TO BE PRESENTED
The Globalization of Starbucks and Its Effect On the World
A cup of coffee; that’s all it is, or is it? One company has taken a simple product and turned it into a lifestyle. People no longer only drink coffee in the mornings to get the caffeine they need for the day, but drink coffee at all times of the day just for the fun of it. Coffee is now an enjoyable experience that anyone can have at any time of the day. Why the drastic change? One word: Starbucks. When one buys a cup of Starbucks coffee, they aren’t buying just a cup of coffee; they are purchasing an experience. From the strong coffee smell, the laid-back atmosphere, and the rich taste in any variety you want, Starbucks customers understand the difference between ordinary coffee and the Starbucks coffee experience.
Starbucks, although technically an American name, is a name known and spoken by people regardless where they are from or what language they speak. Originally just a narrow storefront in the Pike Place Market in Seattle, Starbucks has risen to be one of the largest companies in the world, with more than 15,000 stores in 50 countries. Since 1971, Starbucks has been offering some of the world’s finest coffee to anyone who wants to pay the escalated price for a cup. Starbucks didn’t rise to the top simply by luck however; it did so through acquisitions, differentiation from its competitors, and by protecting the name it fought so hard to establish.
The experience of Starbucks exhibits both how intellectual property rights are essential to globalization and how intellectual property rights have become globalized themselves. The globalization of intellectual property rights has helped Starbucks to protect itself internationally, where competitors in China have ripped off its name and practices, and has also affected how Starbucks does business, as in purchasing trademarked coffee from Ethiopia. By properly utilizing intellectual protection laws, Starbucks has been able to keep its name and business practices its own by preventing its competitors from crossing the line in mimicking the coffee shop powerhouse.
The Globalization of Starbucks
Global expansion is essential to successful companies; Starbucks is no exception. While Starbucks was very successful in its domestic market, the leaders of the company knew they would have to exploit globalization and expand the company to foreign markets to fully utilize the potential that the company had. In 2003, Starbucks quickly expanded into foreign markets and began to evolve into the world-wide company we know today. Countries began experiencing the “Starbucks Effect,” which is the continuous emergence of new competitors with superior business models that force businesses to reconsider the viability of what they’ve always done. In a nutshell - if your company can’t keep up with the efficiency of the Americans, it won’t succeed.
As globalization has helped to establish Starbucks as an international company, the company has run into problems. These problems arose both internally, within the company’s international business model, and externally, in the form of overseas competition. Rival coffee shops started copying Starbucks’ business practices, name, and even its company logo. Starbucks had to utilize intellectual property laws to dispel customer confusion between itself and competitors; more on intellectual property protection is covered in the proceeding section of the paper.
When Starbucks first expanded internationally, it used the same aggressive business model that it had developed in the US, but quickly discovered that the same tactics that had worked to establish the market in the domestic market were not favorable to international expansion. In addition to culture conflicts between retail practices of the organization and various regions, many cities opposed the establishment of Starbucks as a means to protest against the larger trend of globalization. Due to this resistance in some areas, Starbucks has had to establish ways to adapt to foreign nations and seek the support of the residents of those countries. Starbucks does so, and does so well, by listening to its customers. In a 2005 interview regarding international development and adaptation, Jim Donald, CEO of Starbucks from 2005-2008, said “The peak time in China is not 7 to 10 in the morning, it is 4 to 6 in the afternoon. And there are also food preferences we had to adapt to. There is the holiday Yorkshire pudding that is big in the UK but does not work in New York. Breakfast sandwiches in Germany, for example, are made up with a hard roll with sausage and tomato and served cold. So we listen hard to what our partners in a region say.”
Starbucks encountered difficulties when attempting to enter the European market. What Americans find exotic doesn’t translate well to Europe. Europe has been the trading center for some of the world’s most exotic goods from far-flung locales for centuries. While beans from foreign locations were viewed as somewhat of a delicacy for Americans, Europeans thought differently. Initially Starbucks in Europe started with the US approach, as a coffee shop/restaurant offering the Starbucks experience. Over time however, Starbucks evolved to fit the demand of the European citizens. Starbucks employees on the sidewalk would educate passersby on how to “create your own coffee,” attempting to appeal to a classically French sense of artistry and creativity. The Starbucks strategy in Paris “promotes purchases of its coffees as an endorsement, and economic support, of the foreign producers of the coffee beans that capture the unique characteristics of the soil and light…which blends the classic French concept of pride in one’s skill as an artisan or professional, land-specific produce, with a green and sustainable brand promise.”
Starbucks doesn’t just listen to its customers however; it also listens to and appreciates its employees. Starbucks was the first company in America to give comprehensive health benefits and stock options to every single employee, including the over 65% that were part-time at the time. In addition to providing employees with a great benefit plan, Starbucks also offers its employees comprehensive training that enables the organization to promote its products through its employees. Starbucks, by way of word-of-mouth recruiting, is able to save substantial money on marketing costs and redistribute it to improve the company elsewhere. “Starbucks spends just $30 million annual on advertising, or roughly 1% of revenues. Most consumer companies its size shell out upwards of $300 million per year.” This is a huge asset, not only in reduced spending, but also for foreign countries where word-of-mouth recruiting effectively replaces traditional marketing methods that are unavailable.
