Starbucks Coffee Company - Essay Example

Starbucks al Affiliation 0 Introduction This report presents Starbucks Corporation, the largest coffeehouse company inthe world. According to Starbucks Coffee Company, their first cafe shop in the United Kingdom was been opened on May 1998. The main aim of the report is to gather information on demand and supply factors and key issues of Starbucks Coffee Company. The report-writing task has involved analyzing the challenges that is facing the company at the present time and the next few years, drawing conclusions and making recommendations. The findings of this report are presented with the aid of graphics and are followed by conclusions and recommendations. 2.0 Key Issues Each company faces problems and obstacles, even successful ones like Starbucks. One of the main challenges that Starbucks is facing is dealing with competitors. Coffee retailers are scattered all over the world in huge numbers. By involving thousands of shops operating in the coffee field, and as the competition increases, it makes the task more difficult for Starbucks to maintain its place. Also, the most obvious challenge that Starbucks is dealing with is the current financial crisis in America. 3.0 Demand 3.1 Coffee prices: The price of a cup of coffee at Starbucks in the United Kingdom ranges from approximately £1.75 to £3.50 (including taxes). This will depend on the type of coffee the consumer wants. 3.2 Prices of related Cafes: Compared to other cafes prices, Starbucks is one of the most expensive café shops in the world, and a number of consumers find the prices are exaggerated (Fellner 2010). A recent research made by a team of mystery coffee researchers shows that, the rates in Starbucks compared to Costa Café and Café Nero is the highest (Burks 2009). 3.3 Income Source: Capital IQ, a division of Standard & Poors. As seen on the graph above, Starbucks has experienced fluctuations in profit, starting from 2005 with a steady increase in the net income, and then it dropped down in 2008, decreasing the net profit from more than $600 million to less than $400 million. On the other hand, sales grew in 2010 getting the highest net income over the earlier 5 years. In 2010, Starbucks turned about 11% of its revenue into free cash flow (FCF). The company earned more than £600 million cash on net income (Nadine 2008). Also, there has been a surprising increase in the company’s net income in the last year. In the third quarter of 2011, the income rose up to 33%, earning more than $880 million net income. 3.4 Expected future prices As we can see in the graph above, if Starbucks increased the prices, the number of consumers will decrease. 3.5 Population Howard Shultz stated on July 11, 2006, "First and foremost I want to thank you for making Starbucks the $6.4 billion global company it is today, with more than 90,000 employees, 9,700 stores, and 33 million weekly customers." Taking the 33,000,000 weekly customers and dividing it by 7 you will get 4.7 million customers per day. Since that time Starbucks has added many, many new stores so I would easily estimate the number to be closer to 5.5 million customers per day (Fellner 2010). 3.6 Preferences 4.0 Supply 4.1The price of the good Nowadays, suppliers are becoming more in control over the selling prices of the coffee beans, due to the huge changes that have occurred in the coffee industry in the last three decades. In 1987, when Starbucks was still staring out, the farmers and coffee suppliers from whom Starbucks purchased its premium coffee beans were in large numbers, with small size farms, and each farmer was not related to one another. Currently a lot of suppliers that sell their coffee beans to Starbucks and other premium coffee chains, are united by an initiative known as fair trade certified coffee, which was organized by TransFair USA. Although buying from a fair trade marked coffee is more expensive, Starbucks could gain from advertising for the company by being a fair trade certified and therefore attract customers and advance its image and reputation. This makes some consumers more likely to buy from them (Nadine 2008). 4.2 The prices of factors of production The four factors of production are very influential in the successful operation of any business, and Starbucks is no exception. Land, labor, capital and entrepreneurship are important in the current and future success of the company. In the case of Starbucks, coffee beans take the place of the land factor (Burks 2009). The price of labor has increased and will continue to increase. Similarly, high quality coffee beans are becoming scarce and their prices are rising. The little that is available is very expensive. The company is therefore forced to invest more capital in its operations by expanding to foreign countries so as to counter the effect of costly factors of production (Michelli 2009). At the same time, the company has been forced to invest in the nurturing and grooming of future leaders so as to develop a unique core of entrepreneurs that can help it remain successfully now and in the future. Hiring and recruitment of young, ambitious and brilliant employees and aspiring entrepreneurs is now a priority. In general, the factors of production have become very costly, and the prices have risen steadily over the years. 