Business Analysis of Starbucks Corporation - Case Study Example

Business Analysis of Starbucks Corporation Author’s Name Grade course Institution Tutor Date Executive Summary Starbucks Corporation operates in a growing market in the specialty coffee industry where it is in a relatively good position if its market share is anything to go by. Two thirds of all Starbucks stores are in the United States while only a third are located around the world. The Starbucks brand name has been the company’s major asset ever since it went international and it has taken advantage of this by continue to expand its operations in foreign markets making it the largest coffeehouse chain in the world. Being the largest coffeehouse chain globally, Starbucks has the advantage of bargain power over suppliers unlike other small scale coffeehouse chains stores. The threat posed by competitors, both direct and indirect, is ever present and Starbucks has devised strategies to combat this threat. Innovation, exceptional customer service, premium coffees and lattes and warm, welcoming and friendly atmosphere in the company’s stores are some of strengths it has over its competitors. However, as with any company, weaknesses do exist and for Starbucks emphasis on differentiation has compromised its efficiency. The company’s inability to price its products so that they appeal to the average individual is another weakness. By expanding its menu, pricing products with different customer demographics in mind, expanding its current international markets and continually improving its customer service and innovations will ensure that Starbucks increases its market share greatly. Consequently, the company will increase its customer base internationally and locally while at the same time make it profitable and grow its reputation. Table of Contents Introduction and Background………………………………………………………………...4-5 External Analysis……………………………………………………………………………..5-8 Internal Analysis……………………………………………………………………………...8-12 SWOT Analysis……………………………………………………………………………....13 Proposed Changes to the Marketing Mix…………………………………………………….14 and Recommendations References……………………………………………………………………………………17-18 Appendix……………………………………………………………………………………..19 Introduction and Background The first Starbucks outlet was opened in 1971 in Seattle, Washington and was the brainchild of three friends, two teachers and one writer, who got their inspiration from Alfred Peet, founder of Peet’s Coffee and Tea. With its 20,891 stores in 62 countries worldwide, Starbucks is able to fulfill its mission which is “to inspire and nurture the human spirit, one person, one cup and one neighborhood at a time.” This high number of outlets makes Starbucks the largest coffeehouse chain specializing in quality specialty coffee in the world (Starbucks Corporation 2012). Today, Starbucks has become the largest coffeehouse chain globally and in just over four decades, the company has rapidly risen from its humble beginnings as a local coffee roaster to a market leader in the beverage industry. This growth can be attributed to the ambitious move of opening at the least, one coffee outlet every other day, a feat it was able to sustain for the better part of 1900’s and 2000’s. Presently, international outlets account for one third of the company’s total stores and of its 20,891 outlets; a staggering 13,279 are in the United States (Company Factsheet 2013). Starbucks Corporation has a wide variety of products in its menu and this enables it to meet its demands, presented in the form of diverse customer markets. Whether one is in a hurry and would want a take away coffee, enjoys taking coffee at home, prefers to take his/her coffee at Starbucks outlets, Starbucks caters for all these needs and even goes further to customize customers’ coffee (Schulz 2011). Despite the successes that Starbucks has enjoyed over the years, it is still faced with numerous external and internal business problems. The primary issues include competition, an unstable industry macro environment and market maturity and decline. Increasing competition is choking the industry and although there are only few major competitors, fast food outlets such as McDonalds are increasingly offering coffee products to their customers. McDonalds, for example, has added McCafe products to its line of fast foods at very low prices (Liu 2009). Such restaurants have thus ‘stolen’ a portion of Starbucks’ Corporation market share since they act as substitutes to what they offer. Secondly, the beverage industry has continued to mature over the last couple of years, thus saturating it. This is because, although major industry players are few, many small local coffee outlets dot major towns today. Thirdly, prices of coffee products are ever on the high and since there are only a few areas where quality coffee can be grown, supplier power increases. By and large, Starbucks Corporation is still a force to reckon with and remains the