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Starbucks sets its sights on Latin America
The Tea & Coffee Trade Journal / September 2003

By Larry Luxner

MEXICO CITY — Starbucks has finally discovered Latin America.

The giant Seattle-based coffee retailer, which has been flourishing in Mexico and Puerto Rico for one year now, plans to open its first outlets in South America this month, with stores in both Chile and Peru.

Pablo Arezmendi, the company's vice-president for Latin American business development, said that at last count, Starbucks had 12 outlets serving the 25 million inhabitants of metropolitan Mexico City.

"The first opened in September 2002 [at the Hotel Maria Isabel Sheraton], and we will obviously continue to open stores as long as consumers keep responding the way they have been," he said. The largest outlet, measuring 210 square meters, is at Mexico City's busy World Trade Center along Avenida Insurgentes Sur.

Arezmendi, interviewed by phone from his Miami office, said that Starbucks has "between 10% and 20% equity" in the joint venture with Grupo Alsea, the local Burger King and Domino's Pizza franchisee.

"When we go into a joint venture, we drive our revenues from royalties [rather than] store sales," he said, declining to discuss either in detail. "We don't usually disclose our specific plans. We obviously have plans, but Starbucks takes it one store at a time."

But Mauricio Rojas, director of human resources for Alsea, told The Tea & Coffee Trade Journal that Starbucks will have over 20 outlets in Mexico City by year's end, and around 150 outlets — employing 2,000 people — throughout the country within five years.

At the original Starbucks along Avenida Reforma, Mexico City's main boulevard, a double latte costs 36 pesos (about $3.50), about the same as it would cost in the United States. Yet Arezmendi said the product mix for Starbucks outlets in Mexico differs from stores north of the Rio Grande, mainly in the area of food.

"It all has to do with how you drink coffee and what you accompany it with," he said. "In Mexico, you wouldn't find tacos in our stores, but maybe the type of bread that Mexicans like, or sandwiches that are not customary in the United States. But the drinks don't vary dramatically."

Starbucks offers its Mexican clientele two locally sourced coffees. One is a shade-grown blend, cultivated by 700 campesinos at six cooperatives in Chiapas state, where Starbucks has a long-standing partnership with Conservation International. The other is called Mexico Blend, and is sourced primarily from Oaxaca state.

Conservation International says the campesinos who participate in this program get 60% more for their coffee than they could in local markets. Since the partnership began in 1998, says CI, forested coffee lands have grown by 220%, and Mexican exports of shade-grown coffee have risen 50% over the previous year.

Arezmendi declined to comment on local protests against Starbucks by fair-trade organizations that claim Starbucks doesn't pay adequate prices for the coffee it sources from Mexican farmers.

"During the first quarter of 2001, as Starbucks celebrated a 41% increase in profits, 500 families a week were leaving coffee farms in Chiapas to migrate north in search of work," according to an article published by the Minnesota-based Organic Consumers Association. "Companies like Starbucks are reaping windfall profits while paying as little as 50 cents a pound for coffee that retails for about $11 a pound, or about $1 a cup."

Adds Melissa Schweisguth of Global Exchange, a San Francisco-based nonprofit organization: "Mexicans who are concerned about the coffee crisis should by Fair Trade from Mexican-owned coffee shops. This will ensure that coffee revenues go directly to the small farmers and business owners who desperately need a fair and steady income, instead of crossing the border to fill the coffers of large transnational corporations like Starbucks."

Puerto Rico — the only other Latin American market where Starbucks is present — differs dramatically from Mexico in that it's a mountainous island of 3.9 million people known for its exports of top-quality gourmet coffee. As a U.S. commonwealth, Puerto Rico also enjoys a relatively high per-capita income, and Puerto Ricans are quite familiar with the concept of American franchises; the island is saturated with Burger King, McDonald's, Wal-Mart, Wendy's and Pizza Hut, to name a few.

