Starbucks in 2009 - Coursework Example

? A lot of people believe that the United s is the land of opportunity. The story of Howard Shultz, founder of Starbucks, would make you believethat the phrase is completely true. Mr. Shultz after acquired the brand name Starbucks and he turned the company from a six outlet operation into the global leader in the coffeehouse industry with 16,680 outlets worldwide. The company has become a global icon, but despite its amazing organic growth of over 20 consecutive years expansion the firm has finally reach a crossroad due to changes in the marketplace. A declining economy has decrease the purchasing power of many Americans and millions are living economic hardship due to rising unemployment. Starbucks sells a premium product which based on the laws of economic these types of product have a declining demand during bad economic times due to lower consumer disposable income. This paper will analyze Starbucks Cafe. Some of the tools that will be used to analyze the company include SWOT analysis, financial analysis, alternative solutions, and recommendations. SWOT Analysis One of the strengths of Starbucks Cafe is its tremendous brand value. The company is the market leader in the industry by a wide margin. Starbucks has 16,660 outlets, while its closest competitor in the United States has less than 500 stores. The firm enjoys a huge market share advantage over the competition. The product variety of the company is another strength of the company. A third strength of the firm is its tremendous corporate social responsibility program. In 2009 Starbucks doubled its purchases of fair trade coffee and it implemented a program in which it donated 5 cents out of every sale of certain beverages towards the AIDS cause. A weakness Starbucks faces is that the coffee market has become saturated in the United States. There are over 22,000 coffeehouses in the United States. A second weakness Starbucks Cafe has is that its product is priced higher than many competitors. The economy in 2008 was facing a recession and the demand for luxury items is lowered during recessions. A third weakness the firm faces is that its profitability declined in 2008. Lower profitability can lead to liquidity problems. An opportunity the firm has is to achieve growth in other international markets by expanding its licensing revenues of packed foods. The company currently sells Starbucks packaged branded foods at 37,000 stores in the United States, but its only sells these products in 4,000 stores internationally. The company could increase its revenues considerably by tripling the amount of stores that carry Starbucks packaged products internationally. A threat that Starbucks faces is the entrance into the gourmet coffee marketplace of McDonald’s. McDonald’s has double the outlets of Starbucks, thus the company can take away market share from Starbucks since their premium coffees are more economical than purchasing Starbucks coffee. Financial analysis In 2008 Starbucks Cafe achieved global sales of $10,383 million. The sales of Starbucks increase by 10.32% in comparison with the previous year. Despite its impressive revenues the company generated a net profit of $64.3 million. The net income of the company was lower by $143.8 million in comparison with 2007. The net margin of the company in 2008 was 0.62%. The industry average net margin in the food store industry is 1.6% (Dun & Bradstreet, 2011). The firm’s net margin was in relative terms 62.5% lower than the industry. One of the reasons the profitability of the company went down in 2008 is because its operating costs increased by $529.2 million compared to 2007. Porter’s Five Force Model The rivalry in the gourmet coffee segment of the food industry is intense. Starbucks is the market leader and many competitors target Starbucks since they all want to steal market share away from them. Dunking Dunuts ran and ad that says, “Friends don't let friends drink at Starbucks.” (Starbucks in 2009: Coffee Goes Cold). In the United States there are 21,400 coffeehouses. The threat of substitutes is legitimate for Starbucks. People may substitute they need for coffee by buying cheap coffee at convenient stores. Another substitute product is soft drinks since many of them contain caffeine. The threat of new entrants into the industry is medium. The US market is already saturated with coffeehouses. The buyer power of the customers for Starbucks Cafe is represented by the individual customers. Higher unemployment rates and bad economic times could hurt the buying power of the customers. The customer could force Starbucks to lower its prices if the switch to cheaper alternatives such as McCafe. The buying power of the suppliers is medium low. Starbucks has a lot of supplier power due to its very high volume of purchases. Alternative solutions Option One: Divesture The firm could choose to downsize its operations by selling unprofitable stores to other competitors. The contracting of the operations would reduce the operating costs of the company, it increases the cash flow of the firm through the sale of stores which includes the property value of the real estate, and it would lower its human resource requirements. One of the largest costs drivers of the chain’s operation is its labor costs. Option Two: Zero growth strategy The company can hold its ground and delay any future growth in stores for the following two years. After two years the cero growth policy is going to be reconsidered. During the first year the firm would actually be downsized since management could proceed with the 600 stored reduction plans and the withdrawal from the Australian market that has been already approved. Option Three: International expansion. Starbucks Cafe would focus its efforts on achieving international expansion. The firm will target countries with solid economies that have a high GDP per capita and those that in which coffee drinking is customary. The firm currently has 1979 company operated international stores. Further expansion should seek further expansion outside the United States both in terms of company operated stores and licensing agreements. Recommendations My recommendation is a cero growth strategy in the United States with international expansion using solely licensing agreements. The licensing agreement will be used to achieve expansion by forming strategic alliances with company retail chains in the target countries. Another strategy to achieve international expansion is by increasing the number of stores that carry packaged Starbucks products to 12,000 stores within one year. The five year plan is have as many international stores selling Starbucks products as in the United States. In 2008 there were 33,000 stores selling Starbucks packaged food products. Conclusion Starbucks Cafe is one of the greatest American success business stories. The firm created an empire by providing a superior product in a superb atmosphere served by better trained and knowledgeable employees. The managerial staff always emphasized the importance of quality and good customer service. As the company grew many followers entered the industry and other established food firms such as Dunkin Donuts and McDonalds penetrated the gourmet coffee industry. Starbucks realized it needed a new strategic path to exploit the brand value of the company. The solution was a cero growth strategy in the United States with international expansion using solely licensing agreements. By avoiding the use of company owned stores for expansion purposes the company avoided the risk associated with investing capital in new markets. The majority of the risk in the licensing deals goes to the licensor. References Dun & Bradsteet (2011). Business Industry Ratios: Food Stores. [Access 27 August 2011]. Starbucks in 2009: The Coffee Goes Cold. Read More