market leader in specialty eatery market although there is need for the company to constantly evaluate market forces in order to stay ahead of the game (Lingle, 2010). External Analysis Starbucks Corporation is within the Specialty Eatery Industry where it has direct and indirect competitors. It major direct competitors include Dunkin’ Donuts, BIGGBY Coffee and Caribou Coffee with some being global and others domestic (Dicarlo, 2004). On the other hand, its indirect competitors come in the form of McDonalds, 7–Eleven, Panera Bread and Einstein Bagels. The difference between the two kinds of competitors is that direct competitors offer the same products as Starbucks at low prices and additional products. Looking at Appendix A, fig. 1 it is clear that the largest market share is owned by Starbucks’ indirect competitor, McDonalds. While this large market share can be attributed to McDonalds’ global dominance, the strategy they applied in marketing their McCafe gourmet product has allowed them to gradually take over the market and increase their share in this specialty eatery industry (Liu 2009). McCafe products are substitutes to Starbucks products and McDonalds offers them at cheaper prices. A large market portion includes competitors from diverse demographics who apply different strategies in gaining a chunk of this share. McDonalds, unlike Starbucks, carry’s it operations following a cost leadership business strategy whereby they price their products in such a way that they appeal to a larger crowd (Dicarlo, 2004). Starbucks on the other hand does the opposite in that its operations are in the premium end and while it has an overall smaller market share, the company still commands a considerable market share consisting of customers interested in specialty products. This specialty eatery industry is made up of several different restaurant chains, both local and international, and offer mainly gourmet products (Lingle, 2010). These eateries may include bakeries and coffee outlets where different premium coffee beverages and snacks and a narrow food menu. This industry also offers high end customer service unrivalled by fast food restaurants and a friendly social environment perfect for meeting friends, working on small assignments or just enjoying a cup of coffee. Therefore, to survive in this volatile industry, there is need for firms to be innovative, convenient and offer above per customer service that is unmatched. It is important to note that consumers in this specialty eateries industry need something far beyond the amount of money they spend on the products. They don’t mind varieties thrown into the mix and will gladly spend anything for the different gourmets offered. It is thus imperative for these industry players to maintain consistency while remaining convenient to the customers (Lingle, 2010). Over the past decade, the coffee industry has experienced major changes and it is no longer the ‘black, dressed with cream and sugar’ product (Baertlein, 2011). So many varieties are being offered today as a demanding youthful generation continues to grow. Coffeehouses have gone further to alter their premises internal atmosphere so as to accommodate today’s customer demands. Most are social hangouts where consumers can hold small meetings and where students can also study. Furthermore, brewing coffee at home has become much more popular today and with the emergence of single serve coffee brewing machines, avid coffee takers can have their coffee at the comfort of their home without any additional costs. Starbucks Corporation has taken advantage of this by providing its single serve gourmet products to its loyal customers and also new customers (Bussing-Burks 2009). Usually, the average coffee person takes coffee in the office, at home and while on the go and this offers a very unique opportunity that is yet to be exploited. This opportunity is compounded by the fact that almost every company has a cafeteria and that not every employee would want whatever brand of coffee offered at the cafeteria since most have a particular brew he/she prefers. Starbucks can jump on this opportunity and open up small coffee shops so that they can become more convenient and transparent to their customers (Bussing-Burks 2009). The emergence of single serve coffee brewing machines offers another important opportunity in the industry. The Keurig has tapped into the in-house coffee drinkers market and although there are few specialty coffee machines in the market, there prices do not appeal to the average coffee drinker. Starbucks can therefore further develop the capabilities of these machines, for instance, by including in them flavored lattes and cappuccinos and making them cheaper (Cameron and Holt 2010). Lastly, any firm that is within the specialty eateries industry will attest to the fact that substitute products are an ever present threat. For Starbucks, this threat comes in the form of