How the heck did that happen? Starbucks dominated the world. They have 28,000 locations and 76 markets. They even have Starbucks in Guantanamo Bay. In China, a new Starbucks opens every 15 hours. But there's one country, wait, scratch that, one entire continent, that is not interested in the hype.
Australia
Australia is one of the most challenging markets to break into. Starbucks closed 66% of its stores in 2008. What went wrong in Australia? To answer that, let's go back to July 2000 when they opened the first Starbucks in Sydney. They expanded quickly with 87 stores by 2008. The thing with a franchise model is that the system is supposed to be so amazing that you can roll it out in any location, and it will succeed. That could be part of the problem.
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What Went Wrong?
Starbucks Australia grew too fast. They quickly opened new locations instead of slowly integrating into the Australian market. It is in contrast to the early years of Starbucks. The company started in 1971 as a small cafe. They had a slow expansion, opening stores in the Seattle area only. The downside of rapid growth is customers don't develop an appetite for the brand. Starbucks Australia expanded quickly. They even moved into regional areas and suburbs outside major cities. It's too available. The want and need for Starbucks come from organic growth. That is what happened in the U.S., but not in Australia.
They had $105 million in losses in the first seven years in Australia. They were hanging on a thread by 2007. They took a loan from the U.S. that is about $54 million. They shut down 61 stores by 2008. Part of this was the 2008 Financial Crisis that affected all businesses. 600 underperforming stores closed in the U.S. in 2008.
Australian Coffee Market and Cafe Culture
But Australians were not sad when Starbucks stores closed down. The region is pretty spoiled when it comes to coffee. The Australian coffee market is one of the biggest globally. The industry hit $6.93 billion in 2023. It's expected to grow annually by 3.41% by 2025. (Source: Statista) There were nuances in cafe culture since the mid-1900s when Italian and Greek immigrants began arriving. The immigrants introduced espresso. By the 80s, cafe culture dominated the region. They also got accustomed to specialty menu items like the Flat White or the Australian Macchiato. The culture includes meeting your friend at the cafe and knowing your barista. It's a local meeting place where you know everyone. When Starbucks came in, they felt this was American Culture and that coffee was just a product or commodity.
Also, most Australians did not like sugary drinks. They wanted coffee that tasted more sophisticated, not just something full of sugar. Starbucks is also more expensive than a local cafe. Australians opted for a coffee they liked from a coffee shop with a barista/owner they trusted.
An American Coffee Company Thriving in Australia?
Yes, there is one American coffee company thriving here. It was founded in Chicago but now based in Australia. I guess they followed the market. Gloria Jeans got the business momentum in Australia that Starbucks couldn't. They have 400 locations and 35 million customers each year. So what did Gloria Jeans do that Starbucks did not do? They started opening shops in 1996. Today, they have locations in every Australian State. One reason for their success is the menu. They offer a wide variety of espresso drinks and specialty coffee. Not adapting to the Australian Coffee Culture was a strategic mistake for Starbucks.
Fortunately, they learned from their mistake and adopted those lessons when they opened in Italy in 2018. Italy is home to espresso and very rich in Cafe Culture. Starbucks moved to Italy with humility and respect for the country's coffee culture. They started by opening a roastery, not your average Starbucks. Customers see coffee beans roasted and processed before their eyes.
Should Starbucks Give Up in Australia?
Not exactly. Starbucks wants to stage a comeback in the continent. The Withers Group purchased the remaining Starbucks locations in 2014. They also own 7-Eleven and Australia's largest convenience and independent petrol retailer. They are taking a different business approach. They know Australia is a big tourist destination, with most travellers coming from America and China. Starbucks could fill that need for tourists looking for something familiar. They are targeting tourists, not Australians. It includes international students in their universities. They are also starting to penetrate large shopping malls.
Australia welcomed approximately 5.3 million tourists in 2022. These travellers spent about $40-50 billion. Tourists could be the key for Starbucks to stay afloat.
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