Hungary for Starbucks?

Francisco CavazosDipannwita ChakrabortyDa-Jiun ChenRema Ramakrishnan

Background

Hungary was part of polyglot Austro-Hungarian, which collapsed during World War I.

Fell under Communist rule following World War II.

In 1956, a revolt was met with a massive military intervention by Moscow.

Background

In 1968, under the leadership of Janos Kadar, Hungary began liberalizing its economy, introducing so-called New Economic Mechanism

In 1990, Hungary held its first multiparty elections and initiated a free market economy.

In 1999, joined NATO. In 2004, joined the EU.

Geography

Location: Central Europe Capital: Budapest Area: 93,030 sq km, slightly smaller than Indiana. Climate: dry continental climate, with cold winter

and warm summers. Natural Resources: Bauxite, Coal, Natural Gas,

Fertile Soils, Arable Land

People

Population: 10,032,375 (estimate 2004)

Age Structure

0%

10%

20%

30%

40%

50%

60%

70%

80%

0-14 years 15-64 years 65 years and over

People

Median age: Total: 38.4 years

Male: 35.4 years

Female: 41.1 years

Literacy: Total population: 99.4%

Male: 99.5%

Female: 99.3%

Way of Life

Rural nature Fewer than ten cities have a population of

more than 100,000 Cities are surrounded by village-type

settlements Huge number of commuters

Way of Life

Over 50% of the population pursues agriculture in addition to their main occupation.

Higher level of consumption of goods and services, as compared with other former Communist countries.

Social Problems: High incidence of alcoholism Racial discrimination and persecution

Privatization

Ownership structure of companies  

(% in assets)  

  1992 1993 1994 1995 1996 1997  

Total domestic private owners 25.1 29 32.9 35.2 34.7 38.2  

Foreign owners 0.1 16.1 18.9 28.4 31.5 35.3  

Total private ownership 35.2 45.1 51.8 63.6 66.2 73.5  

Total state and other 64.8 54.9 48.2 36.4 33.8 26.5  

Source: Pitti, Zoltán (1998)

Social services

Health care and pension funds are financed by employer-employee contributions totaling approximately 10 percent of the annual wages of each worker.

Health insurance is obligatory, and most medical treatment is free.

Guaranteed minimum wage.

Social Services

Eligible to receive retirement pensions

Men: age 60

Women: age 55 Social insurance provides for

prenatal and maternity benefits. compensation for unemployment. old age and disability pensions. aid to orphans and widows.

Currency and Exchange Rate

Currency: forint (HUF) Exchange rate: 189.09 (forint per US dollar)

Post-Communist period

Hungarian government actively sought foreign investment

Encouraged foreign firms to take over privatized firms

Today-80% of Hungary’s output is produced by private sector

Péter Medgyessy’s government is following a policy of shedding state ownership

Companies to be privatized: financial institutions (e.g. Posta Bank), MOL (The Hungarian Oil and Gas Company

Foreign ownership

National Development Program and the Smart Hungary program: aimed at facilitating foreign investment

100% ownership permitted, exceptions:defense, national airline

Manufacturing

Foreign67%

Local33%

Telecommunications

Foreign90%

Local10%

Land ownership

The 1994 Land Law: restricts foreign ownership to 6000 sq. meters

Leases are allowed up to 300 hectares for 10 years

Restrictions hold until 7 years following EU membership

Business Environment

Ownership more concentrated than in US

Hungarian accounting standards are significantly different from international standards

Dispute settlement

Independent judiciary and well-developed legal system

Hungary has accepted binding international arbitration in cases of dispute between state and foreign investors

Well developed commercial law

Regulations

Regulatory process Relatively open and transparent

Income tax levels 40% individual 18% corporate

Price regulation Pharmaceuticals,energy

Political environment

Political violence Almost negligent, peaceful transition to

democracy Corruption

Very low—good legal system in place Isolated incidents but not pervasive

"Good coffee should be black like the devil, hot like hell, and sweet like a kiss."Hungarian saying

Tradition

Traditional and growing modern trends Early 1900s New York Palace coffee shop

Significant role in cultural life Hub of most lively social events Used by most influential and significant writers

Tradition

Café Gerbeaud Opened 1858 Over 600 people

Oldest in 1824 Rebirth of Café era

Hungarian Coffee Market

2001: Coffee sales up 6% from 1997-2001 2002: Retail outlets accounted for almost

73% 2003: Hot drink market up 2.1%

Growth

Reduction of 12% luxury tax Growing disposable incomes Number of foodservice outlets Western lifestyle Better quality products Growing consumer sophistication

Expected Growth

By 2008 – Expected growth of 7.3% in volume Sales growth of 9.3% valued at HuF114.6 billion

Niche markets Green Tea Decaffeinated coffee Instant cappuccino

History and Objective

History 1971 1984 Howard Schultz,

vice president Objective

To establish Starbucks as the most recognized and respected brand in the world

Growth of Starbucks

Dominant retailer, roaster, and a brand of specialty coffee in North America

4.1 billion net revenue 8% annual store sales growth 1000 stores in Asia Pacific region More than 7000 locations worldwide 9 on Fortune Magazine’s Most admired companies

list

Starbucks: SWOT AnalysisStrengths Strong Brand Name

recognition Large retail distribution

system Quality Product Extensive product list Strong financial history Strong Human Resource

Weaknesses Prices high relative to

competition Strong dependence on

suppliers

Starbucks: SWOT Analysis

Opportunities Expansion into overseas

markets Expansion into untapped

U.S. markets. Expansion of brand name

into new products or business lines

Threats Economic condition may

make consumers unwilling to pay high prices

Political conditions abroad may limit expansion

May be reaching saturation point in some U.S. markets

International Market

Barriers to enter Hungary Competition: Countless coffee

shops in Hungary Trend in Hungary: Every café

serves alcohol Ambience: Elegant and

sophisticated Supply/Demand: Additional

cafés would cause surplus Price: Lower comparative

price

Price Comparison

Hungary Coffee Shops Price Starbucks Price

Espresso $1.30 Espresso $1.75

Cappuccino $1.99 Cappuccino$ 3.45

Coffee with milk &whipped cream

$1.99 Coffee with milk& whipped cream

$3.95

Hot Chocolate $1.99 Hot Chocolate  $ 2.70

Ice Coffee $2.60 Ice Coffee$  3.95

Frappe $3.33 Frappe$  3.95

Frappe ( with vanilla ice cream )

$3.00 Frappe ( with vanilla ice cream )

$  3.95

Recommendation

Do not enter the Hungarian market.

Questions

Any questions?