substitute beverages due to limited supply of coffee beans and the reason for is that coffee only grows in equatorial or subtropical regions (Coffee Research 2006). These factors, added to the continued rise in fuel prices, consequently give suppliers a lot of power who are able to exercise it over small firms but not on bigger firms. Generally, Starbucks Corporation has a considerable market share in the industry and is thus capable of dictating bargaining terms over suppliers. Its niche products make the company a linchpin in the industry although it has to continually and successfully employ strategies that manage competition effectively so as to remain successful. Internal Analysis Starbucks’ Corporation huge success is pervasive throughout the United States and all over the globe. Over the years, management have built the corporation’s reputation by offering exceptional customer service, creating a global brand, focusing more on their corporate social responsibility and lastly making sure that they have coffee beverages of the highest quality (Cameron and Holt 2010). These add to Starbucks’ major strengths. A major strength of the corporation is the management’s ability to predict consumer needs and provide these needs in unparalleled customer service. The company boasts of creating a welcoming atmosphere where people can meet, away from home, and still call it ‘home away from home’ and Starbucks fulfills this by equipping all their outlets with premium interior design décor, functional facilities that are clean and the right kind of music (Miller 2010). Alongside the atmosphere, it is important to make the consumer-product experience an enjoyable and memorable one. Starbucks thus gives customers an opportunity to customize their beverages however they want it and as a result, customers have a variety of flavours to choose from in addition to packing the company’s menu with an assortment of specialty beverages and food. Starbucks does not allow unsatisfied customers to leave unsatisfied and therefore guarantees customer satisfaction by allowing the re-doing of drinks that the customer probably did not like. This hands on customer care allows for the retention of repeat customers who market the company by word of mouth thereby building on the company’s reputation (Miller 2010). Another major strength of Starbucks is the corporation’s willingness to embrace technological innovations. It was among the first companies in the United States to provide their customers with wireless internet for free (CNBC Business 2011). Thus customers are able to work, study and surf the internet comfortably and even download their favourite songs from iTunes on a weekly basis. Starbucks has gone further to employ the use of technology in a way that customers can make payment using their smart phones. Customers download a relevant application, enter Starbucks’ gift cards and rewards and then they are ready to make payments for their purchases via their smart phones. This sets them apart from their direct and indirect competitors. While Starbucks’ success can be attributed to its strengths and tangible resources, its intangible resource in the form of its brand name gives it mileage over its competitors. Starbucks Corporation success has been driven forward by its reputation worldwide (USA Today, 2012). Customers all over the world recognize the ‘Starbucks’ brand name and immediately expect to get the same kind high quality service and product any where the corporation’s outlets are. Starbucks’ reputation is alongside major international brands such as Coca-Cola and McDonalds making it its priceless competency since it acts as a barrier preventing imitation by competitors (USA Today, 2012). Despite Starbucks’ strengths in innovation, quality and timely responsiveness to consumer needs, the company seems to have fallen short in the efficiency department. Since Starbucks’ strategy puts emphasis on differentiation, efficiency is often overlooked and hence considered its most possible weak point (Adamy 2007). While it may be advisable to lower the prices of its products, Starbucks still needs to maintain the high quality of its products its customers are used to. A few years ago, customers did not mind paying more for a cup of coffee; however, this trend is changing and competitors are beginning to apply Starbucks’ strategies in their business models while at the same time offering these products at lower prices as Starbucks’ products substitutes. For instance, McDonalds have in their menu McCafe gourmet products and are renovating their outlets to create a warm, customer friendly environment (Han, 2010). The only way Starbucks can beat this competition is to continually be innovative and ingenious. Poor efficiency in Starbucks is also evident in the high number of outlets found within the United States alone (Adamy 2007). Of the 20, 891 Starbuck outlets worldwide, a staggering 13, 279 outlets are found