Yet Arezmendi says "I don't think consumers view us as a franchise operation. Our concept is very different from fast food. It's much more about a time out, a very nice environment. People stay in our stores; they don't necessarily leave very quickly."

So far, Starbucks has opened three outlets on the Caribbean island: one fronting Calle Tetuan in the historic district of Old San Juan, and two in the suburban Guaynabo shopping malls of Plaza Caparra and Plaza San Patricio.

The stores are operated by Puerto Rico Coffee Partners, a division of Cafe Partners Hawaii, which has 30 Starbucks outlets in Hawaii. According to a press release, the partners will open another 10 to 15 stores in Puerto Rico over the next 12 months.

Yet Starbucks is targeting local Puerto Ricans rather than tourists, even though the island attracts several million visitors a year from the U.S. mainland and elsewhere.

"If we tried to go after tourists, we wouldn't have much business," he said. "In Hawaii, a very tourist-oriented market, we have 32 stores, of which only seven are tourist-driven. The rest is all local consumption."

To attract those locals to its pricey outlets, Starbucks is introducing its new single origin coffee, which features "full body, soft acidity and delicate flavor ... and comes from some of the highest-quality arabica coffee beans on the island."

Arezmendi, originally from Mexico City, has also lived in Argentina, Colombia and Venezuela. Before joining Starbucks in 2000, the 41-year-old executive worked for Coca-Cola, Nestle and other multinationals.

Asked why Starbucks is only recently exploiting the Latin American market, Arezmendi said the answer is simple: "Starbucks made a decision to go international six years ago, and we started in Asia. But we couldn't go everywhere at the same time. We're doing this one country at a time."

He confirmed that Starbucks is actively exploring opportunities in Argentina, Brazil, Colombia and Venezuela.

"In terms of coffee-drinking habits, Latin America is not as developed as Europe, but it's more developed than Asia — especially countries like Argentina and Brazil, where per-capita consumption of coffee is relatively strong. For obvious reasons, we focus on the biggest economies," said Arezmendi, though he pointed out that Peru is not considered a key Latin American economy.

"Where and when we enter a market has very much to do with finding the type of partner we're looking for. Whether the economy is in a good or bad state is not so relevant. In fact, some of the better opportunities sometimes come when economies are depressed. We take a long time to look for those partner organizations. Once we find a partner that's compatible with us, we enter the market."

In Chile, Starbucks is partnering with Grain Red S.A., a Santiago-based company specializing in food and beverage retail operations. Grain Red's majority shareholder, Castaño S.A., specializes in high-quality bread, with 33 retail outlets in Santiago. The new joint venture is known as Sur-Andino Café S.A.

"Our entry into Chile represents an important milestone for Starbucks' expansion into Latin America," said Julio Gutiérrez, president of the company's Latin America division, in a prepared statement.

In Peru, the joint-venture partner of Starbucks is a subsidiary of Delosi S.A., which operates other international franchise brands such as KFC, Pizza Hut, Burger King and Chili's Grill & Bar.

Starbucks says that it's building upon an alliance with Conservation International in Mexico and Colombia by introducing a single-origin Peruvian coffee in these new stores. Sourced from CI's Conservation Coffee project site in Peru's Upper Tambopata Valley, this coffee, says Starbucks, "is grown and processed using methods that protect local biodiversity and provide economic and social benefits for local coffee farmers."

Starbucks seems to be doing very well in Puerto Rico, and that might encourage the coffee retailer to consider other Caribbean markets as well.

Because of the U.S. embargo, Starbucks is prohibited from doing business in Cuba, the largest Caribbean island with more than 11 million people. More realistic markets for Starbucks include Jamaica, Trinidad and the Dominican Republic.

But even those larger countries will have to wait for Starbucks to expand a little more throughout South America, since, as Arezmendi says "we'd be crazy to spend a lot of time in the Caribbean if we haven't yet opened in Brazil."

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