An Analysis Of Starbucks Corporation

Part A

In 1971, Starbucks Corporation was founded by America in Seattle, Washington. The company is a premium retailer, marketer and roaster in the world of specialty coffee around the world. In about 62 countries, Starbucks has 19,767 stores that are company operated where around 182,000 employees work. They deal with the beverages like high quality coffee, tea and food items that are handcrafted and roasted. They also sell a wide variety of tea and coffee products that are sold by other channels like grocery, licensed stores and nationalized food service stations. There is marketing of products that mix with other brands within Starbucks like Tazo, Teavana, and Starbucks VIA, Evolution Fresh, Seattle’s Best Coffee, Verismo and La Boulange. Until 29^th September 2013, $14.89 billion was the total revenue of Starbucks.

Starbucks primarily deals with the operation and competition in the snacks store and retail coffee industry. In 2009, the company faced a major economic crisis and slowdown due to the change in the consumers taste. This led to a major decline in the industry revenue in United States to 6.6% that is to $25.9 billion. However, the industry had a consistent growth for a decade. Due to this economic crisis, the consumers started purchasing low priced food items and started avoiding high priced coffee and other drinks. They started spending less on the luxurious food items. The average growth rate of the company was slow as it rose from 0.9% in 2008 to current $29 billion in 2013 in the revenue industry in United States. The forecasting for the company in next five years is that it will grow at a rate of 3.9% with $35.1billion in the United States revenues. The improvement in the economy, expansion of menu and offerings and increase in the consumer confidence would help the company to gain this future growth rate within the company. In the world of coffee, Starbucks dominates as its market share is 36.7% with competitors like Dunkin Brands with 24.6%, Costa Coffee, McDonalds and Tim Horton as shown in the Appendix 1.4

The company has a medium level competition that is in the mature stage in which the Dunkin Brands and Starbucks make up the maximum of the market share that is 60%. This gives them the immense power to determine the industry trends in the United States.

                       

Environmental macro-analysis

The demand for the snack products and Starbuck’s premium coffee is greatly driven by many factors like disposable income, per capita coffee consumption, demographics, world based coffee pricing and the people’s attitude towards health. The company is greatly affected by the household disposable growth that is the macroeconomic factors. At the time of recession, there was a decline in the income of the household disposable as there was stagnant wages and unemployment in the state. Moreover, it caused a downward pressure on the profitability and revenue of the industry. The increase in the demand of the industry is also due to another crucial factor like coffee consumption per capita in which there is increase in the consumption of snacks and coffee shops thereby increasing the revenue. This is due to the increase in the income of household disposable, improvement in the economy and relaxing of budgets among the consumers. These driving factors pose a positive effect to the industry’s revenue. By 2014, the coffee consumption per capita is expected to increase.

The price of the coffee beans greatly determines the profitability margins and market costs as the coffee beans are the basic input that adds to the industry value chain of participants. In the recent years, there is a remarkable increase in the price of the coffee and as a result, there is shortage in terms of supply. Until 2018, there is a decrease in the prices of coffee beans that will translate into higher profitability and low market costs. The demand in the industry is also determined by the attitudes of the people towards health. In the year 2014, there was shift in the eating habits, diet and lifestyle among the consumers. This shift posed a potential threat to the revenue of the industry as the people are becoming aware of their health in terms of overweight and obesity.  As a result, the company’s menu showed proactive shift with tailoring of food items that are healthy products mix and organic substances.

• The new entrants have a moderate threat on the industry. The barriers are not high and the new competitors can enter the market. (Appendix 2)
• The industry saturation is moderately high with a structure of monopolistic competition.
• The initial investment that the new entrants make is not significant. They cannot lease the equipments and stores with a moderate investment level.
• As there is no cost switching for the consumers, the small shops can compete with Dunkin Brands and Starbucks at the local level. Although, there is possibility for the new entrants to become successful in the revenue industry, the effect is moderate.

• Apart from coffee, there are many beverages like tea, soda, water, fruit juices and energy drinks. The non-alcoholic drinks are sold by the pubs and bars might be a substitute for Starbucks.
• The homemade coffee made with premium coffee makers also substitutes the premium coffee of Starbucks.
• There is no existence of cost switching when the consumers opt for substitutes that pose a serious high threat.
• As a result, Starbucks is currently selling premium coffee packs and coffee makers in their grocery stores putting the pressure to the margins.

• There is no concession in the price as there are different kinds of buyers in the industry.
• The diversity in consumer base and vertical differentiation of products makes the purchases low volume that erodes the power of the buyers.
• Despite of no cost switching and substitute products availability, Starbucks introduces product mix. This is done in relation to the competitive premium pricing with the rival stores and elasticity in the prevailing price in the market.
• There is a moderate sensitivity in relation to retailing of premium coffee. The consumers pay for the high quality products though, they are watchful about the relation between product quality and excessive premium.

