BUSM3311 International Business: Starbucks' Failure in Israel

This report analyzes the failure of Starbucks in Israel, exploring the cultural, strategic, and partnership-related reasons behind its unsuccessful venture. The report delves into Starbucks' overconfidence, its failure to adapt to local cultural norms, and its problematic partnership with Delek Group. It highlights how the company's "grab and go" concept clashed with Israeli preferences for leisurely coffee consumption and how the coffee's taste did not match the preferences of local consumers. The report then recommends that Starbucks should have hired local managers and staff to better understand consumers’ needs and apply a multidomestic strategy, modifying its global products to suit local tastes. By examining this case, the report offers valuable insights for businesses planning international expansion, emphasizing the importance of cultural sensitivity and strategic adaptation. The report concludes by underlining the significance of understanding local preferences and customs to avoid the pitfalls that Starbucks encountered in Israel.

RMIT International University Vietnam
BUSM 3311 – International Business
A1
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Subject Code: BUSM3311
Subject Name: International Business
Location & Campus RMIT Vietnam , HCMC
Class Group Number: 02
Student name: Dang Hong Thu Thao
Student Number: 3778772
Your Teacher: Tzach Ronen
Word Count: 1300

THE FAILURE OF STARBUCKS IN ISRAEL
1. Introduction:
Nowadays, the term "globalization and internationalization” is no longer strange to everyone because of the
rapid development of many multinational firms. However, not all corporations succeed when investing
abroad and Starbucks is no exception (Internationalbusinessguide 2013)
Meticulously, April 2003, Starbucks, the largest coffeehouse company in the world, with 21.000 stores in
65 countries, had to close its 6 stores in Israel after almost 2 years of experiencing a harsh struggle to
survive (ThetimesofIsrael 2014). This essay will clarify and investigate the problems using international
business theories to present recommendations what should be done to deal efficaciously with the failure of
Starbucks.
2. Analysis:
a. Background:
Starbucks first started to participate in the coffee market in 1971, however, at that time, the CEO of
Starbucks did not have any intention of expanding its operations internationally. In 1987, Starbucks began
to internationalize by opening its first chain in Canada, a neighbor country of America. And the first
Canadian store was located nearby the Starbucks’ headquarter within 200km. The reason could be
responsible for this internationalization was the geographical closeness. Moreover, psychic distance is
frequently linked to geographical distance. Therefore, with the entrance of Starbucks to Canada can be
mainly understood of the psychic distance approaching from the Uppsala Model theory of Johanson (Cabral.
J, 2015).
In addition, according to RMIT materials, the level of success in foreign countries of a firm mainly depends
on the 3 factors are ownership advantages, location advantages and internationalization advantages, which is
called ownership location internationalization model (OLI Model). Particularly, the success of Starbucks'
internationalization in Japan, Singapore, New Zealand, Taiwan and the Philippines was the root of taking
advantage of not only ownership advantages (growing GDP per capita, brand value and increasing
Americanisation) but also several locations (Cabral, J. 2015). For this reason, the application of the OLI
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paradigm of Starbucks in those countries between 1996 and 1998 could be seen as a praiseworthy
achievement.
After making some marketing campaigns and public relations activities, Starbucks opened its first store in
Tel Aviv in May 2001. According to Avner Barnea, Tel Aviv customers were known to be the leaders in
catching up with new trends. Due to their high wages, they frequently went on a trip to foreign countries or
visited new coffee brands. Consequently, Tel Aviv could be seen as an influence on other parts of Israel.
Therefore, senior managers assumed that the success in Tel Aviv could lead to its expansion in other parts
of Israel. However, things didn't go well as Starbucks had analyzed Israel's market before and there are
some vital reasons responsible for this severe failure of one of the most well-known coffee brands.
b. Problems:
a) Cultural failure:
First and foremost, according to Sagejournals, Starbucks had not thoroughly researched Israel's culture
before investing in Israel. For the cultural norm of Israel, Israelis have a preference for sitting with a glass
cup of coffee and chatting with friends until the coffee turns cold. Nevertheless, based on Twoheads, the
notion of “grab and go” is the standard of Starbucks chains everywhere and thus, it didn't provide Israelis
with enough seats which led to only one option was getting a to-go cup and leaves. As a result, it made
Israelis feel “rushed” and it led to the downward trend of those who come to Starbucks for a second time.
Therefore, a factor made Starbucks struggle in Israel was the culture of one particular nation. According to
RMIT material, culture is how firms and managers govern and operate in society relied on the rules
determined by the cultural's society.
b) Overconfidence:
Another reason is that Starbucks was overconfident (Kalnins & Stroock). Moreover, overconfidence can
have some severe consequences. Researchers have suggested that overconfidence as a justification for war,
strikes, lawsuit and entrepreneurial failures (Moore & Healy) .Specifically, Starbucks supposed that Israel
consumers would be willing to pay money for its specific reputation such as sourced brews, named drinks
and hipster coffeehouse (Twoheads 2018). However, for Israelis, the most attractive thing is the flavor of
the coffee. In contrast, the standard American coffee as Starbucks makes Israelis taste like weakly
flavored hot water while Italian coffee chains in Israel could provide them with
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strong and flavorful taste as a cup of macchiato or espresso (Haaretz 2015).
Moreover, the venti iced mochaccino of Starbucks did not taste as well as the one they could get on the
