Strategic Analysis of Starbucks Corporation
Starbucks Corporation
Mgmt 340
Professor Rafferty
Due November 9th, 2014
By Larissa Cacique
Strategic Analysis of Starbucks Corporation
1) Introduction and background of Starbucks Corporation
1.1) Introduction
Starbucks Corporation is an American coffee company founded in 1971, in Seattle, WA.
The company is the world leader in specialty retail coffee, operating in the premium
coffee market segment. In 2012, the company made 13 billion in annual revenue, had
200,000 employees, and owned 17,000 cafes, in 40 countries. Additionally, Starbucks
owns Seattle’s best coffee, Torrefazione Italia, Teavana’s Heaven of Tea Brands, and
more. Starbucks also sells prepackaged ground coffee to grocery stores and smaller
national locales.
Starbucks locations serve hot and cold beverages, including the Nariño Supremo bean
coffee, which is a high quality whole-bean from the Cordillera mountain range in
Columbia, instant coffees, loose-leaf teas, pastries, sandwiches, and snacks. Each store is
designed to provide customers with a romantic and comfortable social setting where
customers can interact while indulging on a premium cup of coffee. As Schultz, the
founder of Starbucks once said, “We’re not just selling a cup of coffee, we are providing
an experience”.
1.2) History
Howard Schultz, the innovative creator of Starbucks, strolled through the piazzas of
Milan for the first time in his life. He was on a buying business trip for the original
Starbucks Company, which consisted of 5 stores, a small roasting facility, and a
wholesale business, which sold coffee to local restaurants, by 1982. He became inspired
by the romantic culture in Italy, which he related back to coffee. The Italians start their
day at by having a premium coffee at the local espresso bar and return to the espresso bar
for a second cup later on. He decided that Americans would pay for the same leisurely
experience if they had the opportunity, so he wrote a business plan and videotaped
dozens of Italian coffee bars and looked for investors. In 1986, the first store was opened
and named The II Giornale, where he served the Starbucks brand coffee. In 1987, the
owners of Starbucks sold to Schultz for $4 million; The II Giornale then became
Starbucks.
1.3) Growth and Development
Howard Schultz strategically hired away top executives from corporations such as
PepsiCo, to help grow the company. In the beginning, Schultz implemented a slow
growth policy. Starbucks losses doubled, to 1.2 million from fiscal 1989 to 1990, which
Schultz had predicted and anticipated. At this time Starbucks was focusing on expansion,
overhead and operating costs were high, but there was no way to build an empire without
having sacrifices. Schultz also wanted to have the company keep all of its stores,
company owned in the beginning, he did not license to franchisees until later on. The
company lost money in the duration of its first three years, but by 1991 sales shot up by
84%. People were swarming in to get their $2.00 cup of coffee. Analysts predicted that
Starbuck would top $1 billion by 2000, but they were wrong. By 2000, Starbucks
Corporation reached $2 billion in revenues. Between the years of 1993 and 2003, the
company averaged a growth rate of 28% per year in annual revenues.
By 2007, the company had 15,000 stores, but due to the recession and market saturation
sales declined for the first time. Schultz refused to decrease prices and also refused to
Strategic Analysis of Starbucks Corporation
decrease employee benefits so instead Starbucks was forced to close 900 companyoperated stores in 2008. Schultz focused on developing a new product line and extending
the current one. On February 26th, 2010 he closed every single Starbucks in the US for
three hours to retrain 135,000 employees. The company’s sales climbed once again. In
2012, Starbucks acquired Bay Bread and La Boulange bakery brand, and also Evolution
Fresh, a fruit and vegetable juicing company.
Its international presence is well diversified with 9,405 company owned stores in 5
different continents and future plans of expanding further in Brazil, China, India, and
Vietnam.
As the company continues to grow and expand throughout the world, Schultz must
consider his next steps strategically so that he does not have to deal with the same
problems that he has been faced with in the past. Going forward I will first analyze the
external environment and analyze the porters 5 forces. Second, I will analyze the internal
factors of the company by evaluating the SWOT analysis. Third, I will name and evaluate
the strategy behind Business level strategy, functional level strategy, and the structural
and cultural systems. Lastly, I will conclude with my recommendations.