4.3 The price of related goods In contrast to its coffee and coffee-related products that are normally expensive, Starbucks sells other products at relatively cheaper prices. Fruit juices, sodas, sandwiches, salads, ice creams, pastries all retail at affordable prices. There are also non-food items like coffeemakers, mugs, games, compact discs, storage containers, novelty items, travel tumblers and the Starbucks card that can be consider cheap when compared to its coffee (Burks 2009). 4.4 Expected future prices Starbucks demands the very best coffee beans from its suppliers. It requires that its stores are constantly supplied with the best coffee beans available. This may result in problems in the future, especially in the future prices of its coffee and coffee-related products. According to Fellner (2010), since high-quality coffee is scarce, the company offers to purchase that type of coffee at twice the price it is supposed to go for (almost $1.20/lb). In the future it will be very difficult for the company to charge fair prices for its coffee because it pays and will continue paying more for the high-quality beans it demands. 4.5 The number of suppliers Starbucks has more than 200 suppliers in the US alone, with the total number coming to about 600 worldwide (Pham-Gia 2010). Most of them are either owned by women or minority groups (at least 51% share) in accordance with the company’s policy. 4.6 Technology Starbucks has been found to be very innovative when it comes to the use and application of technology in its quest to stay ahead of its competitors. The company has prided itself in being able to embrace, adopt and implement certain technological decisions that help it stay competitive and at the same time increase turnover and revenue. Notable examples include prepaid cards and automated espresso machines. These two technological innovations have and continue to shorten the transaction time, and as a result lead to more customer convenience and increased revenues (Michelli 2009). Other technological innovations include the provision of wireless internet services, and a proposed pre-order service that is online-based. Technology has allowed the company to develop an extremely efficient and flexible method of operation and organization that allows it to establish new stores in a very short time (just a few weeks). 5.1 Economic Problem 1 As mentioned before, the company could face issues due to the large amount of competitors, and as the competition is increasing, with knowing that Starbucks is the most expensive one, this could cause a numerous cost disadvantages and lead to lose an effecting number of Starbucks coffee buyers (Pham-Gia 2010). Possible Solution: Starbucks could try to attract customers by providing a reward card for their most frequent customers. Putting up great offers could make Starbucks gain costumers’ loyalty. Also, they can install free Wi-Fi so as to create a nice atmosphere in the shop. 5.2 Economic Problem 2 Lately, Starbucks’ market share has been falling in comparison to its major rivals and the market in general. This has been triggered mainly by the current economic condition in which businesses like Starbucks have found it hard to maintain profitability (Michelli 2009). This can also be attributed to the fact that people are now spending less on services like those offered by the company, in addition to competing with highly diversified businesses like MacDonald’s. Possible Solution: The solution to this problem may lie in the revision and modification of the company’s internal strategy. Starbucks has always strived to remain in the premium service and coffee industry. Economic and market conditions may have played a huge role in its declining market share, but the fact that its competitors have been less affected points to another area of concern, and that is the company’s internal strategy (Nadine 2008). The company should revise its strategy to enable it stoop down and reach out to the lower levels that are dominated by fast food businesses. This may be significant in helping them cope with the above problem, because they will be able to diversify and attract more customers. 6.0 Solutions, Recommendations and Conclusion The most appropriate way to deal with all the issues surrounding Starbucks is to introduce another brand that is based on low pricing in order to support the Starbucks brand. In terms of the marketing strategy, there is need to implement a two-sided tactic that ranges between “no change”, “moderate change” and “radical change”. The premium Starbucks brand should be managed using the no change and moderate change strategies, while the second, low-price brand should be managed using a radical change strategy. The product range should also be improved and managed using a moderate change approach. Starbucks therefore needs to change its general business model, its marketing strategy and its product range so as to enable it stay competitive and ahead of its rivals. Almost everybody in the world knows about Starbucks for one reason or another. However, just like all leading companies it must handle and deal with a large amount of internal and external issues and factors so that it can maintain its position as the top coffee retailer and shop globally. References Burks, M. (2009), Starbucks, Greenwood Press, London. Fellner, K (2010), Wrestling with Starbucks: Conscience, Capital, Cappuccino, Wiley- Blackwell, Oxford. Michelli, J.A (2009), The Starbucks Experience: 5 Principles for Turning Ordinary Into Extraordinary. Nadine, P. (2008), The Idea Behind the Starbucks Experience, McGraw-Hill, New York. Pham-Gia, K. (2010), Marketing Strategy of Starbucks Coffee, Penguin, Paris.     Read More