Strategic Analysis of Starbucks
Prepared by: Topu Chowdhury Submitted to: GU, London
Table of Contents Page
1.
Introduction.................................................................................
2.
Starbucks Mission Statement............................ Statement.......................................... ..............
3.
Environmental Analysis of Starbucks Corporation.......................... 3.1
PESTEL Analysis................................. Analysis....................................................... ...................................... ................
3.2
Opportunities & Threats of Starbucks Corporation...........................
3.3
Strengths & Weaknesses.............................
4.
Marketing and Distribution Channel of Starbucks...............................
5.
Human Resources............................... Resources..................................................... .................................. ............
6.
Coffee Purchasing Strategy, Coffee Roasting .................................... .................................... Operations & Corporate Social Responsibilities...........................
7.
"Third Place" Concept................................... Concept......................................................... .................................. ............
8.
Business Risk & Operational Conflict................................ Conflict........................................ ........
9.
Conclusion............................................................................................ References...........................................................
1.
Introduction
Starbucks, established in 1971 by coffee aficionados three academics as a coffee, tea and spice retail shop. They opened their first store at Pikes Place Market in Seattle, Washington, which is a very popular tourist attraction. Starbucks had four stores by early 1980s in Seattle and company was profitable every year since their start. In September 1982, owners recruit Howard Schultz for marketing & overseeing stores, who has great passion for coffee & business expansion. It was Howard Schultz plan to add beverage restaurant business in addition with retail store but owners of the Starbucks were conservative and became strict with their original idea of marketing fine Arabica coffees at retail. Schultz came out of Starbucks and with the help of some investors he formed new coffee company named II Giornale. They opened the first store of II Giornale as a coffee retailer and beverage restaurant in April 1987 which was located near the entrance of Seattle tallest building. By mid 1987, II Giornale opened three stores and the sale was $1.5 million annually. In August 1987, Schultz & II Giornale acquired Starbucks and new name was fixed for two combined companies, Starbucks Corporation. Starbucks corporation invested hugely for expansion of restaurants in the beginning and was not successful in terms of profit. Recruitment of new management team which was very experienced and execution of technology started to bring profit for the corporation from 1990 (Thompson & Shah, 2011). From the beginning, Starbucks differentiate its market position by serving finest Arabica beans' specialty coffee and in-store experience with aroma of freshly brewed coffee, classic music, quiet sitting & relax place. Starbucks corporation starts to face new challenges in recent years for the increasing number of competitors and global economic crisis.
This report is prepared to analyse business strategy & ethics of Starbucks corporation with internal business strength and external threats & challenges. It also analyse the goal & objective of the business and its conflict with operation recently. Human resource management, risk management, strategic planning such as innovation, product range, distribution channels are analysed in this report. Overall Starbucks market performance and position compare to competitors presented in this analysis.
2.
Starbucks Mission Statement
Before 2008, Starbucks mission statement included a premier purveyor of world's finest coffee while main principles were buying excellent Arabica coffee bean, roasting with foremost standard, fresh delivery & serve, developing satisfied customers, providing great work environment, contributing positively to the environment & communities. Starbucks elaborates its mission statement from 2008, where the theme- one person, one cup and one neighbourhood at a time included. Excellent coffee beans and coffee quality still the first priority of the company, it includes ethical sourcing of finest coffee beans, improving the lives of farmer who grow those beans, partners, customers, stores, neighbourhood and shareholders (Starbucks, 2012). New mission statement encourage partners to engage more with customers to build human connection, indicate store environment as a place where people can forget their worries, meet new friends and enjoy their time. Developing good relation with neighbours and attract shareholders by making the business profitable are part of the new mission statement.
3.
Environmental Analysis of Starbucks Corporation
3.1
PESTEL Analysis
PESTEL helps small firms as well as huge corporations to determine their business strategy and research the industry. It is an important research tool for organisations to analyse different external factors that have impact on success or failure of organisation. For this reason, most of the organisation consider this tool to analyse industry environment.
