Starbucks Market Analysis - Research Paper Example

?RUNNING HEAD: Starbucks Market Analysis Starbucks Market Analysis Miralnd (Ericia) Freeman UOPX Richard Pearl December 9, Starbucks Market Analysis History of Starbucks Starbucks opened its first coffee hours in 1971, a privately-owned organization founded by Jerry Baldwin, Zev Siegl, and Gordon Bowker. The business operated one facility in Seattle, Washington, until 1984 when the business was sold to Schultz’s II Giornale. By 1987, Starbucks had 165 different sales centers of operation. In the late 1990s, Starbucks had a dedicated American following, and the business began its expansion into international countries, where it is now present in 55 different countries. Its expansion has been based on foreign direct investment and also acquisitions of rival coffee houses. Starbucks’ success from the late 1990s onward has been to its dedication in providing consumers with a gourmet coffee experience, a means of differentiating the company and also establishing pricing that was higher than industry norms per cup of its products. This high pricing model is supported by advertising and the comparable, tangible quality of its products that continue to satisfy consumers that are willing to pay this extra price for the Starbucks experience. Description of International and Domestic Markets Starbucks does not target specific market groups, rather it has adopted a mass market advertising strategy positioned always on quality compared to competing coffee houses. However, the domestic market consists generally of high income consumers, professionals, and those with above-average household and discretionary income. There are also psychographic elements of Starbucks’ positioning strategies, appealing to those who find ostentatious consumption to be important as it relates to their social reputation. “Beyond signaling of quality, there is some status symbol effect to what coffee you are drinking” (Aronin, Fetterman, Liu & Peng, 2004, p. 3). Under psychographic segmentation and targeting models, this appeals to the Achiever customer profile who is image-conscious, modestly affluent, and has attraction to premium products (Boone & Kurtz, 2007). The domestic market is also associated with the Experiencers, those who buy on impulse and follow fashion fads (Boone & Kurtz). These two markets make up approximately 10-15% of the American population and are usually associated with white collar career-minded individuals. The international market is scattered and does not fit any specific personality, lifestyle, or income profile. Starbucks operates in collectivist cultures where tradition and family are valued and also individualist countries that promote social self-expression, finding favor in both in terms of profitability and consumer following. In China, marketers for Starbucks stand outside of Starbucks facilities, using a handheld clicker each time they achieve new traffic (Boone & Kurtz). Market research identifies that it is the younger, more fashionable cultures that frequent the organization. In Austria and Canada, it is generally the teens, tourists and young adults that favor Starbucks coffee (Boone & Kurtz). SWOT Analysis of Starbucks To understand the market potential of the company it is necessary to understand where Starbucks excels and where the business is lacking in key areas. Strengths Considerable cash capital that provides opportunities for expansion and a high credit worthiness for lending purposes or foreign investment. Backed by years of quality positioning and quality-focused advertising that has established a well-recognized brand and considerable consumer following. High pricing model that contributes to higher capital growth. In-store innovations such as its Coffee Master program that teaches customers about the subtleties of coffee, referred to as the “cupping ceremony,” similar to wine-tasting seminars (Helm, 2007). Partnerships with foreign coffee producers that express its commitment to corporate social responsibility that gains market attention and loyalty and also improves its supply chain methods. The strengths identified illustrate the fundamental differences between Starbucks and much of its competition. Weaknesses Leadership makes risky expansion decisions that often lead to store closings, because of limited market research about foreign cultures prior to entry in foreign markets. No contingency plan in place for market repositioning other than quality in the event that consumer attitudes related to high pricing shift or coffee-drinking trends change from the social norm. Very few locations with drive through services for convenience. Considerable labor disputes leading to negative publicity. Opportunities Offering discount promotions to gain new market attention and interest, a form of new market penetration pricing. Television product placement advertising in high-rated television shows for more market visibility. Licensing agreements with United States high school cafeterias targeting trend-focused youths easily inspired by social trends and peer affiliation. Threats The current global recessionary environment is reducing consumers’ discretionary incomes, which can lead to diminished sales volumes as consumers cut back on recreational and personal spending. Studies conducted by reputable medical professionals continue to argue against the merits of caffeine, which could reduce sales from the more risk-averse customer. Higher commodity prices for coffee beans driven by market investors and market conditions as well as natural weather events. Historical Scenarios with Starbucks Starbucks, over the last two years, has seen a steady increase in its share prices. From 2009 to 2011, the share price has more than doubled from $19 per share to its current price of $43.88 (Starbucks, 2011). This represents a change from its historical stock position that had declined from $20 to $18 between 2007 and 2008 (Herriman, Wanikawa, Ichinose, Darak & Chaivan, 2008). This sparked the closing of 600 stores between 2007 and 2008 due to diminished sales volumes and lowered investor confidence that was eroding share value. However, the business’ turnaround strategy occurring in 2009 with introduction into a variety of new market environments internationally offset these losses with increased consumer loyalty and sales revenues. Starbucks, through its foreign direct investment and new facilities developments, today maintains a total liquidity of nearly $3.2 billion based on assets alone (Starbucks, 2011). This is taking into consideration its bricks-and-mortar facilities, equipment, furniture, and other intangible assets. Starbucks is also heavily invested in different portfolio strategies today giving the business even more value in the event of sale or dismantling. As of 2011, Starbucks’ long-term debt was only a fraction of its liquidity value, at only 549 million dollars (Starbucks, 2011). This important imbalance between assets, cash capital, and debt continues to contribute to its ongoing share price growth and capital sourcing. This represents a significant change from its historical liquidity levels prior to new market entry in foreign