The Proliferation of Starbucks Stores - Case Study Example

Case Study Starbucks Introduction: The main aspects that are considered in this case study are with regard to the proliferation of stores of Starbucks. This has grown into a major issue considering the fact the company has over the years, acquired either through opening their own stores or by taking over other stores a large number of outlets, that is, from162 units in 1992, to over 15,000 in 2007 which could be deemed as being the root cause for its present condition. (Richard Ivey School of Business). Analysis of problem: It is seen that this proliferation of stores has been not very productive in so far as it has impacted upon the sales growth of individual stores and also many of the stores have not been able to meet annual targets or turnover parameters. Moreover, the stocks of the company have fallen over time, and are now around $18, but more serious than this has been the fact that earnings growth of the company has fallen substantially over time. It is seen that the growth rate has slumped from 62% in 1992 to around 16% in 2006, which could be attributed to the large proliferation of stores without productive returns or revenues. (Richard Ivey School of Business). Coming to the short term and long term loans position, it is seen that the short term loans are as follows: $82M in 1995 to $551M in 2007 and again, the long terms debts are seen at $710M in 2007. (Richard Ivey School of Business). Thus, it is seen that perhaps one of the main aspects that have impacted upon business for Starbucks has been the lower demand for its products, in the present economic scenario. Identification of the problem statement: It is seen that the proliferation and high rate of number of stores has detrimentally affected growth and profitability of business. Interpretation and Solutions: It is seen that there is need for Starbucks to adopt a global approach, instead of an American approach if it has to succeed in the marketplace. Most of the business is concentrated in North American markets, and therefore, any adverse reactions, as the present economic slowdown and fall in the demand for consumer products and services has affected Starbucks business prospects and opportunities. Therefore, it would be better if Starbucks takes a global approach and diversifies to other destinations of the world. Secondly, it is seen that labor costs are high, taking to account insurance and compensation benefits for employees, which has resulted in a hefty wage bill for all centers. It is therefore necessary that labor costs are controlled and brought within reasonable limits. The company needs to make cost benefit analysis for staff and labor and has to rationalize and control all direct costs. It is necessary that wastage of coffee is controlled and minimized and more efficient processes and procedures to cater to large number of clientele be made. For this purpose, more percolators and vending machines may be put into service and greater efficiencies derived from them. Again the administrative and technical training has to be upgraded and brought on par with other competitors. This is especially true for baristas, or coffee makers, since the main aspect that Starbucks is famous for is the high quality of its coffee and the excellent environment in which it is served. The Starbucks experience needs to be maintained and customers have to be served with care and warmth. One of the main aspects that possibly affects the cost structure of Starbucks could be the issues arising in the procurement of raw materials for coffee making. It is seen that the prices of Arabica coffee beans are rising over time and this impacts its bottom line. It could also be seen in terms of ready availability and maximum output to be received from the raw materials. With increase in demand and more customer outlets, the need for raw materials may rise in future. (Richard Ivey School of Business). Therefore, it is necessary that economies of supplies in raw materials used in coffee and other product lines be derived. This could be done by setting yearly, monthly, and daily requirement for raw materials for coffee and placing bulk orders, preferably at the beginning of each year. The main point is that price to be paid for the raw materials by Starbucks need to be consistent and should remain fixed for a year or so, so that price fluctuations do not affect the off takes and profits of Starbucks business. Thus, through this process, the planning, organizing and supply chain management system pertaining to raw materials and consumable could be scientifically and correctly assessed and budgets and costing figures could be made out. It could also be seen in terms of the fact that such economies could help cash flow and achieving revenue targets. Another aspect would be in terms of going in for strategic partnerships, alliances and business understandings, instead of setting up new outlets. Franchising and partnerships could also bring in market shares and goodwill of existing businesses, which could be shared between partners and business associates. It would be seen that coffee business entails a long gestation period to get good number of customers and business and therefore, it is necessary that Starbucks invests in acquisitions and business arrangements, instead of building their own stores from scratch. Another aspect that should be given thought to is that Starbucks needs to make productive forays into large coffee consuming markets like Arab countries, India, Spain and others where there are good markets for the kind of products that Starbucks offers. It is seen that major business houses in these countries could invest on partnerships, or perhaps, franchising agreements with Starbucks. Strategies: The main strategies that could be adopted are being summarized as follows: Invest in global technologies that could address the present economic crises more effectively Better training and facilities for baristas and shop personnel Consistent purchasing rates under yearly agreements with pre-determined bulk buying rates Cost reduction and striving for economies of scale and efficiencies Reducing the number of new stores since the present system of opening large number of stores within a locality would tend to cannibalize sales of Starbucks. Thus acquisitions of existing business or joint ventures would be more appropriate at the present moment Reduce debts through injection of capital, preferably through public issues, and other means of capital procurement through open market operations. Better personnel interaction, motivation and incentives for staff Lesson that have been learned: The main lessons that have been learned by Starbucks are that it needs to reduce its concentration in American markets and seek out a global perspective. This could be done by acquiring stores in large coffee consuming countries like Brazil, Indian sub-continent, Middle East and Far East. China would also not be a bad idea, considering the proclivity for beverage drinking by large population of China. Again, it is seen that the large number of outlets that Starbucks deals with, needs to be trimmed down considerably, since many of them may be not be able to meet stores targets, profit margins but will add to costs. Moreover, it is also seen that large workforce tends to increase labor costs, lead to lowered productivity and other related issues. Conclusions: Established way back in 1982, by its present CEO, Howard Schultz, the company started coffee brewing operations with just four stores, operating under name of II Giornale. By merging existing coffee brewing business of Baldwin, Bowker and Siegl during 1987, the company came into the present position and currently, the company provides employment to more than 60,000 partners worldwide catering to large cross segment of beverage drinkers, not only in the Americas but also in major destinations of the world. It is necessary that in future also, Starbucks maintains its position as a numero uno coffee server in major destination of the world. To achieve this Starbucks top management will have to undertake a kind of corporate introspection, including the areas in which improvements and gains could possibly be achieved and implemented. By pursuing a more conservative and laid back overall strategy in future years, and also catering to needs of a more diversified and diverse global coffee consuming community, it is possible that major issues, including the fiscal ones, could be alleviated and eliminated. This would definitely augur well in the present context, with competition from Burger King, Mc Donalds and others very much on the cards. Starbucks strategic renaissance: Starbucks strategic renaissance would be a glowing testimonial to their company’s positive organizational behavior strategies aimed at gaining and retaining customers on a long term basis for a long time to come. It could also be seen in terms of a catharsis, not only for the company, but also for the millions of coffee lovers all over the globe. Works Cited Richard Ivey School of Business: A Crack in the Mug: Can Starbucks mend it? 2008. (Provided by the customer). Read More