in the United States alone. The company’s own high saturation has led to hindered profitability of some of its outlets by others. For instance, in Seattle, Starbucks outlets are located right opposite each other leading to cannibalizing of the older stores by the newer stores (Adamy 2007). The inefficiency experienced in the distribution of outlets eventually makes it costly and customers may opt for lower priced similar products from competitors during economic slumps. In Starbucks 2012-2013 business year, the company was very successful judging from the record revenues they had achieved globally, high profit margins and the 43% increase in stock price from the 2011-2012 business year (Starbucks Corporation 2013). After going through the financial statements spread over the past half a decade, it is clear that the company is growing steadily and this growth was more rapid in the last one year. According to the same financial statements, the company has not experienced any major financial setbacks and therefore it would be safe to conclude that it will continue growing only if it maintains its competitive advantage (Edgar Online 2012). Starbucks’ profitability is best captured in the analysis of its return on invested capital (ROIC). Starbucks return on invested capital in the past one year stands at 24.1% with a five-year average of 19.2% (Forbes.com LLC 2012). This is in contrast to its competitors whose ROIC figures stand at: 20.7% for McDonalds, 34.8% for Caribou Coffee and 1.6% for Dunkin Donuts (AOL Daily Finance, 2012). These statistics offer Starbucks an opportunity to critically look at is ways they can lower the cost of goods sold, increase revenues from sales and increase its capital turnover so that they are able to outdo their competition. Employee turnover rate is also another performance indicator and in Starbucks Corporation case, employee satisfaction, loyalty and engagement is very important when strategizing. The company offers employees with benefits such as insurance plans and bonuses, and considers them as ‘partners’ in the company rather than as ‘employees’ (CNBC Business 2011). Additionally, Starbucks has over the years been voted one of the best companies to work with and they keep its employee turnover rate at about 65% annually, a huge contrast to some its competitors who may go as high as 400% in employee turnover (CNBS Business 2011). Other areas where Starbucks can grow include the further development of the company’s retail line to be buoyed by the introduction of single-serve coffee for in-home brewing machines manufactured by Keurig. This move will see Starbucks avoid the potential threat to its core business. Social responsibility being a major part of a company’s internal practices has seen Starbucks get involved with communities all around the US that support job creation. The company also works on initiatives involving clean water, support for HIV/AIDS campaigns, green practices development, community developments and issues in climate changes. All these can be seen on the Starbucks Corporation website. Starbucks has started recycling cups, reducing their consumption of water and energy and going the extra mile of building LEED certified outlets (Starbucks Corporation, 2011). Starbucks organizational structure has continued to play a major role in the ever increasing success of the company (Schulz 2011). Recent rearrangements in its organizational structure were carried out to accommodate the need for outstanding customer satisfaction. Sometime in 2012, the company’s CEO then announced that Starbucks would be expanding the organizational structure matrix. As a result, the company now carries out its operations under four divisions in the United States i.e. Western/Pacific, Northeast/Atlantic, Northwest/Mountain and Southeast/Plains. Additionally, Starbucks has a different division for its foreign markets. For Starbucks, a matrix organizational structure has its own advantages as it allows the firm to maximize on both the available communication channels and the company’s division-specific value chain (Schulz 2011). According to Howard Schulz, Starbucks CEO, these adjustments have enabled the company to come up with products that specifically and rapidly appeal to the market. Starbucks second portion of the organizational structure includes the support arms that operate as autonomous departments but share the firm’s same goals, objectives and vision across all divisions, both locally and internationally (Schulz 2011). Starbucks SWOT Analysis Diagram Proposed Changes to the Marketing Mix After critically analyzing Starbucks Corporation business, we are now in a better position to appreciate the company’s success over the years and also to understand possible threats in the future, in addition to its strengths, opportunities as well as weaknesses. With the necessary tools and facts that we have, we are now able to recommend possible changes to