The Starbucks premium coffee is made from coffee beans like Arabica Coffee is grown in the selected areas that provide standard inputs. This results in moderately low effect cost switching between the substitutes and suppliers.

The incumbent brands like Starbucks counter the entry of these suppliers by scaling the economies in terms of improved efficiency, low cost and a huge market share. There is differentiation in terms of product quality, store experience and real estate locations of Starbucks as compared to the new entrants that experience a moderately high barrier.

Industry analysis

Being an encumbering firm, Starbucks has large scope and scale that yield the favorable access and learning curve advantage in terms of raw material and also in the building of relationship with the suppliers.

The factors like resources, brand equity, price competitions and real estate locations are moderately high in terms of retaliation from the branded companies that leads to the creation of moderate barrier for the new entrants.

Although Starbucks have the power to take advantage of the suppliers because of its scale and size, it maintains a C.A.F.E program that is coffee and farmer equity in certified fair trade coffee. This provides a fair status in partnership that yields low and moderate power to its suppliers.

• Due to Starbucks scope and size, it forms an important part of business suppliers. This makes the suppliers’ power low and poses a bargain power that is moderately low.

Starbucks have monopolistic competition with closest competitors and large market share that have a significant effect on the market share. This creates significant pressure on teh industry.

• The high intensity rivalry is created when the consumers have cost switching in relation to other competitors.
• There is competitive advantage of Starbucks as the products of the industry is of premium high quality and that pose a moderate intensity level to the competitors.
• Being a mature industry, there is moderately low growth rate and competition intensity moderately high among the competitors.
• The rivalry intensity is moderately high as the company currently does not have over capacity.

The five force analysis gives a clear picture of the industry analysis that the strength of forces and profitability in the snacks and coffee industry is moderate.

The offering of high quality premium product mix, beverages and snacks gives Starbucks the ability to leverage effectively the customer needs by product differentiation strategies. Starbucks sell the premium quality of coffee and provides a unique experience to the consumers of Starbucks and that is the way the company has built its brand equity. Moreover, it also provides superb customer service and maintains a clean hygienic environment that reflects the community culture of their operation and helps to build customer loyalty on a high degree. The human resource management is its core competence that is value-based which helps in establishing string relationships with the internal and external suppliers. It also drives the expansion into the international markets with successful deployment of its business strategies. It also maintains its long-term objectives and strategies and horizontal integration through alliances and smart integration makes Starbucks the most respectable and recognized brand in the world.

• It has brand recognition globally and strong position in the market: It has a geographical position that is significant. It has a market share of 36.7% in the market of United States (Appendix 1). It operates in around 60 countries and recognized as a premium brand in the chain of coffee makers. In 2013, Starbucks ranked as the best 91^stin the global brands. By licensing of the brand and merchandizing products, Starbucks leverages the brand equity effectively. The brand recognition and strong position in the marketplace makes the company gain advantage over the competitors and in the expansion into the international markets. It also helps them to gain high growth in the domestic and international marketplace. In the recent years, the company has scaled superior distribution of supplier relationship and channels.
• High quality products: The quality of the products is given high importance and avoids the quality standardization for the high production outputs.
• Store location and aesthetic appeal: Globally, Starbucks stores are located in most prime and strategic locations. The locations are of high-visibility, high-traffic and premium settings. The locations include retail canters in suburbans and downtown, off-highway locations, rural areas and university campuses. All these factors have provided them a competitive advantage and given them an opportunity to get into the prime markets and gain customer convince. The stores have a cool factor and visually appealing. They are also environmental friendly with the reflection of the neighborhood’s reflecting unique characters. They provide great music, free wifi, a spot for community meeting and warm atmosphere. The main aim of the industry is to provide a third place of the people that lied between the home and workplace. All these comprises of the Starbucks Experience.
• The Human Resource Management:  The base employees are highly knowledgeable and considered to be the main assets for Starbucks. They contribute to healthy culture, retirement accounts and stock options considered s the benefits for the company. The company ranked 91^stamong the best 100 places to work by the Fortune Magazine.
• Social Responsibility Initiatives contribute to goodwill among the customers. The stores focuses on recycling, reducing of waste and are community friendly.
• Diversity in product mix: In the appendix 8, the portfolio of the Starbucks products are given that caters the demographic factors and age groups.
• Mobile outlets and Technology use: The Starbucks app which is accessible in both android and apple helps them to leverage the technology efficiently. To support their growth, they make investments in the technology.
• Loyalty based programs for customers: The Company has implemented loyalty based programs among the consumers like Starbucks Card and Starbucks Rewards programs that help to drive loyalty. The value card like Starbucks Card provide support, convenience, increase in store visits and gifting by the cardholders that can be accessed with the use of mobile phones.