2) External Analysis
2.1) Porters 5 Forces
Barriers to Entry in the premium coffee market segment:
The barriers to entry are moderate because the market is not yet fully saturated and there
is room for new premium coffee companies. But, if the new competitor does not hold the
innovation, patient, and resources necessary there is a chance of failure.
Starbucks has been able to achieve economies of scale, but it took many years before this
could happen. A company entering the market might fail due to lack of patience and
resources, one must invest before attaining high sales volume.
Economically, conditions are slowly getting better, people are starting to pay for higher
priced goods again, but not everyone is there. Factors like store location play a large role
in the premium coffee business. The coffee must be easily accessible to the target market,
which are the coffee drinkers who are willing to spend more on both the coffee and
experience. A coffee shop in a work district or university would be more successful than
one in a lower class neighborhood.
Start-up companies have options of how to go about paying their start-up fees for a new
coffee company, they could rent or lease machinery and furniture for a small coffee
company. Also, patents and trademarks would not be difficult to acquire. Mom and pop
coffee shops have the ability to successfully compete with companies like Dunkin donuts
and Starbucks because they can to offer localized goods, fresher coffee, and have
specialized feel within the store of the hometown. But, there is also another end of the
spectrum, when it comes to brand loyalty a new startup company might be unsuccessful
if there is not enough innovation. Customers who are faithful to Starbucks might have a
tougher time switching to the different coffee brand at the mom and pop shop, so they
won’t and the company will fail.
Risk of Industry Rivalry:
Starbucks Risk of Rivalry is moderate to high. There are numerous competitors but
Starbucks holds the largest portion of the market share. When it comes to innovation,
Strategic Analysis of Starbucks Corporation
Starbucks comes in 1st place, but its rival companies within the U.S. like Dunkin Donuts,
Peets coffee and Tea, Green Mountain Coffee, McDonalds all hold a piece of the pie (see
exhibit 1).
Fixed costs are high for Starbucks, due to costs such as giving the part time employees
benefits as well as the full time employees. Their products are premium, their stores are
all furnished with high quality seating to maximize the comfort of customers, and both of
these operations amount to higher spending costs.
Exhibit 1
Return on Assests in 2012
7%
Peats coffee and Tea
18%
Starbucks
45%
Dunkin Donuts
3%
11%
Green mountain coffee
McDonalds
other
16%
Threat of Substitutes:
The threat of substitutes is high. Since Starbucks is highly priced, people have many
different options; they could start making coffee at home from a premium brand bought
at the store.
Trends like drinking teas and fruit juices could also decrease revenues for Starbucks. But,
Starbucks is ahead of the game since they currently own a Evolution Juices and Teavana.
Starbucks also has prepackaged coffee that they sell in grocery stores.
Bargaining Power of Buyers:
Power of buyers is low. Consumers are price sensitive in terms of buying coffee, but
Starbucks has such a high quality coffee that it is difficult to find elsewhere so customers
are paying the premium price.
There are many buyers in the industry and again due to the quality they are paying for the
premium product.
Bargaining Power of Suppliers
The bargaining power of suppliers is low, this again relates back to the high quality of
Starbucks amongst other reason. Due to Starbucks high quality size and large market
share it has power the control its suppliers, but Starbucks is one of few that does not. One
of Starbucks main goals going forward is to establish a higher social responsibility;
Starbucks is attempting to set a trend in hopes that other companies will follow.
“Starbucks became the first agricultural commodity importer to implement a code for
Strategic Analysis of Starbucks Corporation
minimal working conditions an pay for foreign subcontractors”; Starbucks also has
guidelines for “over seas suppliers to pay wages and benefits that address the basic needs
of workers and their families.” His is something other companies do not tend to practice.
2.2) Life Cycle Analysis
Schultz believes the company is in the early stages of what Starbucks will become and
there is no doubt in his aspirations, but the industry is at the mature level of the industry
life cycle. Starbucks has market power in the industry, the company is also an
international company with revenues reaching billions, there is a Starbucks in almost
every neighborhood and everyone knows who Starbucks is. In the past, analysts believed
that Starbucks had reached market saturations but the annual revenues and store openings
show differently.
2.3) Macro-environmental Forces:
As previously mentioned the company has continued to grow by expanding further in
international locations, buying new stores including bakeries, a tea company, and a
juicing company. The company is not too vulnerable interest rates or exchange rates
because they are currently so successful. But, an instance like a recession could lead a
decline in sales due to price sensitive customers. Even though the company is selling
prepackaged coffee, if customers stopped making trips to the actual Starbucks café, sales
would heavily decrease.