countries, taking into consideration unlicensed asset production. Starbucks has also removed inefficiency and cost from its supply chain, especially in terms of raw product purchasing as it relates to the cost of goods sold. By establishing short-term investments in improving the farming capabilities of international coffee bean growers and improving their family lifestyles through this investment, it has built a more competent and dedicated system of growers for Starbucks. The long-term benefits of its corporate social responsibility efforts improve the entire value chain, logistics, and contracted commitment to ensure adequate supply of product from around the globe. Even though these represent capital investments over the short-term, the long-term benefits include better supply relationships, more leveraging power associated with pricing of commodities, and the ability to demand certain supply mandates from growers who benefitted from Starbucks CSR policies and investments. In 2007, Starbucks was victimized by negative publicity regarding its lack of commitment to environmental sustainability. The business’ coffee cups had been made of polystyrene, a known man-made packaging that continues to cause environmental problems. In response to this outcry for more responsible environmentalism, changed its packaging and is today introducing recycling bins in some of its stores to show this commitment to meeting consumer and environmental advocacy groups. There is a growing trend, especially in the United States, for environmental sustainability and corporate ethics. By publicizing Starbucks’ efforts in improving the environment, it gains more consumer following from those who make purchasing decisions based on corporate social responsibility and environmentalism. Starbucks has also made changes from its traditional, somewhat hands-off approach to interaction with customers. Starbucks had, previously, relied on consumer patronage in-store rather than seeking customers through guerilla marketing tactics. Today, however, in certain metropolitan areas, Starbucks has coordinated what it refers to as “chill patrols” that pass out free samples of cold Frappucino product to overheated consumers during rush hour periods (Keegan & Green, 2009). This change of tactics to include more hands-on advertising and sampling illustrate that Starbucks is changing its interactivity with customers to make itself more visible, socially responsible, and to promote its brand extensions. Starbucks Closings and Renewals In 2007, Starbucks was receiving considerable negative publicity from Chinese consumers, a largely collectivist culture. Online signatures for a petition to oust Starbucks from traditionalist metropolitan areas received more than 500,000 commitments from angry consumers (Watts, 2007). Starbucks opened a store in Beijing’s Forbidden City that outraged many Chinese consumers who strongly valued their traditional, historical heritage. Starbucks nestled itself among a variety of different historical architectures and the buzz about this self-promotion amidst a very old historical environment made consumers believe that Starbucks was attempting to trample on Chinese culture. This is one reason Starbucks started closing some of its stores in China due to the online buzz that continued to deplete consumer sales volumes. It was also during the period between 2007 and 2008 when share prices were declining that Starbucks was closing stores either under-performing, contributing to high operational costs, or were meeting with the type of consumer backlash provided in China. Starbucks chose a rapid expansion strategy, again, without conducting considerable cultural research into market lifestyles and social preferences. The business assumed that it would simply transfer existing advertising and operational strategy from the United States and the United Kingdom and find success. In countries like China, who were traditionally tea drinkers, Starbucks initially had problems with promoting coffee as a social norm and also finding interpersonal connection with local cultures. Coupled with declining sales revenues domestically and in other foreign territories due to economic conditions and reduction in consumer discretionary income, Starbucks decided to scale back its expansion plans and close many stores. Today, however, it seems that Starbucks has managed to overcome its cultural problems in China and is again pursuing growth in this country. Starbucks believes that it has been instrumental in promoting a coffee culture, superseding traditional tea-drinking values, which will allow it to expand in South Korea and China (Galvez, 2011). As identified, Starbucks today has considerable cash flow and minimal debt from closing so many underperforming facilities that it can again pursue expansion. Expansion will occur on the basis of brand recognition and some level of brand loyalty with international consumers during a period where investor confidence is high and the stock price continues to rise year-to-year. Conclusion Starbucks and its risky expansion strategy with such speed led to the short term declines in sales revenues and lowered stock prices. Rather than expanding at a pace more in-line with industry norms, the company made inappropriate market entry strategies in some regions without identifying consumer behavior in each territory. Today, its strong financial position gives it virtually unlimited opportunities to innovate, expand, or provide better customer service principles. The business is still positioned based on quality, with pricing to support these values, and consumers still continue to provide sales volumes domestic and internationally. Starbucks has managed to create the impression that their products are superior to other coffee houses and whether true or not the advertising to promote this has brought significant changes to their profit achievements. Backed with better publicity related to their corporate social responsibility efforts and environmental sustainability, the business will likely be able to explore further growth in developing countries for its well-known international brand. References Aronin, B., Fetterman, A., Liu, X. and Peng, J. (2004). Rustic Coffee: A Strategy for Challenging Starbucks, p.3. Retrieved December 2, 2011 from http://www.mcafee.cc/Classes/BEM106/Papers/2004/Starbucks.pdf Boone, L. & Kurtz, D. (2007) Contemporary Marketing, 12th ed. Thomson South-Western. Galvez, J.K. (2011). Starbucks to Triple Stores in China. Retrieved December 2, 2011 from http://www.startupbizhub.com/starbucks-to-triple-stores-in-china.htm Helm, Burt. (2007). Savings Starbucks’ Soul: Chairman Howard Schultz is on a mission to take his company back to its roots, Business Week, Iss. 4029, April 9, p.56. Herriman, M., Wanikawa, M., Ichinose, R., Darak, S. and Chaivan, Y. (2008). A Crack in the Mug: Can Starbucks Mend it?, Harvard Business. Retrieved December 2, 2011 from http://harvardbusiness.org/product/a-crack-in-the-mug-can-starbucks-mend-it/an/908A16-PDF-ENG?N=516163&Ns=is_HBD_bestseller|0&Ntt=starbucks Keegan, W.J. & Green, M.C. (2009) Global Marketing, 5th ed. 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