that already existed….Starbucks
did not have any uniqueness in Israel….I
was surprise by the high quality of coffee in Israel, the service and the (coffee)culture”.

 

In addition, to the failure of the marketing strategy, one of the main
reasons for the failure was the choice of their local partner. Starbucks chose
a partner which didn’t have any experience in retailer and didn’t shared the
same vision and values as Starbucks, this made things more difficult when the
sales report did not meet the expectations. The local’s partner lack of
patience and support didn’t give Starbucks the time to make the needed
corrections and to open enough stores to establish the brand in Israel.

 

After they closed the stores Howard Schultz said that this is a
temporary setback and they will come back to Israel in the future, but for the
time being Starbucks didn’t make any official plans in doing so.