Political
The main materials to produce coffee is coffee beans, most of which produce in developing countries though main consumers are from developed countries. Farmers in developing countries have to pay high tax for the production of coffee, which they cover from coffee companies or coffee beans' buyers. Government of Tanzania took steps to restructure their taxation to increase coffee beans production in rural areas in 2003. This step slightly decreased the price of coffee beans. But this price hugely depend on international politics, government regulations, countries trade barriers, International trade regulations and so on.
Most of the government set export quotas and increase tax rate recently, which eventually increase the price of coffee beans. Consequently, coffee companies should consider countries trade laws & regulations before expanding their business in any country because country's political situation or government change may change the taxation or legislation (Heavy, 2010).
Economic
Global fiscal crisis and its impact on business is a great challenge for organisation. Consumers are more conscious with their spending specially on branded products where cheaper non-branded products are available. Rise in daily expenditures such as house rent, gas, oil, food and less savings pressed consumers to cut their expenditure on optional or recreational purposes and think differently such as making foods & beverages at home which is cost effective. Slow economic growth, growth, job redundancy redundanc y and impact of national economy econom y which is mostly negative decrease the sales rate sharply. Increasing inflation rate and unusual fluctuation of exchange rate increase the coffee bean price in most cases and also increase other expenditures of the business (Heavy, 2010). As a result, overall expenditures of the business are increasing where decreasing sales be an economic challenge for the company.
Social
According to Sunday Times (2008), customers usually consume more coffee than tea in UK; Coffee: £738 million where Tea: £623 million. Customers not only go to coffee shop to drink freshly brewed coffee or eat food, they also like to pass time with friends, families or relax there. Starbucks has "stored of the future" project team who designed all the stores for next generation based on company's four themes. Colour, design, theme of the store may vary based on location. In recent years, Starbucks introduced drive-through windows in retail store to provide greater access & speedy service. Starbucks geographic expansion strategy not only target demographically favourable location but also look for the position where the company can serve & provide support according to the corporation's standard. Starbucks only serves fresh foods for health consciousness, which is great attraction for customers who search for healthy alternatives (Rodenberg, 2008).
Technological
Advanced technology such as electronic cash register, quicker & effective coffee making machine improve the service in coffee beverage industry. Customers are served more quicker
now using these technologies. Most of the Starbucks restaurants are providing free Wi-Fi service for customers in restaurant premises and also planning to introduce online customer experience known as Starbucks Digital Network, which provide free excess to various paid sites, free downloads, exclusive previews & contents, local activities & news via customers' electronic device. Starbucks also provide in-store CD burning facilities for its customers and free download from iTunes. Starbucks VIA Ready Brew, introduced in 2009 was a breakthrough in coffee industry which used microground technology and simply need to add a cup of hot or cold water with a packet of VIA. Starbucks claims VIA has rich taste which very much imitate the taste of freshly brewed coffees (Thompson & Shah, 2011). Compare to twenty or thirty years ago, in coffee beverage industry technology is changing rapidly and providing great support & competitive advantage to companies (Heavy, 2010).
Environmental
Environmental awareness is increasing globally among the countries and consumers. Company should use environment friendly cultivation method, environment friendly packaging and has strong waste management system. Environmental laws & regulation may vary country wise and company should follow those regulations. Starbucks partnered with International's
Center
for
Environmental
Leadership
since
1998,
which
develop
environmentally sustainable coffee bean cultivation method using specific guideline known as Coffee and Farmer Equity (C.A.F.E.) practices (Thompson & Shah, 2011). Four areas such as environmental responsibility, product quality, price received by growers and safe working environment including minimum wage & restrictions on child labour. Starbucks use recycled materials for the construction of roasting plants and recycled most of the waste generated by the construction works. Company received U.S. Green Building Council's LEED Silver Certificate for construction in South Carolina roasting plant (Thompson & Shah, 2011).
Legal
Starbucks, as a multinational company follows all the rules and regulations of countries where company has operations and also countries regulation from which company collect raw materials especially coffee beans. Export and import tariffs, tax regulations varies from country to country which company should follow strictly. Sensitive issues such as child labour, minimum wages, cultural restrictions, holidays may varies among countries which company should concern about. Company should aware about local health & safety rules,
beverage restaurant opening rules, opening hours restrictions and so on. So far, Starbucks has very fair reputation on following country specific rules & regulations.
