Should Starbucks expand to Africa - Essay Example

Should Starbucks expand to Africa? Table of Contents Acknowledgement 3 Executive summary 4 Introduction 5 1RESEARCH PROPOSAL 6 1 Statement of the Problem 6 2 Research Questions 6 3 Research Hypothesis 6 4 Research Methodology 6 2BUSINESS REPORT 7 1Literature Review 7 2 Strabucks Swot Analysis 7 1Strengths 7 2Weaknesses 8 3Opportunities 9 4Threats 9 3 Pest Analysis 10 1 Political environment 10 2Economic environment 10 3Social environment 11 4Technological environment 11 5Legal environment 11 6Environmental factors 12 4Mission of Starbucks 12 5Ratio Analysis 12 6Main Findings 13 7Analysis and Evaluation 13 1 Starbucks Africa business strategy 13 2 Feasibility 13 3 Competition 14 4 Market positioning 14 5  Innovation 14 8 Conclusion 14 9Recommendations 15 Works cited: 15 Appendix 16 Acknowledgement I give thanks to God for helping and enabling me to make it this far. I acknowledge my supervisor for being patient with me and guiding me through the process. I also appreciate my colleagues for their great cooperation and assistance they gave me during the study. Am greatly humbled by the help you all gave me. Executive summary Many people prefer taking coffee in a relaxing atmosphere where they can join friends and hold business meetings. This paper will discuss whether Starbucks should consider setting operations in Africa. This concept started in US and has spread to other parts of the world. Traditional cafes did not understand the changes in consumer needs hence this gave room for Starbucks to expand quickly by opening more stores. Starbucks Corporation has opened stores and coffee outlets in North America, Europe and Asia. The objective of Starbucks opening coffee outlets in Africa is to meet its business strategy of global expansion. The increase in profitability can be attributed mainly to its aggressive expansion strategy. For the long term objective to be achieved, more than half of the stores will have to be located outside the United States. Starbucks has achieved market leadership by ensuring high quality products and services together with excellent customer service. The company can increase market share by expanding to Africa. The company will have to maintain its global business strategy of differentiation and added services. Introduction Starbuck is the largest coffeehouse in the world with operations in all the continents. The company operates more than twenty thousand coffee stores in more than one hundred countries in the world. From a single coffee store which was opened in 1971, the company has achieved a market leader position in the beverage industry by establishing operations in the US and beyond (Hill and Jones 165). Starbucks licenses and franchises operate more than seven thousand coffee outlets worldwide with many of the operations being based in shopping centers and global airports. The company has diversified product portfolio offering which include coffee, tea, soda, juices and pastries (Boone and Kurtz 56). The company has also venture inn entertainment segment where it markets music, videos and books. The company products are localized to the specific market (Ungson and Wong 145). The company has also maintained its original culture which has not being diluted by the global culture hence the common goal of the company is to offer distinctive experience to its customers (Boone and Kurtz 69). The company has been able to provide great working environment to its employees by embracing diversity and treating all the employees with dignity and respect (Ungson and Wong 160). The operations of the company are centered on excellence in purchasing inputs, roasting and delivery of the final coffee product to the customer. The company business strategy is to maximize sales by creating relaxing and attractive atmosphere with guarantees excellent customer service (Hill and Jones 177). The company also uses both retail and online music sales to widen the target market share. The company also maximizes market penetration partnering with global airlines and other associated companies like PepsiCo. The company business strategy aims at achieving profitability by offering high quality products and services to its customers (Hill and Jones 217). 1 RESEARCH PROPOSAL 1 Statement of the Problem Many studies have been carried out regarding the business strategy of Starbucks, however, no single study has pointed at the relevance of the marketing strategies which the company has being using it its global operations. Lack of effective business strategies can hinder rapid market penetration and market share growth. Effective business strategies will increase customer retention and loyalty which results to increased profitability of the company. The business strategies implemented by any particular company would determine the brand recognition in the market. 2 Research Questions i Has Starbucks implemented effective business strategies? ii What are the competitive strengths and weaknesses of Starbuck? iii Are there opportunities for growth which the company needs to tap in Africa? iv Has the company differentiated its products from those of competitors? v What is the degree of rivalry in the industry? vi Is there a need of changes in the business strategies currently used by the company? 