Starbucks to Russia

Overview

Russia is the largest country in the world with a total population of 143 billion and areas stretching over Europe and Asia. Formerly the dominant public of the Union of Soviet Socialist Republics (USSR), Russia now is an independent country and the most influential member of the Commonwealth of the Independent States (CIS). Several governmental policies have been launched in the last few years aiming to transform the country to be more democratic with a market-oriented economy. From 2002 to 2006, Russia's economic growth has been improving with the average of 6.1% annually. Its real personal incomes and consumer expenditure has also been rising dramatically. Poverty has declined steadily and the middle class has continued to expand. The country's economy has been expanding with a rapid rate due to high oil prices, stabilized rubles, rise in exports, and increasing production and industrial output. In addition, Russia is full of an educated and skilled labor force. With a strategic location, providing the speedy and effective access to the countries of the CIS, the large number of population and increasing in consumer's purchasing power, Russian market is a profitable area that should not be overlooked at all.

Market Research

According to the research from Euromonitor International (October, 2005), Russian coffee market is dominated by an instant coffee with a significant 90% share of the market in value terms. The fresh coffee market is still in the introductory phase compared to the instant coffee; however, as shown in Exhibit 1, the market is growing at the rate of 10 percents in 2004 with the value of approximately 200 million dollars. Sales from coffee shops had risen to account for 8% of foodservice distribution in 2004, three percent higher than the previous year. Such significant growth is fostered by the current boom in foodservice, an increase in consumer awareness and a thriving coffee culture. In addition, Euromonitor found that one third of those who drink coffee regularly admit that they would drink it more frequently if they could afford it. All the above-mentioned information indicates that there is a high possibility for the coffee market to expand largely in Russia, with more numbers of Russian consumers turning to consume a freshly brewed coffee instead of an instant one.

The rising Western influence and increasing level of consumer's disposable income means that more consumers are able to afford premium coffee in the future. Furthermore, the low penetration rate of filter coffee machines in Russian households, which discourages consumers from buying fresh coffee for the home, is also another driving force.

Starbucks will primarily face competitors from substitute products such as instant beverage goods, bottled drinks and local coffee shops. Some multinational corporations which already established their entities in Russia are Nestle, Kraft and Unilever. There are also 30 local companies working on this market, 80% of which held by Zolotye Kupola, Kuplo, Orimi trade, Product-Service and Pauling (Drujinina, 2006). However, those companies are focusing on a ready-to-drink coffee while Starbucks is focusing on different sector, natural coffee. Regarding threats from existing local coffee shops, they do not post significant influence since, as mentioned earlier, the Russian market of freshly-brewed coffee is still in an introductory phase. Only a few stores offer a premium coffee and have a lot of experiences (Restcon, 2005).

Starbucks which has already established a reputation worldwide in offering premium coffee should quickly enter the Russian market to reap benefits from being a first mover and acquire the market share of premium beverage and coffee-making equipment. The company can avoid a direct competition in Russian coffee market by differentiating to offer superior products and services in a feel-like-home atmosphere and by letting customers experience with a unique Starbuck's culture, which an instant coffee or local coffee shops can hardly match.

However, although Russia is a noticeably attractive market, there are several issues management needs to deliberately consider in order to enter their market successfully. While the economy is producing increasingly positive results, the country remains a complex place to do business. Subjects presented following are entry procedures, regulations, and some potential benefits and difficulties the company shall take into account.

Market Entry

There are several forms for foreign investors to start up business in Russia. Foreign investors may register a Russian legal entity in the form of a limited liability company, a joint-stock company (which can be private or public) or a partnership. Another way is to register a representative or a branch office. However, the recommended alternative that Starbucks should use is a joint venture. Starbucks shall diversify the risks to local partners since Russia has a complex environment for doing business. Reasons of such complication will be discussed later.

Establishing companies in Russia requires a strong commitment and long-ranged planning. According to the foreign direct investment law of the Russian Federation, there is no discrimination between foreign investors and local investors. Nevertheless, there is a limitation in certain strategic and large-scale sectors, such as oil, aerospace, mining etc. Although Starbucks will not be negatively affected by this provision, a problem regarding selecting proper partners is a big concern. JVs are often viewed in different aspects by Russians and Americans. According to a report regarding doing business in Russia of U.S. and foreign commercial services (2005), JV is considered to be as a way to secure a local partner with experience in the Russian market by American managers. In contrast, it is viewed primarily as a source of working capital a foreign partner brought by Russian executives; as a result, these managers may not have enough commitment to develop local market as Americans demand. Selecting potential partners in Russia, therefore, requires due diligence in evaluating their business expectations and priorities to ensure that they meet the same needs.

Setting up legal entities in Russia has to go through several complex procedures and has to meet numerous requirements. The registration (renewal of registration) of companies with foreign investment, including joint ventures, wholly owned foreign companies, branches, representative offices, is handled by the Russian State Registration Chamber. Companies whose volume of foreign investments exceeds 100.000.000 rubles (at the rate on the day of registration) shall have to be registered with the Russian