Excelsior Versus Starbucks - A Strategic Analysis Of The Japanese Coffee Market

Note on this Essay: It was published February 8, 2002, for a class on "Corporate Strategy" taken at Sophia University. The essay originally included several graphs and charts, but I have chosen not to include these in the online version of this document. If you find my essay useful, or if you have any comments, please visit my homepage for info on how to contact me.

This paper will attempt to apply various analytical tools in order to present a thorough strategic review of Starbucks Coffee Japan and Doutor Coffee Group’s Excelsior Coffee chain. The strategic models applied include the experience curve, the Porter model, the growth-share matrix, the industry attractiveness – business strength matrix, and the product-life cycle. Before commencing, however, a brief review of the industry and the featured companies is necessary.

Industry

While the number of coffee shops in Japan peaked in 1980 at 154630, it has since declined and currently stands at around 90 000. This evidently means that that there previously was a demand for many more coffee shops than what the current demand should imply, yet this not explain the entry of Starbucks into the Japanese coffee market in 1996. The sheer coffee demand in terms of volume reached 416 090 tons (green-coffee) last year, an all-time record. In other words, while the number of coffee stores in Japan is much lower than it was in 1980, the demand for coffee is higher than ever. Part of this increase can evidently be explained by an increase in home consumption, but it can also imply that the average sales revenue per store has increased. Regular coffee makes up about 34% of the total market, instant coffee about 44%, while liquid coffee sold in cans or bottles account for the rest of the Japanese consumption. The average per-capita consumption of coffee reached 3,17 kg last year, which surpasses the amount drunk in Great Britain, but is less than the American per-capita consumption. The numbers for the two latter countries are 2,42 kg and 4,07 kg respectively. Continental Europeans, on the other hand, drink a total of 5,24 kg a year. As this paper is mainly concerned with the retail coffee market, the latter will from now on simply be referred to as the coffee market.

Although the decease in the total number of coffee stores may appear dramatic, the number of self-service coffee shops has in fact increased. Companies like Doutor and Starbucks are both expanding rapidly, and the market has recently seen a particularly rapid influx of foreign and domestic companies into the high-end coffee market. The latter market will be commented upon shortly. Apparently, the big majority of the coffee shops that have disappeared from the market are so-called mom-and-pops coffee shops. These are independent non-branded coffee shops with a highly targeted customer base. Typically, the clientele is made up by a rather elderly segment of the population, and due to a sense of exclusivity prices have been and continue to be the most expensive in the market.

The Market

Until 1996, the coffee market in Japan was divided into two major segments. One consisted mainly of the earlier discussed mom-and-pop coffee shops, the latter making up all but at few thousand of Japan’s estimated 80 000 coffee shops. Known in Japan as kissaten, they are relatively formal sit-in places. Customers are served in a traditional restaurant-style manner and the average stay is around 30 minutes. A cup of coffee usually costs around 600 yen, typically even more. The second segment of the market is dominated by the Doutor Coffee Company and its chain of Doutor Coffee Shops. Often referred to as the McDonalds of coffee-houses, the focus is on self-service and a very limited menu. The average customer stays for around 10 minutes and a standard cup of coffee costs around 180 yen. In contrast, an average cup of coffee bought in Tokyo in August 1999 would have cost 399 yen, which evidently was a result of the more expensive kissaten shops pulling the average upwards. As the parent company of the Excelsior brand, the Doutor Coffee Group will obviously be referred to in greater detail later.

The second biggest player in the Japanese coffee market used to be Pronto, which in 1997 has 112 shops compared to Doutor’s 591. Pronto opened its first store in 1987, and serves light snacks and coffee during the day, while alcohol and light meals are served at night. Although the average cup of coffee costs about the same as at Doutor, the president of the company was in 1996 frightened at the aspects of Starbucks entering Japan. According to the Wall Street Journal, he visited more than 20 American Starbucks stores in America to study the potential competitive challenge posed by them in Japan. Still, this did not provide him with a good strategic defence plan, and he commented to the newspaper the same year: “I don’t think that the opening of the first Starbucks store in Japan would immediately be a threat to our business... But Starbucks could become a strong competitor if it is able to gain consumer recognition in the next three years or so. In order to do so, Starbucks will need to have about 30 to 50 stores in the Tokyo area”. As will shown, the Pronto president’s nightmare was to become reality.

