Coffee giant Starbucks sets its sights on Latin American expansion; the region grows coffee but will it drink it?

Feb 10, 2014 | 0 comments

By Ángel González

Starbucks is ramping up plans to spread across Latin America, the region where it buys the majority of its coffee. First, however, it must deftly adapt itself to a different coffee tradition and one that still drinks more tea than coffee.

Starbucks has long bought some of its best beans in countries like Costa Rica and Colombia and is now betting that they, and other coffee-rich Latin American nations, will be a source not only of fine Arabica, but also of affluent customers eager to trade their traditional chorreado drip coffee for what Starbucks here calls an alto latte.

Some are eager to embrace it. “It’s a coffee shop with a lot of variety. We have nothing like that in Costa Rica,” said Armando Madrigal, 26, a pharmaceutical-sales representative drinking an iced coffee at Starbucks’ flagship Costa Rican store, at the fancy Avenida Escazú shopping center outside of Costa Rica’s capital. The Starbucks is near a Max Mara store, an IMAX movie theater and upscale French and Italian restaurants.A barista pours a drink at a newly designed Starbucks coffee shop in Fountain Valley

Madrigal’s companion, Melanie Ascanio, was less impressed. It’s too expensive, the 20-year-old university student said. Moreover, the flavored drinks don’t highlight the storied quality of Costa Rican coffee, she added. “It’s all about fashion,” Ascanio said of Starbucks. “It’s all about the name on the cup.”

The contrasting opinions at this one table underscore the challenges — and opportunities — Starbucks faces in Latin America, the region where it buys the majority of its beans.

Coffee has deep roots in Latin America, of course. Yet in many countries that grow it, including Costa Rica and Colombia, coffee is mostly brewed at home, and many balk at paying high prices to buy it elsewhere. Latin Americans, with the exception of Brazilians, drink less coffee on average than consumers in the United States or Northern Europe, having a long tradition of tea drinking.

Things are changing, though, as coffee produced in the region, inclding in country’s not typically known for production, is gaining a reputation for excellence. In Ecuador, coffee growing areas in the Andes, north of Quito and just south of Cuenca have recently been recognized for the high quality of their product. As a consequence, Ecuadorians are drinking more coffee.

Starbucks hopes the region’s booming middle class, heavily influenced by the U.S., will heed the siren’s call.

One obstacle for the company is the time-honored Costa Rican chorreado, which involves pouring hot water into a coffee-filled cloth bag hanging from a wooden stand and watching the brown liquid slowly trickle into a cup. Another hurdle comes from the small-time but savvy local operators like Manuel Dinarte, a national barista champion who runs a truly homegrown operation: He built the furniture in his coffee shop and roasts his own coffee. “How is it possible that they’re selling us our own coffee at five times the price?” asked Dinarte. He calls Starbucks’ appeal here a sign that “too many people have gone to Miami,” a popular tourist destination for Costa Rican travelers.

Latin American drive
Starbucks’ Latin American retail push, well into its second decade, is picking up speed with the expected opening of the company’s first store in Colombia this summer, a high-profile move in a country from which it has been buying coffee for decades. International markets have more upside than Starbucks’ mature U.S. core.

And even though most Latin markets are small in comparison with India or China, establishing a strong presence in the coffee-rich region has high symbolic value for the company. Cliff Burrows, the Starbucks executive who oversees retail operations in the Western Hemisphere, said the company is helping boost the sophistication of Latin American customers by bringing them coffee not only from their countries, but from hitherto exotic locales such as Kenya, Indonesia and Ethiopia.

Starbucks also connects wired young people with the global community they already know online or through stints in Europe and the United States.  Even in Argentina, a country with its own grandiose cafes rivaling those of Vienna or Paris, “We are attracting a new generation,” Burrows said in an interview at the company’s Seattle headquarters.

Latin America is also home to a highly coveted giant: Brazil, which has a large, young population and a dearth of foreign competitors. Its emerging affluence has made it one of the world’s largest consumers of coffee in recent years. Starbucks already has 74 company-owned stores in the South American giant, and plans for more. “No doubt that over time, the biggest opportunity is in Brazil,” Burrows said.

But Starbucks is also looking at smaller markets, such as Colombia and Ecuador, for expansion. Cities like Medellin and Cali in Colombia, and Quito and Cuenca in Ecuador, are known for growing their prosperity and large number of upwardly mobile young professionals. Those cities are also tourist destinations with growing populations of U.S. expatriates who are familiar with the Starbucks brand.

Latin America has seen recent volatility as the prospect of higher interest rates in the U.S. stems the flow of capital into the region, and the moderation of China’s growth has undercut a raging commodities boom that bolstered Latin economies. But Starbucks remains optimistic. A spokeswoman said the company’s success over the past decade is “a good indicator of how we will do going forward.”