Starbucks and Intellectual Property Protection
Starbucks has also had to utilize intellectual protection laws to prevent Starbucks’ modes of success and diversity from being copied by competitors around the world. In 1999, Starbucks opened its first café in China and by 2003, Starbucks had registered all its major trademarks in China, including its Chinese name, Xingbake. Shortly after, foreign rivals and Chinese upstarts jumped into the market to compete for customers who will pay up to 50 yuan ($6US) for a cup of coffee, which is more than the average Chinese worker makes in a day. Since then, the foreign rivals and upstarts have been attempting to mimic the Starbucks business model in order to reap some of the success that Starbucks has had in their native countries; a couple of rivals however went too far.
In 2003, Starbucks sued Shanghai Xingbake Café Corp. Ltd. over Shanghai’s use of the same Chinese name that Starbucks uses in China. In Chinese, “Xingbake” basically means and sounds like “Starbucks;” Xing, pronounced “shing,” means star in Chinese, and bake, or “bah kuh” sounds like bucks. Shanghai Xingbake argued that its name was valid because it was registered in 2000, before Starbucks had applied for its own Chinese trademark. Starbucks contended that its name and mermaid trademark had been registered in China in 1996.
In 2005, a Chinese court sided with Starbucks. This decision highlighted China’s struggle to mediate trademark disputes, which is a new concept for the communist legal system. The Chinese court ordered Shanghai Xingbake to stop using the name “Xingbake,” and said that Shanghai Xingbake was engaging in illegitimate competition by using Starbucks’ Chinese name and imitating the design of Starbucks cafes. The Starbucks ruling was the first of its kind under a 2001 Chinese law, which was drafted to protect well-known international trademarks.
In a strikingly similar action, Starbucks has been in a long running dispute with Qingdao Xingbake Coffee Shop Co. Lt. over the use of the Starbucks trademark. Starbucks filed suit against Qingdao Xingbake, claiming it was infringing on its Xingbake and English language trademarks.
Qingdao Xingbake, the defendant coffee shop, starting business in Qingdao on October, 23, 2003, under the name Qingdao Xingbake Kefei Canting Youxian Gongsi, which means Qingdao Xingbake Coffee Shop Company Limited. Qingdao Xingbake made use of the Starbucks registered name “Xingbake” in its company name; it also used the English name Qingdao Star Sbuck Coffee on its napkins, menus, and business cards. Within its coffee shop, the defendant coffee company used Starbucks trademarks such as “Frappucino” and “Yukon Blend,” and it sold coffee beans that were clearly labeled as Starbucks Coffee. The Starbucks Coffee beans were packed in bags identical to those used by Starbucks in its actual stores. Qingdao Xingbake’s company logo is a round circle with stars, just like Starbucks, but it replaced the Starbucks siren with a coffee cup and eliminated the company name.
Starbucks filed suit against the Qingdao Xingbake coffee company, claiming it was infringing on its Xingbake and English language trademarks. Qingdao Xingbake claimed the following defenses: 1) A trademark that has been registered but never used cannot be enforced. Though Starbucks registered Xingbake as its trademark in China, it never actually used the term. It uses only its English language trademarks. Accordingly, defendant is free to use the term Xingbake as its business name. 2) There is a difference between a business name and a trademark. A company is free to use its legal business name in conducting its business activities, so long as it does not infringe on someone else's trademark. The relevant Chinese authorities approved the Qingdao Xingbake company using the Xingbake business name and since Starbucks does not actually use that name, defendant has the right to use it in its normal business activities. Qingdao Xingbake’s only defense for using the English language Starbucks trademarks was the groundless and somewhat laughable argument that Plaintiff Starbucks Company did not actually own the trademarks in question.
The Chinese court rejected the argument that Starbucks does not own its own English language trademarks and rejected both defenses regarding the “Xingbake” name as well. First, the Chinese court found that Starbucks had in fact used the Chinese term “Xingbake” in identifying its business in China. Second, the Chinese court held that the defendant Qingdao Xingbake was not using “Xingbake” as a business name; it was using “Xingbake” as a trademark to identify its business as a coffee shop. The “Xingbake” name was prominently displayed throughout the coffee shop and on the sign identifying the shop from the street. The Chinese court found that this could confuse customers as to the identity of the ownership of the coffee shop. The Chinese court was notably persuaded towards its decision by Qingdao Xingbake’s use of the English language Starbucks trademarks to identify its products and the use of Starbucks’ green color for its signage and logo. These facts convinced the court that Qingdao Xingbake had not simply taken on the name “Xingbake,” but had knowingly and purposefully copied Starbucks’ full trademark system, along with Starbucks’ unique look and feel. Qingdao Xingbake was clearly operating a business openly infringing on Starbucks’ trademarks. All of Starbucks’ trademarks were properly registered before the Qingdao Xingbake was even incorporated.