street while its price was double in comparison with the street's price (Barnea 2011).
c) Partnership:
Furthermore, partnership plays an important role in business as it is a key element to set up an affluent and
effective company, relied upon LegalNature. Nevertheless, one of the mistakes that Starbucks encountered
was its partnership - Delek Group with 80% held by Delek Group and the remaining 20% held by Starbucks
(Mahara n.d.). To be more detailed, the cooperation between Starbucks and Delek caused the loss of $5m
within two years of operation. (Barnea 2011). Despite the fact that Delek Group was considered as a
successful petroleum business, it had no previous experience in the coffee shops business. Hence, the co-
operation between Starbucks and Delek Group led to the relief of most of the local and international
competitors in Israel.
3. Recommendations:
Despite the fact that Starbucks is a well-known brand, however, it still has some weakness that needs
improving.
a. Hiring locals:
According to RMIT material, culture is how firms and managers govern and operate in society relied on the
rules determined by the cultural's society. Hence, the first recommendation for Starbucks is hiring a local
manager and staff. This is because hiring a local manager and staff might strengthen the connection between
the company with the locals to better understand the consumers' needs. Moreover, locals are those who
know their culture well and thus, it is easier for them than foreign staff when unexpected problems occur.
b. Applying multidomestic strategy:
Another suggestion for Starbucks is that they should apply the multidomestic strategy by modifying its
global products but with a lot of local customization to suit with the coffee taste as well as the culture of
residents in Israel. In particular, according to Myaccountingcourse, multi-domestic strategy in which each
subsidiary of multinational firms conduct its own marketing strategy depends on the culture, preferences
and specific needs of that nation. With the multidomestic strategy, many MNEs have achieved success in
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Israel, including McDonald’s. According to Avner Barnea, many big US food brands existing in Israel such
as KFC, Pizza Hut, Dunkin’ Donuts and so forth. McDonald’s was considered as the most successful one
mainly because instead of forcing Israelis to adapt with its global standards, McDonald’s had made
appropriate changes such as adjust another way of organizing the hamburger meat to adhere to the Jewish
dietary laws to fit with the local tastes. For this reason, Starbucks had to set up some adjustments that follow
Israel’s norms. To demonstrate, they should emphasize on the design, especially design opened space for
Israelis to sit back and savor a cup of coffee. Moreover, Starbucks also needed changing the way brewing
coffee, making coffee more bold in place of weak, flavorless, fateful cup of coffee (TLV1 2016).
4. Conclusion:
Although Starbucks is the most renowned coffee brand in the world, it still had difficulties and could not
overcome in some countries such as Israel. This is due to the fact that Starbucks was too confident, chose
wrong partnership as well as misunderstood about Israel’s culture. Therefore, by applying the multidomestic
strategy and hiring locals to govern the operations could help Starbucks mitigate the problem it had faced.
From my perspective, people start to get distance from each other due to the lack of communication and
fewer face-to-face interaction, especially in this technological era. Therefore, with the culture of Israel, it
could alleviate this situation. Moreover, the case of Starbucks can be seen as a wake-up call for other
businesses having a plan of internationally expanding in foreign nations. These 2 reasons are the factors
make me immerse in this case.
5. References:
Barnea, A. 2011, “Lack of peripheral vision – How Starbucks failed in Israel”, African Journal of Marketing
Management, Vol.3, no.4, pp.78-88
Cabral, J. 2015, “The internationalization process of Coffeehouse Chains: The Starbucks Case”, Annual
Conference of the European International Business Academy, Vol.1.
Gilmore, J 2004, “Boycott Israel Campaign”, Boycott, November 9, viewed 25 July 2019,
<http://www.inminds.co.uk/boycott-starbucks.html>
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International Business Degree Guide 2013, “10 Successful American Business That Have Failed Overseas”,
InternationalBusinessDegreeGuide, September 12, viewed 25 July 2019,
<https://www.internationalbusinessguide.org/10-successful-american-businesses-that-have-failed-
overseas/>
Kalnins, A. & Stroock, L. 2011, “Pouring Israel into a Starbucks Cup”, Cornell University School of
Hospitality Administration, Vol.52, no.2, pp. 135-143
LegalNature n.d., “The Various Roles within a Partnership”, viewed 26 July 2019,
<https://help.legalnature.com/articles/the-various-roles-within-a-partnership>
Mahara n.d., “Week 2 Starbucks & Best Job in the World by Millie Gorman: Starbucks Fail in Israel”,
Mahara, viewed 25 July 2019, <https://maharabu.bournemouth.ac.uk/artefact/artefact.php?
artefact=145729&view=28846&block=167786>
Moore, D & Healy, P. 2007, “The Trouble with Overconfidence”, Carnegie Mellon University and Ohio
State University, viewed 26 July 2019
My Accounting Course n.d., “What is a Multidomestic Strategy?”, MyAccountingCourse, viewed 25 July
2019, <https://www.myaccountingcourse.com/accounting-dictionary/multidomestic-strategy>
Sage Journals 2011, “Pouring Israel into a Starbucks Cup”, SageJournals, March 17, viewed 25 July 2019,
<https://journals.sagepub.com/doi/abs/10.1177/1938965510395015>
The Times Of Israel 2014, “The grand coffee plan that failed”, TheTimesOfIsrael, August 13, viewed 25
July 2019,< https://www.timesofisrael.com/the-grande-coffee-plan-that-failed/>
TLV1 2016, “Why Starbucks Failed In Israel”, TLV1, August 15, viewed 25 July 2019,
<https://tlv1.fm/business/2016/08/15/why-starbucks-failed-in-israel/>
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Two Heads 2018, “The #1 Reason Starbucks Failed in Israel, and What That Has to Do With Your
Business”, TwoHeads, October 24, viewed 25 July 2019, <https://www.twoheadsil.com/blog/why-
starbucks-failed-in-israel>
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