Starbucks began operating in Mexico in 2002, and now has 415 stores there run by partner Alsea. Its presence helped spark a big boom in out-of-the-home coffee consumption, said Burrows.

Altogether the company now has about 725 stores in 11 Latin American countries, and plans to reach 800 stores in 2014, a 14 percent bump from last September.

While the number of stores will still be a small percentage of the company’s global total, it still represents gaining momentum. Starbucks’ operations in Europe, the Middle East and Africa, a market with 1,969 locations at the end of the last fiscal year, will only open 150 stores in 2014, a 7.6 percent increase.

A key part of this ramp-up is Colombia. Starbucks last August announced “aggressive plans” to open some 50 stores there in the next five years.

It will also roast espresso and packaged coffee locally, the first time it does so in Latin America. That announcement followed a meeting between CEO Howard Schultz and Colombian President Juan Manuel Santos. It won’t be a slam dunk. Starbucks will face off against homegrown chain Juan Valdez Café, which has a strong relationship with the national federation of coffee growers and about 170 stores in the country.

Luis Genaro Muñoz, the president of the coffee growers’ trade group, has nevertheless said Starbucks’ arrival will be good for Colombia’s coffee industry. Burrows, who accompanied Schultz to the meeting with Santos, said the Colombian foray is something “we don’t take lightly.”

It’s hard to tell how well Starbucks is doing in Latin America because the company lumps the results with its far bigger markets in the U.S. and Canada. But executives say business in the region is growing rapidly.

Morningstar analyst RJ Hottovy said the same elements that led to Starbucks’ success in the U.S. — a strong brand, a welcoming ambience, relentless innovation — are likely to work as well in Latin America despite the region’s rich coffee tradition.  “It’s a lot more than coffee that’s going to make it successful there,” Hottovy said.

Costa Rica
Tiny Costa Rica is one of Central America’s oldest democracies. Its gorgeous rain forests and beaches, as well as its political stability, have made the nation a top tourism haven.

At the same time, a patchwork of small plots in the cool highlands, nourished by the rich volcanic earth, yields some of the world’s highest quality coffee. The bean has been a mainstay of the Costa Rican economy since colonial times.

Starbucks’ ties to Costa Rica are also relatively old. It has bought coffee there for decades, and in 2004 opened its first farmer-support center there. Last year, it bought a Costa Rican farm near the famous Poás volcano to do coffee research.  But its first retail foray there only came in 2012, operated by a licensee.

Now Starbucks has three licensed stores, two of them in the fashionable upper-middle-class suburbs west of San José, the capital city, where well-heeled Costa Ricans and expatriates from the U.S. and other Latin American countries live.

The newest location, like the Escazú flagship store, is in a trendy residential and commercial development called Distrito 4.  A mile or two away, amid the mom-and-pop bodegas and small farms that still dot this temperate valley, most traditional ticos, as Costa Ricans are known, still prefer their coffee chorreado style, like their grandmothers made it. That may be changing, but only slowly.

Local roasting of gourmet coffee only began in the 1980s. In the past decade, the Italian terms Starbucks popularized worldwide have become common here, spread by local coffee shops and rival U.S. chains such as the McCafés built by McDonald’s. Also, a nascent barista movement, backed by local coffee growers, is slowly taking root.

The recent arrival of the Seattle coffee giant itself has upset artisans such as Dinarte, who owns Café del Barista, an independent coffee shop in the downtown San José neighborhood of Aranjuez. Dinarte, who was Costa Rica’s national barista champion in 2008 and has competed internationally, said it has been a struggle for a fledging movement to instill coffee appreciation among Costa Ricans.

That said, in the cafe entrepreneur’s view, Starbucks’ milk-rich espresso beverages won’t necessarily teach them either. “They’ll be learning badly,” Dinarte said. A photograph of the famous Pike Place Market store adorns Starbucks’ Distrito 4 location.

A lot of the menu would also be familiar to U.S. travelers: cheesecakes and marble-loaf cakes imported from the U.S. But across Latin America the company also caters to local tastes.  Prices at Starbucks here are not for the light of pocket. An espresso costs about $2.40, slightly more than its U.S. equivalent, in a country where the gross national income per capita is about $8,820 — about one-sixth of the U.S. figure.

Burrows said many people in developing markets initially see a Starbucks coffee as an indulgence. “Over time, the appeal broadens,” he said.

The company hopes to win over more people like Angélica Furzán, a 35-year-old Venezuelan immigrant to Costa Rica.

Furzán said she usually orders the coffee of the day because it’s less expensive than the espresso beverages, although on a December morning, at the Distrito 4 store with her visiting mother, she ordered a latte.

It wasn’t her only recent visit, she said. “We came here yesterday.”

Credit:; Photo caption: A Starbucks counter in Mexico City.


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