3 Research Hypothesis Starbucks should expand to Africa. 4 Research Methodology The research will utilize review the current business strategy of Starbucks and management techniques in order to evaluate whether the African market is viable for the company. 2 BUSINESS REPORT 1 Literature Review Starbucks mainly conduct their advertising through magazines and newspapers. The company has an entertainment division which deals with music, films, magazines and books hence it has being able to capitalize of this division for its promotion and publicity of the coffee products and other related products. The advertising messages in most of the magazines emphasize on the quality of Starbucks coffee and the health related benefits of drinking a cup of tea of coffee daily in life (Ungson and Wong 187). The advertising content also emphasizes on the roasting and brewing process of the company which ensures natural aroma and nutrients and preserved in the end product. The company also creates specific advertisements messages for the different classes of their customers like the elderly and airline passengers segment (Botten 214). 2 Strabucks Swot Analysis SWOT (strengths, weak nesses, opportunities and threats) is a marketing tool which can be used to analyze the competitive strengths of a product, service or company in the industry in relation to the competitors (Boone and Kurtz 83). 1 Strengths Starbucks has some core competencies which has made it the market leader in the coffee and beverage industry. Starbucks is globally recognized for production of quality products and services. The brand image of Starbucks is associated with unique coffee experience hence enhancing the brand recognition (Ungson and Wong78). Starbucks is also the leading retailer and roaster in the world with outlets in more than one hundred countries. The company has established strong partnerships through license shops and franchises that have enhanced its global presence and market penetration. The company stores and outlets offer cool and relaxing ambience which is depicted by the quality interior design, music and artwork especially in the Italian market. The company outlets are also strategically located near many shopping malls, busy streets and at airports hence creating customer access and convenience to the stores (Ungson and Wong 75). The company has installed WI-FI internet connectivity services in their stores and outlets hence customers can hold business meetings as they enjoy unique products and services from the company (Boone and Kurtz 92). The company has achieved customer loyalty in its service offering due to its consistency in maintain customer relationships and offering quality services. The company has continuously differentiated its products as well as increasing its product portfolio in line with the changing customer needs and tastes (Botten 225). The company has been participating in environmental awareness programs through supporting the immediate communities and also preserving the environment through recycling some waste (Boone and Kurtz 105). The company attracts and retains high quality employees who are responsive to the customer needs. The company has a well organized employee union where employees are free to channel their grievances. 2 Weaknesses However, the company suffers from certain weaknesses which could negatively affect its market share growth and profitability. Though the company offers high quality products and services, its products are considered to be highly priced by the low income consumers compared to those of other competitors like McDonald (Botten 236). The company has focused on the United States Market which is almost saturated. The company has not openly refuted claims that its products like beverages and chocolates contain genetically-modified ingredients which are a major concern for consumers in some markets. The business profitability is highly dependent on the coffee segment (Boone and Kurtz 124). The company has higher operating costs compared to its competitors. The company was forced to scale down and close some outlets during the recent global financial crisis hence negatively affecting the growth and profitability. Since the Africans have a culture of smoking in coffee cafes, the company may lose revenues since its does not allow customers to smoke inside the coffee houses. Raw materials supply like coffee beans may not be reliable hence the company may be forced to import quality coffee beans from South American countries like Brazil (Ferrell and Hartline 71). 3 Opportunities Starbucks can utilize its capabilities and strengths to exploit several opportunities in the global market. The company can partner with major food manufacturers and co-brand hence increasing the whole coffee bean sales in major supermarkets (Botten 246). The emergence of health conscious consumers presents a good opportunity for the company to increase its tea and coffee brands portfolio (Ungson and Wong 84). Starbuck can increase sales through internet selling. The number of consumers in Africa looking for quality products has increased. There is plenty of cheap work-force in Africa. Africa has developed a coffee consumption which is associated with its cultural lifestyle. 