3) Internal Analysis
3.1) Internal Analysis
Starbucks mission’s statement is “To inspire and nurture the human spirit – one person,
one cup and one neighborhood at a time”. The Starbucks product mix is built off of high
premium quality, whole bean coffee and other high quality beverages and snacks.
Starbucks practices high customer responsiveness, treats their employees like family, and
practices outstanding and admirable social responsibility by implementing fair over seas
employee compensation for suppliers.
3.2 Starbucks SWOT Analysis
Strengths:
Product Quality: From the beginning in 1986, the store always focused on high quality,
whether it was coffee, service, or the all around experience. Focusing on product quality,
as the company grew and gained access to new channels Schultz found the Nariño
Supremo bean coffee, from the Cordillera mountain range in Columbia. He ensured the
owners he would sell the bean whole and outbid his European opponents. Starbucks then
became the only company in the World to sell the Nariño bean coffee, “one of the best
coffees in the world”.
Social Responsibility: As previously mentioned, Starbucks became the first to implement
a code for minimal working conditions. Companies nowadays are looking to extort their
suppliers but Starbucks is attempting to set a trend by creating regulations for family
workers so that they are making enough to live and feed their families, as well as
implementing a regulation that limits child labor to hours outside if school.
Strategic Analysis of Starbucks Corporation
Product Diversification: Not only is the Starbucks coffee diverse and unique, it comes in
allsorts of differentiated flavors. Additionally, with the acquisition of Teavana as well the
Juicing Company their beverage diversification fits every type of consumer, aka the
coffee addicts as well as the non-caffeine drinkers. The bakeries will also add another
positive growth channel for Starbucks as well as another tasty option for customers.
Employee Competency- From day one Starbucks has been one of the better employers to
work for. Starbucks offers health benefits to both part-time as well as full time workers.
The employees are highly trained and they are treated like family. One story mentioned,
describes an employee’s inability to keep working and how he was diagnosed with aids,
Schultz continued to give him the employee benefits, and cried as his employee left the
office.
Schultz and Starbuck maintained their values– Schultz did not come from a family of
means and as his Starbucks empire grew he continued to maintain his promises, more
importantly when he was faced with the challenge of closing stores or decreasing
employee benefits in 2008, he put his employees first and closed down 900 stores. His
values are clear and so are his messages, he built an innovative company using morale
values and continued to grow it maintaining the same morale.
Brand loyalty- Today, Starbucks has a large customer base that is addicted to those
mermaid branded cups. Their brand loyalty is very strong, the switching costs of
returning to a weak, diluted coffee like Dunkin Donuts is impossible.
View amongst the public: For Starbucks there was never a sense that their product was
losing value because it never decreased its prices, even when it was faced with challenges
it strategized in dealt with losses in another way. The quality was kept but the quantity of
stores decreased, so quality over quantity!
They were the first- Starbucks was the first to sell premium coffee in the states.
The slow growth policy – In the beginning of the Starbucks store expansion, Schultz did
not lease stores to franchisees, even though he was receiving offers daily. He wanted to
ensure the stores would be kept exactly the same and that the service would also maintain
the exact same high quality. He practiced total control over his stores a method that led
the company to success. Today, the company benefits from this by having a more direct
relationship with the majority of the total stores, since the company owns most of stores.
They also are able to receive a higher profit margin.
Tech Savvy- Starbucks is an up to date company, they use technology and mobile apps to
their advantage. There is an app that allows you to gives you points whenever you buy a
beverage, after a certain mount you receive a free beverage.
Weaknesses:
Product Pricing: Starbucks must maintain its high-quality and reputation, and in order to
do this the product pricing must maintain. The problem with this is the coffee prices are
very high and other companies like Dunkin Donuts and McCafe are investing in premium
coffee brands and are selling at lower prices than Starbucks.
Cost-benefits: Starbucks suffers and benefits from this in may ways, the fact that the
company does not exploit their over seas workers, and that they also give top of the line
employee benefits can possibly hurt the company by decreasing money that goes into
furthering the new product lines.
Strategic Analysis of Starbucks Corporation
Difficulties in European locations: There is also potential that Starbucks gets a bad
reputation in European locations, this is because Starbucks is supposed to be an imitation
Italian café, although it is unique in its own ways it is difficult entering a market in a
different country that has been around for a much longer time, and who have sold the
worlds best coffees years before Starbucks became a player.
