Starbucks Japan -- A Brief Research Note / Position Paper
What are the triggers of cultural change that drove, shaped and made possible the
introduction of Starbucks to Japan? From a financial perspective, what were Starbucks’s
options for licensing for entry into Japan vs. setting up a wholly owned subsidiary there?
The triggers of cultural change in Japan that drove and shaped the initial invest-
ment and then the continued expansion of Starbucks coffeehouses since their introduction
there in 1996 are rooted in that country’s emergence and self-image as a highly affluent,
post-industrial society since the end of the Second World War. While many Japanese
leaders and ordinary consumers have taken their economic clout as a clue to compare
their country more often against North America and Western Europe rather than against
closer geographic neighbors such as China and South Korea, this outlook has also
manifested itself internally. Japan’s continued industrialization amid an increasingly
globalized world, even in the face of the nation’s own prolonged recession in the 1990s,
is indicative of a cultural and societal shift away from its traditions of collectivism and
towards more individualism.
The social scientist Ronald F. Inglehart has corroborated this set of changes in the
World Values Survey across more than 25 years and nearly 80 countries. For Japan, the
increases in wealth and per capita income from about 1955 to 1995 resulted, for
example, in new generations more likely to plan their own careers rather than depend on
employment for life at one company. For global brands such as Starbucks, this change
in values has translated into many persons who can both afford and wish to be seen
consuming an upscale ($3 to $6+ per serving) coffee-based drink in its own distinctive
packaging and cup, Starbucks being merely one Western luxury or ‘status’ brand to
which people can aspire. For at least as long as the novelty or cachet of such a famous
American brand is in effect, many young people are willing to break with any traditions
of visiting teahouses or Japan’s previously existing coffeehouses, the latter of which
Starbucks differed from greatly by being clean, smoke-free, family-friendly, and well lit.
If Starbucks’s retail environment as a Third Place beyond home and work can be
seen as a healthy alternative to its peers, then it is a good example of Japan’s shift from
traditional or ‘survival’ values to “secular rational” values based on an individual con-
sumer’s well-being as dictated by personal choice. In such an environment of changing
psychographics, Starbucks achieved market entry in 1996 and has now grown to more
than 1,000 retail stores in Japan by foregoing competing on price – a decision which, in
turn, conveys increased value – so it can focus on its core competencies of customer
service (which was already highly valued in Japan), customized products, and the
creation of a welcoming environment. Starbucks has thus been able to profitably
customize additional products for the Japanese market such as smaller sandwiches, less-
sweet desserts, and new entries in the crowded field of chilled, ready-to-serve coffee.
Had Starbucks pursued a Japanese expansion strategy based on creating a wholly
owned subsidiary to manage its operations there, the financial advantage of such an
arrangement would have been a more integrated, consolidated, and streamlined balance
sheet of Starbucks Japan with the parent company’s, with profits in Japan eventually able
to subsidize financial losses or newer expansions elsewhere internationally. However,
the risk that Starbucks wished to mitigate was having any financial losses from this
particular international expansion, especially in its early years, disproportionately
impact the company’s overall financial performance. In fact, to this day, Starbucks
Japan, which was the company’s first foray outside of continental North America, is a
public company traded separately on Japanese stock exchanges. Considering the amount
of control that Starbucks and its CEO, Howard Schultz, wish to exert so as to protect the
company’s strategic asset of a very strong brand image, any wholly owned subsidiary in
Japan most likely would have been a greenfield investment for such a new entity.
Starbucks actually did set up a new business entity but instead chose the joint
venture financial option whereby they licensed their Starbucks methods and technology
(store format, employee training, customer service, etc.) to a local Japanese partner in
order to achieve rapid market entry, with a balance achieved between financial risk and
management of brand integrity. While Starbucks locations are all company owned, the
parent company formed the new company Starbucks Coffee International (SCI), with
SCI then forming Starbucks Japan with Sazaby Inc., which now owns 60.4% of this local
joint venture, according to the parent company’s 2012 annual report. Sazaby contributed
knowledge of Japanese culture and consumer tastes, experience in the local real estate
market (keeping in mind the custom design of each Starbucks store within each retail
location’s physical environment despite similar décor in each one), and regulatory
expertise and navigation through local and national laws, rules, and customs as Starbucks
sought a successful market launch and expansion within the country. Sazaby could meet
these objectives while simultaneously respecting the separate Starbucks brand image
enough so as not to promote any products that could clash with Starbucks’s own oft-
stated commitments to authenticity and quality.
On a practical level, licensing allows Starbucks much tighter control over its
foreign operations than franchising would, to compare it to another method of fairly rapid
foreign market entry. Howard Schultz is willing to keep only about 40% of Starbucks
Japan’s profits, which would not even be repatriated to the U.S., in return for spreading
his business and financial risks, making a smaller initial outlay per Japanese store, and
having a greater chance of long term profitability and growth in company wealth through
market saturation should the licensing and joint venture agreements with Sazaby Inc.
continue to be successful.