4 Threats Starbucks faces some threats in its business operations which could jeopardize its expansion and marketing efforts. The decline in consumer income levels due to the recent global financial crisis has affected the sales volumes of the company. There are numerous accusations on exploitation of farmers in South America which can dent the company reputation in the global markets (Pham-Gia 175). The company faces the threat of substitute products like colas and juices. The company has in the past experienced legal suits on labor issues like paying its workers low wages in return for quality employee performance. Starbucks may face resistance in some Asian economies due to its deep seated American cultural practices and political inclination (Botten 243). The man power is not qualified in customer service hence the company may be forced to employ expatriates. 3 Pest Analysis 1 Political environment African governments are inclined to encouraging foreign direct investments mainly from the Western countries. The governments also help medium sized companies through loan facilities hence Starbucks can easily establish operations in Africa (Ferrell and Hartline 174). Political stability has greatly improved in Africa. The African governments would encourage Starbucks to set up operations in order to create demand for the local coffee production and offer jobs to the citizens. 2 Economic environment Some countries like South Africa, Nigeria and Egypt are emerging economies with relatively high consumer income levels. African countries have implemented monetary ad fiscal policies to stem budget deficits and meet inflation targets. The African market has not been negatively affected by the recent global recession. Since North American, Europe and Asia markets are almost saturated; Starbucks can increase profitability by expanding to Africa. Starbucks has consistently improved its profitability hence has enough financial resources to set up operations in Africa (Botten 256). 3 Social environment About 60 percent of the African population is made up of regular consumers of coffee. Education levels in Africa are above average while income distribution is even. African have positive attitudes towards work hence they can afford high quality coffee. Coffee consumers are likely to stay for long hours in the cafes hence increasing the revenues of the company (Ferrell and Hartline 28). Starbucks has instilled a coffee drinking culture to its customers by emphasizing the healthy benefits of taking at least one cup of tea or coffee daily hence it will be able to retain royal customers in the African market. 4 Technological environment Africa is a net importer of technology hence Starbucks should bring in its own roasting and coffee brewing technology which is considered to be of high quality. Starbucks utilized the best coffee brewing techniques which preserve the natural aroma and ensure the nutrients are preserved (Ungson and Wong 99). Starbucks roasting techniques ensure that the whole grain coffee beans have longer shelf life in the outlets. 5 Legal environment There are numerous employment laws which Starbucks must comply with like health and safety standards of the workplace. Labor unionism is not very active in Africa hence the company can benefit from relatively cheap local labor. Starbucks treat its employees with respect and dignity hence it may not experience industrial action activities in the African market (Botten 266). 6 Environmental factors Africa is endowed with abundant natural resources like clean water. There is plenty of clean energy and environmental degradation concerns are minimal. Starbucks has been able to manage the environmental threats by partnering with communities in developmental projects like building schools hence it will be able to partner with African societies to preserve the environment (Pham-Gia 89). 4 Mission of Starbucks The mission of Starbucks is to apply high standards in their operations like purchasing and delivering. The mission also entails creating working environment which treats employees with respect and dignity and also embraces diversity in workforce. The mission also entails making positive contribution to the society, satisfying clients and maintaining business profitability (Botten 271). 5 Ratio Analysis Starbucks has posted impressive financial performance over the last five years. Below is a summary of the financial ratio analysis of the company for the last twelve months and five years on average basis. ratio Last twelve months Average of last five years Return on equity 25.2% 22.5% Return on assets 17% 11.8% Gross profit margin 58% 43.9% Pre-tax profit margin 16% 10.2% Post-tax profit margin 10% 6.9% Net profit margin (total operations) 10% 6.9% Debt-equity ratio 0.14 0.18 Total debt-equity ratio 0.13 0.27 6 Main Findings Starbucks can increase its global market share by expanding in Africa. The company business strategy is suitable for the African market which has not being tapped. There are no organized coffee beverage competitors in Africa which can pose significant rivalry to Starbucks. The company has consistent maintained its profitability by aligning its operations to the mission statement. Starbucks competitive strength results from the added value differentiation and excellent customer service which is accorded to the customers. Starbucks provides relaxing atmosphere for the customers which enhance the customer loyalty. For the company to maintain profitability and market share, it should maintain its momentum of global expansion in order to achieve its long term objective of 30,000 coffee stores and outlets worldwide 7 Analysis and Evaluation 1 Starbucks Africa business strategy African market is currently encouraging for foreign investors due to immense business opportunities which are available and political stability. Coffee consumption is high due to relatively large family sizes. Customers in Africa enjoy added services like relaxing atmosphere and entertainment hence Starbucks coffee experience is ideal for African market (Pham-Gia 117). The business strategy should be to add value and differentiate the products from those of competitors. 