Although the Pronto president was nervous concerning the entry of Starbucks, the traditional Japanese kissaten are believed to have been hardest hit. Still, it is a subject for discussion to what extent the decrease in the number of mom-and-pop stores is due to the entry of Starbucks and similar high-brand coffee stores. After all, the number of mom-and-pop stores had been on the decline for quite some time. In 1996, trailing Doutor and Pronto in the coffee market were the Japanese chains Café de Crie and Café Veloce.

Considering the prospects of potential entrants into the Coffee Market, the Wall Street Journal was not very optimistic when providing its analysis in 1996:

“The Japanese have not developed a taste for espresso drinks like caffe latte and caffe mocha; they drink a lot of instant coffee or ready-to-drink coffee in cans, as well as American-style hot coffee. Moreover, the Japanese coffee market may be saturated with many coffee shops and vending machines serving hot coffees. Coca-Cola alone has more than 800,000 vending machines that sell canned coffee”.

Similarly, the Nikkei Weekly pointed out that the Japanese coffee industry in terms of the number of stores was in decline, and thus was not much more optimistic than the Wall Street Journal regarding the prospects of an entry into the market. Starbucks was to prove them both wrong.

In October 1995, Starbucks entered into a joint venture with Tokyo-based Sazaby Inc. The latter is primarily known for its ability to bring unique goods into the Japanese market, and does in addition operate upscale restaurant and retail chains throughout Japan. The first Starbucks store opened in the posh and trendy Ginza district, while the almost equally prestigious Ochanomizu witnessed the second store opening. Although the Wall Street Journal raised questions regarding the Japanese taste for caffe latte, the Japanese menu was and continues to be similar to that of the United States. There are around fifteen types of beverages, different kinds of snacks and cookies, coffee beans, and various novelty goods that best can be described as souvenirs.

The Starbucks Corporation, which owns fifty percent of the shares of Starbucks Coffee Japan, operates a total of almost 3000 stores world-wide. Most stores are company-owned, but some are also run through for instance licensee agreements. The goal of the company is to establish Starbucks as the most recognised and respected brand of coffee in the world. In January 2001, Starbucks Japan opened its store number 200 in Tachikawa, Tokyo. Less than a year later, the company opened its store number 300 in Osaka. The growth has thus been tremendous since the Ginza launch in August 1996, which in fact represented the first Starbucks store outside North America.

The CEO and President of Doutor Coffee Group, Hiromichi Toriba, probably did not expect Starbucks to grow as quickly as it did. Still, while Starbucks Japan increased its number of stores from 12 in late 1997 to 227 in 2001, Doutor Coffee Group increased its number of coffee stores from 591 to 819 during the same period. In terms of store openings, Doutor did therefore in fact open more stores than Starbucks. Still, the obvious difference is evidently that the Doutor Coffee Shops and Starbucks operate in quite different markets. As discussed earlier, Doutor Coffee Shops focus on the speed of service and a high turnover of customers. The price of coffee is thus relatively low, while the average customer stays in the store for about 10 minutes. It can thus be considered a place to buy coffee for then to leave, while Starbucks on the other hand, intends to sell a different product. The Starbucks Japan website states: “Starbucks Coffee Japan was established in October 1995 with the idea of bringing to Japan the Starbucks Coffee store experience and the new coffee and espresso culture that had proved so successful in North America”. Rather than just selling coffee, the company claims to be selling an experience. The reasoning is evidently that this will allow the company to charge a higher price for its coffee, which evidently also is marketed as being of a higher quality than that of its competitors.

“Recently, Japan has undergone a real espresso café boom. One might think that is bad for Doutor. However, my view is that, in addition to expanding the range of choices for consumers, this trend has also expanded opportunities for the entire industry. Doutor leads the market for coffee shops frequented by customers on a daily basis. The new market created by espresso cafés is geared toward infrequent visits. The overall size of the market is smaller, and product prices are somewhat higher. However, we have been able to capitalise on increased demand for such cafés by opening more of our own Excelsior Cafés. Right now, almost one in every two self-service coffee shops in Japan is either a Doutor Coffee Shop or and Excelsior Café. We far outstrip all our competitors in market penetration and, as a result, competitiveness”.