3.2
Opportunities & Threats of Starbucks Corporation
Company should do the SWOT analysis to understand its position within industry. This analysis help the company to take advantage of available external opportunities and mitigate the threats within industry. It also help company to know its core internal strengths and weaknesses which should be mitigated as well (Johnson et al., 2012).
Opportunities
Starbucks has huge revenue, so it can expand its global presence easily by opening beverage restaurant in more European countries & developing countries. Number of stores should be increased by Starbucks in prospective countries like Russia, India, Brazil and emerging country with strong economy, China. Higher population density in urban areas, increasing income and change of lifestyle increase the number of coffee & tea consumers in these countries (Murphy, 2011). Apart from these countries, overall growth of coffee market & increasing consumers become an opportunity for the company.
Diversification is a good opportunity for Starbucks which company already did by entering businesses like book sales, CD burning, selling breakfast items, fresh salads, sandwiches, liqueur and ice cream. Company can increase their range of products and can target noncoffee drinkers or more consumers by entering new business segments. Starbucks jointventure with Jim Beam Brands in 2004 to produce Starbucks Coffee Liqueur, which was a success for the company, consequently co-branding or joint-venture with other companies will be an great opportunity for Starbucks (Thompson & Shah, 2011).
Threats
Presence of high number of competitors is a significant threat for the company where for beverage products switching cost is almost nil. Apart from brands such as McDonald's, Dunkin Donuts, Costa, Krispy Kreme; local restaurants, coffee shops and nationwide coffee producers are competitors of Starbucks as well. Successful growth of Starbucks' business really threaten by global fiscal crisis, slow economic growth and cut-price offers from rivals. Business success of Starbucks may influence others to create copycat brand or products.
Global warming & increasing temperature may be a potential threat for the coffee & tea beverage industry. In future, coffee may not be popular drinks any longer or other beverage items become favourable instead coffee.
3.3
Strengths & Weaknesses
Strengths
Brand reputation & increasing revenues are the two significant strength for Starbucks. Brand reputation easily attracts new customers, increase customers preference & create loyalty where significant revenues give company advantage of utilising any opportunities or creating new opportunities. Diversification of business segments is another great strength of Starbucks business. In this extremely challenging business environment, diversification helps Starbucks to overcome the loss of other slow segments. Another strength of Starbucks business is innovative & strong research & development team, who can understand market demand & introduce new products according to customers' demand. Huge distribution network with contract with reputed companies such as Walmart, PepsoCo, Uniliver, etc. and global presence with enormous number of stores (according to Thompson & Shah (2011), Starbucks has 16,664 company owned & licensed stores worldwide on March 2010 ) make it easier for the customers to have access to Starbucks coffee, coffee beans and other products.
Weaknesses
According to March 28, 2010, Starbucks had 6,736 company operated & 4,385 licensed stores in USA compare to only 2,076 company operated and 3,467 licensed operation in rest of the world. Company's highest sales revenue came from USA, where England & Irelandtogether and Canada borrowed second & third highest revenue respectively in 2009 (Thompson & Shah, 2011). It means, Starbucks' operation highly dependence on USA and its economic growth. Slow economic growth or increasing living cost in USA may adversely affect the business of the company. According to Thompson & Shah (2011), up to thirty percent of a store business can be cannibalised by another Starbucks store if it is nearby and in some places Starbucks has this type of stores. In some places Starbucks faced difficulties to adjust with local culture or business theme such as business in Japan and business closure in Israel. Another weakness is Starbucks business highly dependent on sales of beverages. In
2009, beverages sale was 76 percent of total sales where food items, equipment & merchandising and whole bean sale was 18 percent, 3 percent and 3 percent respectively. Diversification of business on segments which are not directly related with beverages or foods such as CDs or books and joint venture with non-beverage companies may decline the brand image of Starbucks and shift from its original aim & mission.
4.