2 Feasibility Starbucks has enough financial resources to set up operations in new markets. Other methods like mergers, acquisitions or strategic alliances are not possible in the African market since no similar businesses which can offer high level of customer service and quality products like Starbucks. Starbucks should sign alliances with African coffee farmers in order to have exclusive rights on the coffee production methods. Starbucks posses many added values such as the management commitment to the company vision, diversified and differentiated products and services and strategic alliances. The company corporate structure which enables implementation of the overall corporate strategies in all coffee outlets (Pham-Gia 123). Being the market leader in coffee business, the company can afford to charge higher prices hence increasing profitability. 3 Competition There are no major coffee companies in Africa. The company will have to use the same global strategy of added value differentiation in African market which will enable it beat any competition which may be present in the market. 4 Market positioning The company should provide the same products to African market. Starbucks Corporation offers different lines of music, food and beverages. Customers will enjoy more than thirty specialty coffee. 5   Innovation Starbucks has a long history of creativity and innovative ideas which add value to its products and services. The company should maintain the same strategy in African market and add new flavors to the coffee and tea segments (Botten 234). 8 Conclusion Starbucks should extend its operations to Africa. After analysis of the environment using SWOT and PESTLE techniques, the research shows the African economy opportunities and strengths of Starbucks can increase the profitability of the company. Excellent customer service and high quality products and services will enable Starbucks to maintain its global coffee experience in the African market. South Africa should be the focus country while the goal should be to spread to other five countries within the next six years in order to increase the market share. 9 Recommendations I. Starbucks should expand to Africa. II. The company should maintain the same business strategy for the Africa business. III. The company should differentiate and offer added value services to the unique Africa market. Works cited: Botten, N. Enterprise strategy: strategic level. New York. Cengage Learning. 2009. Boone, L and Kurtz, D. Contemporary marketing. London. Springer. 2011. Ferrell, O and Hartline, M. Marketing strategy. New Jersey. Cengage Learning. 2010. Pham-Gia, K. Marketing strategy of ‘Starbucks coffee’. Munich. University of Applied sciences. 2009. Hill, C and Jones, G. Strategic management: an integrated approach. New Jersey. Cengage Learning. Ungson, G and Wong, Y. Global strategic management. London. Springer. Appendix Currency in Millions of U.S. Dollars As of: Sep 28 2008 USD Sep 27 2009 USD Oct 03 2010 Reclassified USD Oct 02 2011 USD 4-Year Trend Revenues 10,383.0 9,774.6 10,707.4 11,700.4 TOTAL REVENUES 10,383.0 9,774.6 10,707.4 11,700.4 Cost of Goods Sold 4,645.3 4,324.9 4,458.6 4,949.3 GROSS PROFIT 5,737.7 5,449.7 6,248.8 6,751.1 Selling General & Admin Expenses, Total 4,201.1 3,878.1 4,097.0 4,295.3 Depreciation & Amortization, Total 549.3 534.7 510.4 523.3 Other Operating Expenses 330.1 264.4 293.2 379.9 OTHER OPERATING EXPENSES, TOTAL 5,080.5 4,677.2 4,900.6 5,198.5 OPERATING INCOME 657.2 772.5 1,348.2 1,552.6 Interest Expense -53.4 -39.1 -32.7 -33.3 Interest and Investment Income 5.2 37.0 33.1 56.2 NET INTEREST EXPENSE -48.2 -2.1 0.4 22.9 Income (Loss) on Equity Investments 113.6 121.9 148.1 173.7 Currency Exchange Gains (Loss) -- -- -11.0 -- Other Non-Operating Income (Expenses) -- -- 5.1 4.5 EBT, EXCLUDING UNUSUAL ITEMS 722.6 892.3 1,490.8 1,753.7 Merger & Restructuring Charges -266.9 -332.4 -53.0 -- Impairment of Goodwill -- -- -1.6 -- Gain (Loss) on Sale of Investments -- -- 23.1 55.2 Gain (Loss) on Sale of Assets -- -- -- 30.2 Other Unusual Items, Total -- -- -22.3 -28.0 Other Unusual Items -- -- -- -22.1 EBT, INCLUDING UNUSUAL ITEMS 455.7 559.9 1,437.0 1,811.1 Income Tax Expense 144.0 168.4 488.7 563.1 Minority Interest in Earnings 3.8 -0.7 -2.7 -2.3 Earnings from Continuing Operations 311.7 391.5 948.3 1,248.0 NET INCOME 315.5 390.8 945.6 1,245.7 NET INCOME TO COMMON INCLUDING EXTRA ITEMS 315.5 390.8 945.6 1,245.7 NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 315.5 390.8 945.6 1,245.7 Read More