The first Excelsior Coffee Store opened in 2000, and the number of stores had expanded to 30 by March 2001. They were thus a far cry behind Starbucks, which at the same time operated 227 stores across the country. To avoid confusion, the company will from hereon be referred to as the Doutor Coffee Group, while is primary chain will be referred to simply as Doutor Coffee. In addition to Doutor Coffee and Excelsior Coffee, the Doutor Coffee Group operates several other smaller chains and subsidiaries that will be discussed in greater detail later. This will be done as part of a rather in-depth analysis of the main strengths and weaknesses of Starbucks Coffee and Excelsior Coffee.

The experience curve provides an empirical relationship between changes in direct manufacturing cost and the accumulated volume of production. It is therefore an important tool that managers can use to address the question of the competitive cost structure. The curve shows that the cost of doing a repetitive task decreases by a fixed percentage each time the total accumulated volume of production doubles. This is due to several factors, these primarily being learning, specialisation and redesign of labour tasks, product and process improvements, methods of systems rationalisation, economies of scale, and know-how. Logically, high market share is a result of high-accumulated volume, which again tends to be the result of a low unit cost. Presumably, this also leads to high profits, but it can evidently be discussed how important a role the experience curve plays in the high-brand coffee market of Excelsior and Starbucks.

The above chart displays what the current situation might look like with regards to Doutor Coffee and Starbucks Coffee. A survey of the market in 1996 might have shown that there was potential for the branding of coffee, although both the Wall Street Journal and the Nikkei Weekly believed otherwise. Doutor Coffee already had a major presence in Japan, and its presumed advantage in terms of the experience curve can be read from the above chart. The company was already rather known, although the attributed values were of a different character than those that are currently used to describe Starbucks. The first Doutor store opened in 1980, so the company thus had more than 15 years of experience selling coffee when Starbucks entered in 1996. When opening, Doutor Coffee was Japan’s first self-service coffee shop, and did thereby introduce something brand new into the Japanese coffee market. Interestingly enough, 1980 was also the year when the total number of Japanese coffee shops peaked at 154630. When Starbucks entered in 1996, the number had decreased by almost a half, thereby suggesting that Doutor helped revolutionise the market by entering in 1980.

What Doutor did when entering the coffee market was to create a new experience curve, and Starbucks used the same strategy when entering in 1996. The strategic implications of the experience curve require that a common a common curve is applicable to every competitor in an industry. Starbucks, as a new entrant, introduced a brand new business model to the market, which originated partly in the quick transfer of know-how from the American market. The company entered to sell what it terms to be the “Starbucks experience”, and thus not simply coffee. Consequently, being successful with this strategy, Starbucks has been able to attract more customer segments and to sell coffee at a higher premium. Rather than going head-to-head with Doutor Coffee, Starbucks realised that it would have to create a new experience curve. That explains why the above chart shows two different curves, one for Doutor Coffee and another for Starbucks. Evidently, the creation of this new market segment forced the Doutor President to introduce a new coffee chain to the market, namely Excelsior Coffee.

As this chart shows, Doutor Coffee was not able to create anything substantially new to counter the success of Starbucks, and thus had to attack the company using a common experience curve. Thus, as Starbucks has many years of experience in the high-brand coffee market from both the US and Japan, we believe Excelsior is entering at a disadvantage. An additional factor is evidently that Starbucks has more than ten times the number of stores, and the difference is volume is therefore also substantial. Excelsior Coffee can, however, probably derive some benefits from the Doutor Coffee Group’s extensive network of suppliers, know-how and infrastructure. Still, this does not help Excelsior beat Starbucks at what the latter does best, namely branding and marketing. While Doutor Coffee is involved in the basic retailing industry, Excelsior needs to learn how to sell an experience, which makes it tempting to say that Starbucks and Excelsior operate in the entertainment industry rather than the retailing industry. Currently, the high-brand coffee market is experiencing very high growth, and there are several companies trying to follow Starbucks down the experience curve. These include foreign entrants as Seattle’s Best, Tully’s, and Segafredo Zanetti, but also various Japanese entrants. The hope of Excelsior must be to remain one of the leading players in the market once slow growth and a consequent shakeout sets in. A different strategy concept is useful in providing more information on the market situation facing Excelsior and Starbucks.