A Lesson in the Importance of Market Research

Between 2001 and 2003, Starbucks opened six locations in Israel. They were all closed in 2003 when Starbucks decided to pull out of the country completely. A disregard for market research and the results it yielded ultimately led to Starbucks’ decision to close operations in Israel.

In 1998, Starbucks CEO Howard Schultz visited Jerusalem and met with Benjamin Netanyahu, then and current Prime Minister of Israel. At a request from Netanyahu to help boost the Israeli economy, Schultz agreed to bring Starbucks to Israel. Upon returning to his hotel, the luxurious King David hotel, Schultz decided to order a cup of coffee. He concluded that it was “weak, flavorless, no better than hot dishwater,” and that he would use Starbucks to introduce “good” coffee to Israel.

Starbucks CEO Howard Schultz

As a Jewish man, Schultz considers Israel, home of the Holy Land, to be a special place. The idea of opening his business in Israel was so exciting to him that he was willing to disrupt his typical process for starting up in a new country in order to make his vision a reality. This included bringing on as partner a local petroleum company, Delek Group.

In my opinion, this is mistake number one. Delek Group had the ability to provide financial support for Schultz, but as a petroleum company, it was not familiar with the coffee industry. Its focus was on getting Starbucks into its gas stations, and the actual experience of customers in Starbucks cafes was not important enough to Delek to take seriously. In fact, it rejected advice from Schultz’s other local partner, Yair Hasson, an entrepreneur who did have experience with the country’s food industry. Hasson insisted that Israelis’ coffee taste is more European than American, and that they should adapt the menu to cater to these preferences if they want to be successful in Israel. Market research reinforced this recommendation, but Delek refused to heed Hasson’s advice.

This leads us to mistake number two: Schultz didn’t do his homework. Instead of researching the market and ensuring he had an adequate understanding of Israel’s coffee market and preferences, Schultz generalized and made decisions based on assumptions. He had one cup of coffee at the King David hotel, never had coffee from a local cafe, and assumed the coffee at King David was representative of coffee in Israel. He also assumed that he was bringing the coffee culture to Israel. In reality, European-inspired espresso had recently become popular in Israel, and the quality of this espresso was a point of pride for its fans. Schultz’s insistence that he was going to show Israel what “good” coffee is like was off-putting to the market, especially since his idea of a “good” cup of coffee did not match theirs. Furthermore, Israelis did not get coffee to go, as is so popular at the typical Starbucks; instead, they would spend hours at the cafe socializing. Performing market research as a first step would have revealed these crucial pieces of information in the beginning, and should have informed Schultz’s strategy from then on.

Mistake number three was charging a high price for the coffee. One of the most-loved coffee chains in Israel was Arcafe, which sold high-quality coffee at a high-quality price. People loved it, so they were willing to pay that price. Starbucks coffee, on the other hand, was not up to Israeli standards, but was priced in the Arcafe range. Consumers were not willing to pay that price when they could get a much better cup of coffee at Arcafe, or a cheaper alternative at another coffee chain. This left Starbucks at a competitive disadvantage from both ends. Again, market research would have revealed this ahead of time.

Had Schultz performed market research for Israel and respected the existing research around the market, Starbucks may have been able to adapt and survive in Israel. His mistakes teach us that to ignore this step of the process is to (very likely) shoot yourself in your foot.