Marketing and Distribution Channel of Starbucks
In the mid-1990s, Starbucks management felt to offer its products beyond retail stores and marketing coffee products at restaurants, universities, hospitals, airlines, hotels, business offices and selected retailers. To fulfil this goal, Starbucks developed in-house specialty sales group. At that time, in-house sales group enabled to win contracts in many restaurants and well-known hotels. In 1994, Starbucks made a joint-venture with PepsiCo known as North American Coffee Partnership, to use huge distribution channel of Pepsi Company and create coffee related products on cans & bottles. The company penetrated almost 80% of USA market in 1997 using PepsiCo distribution channels. In 2008, Starbucks made an agreement with Unilever, well known multinational company & consider as global leader in Ice cream production & distribution, to manufacture, distribute & market Starbucks branded ice creams in USA & Canada. Starbucks made a licensed agreement with Kraft Foods for the distribution, marketing, advertising and promotions of Starbucks ground coffees and whole bean across United States using groceries & huge-merchandising channels of Kraft Foods in 1998. Later two companies expanded their license agreement to United Kingdom and Europe. Starbucks distributes & markets its products globally using well-known companies who have huge distribution networks. This strategy of the company, available its products in maximum locations and penetrate most available percentage of global market. Starbucks uses its own & licensed stores for the distribution & sell of its products in addition with those agreements and license. Maximum varieties of products are available on Starbucks stores which make its stores exceptional than those distribution channels & stores, where only selected products are available.
Advertising
Starbucks spent comparatively less amount of money on advertising than rivals so far. The company carries the original marketing theme developed by three academics of dependent on
word of mouth and then build customer loyalty cup by cup by serving finest premium quality coffee. In modern era, company uses store fronts as its advertising logo. Starbucks spent $126.3 million, $129.0 million, $103.5 million and $107.5 million in fiscal years 2009, 2008, 2007 & 2006 respectively for advertisement. Starbucks, who usually avoid traditional marketing, had undertaken biggest marketing campaign in 2009 to compete with rival McDonald's advertising blitz to promote its new coffee drinks- McCafe (Miller, 2009). To promote its new coffee Drinks line, McCafe, McDonald's expenditure was almost hundred million US dollars on print, TV, online, radio and billboard advertisements. But Starbucks used different way of advertisement, where in newspaper they published their process of coffee roasting, contribution to employee and use social networking for the participation of customers in its advertising campaign.
5.
Human Resources
Most of the Starbucks baristas are young in their 20s & part time worker for the company. These baristas who represent the company from front bring the success such as rapid growth of stores & revenue for the company. This truth was realised by Howard Schultz and he raised the concern of health benefit insurance coverage for part timers who worked at least 20 hours to board of directors. He presented his argument to the board of directors in 1988 and showed how the health insurance coverage cost is less than employee turnover cost. After long-lasting argument, board approved Schultz's plan was approved by board after a longlasting debate.
This encourage employees employees to deliver more for the company & brought
success in the long run.
Starbucks profitability increased in 1991, which delighted its CEO Howards. He took steps to share the success with employees.
He planned to change the name of employee or
colleague into partners and a 12 percent of base pay stock buying options. This plan was known as Bean Stock and employee, partner or barista title was replaced by partners. The feelings to become part of the company motivated all partners and make Starbucks one of the best companies to work for. Partners are given power to take heroic steps, raise its voices for the company and participate in decision making process by delivering its opinions.
6.
Coffee
Purchasing
Strategy,
Coffee
Roasting
Operations
&
Corporate Social Responsibilitie Responsibilitiess High-altitude Arabica coffees- premium quality coffee for which Starbucks so popular till today, for supply chain of bean company set strategies to guarantee the quality of Arabica Beans. Starbucks partnered with Conservation International's Center since 1988, to develop a guideline for environmentally sustainable coffee cultivation name as Coffee and Farmer Equity (C.A.F.E.) Practices. C.A.F.E. Practices helped farmers to grow high quality coffees in ways that were good for the planet, it covers most of the aspects of Fair Trade Policy, social & environmental responsibilities.