Coffee is not a beverage for families: Starbucks primarily sells caffeinated beverages, if
families are looking for somewhere to catch up and there is a young child Starbucks will
not be an option for them. This could also be seen in a beneficial way, because the
customers at Starbucks want a quieter setting and kids can make that unattainable, ruining
the experience for others.
New focus for Schultz: Schultz speaks about focusing on “deepening the company’s
involvement in health and wellness”. If Schultz leaves his position for another focus what
will happen? When the company began to decline, Schultz had to return to his position as
chief executive officer. He put the company back together by retraining his employees
and adding to the menu. This showed the companies dependence on Schultz, which leads
to a question of whether or not the company could survive without him.
Market Saturation: Lastly, there is the fear of market saturation, this would probably only
occur if the company was no longer innovative. Starbucks is constantly changing up their
menus and with its recent bakery and beverage purchases; it would be difficult for them
to have market saturation.
Opportunities:
Addition of new products into the Product Mix: With the increase in heath awareness
people are straying from processed beverages and foods. Bakeries produce their bread
daily, a great replacement option for store bought bread. By integrating bakery bread into
the Starbucks product mix, people will be able to eat their breakfast or lunch a Starbucks,
rather than just buying their coffee and getting food elsewhere. The addition of juices and
teas also bring great potential to the product line. People will be able to buy a high quality
meal without leaving Starbucks.
Expansion into New Countries: Starbucks is looking to expand into Brazil, China, India,
and Vietnam, all countries that do not traditionally have cafes. This expansion has the
potential to be very beneficial for Starbucks, the chance of cafes gaining popularity
quickly in these regions is highly possible and most likely will be very profitable.
Threats:
Increased competition: Since Starbucks has been so successful in selling premium coffee,
their competition has picked up their own premium coffees as well, and they have begun
to sell it at stores including Dunkin Donuts, Pete Coffee and Tea, Green Mountain coffee,
and McCafe for lower prices. They also face competition against mom and pop stores.
Pricing in developing countries: Pricing in developing countries is tricky, Starbucks must
strategize exactly where place their stores because there is high chance for profit loss.
3.3) Functional Level Strategies
Efficiency – They practice Just in Time inventory systems, their turn around is quick. An
example of this would be their menu, which changes according to season.
Strategic Analysis of Starbucks Corporation
Quality- The quality is high; their coffee is Nariño Supremo, one of the best in the world.
Their customer responsiveness is high, and their employee’s receive great benefits,
training, and compensation.
Innovation- The Company is constantly practicing innovation, by adding to their menu as
well as adding to their product mix.
Customer Responsiveness- Their customer responsiveness is also high. Schultz has works
on high employee training and offers his customers high quality coffee and an experience
at every store.
3.4) Business Level Strategies
2.2) Strategy
Starbucks operates in the premium coffee market segment under the focused
differentiation group. The original goal of Starbucks was to be in every neighborhood in
the United States, this goal that has been reached. Now, Starbucks Corporations next goal
is to “deepen the company’s involvement in health and wellness” and also expand other
differentiated focus groups, a goal that is attainable. With the acquisition of the French
bread companies, Starbucks has further dipped its toes into the traditional European café
lifestyle, by adding bakeries. Starbucks has also acquired the additional tea and juicing
companies, popular emerging companies, which are quickly gaining brand recognition in
their individual market segments. Additionally, people are going for the healthier options,
the popularity of juicing is rapidly growing and Starbucks is infiltrating that field already.
Starbucks also plans to further expand internationally in a socially responsible way. Both
goals are attainable with the proper strategic implementation.
The company is profiting more than spending on expenses for the company so it does
have economies of Scale. The company also obtains brand loyalty, as previously
mentioned.
3.5) Structure and Control
Schultz practices “under promising and over delivering”. He created a focusdifferentiated product that effectively led him to dominate a market that did not exist in
the United States, the premium coffee retail industry segment. Schultz follows the
company closely and when there are implications he steps right in to deal with the
situation. This occurred when sales began to decline in 2008 and he closed down all of
the Starbucks stores and retrained his employees.
When you go to Starbucks you go for the cup of and Joe and the experience. The
company structure is a combination of high quality product service, well managed
branding, and its reputation for social responsibility.
