A post by Stan Zin
I saw in the news today that Starbucks has entered a joint venture with Tata, one of India’s most respected business groups, to open coffee shops in India. I don’t know if India has an urgent need for coffee, but it reminded me that international ventures often run across obstacles that wouldn’t cross your mind. One of my favorite stories concerns Starbucks’ ill-fated attempt to enter the Norwegian market.
I was giving a talk at a Norwegian business school a few years ago and met a guy who worked for one of Norway’s leading venture capitalists. He had just spent — and ultimately lost — a fortune on the exclusive rights to open Starbucks franchises in Norway. Norway is one of the world’s leading coffee consumers (not seeing the sun for months at a time can have that effect on you), so bringing a high-profile global brand like Starbucks to Norway seemed like a no-brainer.
When they ultimately got around to running the numbers, they discovered two surprising facts about the Starbucks business model. It turns out that Starbucks outlets aren’t really coffee shops. They’re dairy stores. Most of their value added comes from heating up milk, which is then flavored with coffee: cappuccinos, lattes, mochas, and so on. In addition, most of this warmed-up milk is bought by young women, who happen to have a strong preference for cleanliness in their coffee/warm-milk shops. Unfortunately, those two particular inputs into the Starbucks production function, milk and cleaning services, are both extremely expensive in Norway, which makes it difficult to “add value” while selling the final product at a reasonable price.
Why is dairy so expensive? Tariffs on imported milk products are kept extremely high to protect Norwegian farmers from foreign competition (you can find butter and cheese alongside single malt Scotch at duty free shops). These tariffs have to be very high, of course, since Norway isn’t a very efficient place to run a dairy farm: neither the land nor the weather is conducive to raising and keeping cows. But a small number of Norwegian farmers have enough political clout to keep these tariffs in place, while a large number of Norwegian consumers must then pay $10 for a cappuccino or $45 for a pound of butter.
What about unskilled labor? Norway doesn’t have a minimum wage per se, but agreements among unions, trade associations, and the government keep salaries for unskilled workers very high, in the neighborhood of $40,000 to $50,000 per year plus fairly lavish benefits. Moreover, even though wages are high, unskilled labor is scarce. Immigration, which seems like a natural solution to this scarcity, is strictly controlled and favors skilled professionals (and Swedish bartenders). This is deemed necessary to protect Norway’s generous and expensive social welfare system from being overburdened.
The net effect is that there is no Starbucks in Norway. Although I did read a report recently that a Starbucks is being planned for the Oslo airport and is scheduled to open sometime this year. This exception seems to prove the rule: international airports seem to be one place where people are willing pay ridiculous prices for almost anything.
Posted by Dave Backus for Stan Zin