the way the firm carries out its operations. These recommendations, we believe, will help Starbucks Corporation increase its market share in the specialty eateries industry. Starbucks Corporation international growth has been so rapid over the past decade. Despite this great growth that has seen successes in the foreign markets, more than half of Starbucks stores are found in the United States. Presently, of Starbucks 20,891 worldwide only a meager 7612 are found outside the US. This accounts for just a third of Starbucks total stores. The firm has maintained its growth in international markets at a constant 30% despite having doubled its number of stores since 2010 (Starbucks 2010). It is thus important for Starbucks to focus more on expanding it international markets base to ensure diversity its revenue base. This can be achieved by adding more outlets in countries it is already in business with. This need is echoed by the fact that 50% of Starbucks profits are derived just a single market from stores in the US alone (“Starbucks Coffee Company-Investor Relations-Financial Highlights,” 2009). The problem with this is that it would make it really difficult for the firm to recover if this market begins to perform poorly since there would be no other market to cushion it against such economic possibilities. Although this needs to be accomplished, diverse social norms and cultures of the different countries come into play and Starbucks needs to look into them carefully. The kinds of associations products are going to trigger with consumers do depend on the culture of the same consumers (Bartlet, Ghoshal & Beamish 2008). Diversification of its product base is another area that we would recommend Starbucks to look at (Starbucks Corporation. 2011). Currently, most people know Starbucks for its premium coffee, tea and light nibbles but not anything more. It is a known fact that trends do not last long, much like fashion and hair styles. Starbucks has been successful and profitable year in and year out, but the future is unpredictable and this may change if the high class was its only market. In times of economic downturns for instance, the premium coffee Starbucks makes will definitely be a priority over health or mortgage payments. The last economic crisis in the US saw Starbucks get hit so badly that its stock plummeted a great deal, and although it has got back to where it was financially in 2007, the road back hasn’t been that smooth (USA Today. 2012). Most of the people affected were the middle and upper class as they lost their jobs. Starbucks suffered because this class could not afford to spend on novelties such as Starbucks. This goes to show that economic crises do hit when they are least expected and no major corporation is spared, Starbucks is no exception. The firm therefore needs to consider the possibility of another economic crash in the future and make sure that it applies a market differentiation strategies so that is able to appeal to different consumer demographics. The threat of an ever growing number of competitors, such as McDonalds, is not going to fade away anytime soon (Miller, 2010). Starbucks therefore needs to take advantage of the strength of its brand name and reputation and use it as leverage against such competitors. Continued strides in innovation, improving their already high quality customer service, the warm and friendly atmosphere in its stores and product diversification will certainly keep competitors a bay. We would also recommend that the firm enter into agreements with fast food restaurants to allow them sell their coffee in their stores thereby making it a win-win situation for parties involved. All in all, corporate strategies undertaken by Starbucks Corporation have made the company so successful that it’s been making huge profits ever since its creation in 1971. This is attributed to the company’s strong business model, internationally and locally coupled with its ambitions to continue building achievable goals and prospects. Strategies in differentiation have gone a long way in ensuring that the company maintains its massive market share despite the growing number of competitors and substitute products (CNBC Business. 2011). References Adamy, Janet. 2007. At Starbucks, Too Many, Too Quick? Wall Street Journal, p. 1. Starbucks Corporation. 2012. Starbucks Corporation Fiscal 2011 Report. 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Retrieved January 28, 2014 from: http://www.cnbcmagazine.com/story Schulz, H. 2011. Onward: how Starbucks Fought For Its Life without Losing Its Soul. New Jersey: Wiley Publishers Bussing-Burks, M. 2009. Starbucks. Santa Barbara, CA: ABC-CLIO. Cameron, D and Holt, D. 2010. Cultural Strategy: Using Innovative Ideologies to Build Breakthrough Brands. Oxford: Oxford University Press. Appendix A Fig. 1 Retrieved from Yahoo! Finance SBUX - Starbucks PNRA – Panera Bread CBOU – Caribou MCD - McDonalds Read More