In Costa Rica & Rwanda Starbucks opened Farmer Support Centres with agronomists staffs & experts on environmentally coffee growing method to work with coffee farmers to support best practices in coffee production & develop both coffee qualities & production yields. Starbucks purchased almost 80% of its coffee beans from suppliers whose standard met C.A.F.E. practices. Rest of the coffee beans purchased from suppliers who can provide evidence of quality, farmers wages & overall supply chain. A significant percentage of Starbucks coffee beans purchased that originally grown under organic cultivation method. This methods, which do not use pesticides, herbicides or chemical fertilizers, is good for health and also for environment by producing clean ground water & helping protect against degrading of local ecosystem.
Starbucks has proprietary roasting facilities where it roast best quality beans into perfection. It supplies coffee beans to stores & other retailers from its roasting plants directly. Starbucks does not mix any flavour with its coffee to maintain the values & principles of the company.
7.
"Third Place" Concept
Starbucks has its own team of architects & designers to convoy the image of the company in every stores. Without selecting unique design models, it develop a set of model & design which may vary depending upon the place & situation. It develop a theme called "Third Place" apart from home & work, where people can meet, gossip, relax, enjoy moment with family or enjoy a quiet moment alone with book or newspaper, or listening music.
The advantage of technology opened new opportunities for Starbucks, it teamed with TMobile to provide internet access & enhanced digital entertainment at more than 1200 U.S. stores as an experiment in August 2002. The objective was to intensify the "Third place" concept and entice customers for long time at Starbucks store which may increased sales. The increasing number of population working from home helped Starbucks to success in this strategy, these people like to sit on coffee shops & do their work.
8.
Business Risk & Operational Conflict
Starbucks business risks are analysed on threats. Apart from those risks, global economical crisis which change the preference of the customers is also a risk for the company. Because Starbucks is the premium quality coffee provider. Slow growth of economy & increasing cost of living force customer to choose ordinary brand or cheap brand instead of premium or quality brand. Starbucks also trying to reduce the cost of it coffee, coffee beans & other products to compete with the rivals which may deteriorate the quality of the products and hamper brand image of the company. Though company slow down its aggressive store expansion strategy, its huge number of stores make difficult to maintain quality customer service on all stores. Customer services of company operated stores and franchise stores may vary, which have direct impact on company's brand image. Proper training is necessary for the quality services of the partners which is not possible for substantial number of part-time workers.
9.
Conclusion
Starbucks' main differentiating factor is its quality coffee made from premium Arabica beans which are fresh roasted. In addition with this, in-store environment and quality services bring attraction of the customers. Starbucks should invest more money on advertisement to inform differentiating factors and why customers are paying more for specialty coffee. Though company has one of the biggest distribution channel via joint venture & license agreement, it should control advertising & quality of the products. Starbucks specialized real state team can identify the exact location on new stores. New store location should consider the position of previous stores and company should develop minimum standard range for the opening of new
store. Diversification of the business should be maintained by innovation & development of new products which should fulfil the value & business principles of the company and can be easily differentiate from rival's product. Finally, Starbucks should strict with its business strategy and introduced new products which accomplish the values & business principles of the company.
References Johnson, G., Whittington, R. & Scholes, K. (2012), “ Fundamentals of Strategy”, 2
nd
Edition,
Pearson Education Limited, Harlow, England.
Starbucks (2012), "Our Starbucks Mission Statement". [Online] Available from: http://www.starbucks.com/about-us/company-information/mission-statement [Accessed 10 November 2012]
Heavy, J. (2010), "Starbucks a strategic report by James Heavy". [Online] Available from: http://www.scribd.com/doc/27614539/Starbucks-a-Strategic-Report-byJames-Heavey# [Accessed 02 November 2012]
Rodenberg, J. (2008), "Costa Coffee vs. Starbucks". [Online] Available from: www.rodenberg.nl/.../COSTA_COFFEE_vs_STARBUCKS.pdf [Accessed 20 November 2012]
Murphy, P. (2011), "Brazil could be world No.1 coffee drinker by 2012". Reuters.com [Online] Available from: http://www.reuters.com/article/2011/01/26/coffee-brazil-consumptionidUSN2611848020110126?pageNumber=1 [Accessed 25 November 2012]
Miller, C.C. (2009), New Starbucks Ads Seek to Recruit Online Fans. [Online] Available at: http://www.nytimes.com/2009/05/19/business/media/19starbux.html [Accessed 07 November 2012]