• Expensive products: The Starbucks experience and high quality products differentiate this company from other brands in the market. The switching of the costs to the competitors products that is of low prices especially in times of economic sluggishness. However, these expensive products pose weakness in terms of success in the developing countries.
• Overcrowding and self cannibalization: The high saturation and aggressive expansion due to overcrowding pose self-cannibalization and highly diminishes the Starbucks growth targets that are long termed. This phenomenon is occurring in United States where there are around 8078 stores.
• Overdependence: In the United States market, self-cannibalization occurs with 8078 stores in operation. As a result, Starbucks generate the maximum revenue from the United States and therefore, the United States market in terms of economy and growth is very sensitive.
• Corporation Image large and negative: Starbucks is not under the scrutiny as large corporations and therefore the investment in the corporate social responsibility is activated and maintains the labor practices in a tight control.
• Due to their strategy in international expansion, Starbucks coffee is not widely accepted due to the clash of cultures with the European and American coffee culture.

• Expansion into the emerging markets: The international marketing strategy is important due to the self-cannibalization and increase in saturation in the United States market. Starbucks has been able to make good market in other countries like India as it is making a new entry into the venture. The company holds great potential to expand into the developing and emerging markets. They can easily leverage their efficiencies, financial prowess, experiences and size that makes into the market share.
• Expansion of offerings and product mix: Starbucks has recently started mixing their products with fresh fruit juices and tea that offers a smart acquisition strategy. This strategy provides significant opportunities to expand their offerings.
• Retail operation expansion: Through large box retailers, Starbucks sells its iced beverages, coffee products and merchandizes. The Company’s potentials are not fully realized and this gives them great opportunities for the future to monetize its brand.
• Advances over technology: The use of technology through mobile phones and Squares’ investment partnership has helped to make payments that are integrated with the Starbucks app. This creates an opportunity for the customers in use process and reward programs offering customer loyalty. The transactions are made online especially in United States having 10% of the transactions online.  This will help to drive business and provides a growing filed through the technology advancement.
• Mobile Pour-distribution channels: The Starbucks has introduced a beta version delivery system called the Mobile Pour that provides an opportunity to expand their end product distribution system for the future. This could also help to drive more revenue if the implementation turns out to be successful.
• Brand extension: The Company has a brand image that is powerful and extend its leverage into the business horizontal lines. It also ventures product diversification that helps the brand dilution risk in constant check.

• Increase in competition: Starbucks faces the biggest threat in terms of increased competition. The market is matured and thus poses pressure on the Starbucks. It faces a threat from the brand competitors like McDonalds, mom and pop, Pete’s Coffee, Dunkin Brands, Costa Coffee, specially the coffee stores. The brand Dunkin Brands is the biggest threat to Starbucks in the United States market that is trailing the Company by a share of 24.6%. (Appendix 1)
• Price Volatility: At the global level in the coffee market, company like Starbucks faces significant fluctuations in the pricing of the high quality of coffee beans that is getting hard for the Starbucks to control.
• Market Saturation in terms of Developed countries: As Starbucks derives its revenue from the developed markets; the markets are facing an increase in saturation in the current phase.
• Economy of the developed countries: The economic crisis could pose a threat to the revenues market of the country. For example, the economic crisis caused a trickle-down effect as happened in 2008 from the developed markets into the developing markets. This effect could pose a serious threat to Starbucks as there would be consumer shift in which the consumers will move from premium quality product mix to limited budget products to overcome the hardships they face due to economic crisis.
• Changing of lifestyle choices and consumer tastes: The consumers are gradually moving towards healthy lifestyle of diet and living. People are getting conscious about health related problems like overweight and obesity. Therefore, this poses a threat to the Starbucks in terms of coffee culture in the near future.

The generic value chain of Starbucks: Analysis 

                                         

Operations: Starbucks is operating in around 60 countries with their licensed stores and company operated stores being modeled.

Inbound logistics: They source their coffee from the diverse producers of coffee beans. They have a strong relationship with the suppliers that make up the efficient supply chain management system.

Outbound logistics: The product mixes of Starbucks are generally sold in store and the coffee, tea, iced beverages and fresh fruit juices in the large box retailers. The payments are greatly done in the form of mobile payments, point of sale and prepaid Starbucks cards.

OT analysis

Sales and Marketing: The investments made in the marketing activities are generally insignificant as it mainly relies on the growing reputation in terms of product mix of high quality and in the customer services that are superior giving a Starbucks Experience that drives the consumers to use their products and visits stores.

Service: The Starbucks hold reputation in the delivery of providing customer services at supreme level to the consumers.