4) Recommendations:
Starbucks is very successful within the United States. I do not believe that Starbucks has
reached market saturation here yet, but I do believe that its primary focus should be based
on international expansion. Since Starbucks is going to be expanding into Brazil, China,
India, and Vietnam all of the companies attention should be directed on those locations.
The company should follow the economies in each of the specified countries closely
because these 4 countries currently have growing GDP but what if something like a
recession were to occur in Brazil or Vietnam at the beginning of the expansion process.
Strategic Analysis of Starbucks Corporation
Starbucks should also look into specializing favors within these countries. Brazil is
known for their exotic fruits; by expanding into Brazil Starbucks has the opportunity to
establish connections with people and companies that could take the Starbucks product
line further. The Chinese traditionally drink exotic teas, Starbucks could learn from them
as wells by attempting to specialize in products within each of these areas, following
them to see if they become popular products, then possibly adding them into the product
mix.
Starbucks should immediately integrate the Evolution Juices as well as Teavanna into
their Starbucks stores. By adding these new diverse products more customers will go
directly to Starbucks instead of going to more than one location. This is very important
because both juicing and specialty teas are fast growing market segments, which
Starbucks would highly benefit from.
Starbucks should also begin offering their sandwiches on the bakery bread. By adding the
bakery into their stores, the Italian romance experience would be complete.
Strategic Analysis of Starbucks Corporation
Appendix
1. How would you characterize the specialty coffee café industry?
I would characterize it as a growing industry here in the United States dominated by
Starbucks Corporation, one that has been around in Europe and is slowly trickling into
to non-European countries.
2. What are the key success factors in this industry?
In the specialty coffee industry, you need Innovative-strategic methods, as well as a
high quality product. The premium coffee market segment already requires a high
quality product, one would need to mix it with other high quality products to diversify
the menu to ensure it attracts a wide variety of consumers, as well as high quality
products to add to the product line, like snacks and other beverages like teas.
3. What are Starbucks' strengths and weaknesses?
As previously mentioned the Starbucks strengths include a product mix that is built off
of high premium quality, whole bean coffee and other high quality beverages and
snacks. They have established brand loyalty and dominated its market segment.
Starbucks practices high customer responsiveness, treats their employees well by
giving them benefits and good compensation, and practices outstanding and admirable
social responsibility by implementing fair over seas employee compensation for
suppliers.
Starbucks weaknesses include
3A. Does it have any sources of sustainable competitive advantage?
Yes, for a company attempting to open and survive on a small scale it would be
successful, but if a company attempted to imitate Starbucks on a large scale, it would
not be successful because Starbuck has brand loyalty. It would also be difficult for a
company to create such a wide varietal product line, Starbucks has been around for
some time so it has been able to pickup new and innovative creations that have been
very successful additions to their product line.
Additionally, with the stores they have recently purchase it will be difficult to compete
against Starbucks because they have the potential to monopolize the specialty beverage
market, with fresh juices teas, as well as their top of the line coffee.
Lastly, Starbucks is becoming very socially responsible by implementing regulations
for their suppliers that other companies would never implement.
4. Porter argues that to achieve a sustainable position, a company has to make
trade-offs that its competitors are unable or unwilling to make. What trade-offs
has Starbucks made? What different activity choices has it made from its rivals?
First, Starbucks foundation was based off of the slow growth strategy, Starbucks did
not license to franchisees, allowing Starbucks to have total control of how the company
would grow and how the public would view it, in its early years.
Second, Starbucks gives benefits to employees that the majority of other companies
would never do because it would decrease their profits, like health insurance for part
time workers.
Strategic Analysis of Starbucks Corporation
Third, the company also has regulations for its over-seas workers that most other
companies would not have, if anything they go the other direction and completely
exploit their suppliers by offering less than minimum wage.
4. How is Starbucks' product positioned in the market? How do its functionallevel strategies align (or fail to align) with this positioning?
Marketing - Starbucks does not market the product the way McDonalds does. Instead of
spending money on marketing Starbucks spends it on the brand and its operations. There
marketing is primarily through word of mouth and the company has been able to be
successful in doing so.
Human Resources - Starbucks is a leader for its core competencies when it comes to
customer responsiveness and employee training. Employee are what make the company
function, they must spend many hours training for the position.
Efficiency – The Company is efficient practicing turnovers depending on the seasons.