Starbucks Strategic Management Report Report Example
Starbucks is a retail coffee company founded in 1971 by Gordon Bowker, Jerry Baldwin, and Ziv Siegl with the intent to sell the finest quality coffee (whole bean and ground) (Hoover’s, 2015). In 1982, after expanding from one to five retail stores, a fifth team member (Howard Schultz) was brought on to manage marketing and sales (Hoover’s, 2015). Schultz introduced the idea of a coffee bar, and opened Starbucks’ first coffee bar in downtown Seattle in 1984 (Hoover’s, 2015). In 1987, Howard Schulz became president and CEO (Hoover’s, 2015). Expansion efforts during the 1990’s included placement of coffee bars within Nordstrom and Barnes & Noble, opening of stores in the UK, and acquisition of Tazo Tea Company (Hoover’s, 2015). In the early 2000’s, Starbucks opened Germany, Austria, Switzerland, Japan, Greece, Mexico, and Latin America, and became one of the first national retailers to acquire Wi-Fi for its retail locations (Hoover’s, 2015). Following this, Starbucks acquired various other coffee, juice, and tea companies, including Seattle’s Best, Teavana and Evolution Fresh (Hoover’s, 2015)
Starbucks currently operates 10,713 company owned and 10,653 licensed retail locations across 64 countries (GlobalData, 2014). It owns the Starbucks band as well as Teavana, Evolution Fresh, Tazo Tea, VIA, and Torrefazione Italia (GlobalData, 2014). Starbucks roasts, markets, and sells premium specialty coffee, other substitute beverages including bottled drinks such as smoothies, juices, and tea, food (baked goods, packaged snacks), coffee making equipment, and other products such as Starbucks branded ice cream sold to big box retailers (GlobalData 2014; Hoover’s, 2015). Beverages make up approximately 58% of its annual sales, while food items are 15% packaged and single serve coffees 14% and coffee making equipment, 13% of its yearly revenue (Hoover’s, 2015).
Aside from simply selling coffee, Starbucks markets a unique “in-store experience” by tapping into the “coffee ritual” culture, especially in the United States (Hanna, 2014). This includes exceptional customer service, a welcoming place to relax and linger, and offerings such as Wi-Fi, iTunes, and a digital entertainment network (MarketLine, 2014).
External Environment Analysis
Starbucks operates within the retail coffee, beverage, and snacks industry. This is a mature industry with growth rate of 2.9% in the U.S. (Starbucks’ most profitable country), and is dependent upon economic stability, consumer trends, particularly in health and nutritional behaviors, and various global market prices of coffee (IBISWorld, 2014). Starbucks is the dominant player in this industry with 33% share of the U.S. market, and 1% of the global market (IBISWorld, 2014).
PESTEL analysis was performed to analyze the external environment of the Starbucks corporation, with particular emphasis placed on three factors: economic, technological, and environmental.
Outsourcing is a large contributor to the success of Starbucks, as it obtains most of its coffee beans from Africa and South American nations. Instability in suppliers’ local economies can and does occur, which then can affect supplier price. Unpredictable weather can also cause poor crop yield. These factors trickle down cause volatility in retail coffee prices (Krikorian, 2014). Economic stability, particularly in the U.S. (including the recession of 2008/2009) affects consumers’ disposable income; disposable income dictates how much money people spend on coffee, and can negatively impact Starbucks’ profit margin (Krikorian, 2014). Economic expansion barriers also exist: although Starbucks recently expanded into India, sales are poor as the environment is India’s lower to middle class, and the cost of a cup of coffee is equal to many residents’ daily income (Krikorian, 2014).
Technology has granted several advantages to the coffee brewing industry, most importantly equipment that allows shorter preparation and brewing times. This allows Starbucks to serve the customers more quickly, elevating customer satisfaction and increasing volume served in shorter period of time (Hanna, 2014). Information technology is also used to enhance customer experience. Starbucks offers Wi-Fi in-store, as well as its own branded Digital Entertainment Network in partnership with Yahoo, allowing free access to multiple subscription news sites. Additionally, free iTunes and eBook downloads are offered to in-store customers (MarketLine, 2014).
With sustainability as one of its top goals, Starbucks takes an active approach to producing sustainable agriculture by working with suppliers (Starbucks, 2015). Steps are also taken to reduce carbon footprint and environmental impact by creating greener retail locations through energy and water conservation, and by using recyclable products in packaging and cups (Starbucks, 2015). In fact, two of Starbucks’ top priorities are providing recycling bins in stores and ensuring all cups are recyclable (Starbucks, 2015).
Porter’s Five Forces Analysis
Threat of new entrants.
Low barriers to entry and minimal skill level mean high risk of threat from new entrants, who can easily enter this highly fragmented industry and cater to a market niche on a smaller scale, including local, particularly on the basis of convenience (IBISWorld, 2014). Additionally, any current restaurant can easily obtain and market specialty coffee beverages as menu augments, particularly fast food establishments that undercut Starbucks prices while offering comparable taste (IBISWorld, 2014). Difficulty creating a brand presence slightly raises the entry barrier, particularly in the face of a monopolistic competition structure and Starbucks’ well-known taste, quality, existing relationship with suppliers (IBISWorld, 2014).