Human Resource Management: Employee empowerment, great benefits and amazing corporate and organizational culture of Starbucks make the human capital with efficient management.

Firm Infrastructure: They have great appealing stores that are well designed. They also have efficient level of accounting, finance and legal departments that greatly supports the company’s infrastructure.

Technology development: The investments in mobile app and other innovative technologies are use widely by the Starbucks consumers.  

Procurement: The Company obtains its products from a wide range of suppliers and also has fixed contacts with many suppliers.

3.4) VRIO analysis of Starbucks: (Appendix 4) this framework is used for the analysis of the detailed competitive position and strategic positioning of Starbucks Corporation.

                                 

Since the time of its inception, Starbucks followed product differentiation in terms of offering premium product mix, coffee, iced beverages, locations and customer service. This offers the company to build premium value brand that is too costly for other companies to imitate. It has also followed a strategic alliance that is shrewd and in smart acquisitions making. The franchising model and the stores operated by model orientation were not followed by Starbucks. Rather, the key acquisitions such as Bay Breads in the form of premium bread products, Teavana in the form of tea products and Evolution Fresh in the form of fresh fruit products are made by Starbucks that is product diversification strategy. The Appendix 7 provides a whole list of the strategic alliances, joint ventures and acquisitions of the Company. The acquisition history, strategy in shown in the Appendix that is product, horizontal and market extensions acquisitions provided in the acquisition history.  Starbucks followed another crucial strategy for its growth in the international expanding markets like the emerging and developed markets. It is geographically diversified and is successful in their operation which helped them to operate in around 60 countries. All these strategies derived serious competitive advantage for Starbucks.

The six year analysis from the year of 2008 to 2013, the revenue growth has declined with a drop of -5.9% due to the 2008 recession. However, since the year 2010, the revenue has shown a healthy growth from the financial years from 2010 to 2013. It has a growth rate from 13.7% and posted revenues of $14.9 billion in the financial year 2013. The Company’s operating margins of income have increased from 4.9% to 15% since 2008 to 2012 during the financial year. In the year 2013 the Company has an operating loss that resulted in the -2.2% during that year. This caused them litigation in terms of $2.8 billion to the Kraft Foods that terminated the agreement with Starbucks. This was considered to be the extraordinary event that discounted from the healthy operational performance of the Company. Starbucks ROA was 17.8% and ROE was 29.2% that is quite impressive with 17.8% and 29.2% in 2012 financial year. The efficiency ratios of Starbucks are impressive with operational efficiency of inventory turnover ratios and impressive assets of 5.4 and 1.51 respectively for the financial year 2013. However, the cash conversation cycle of the Company has increased to 54.7 in the financial year where the company should concentrate to reduce so that it attains high efficiency. The financial growth and ratio calculations are provided in Appendix 5. With low debt leverage and good financial health Starbucks boasts with a equity or debt ratio of 0.29 for the financial year 2013.

• It has the biggest growth in the International markets like emerging markets in South Africa, China and Mexico that has a middle class population and offers opportunities for the Company to add new stores and serves a lot of customers. The company has entered the China markets however, need to explore the untapped potential that is required to grow in the markets. Starbucks should also make efforts to grow in the emerging and local markets and the management teams should operate in their framework freely to tailor the format of the stores, introduction of product mix that is local and points to the lifestyles, needs and tastes of the individual community or market.
• Starbucks, under the international strategy should try to transfer its capabilities and core competencies from country to country that would help to build profit drivers in various countries. It should also continue to expand globally in an organic way.

• Starbucks have an immense growth in terms of Fresh Juice product mix and Tea. These products should be made in alignment with the core coffee premium products.
• As the customers’ choices, lifestyle and tastes are being shifted from coffee to beverage options and snacks, they should keep expanding their menu towards healthy products in their mix.
• There are fluctuations due to price of high quality coffee beans in the market as the coffee beans have added to the value chain of the company. A hedging strategy should be implemented by mitigating the price volatility and future contracts to the lock in the estimated quantity inputs. This should be at a low price so that the management of the future costs is done to a great extent.
• Starbucks should make strong relationships with the large box retailers to provide efficiency increase and premium shelf for their distribution channel as the iced beverages and packaged coffee packets are transported through it.
• Due to increased competition in the market, Star bucks should invest in the marketing and advertisement as seen from their 10-K’s.
• There should be building of strong relationships and gaining of customer loyalty that is build on beta concept on go home delivery.
• The technology use through the mobile apps has helped the business sales to increase to 10% in United States. It is recommended to increase the ease and streamlining of payment process through online payment. This would help in driving customers, increase efficiency and decrease the duration of wait time. The integration of mobile application with customer loyalty programs would also be implemented as a part of recommendation.