The Chinese court ultimately held in favor of Starbucks and issued the following order: “1) Defendant must remove the term Xingbake from its legal name; 2) Defendant must cease using any Starbucks trademarks, including the Chinese term Xingbake; 3) Defendant must cease using the green circle logo as it is confusingly similar to the Starbucks’ logo; 4) The Defendant is ordered to pay economic damages to Starbucks in the amount of 500,000 RMB ($62,000).”
One thing we can take from this case is that China’s legal system is continuing to develop and has developed to the point where intellectual property rights can be successfully defended through legal action. This is a big step, because much of the Chinese market is flooded with pirated merchandise that is sold significantly lower than market prices. Much copying in China is organized and carried out by overseas Chinese based in Taiwan, Hong Kong, Canada, and the United States, which increases the complexity of dealing with intellectual property infringement issues in China. Further, foreign companies looking to expand in to China can learn a few lessons from this case:
- Register your trademarks early.
- Register your Chinese name even if you do not plan to use it right away. This is especially important if your Chinese name is different from your company name, as was the case with Starbucks.
- Registering your trademarks in China is a necessary start towards protecting them, but it may not be enough. The Chinese government will not protect your trademark for you. You must enforce the trademark yourself.
- If you properly register your trademarks in China you will probably succeed in an enforcement action. However, you must be prepared to incur the legal costs of enforcement. China is a huge and complex country. If your product is successful, there is a good chance it will be copied. You will need to vigorously defend your rights from the very start in order to prevent this.
Starbucks has also attempted to use intellectual protection laws to keep its own expenses down in the supply market. A couple years back, Ethiopia wanted to trademark the names of three coffee-growing regions to force companies that sell its beans to sign licensing agreements and to gain higher prices for its produce. Ethiopia, the birthplace of coffee, sells its coffee very cheaply. This is odd however, because Ethiopia’s “specialty beans” retail abroad for three times the price of normal coffee. An Ethiopian farmer will sell a pound of coffee for roughly $1.45. The same coffee in the US, branded and sold by Starbucks, costs $26. Getachew Mengistie, the head of Ethiopia’s Intellectual Property Office, says that “the price differential is evidence that his country has been unable to capitalize on…its intellectual property. There is clearly an intangible value in the specialty coffee of Ethiopia…But it’s not being captured here.”
The conflict between Starbucks and Ethiopia started when Ethiopia filed with the U.S. Patent and Trademark Office to trademark the names of three coffee-producing regions: Yirgacheffe, Harrar, and Sidamo. By seizing control of these brands, the Ethiopian government planned to force sellers of its coffee into licensing agreement, which would give the farmers a larger share of the sales. Starbucks however, applied for a trademark application on its coffee, “Shirkina Sun-Dried Sidamo,” before Ethiopia did. Until Starbucks’ application was resolved, Ethiopia’s claim could not go forward. Ethiopia pled with Starbucks to drop its claim, but Starbucks refused. 
Starbucks objected to Ethiopia’s choice of intellectual property protection, as trade marking is an unusual choice for a designation of a geographic region. Starbucks argued that Ethiopia should use geographic certification, which is used for products such as Idaho potatoes and Florida oranges. Geographic certification guarantees that the product comes from the stated region, but allows others to use the name in their branding. Ethiopia argued against geographic certification however, contending that geographic certification is expensive and it wouldn’t require distributors to seek permission to use their names in their branding. For example, Starbucks could still sell Shirkina Sun-Dried Sidamo, as long as it used beans from Sidamo.
On June 20, 2007, Starbucks and Ethiopia issued a joint press release, saying “Starbucks will not oppose Ethiopia’s action to register its trademarks for its specialty coffees; and the parties have entered into an agreement to promote the specialty coffees.” The two sides agreed to sign a licensing and marketing deal which stresses the importance of Ethiopia’s specialty coffee beans. Starbucks said it would “double purchases of coffee from East African countries by 2009 and invest in several aid measures for farmers.” Overall, this is a victory for Ethiopia; not only in acquiring the trademark rights to the geographic indicators for coffee from its regions, but in development as well. If Ethiopia, one of the world’s poorest countries, can enforce and defend its intellectual property laws, any country should be able to. It will be interesting to see how developing countries use the Starbucks/Ethiopia dispute as an example in the future with the enforcement of intellectual property disputes.
Globalization and intellectual property go hand in hand in international business. Globalization helped Starbucks become the coffee-shop powerhouse it is today, and intellectual property law has kept it steady. Through intellectual property protection laws, Starbucks’ has been able to preserve the differentiation that put itself above its competition; however, Starbucks may have to pay higher premiums on its coffee from Ethiopia as a result of the same intellectual protection laws. As we’ve seen through Starbucks’ point of view however, intellectual property laws can be an asset and a liability at the same time. Through the experiences of Starbucks, we can see the forces driving globalization and intellectual property, and how they unfold in developed and in developing countries.
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