Threat of substitutes.
Substitute products include other non-coffee beverages (smoothies, teas, hot chocolate, juices) (Hill and Jones, 2012). Threat of substitutes is high, as Starbucks only offers a limited selection of substitute products and companies like Dunkin Donuts, O’Drink, and McDonalds offer comparable substitutes at competitive prices and quality. Customers can also make similar specialty drinks at home, with the cheap price tag and availability of home brewing equipment. There are no switching costs to consumers to switch to substitutes, with increases the threat (Hill and Jones, 2012). Starbucks attempts to counter this threat by selling coffee making equipment, bagged coffee in grocery stores, and other branded substitutes.
Power of suppliers.
Suppliers have low bargaining power due to the fact that Starbucks has its own distribution network and makes up a considerable percentage of its suppliers’ sales, with some suppliers only providing product exclusively to Starbucks, and others providing large negotiated volumes (Hoover’s, 2015). Starbucks size and the volume of its coffee bean orders mean it has the power to take advantage of its suppliers; however, maintenance of Fair Trade practices with at least 30% of them also maintains favorable relationships, and decreases bargaining power, as many competitors do not engage in Fair Trade practices (Hoover’s, 2015; IBISWorld, 2014).
Power of customers.
High market saturation and intense competition in the industry means fairly high bargaining power of customers (IBISWorld, 2014). Many other competitors are able to provide similar premium quality products and undercut Starbucks’ price tag; particularly in light of absent switching costs for the consumer (GlobalData, 2014). However, the sheer scale of the corporation, and Starbucks’ particular branding based around specific quality and coffee flavors, as well as a particular in-store experience, have helped to procure brand loyalty among consumers (Hoover’s, 2015). Starbucks also uses a competitive pricing model to lower power of buyers further (Hoover’s, 2015). Overall, power of customers is low to moderate.
Intensity of rivalry among competitors.
Large numbers of substitution products in a mature industry with low growth rate and low entry barriers mean a large number of competitors with substantial rivalry (IBISWorld, 2014). Competitors include all other large global coffee chains, smaller local privately owned coffee or tea bars, and restaurants that provide coffee services secondarily (Hoover’s, 2015). Current top competitors are Dunkin Brands Group, McDonald’s Corporation, and Nestle SA (Hoover’s, 2015). The competitive environment in the coffee industry is one of monopolistic competition, with Starbucks having some of the largest market shares, although its top competitors also hold significant shares (IBISWorld, 2014). Overall the intensity of rivalry among competitors is moderate to high.
Conclusion and Recommendations
Starbucks is dependent on the U.S. market for its primary revenue, and only has a 1% share of global markets. Further international expansion efforts should be implemented to help increase its revenue from other untapped geographical locations. Expansion into untapped rural markets could also be potentially profitable. The company should also utilize its strong financial position to continue to acquire competitors to eliminate rivalry. Expansion efforts should also be extended to increasing its line of substitute beverage products available through its retail stores and big box retailers, with more emphasis on health-conscious choices, with tighter quality controls to avoid further recalls. To offset fluctuations in the cost of importing coffee beans, hedging strategies could be implemented which will allow contract prices to be locked in. Accounting practices could be overhauled and improved to avoid future tax issues. Localization of the menu to geographic location as well as specific trends and demographics (such as marketing different products to various age groups) could help adjust to varied consumer tastes and preferences.
GlobalData. (2014). Starbucks corporation – financial and strategic analysis review. Retrieved from http://callisto.ggsrv.com/imgsrv/FastFetch/UBER1/239921_GDRT33172FSA
Hanna, J. (2014). Starbucks, reinvented: A seven-year study on Schultz, strategy, and reinventing a brilliant brand. Forbes. Retrieved from http://www.forbes.com/sites/hbsworkingknowledge/2014/08/25/starbucks-reinvented/
Hill, C., and Jones, G. (2012). Essentials of strategic management. Mason, OH: South-Western Cengage.
Hoover’s. (2015). Hoover’s Company Profiles: Starbucks corporation. Austin: Dun and Bradstreet, Inc. Retrieved from http://search.proquest.com/docview/230621333?accountid=7374
IBISWorld. (2014). The retail market for coffee in the U.S.: Market research report. Retrieved from http://www.ibisworld.com/industry/the-retail-market-for-coffee.html
Krikorian, M. (2014). Rethink your drink: An investor’s guide to Starbucks coffee company and Starbucks corporate profile. Market Realist. Retrieved from http://marketrealist.com/2014/01/business-overview-starbucks-deserves-attention/
MarketLine. (2014). Company profile: Starbucks corporation. Cyprus, Greece: MarketLine.
Starbucks. (2015). Environment. Retrieved from http://www.starbucks.com/responsibility/environment
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