Mgt 4199 Mini Case: Starbucks

Solange Ruiz

Professor Canan Mutlu        

MGT 4199

October 14th, 2017

Mini Case: Starbucks

The Starbucks chain is the coffee phenomenon of the last decades. A brand, where the idea of a luxury cafe and a chic place to meet friends are already consecrated in the collective unconscious. Currently, the chain has more than 16 thousand branches in various countries of the world and its prestige is recognized worldwide. To understand better the business it is important to conduct a SWOT analysis for powerful strategic study that will allow understanding the potential and challenges of this company.

SWOT Analysis

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Starbucks for being a well positioned franchise in the market has its strengths very well marked and consolidated. These are: solid financial statements.  Starbucks profitability has been rising over the past few years. Since 2000, Starbucks’ revenues have grown 10-fold, from less than $2 billion to some $20 billion in 2015. Also, Starbucks has a solid brand reputation associated with quality coffee and excellent customer service. Its brand is the most valuable brand in the coffee segment and is valued at $ 4 billion. One of Starbucks' strongest strengths is that it has the necessary expertise and knows its customers. They know their customers need excellent attention, high-quality music, friendly staff and warm atmosphere, resulting in unparalleled customer service.  The company operates around 20,000 coffee shops in 60 countries, making it the largest coffee chain in the world.

As for its weaknesses, Starbuck’s profitability depends heavily on coffee grain prices, which is a raw material that is out of Starbucks control. Because of hedge funds, weather conditions and many other factors, Starbucks cannot estimate the price of coffee and hence the profitability of the company. Also, Starbucks offers a great coffee experience and great customer service, which translates into high prices for its products. In comparison, McCafé's premium coffee is lower than Starbucks coffee and was better evaluated.

As a big company, Starbucks has several opportunities ahead. It is clear that the company has opportunities to growth even more.  As for opportunities, Starbucks does not sow its own coffee beans, but has to buy them from several suppliers, which are mainly grouped in South America, Arabia or Africa. Starbucks to secure critical supplies for its operations in Asia reduce reliance on good or bad harvests in Africa and South America and to save on shipping costs, has to extend its network of suppliers. Also, there are great opportunities for cafes in China and India, where Starbucks has comparatively only modest number of venues, they should probably try to open new stores there. Starbucks not only sells with coffee shops and franchises but sells some of its products through other retailers. The company must form more partnerships and offer the sale of its coffee, for example, in the retail markets (Forbes).

Unfortunately, as every company in the market, it has some threats to consider maintaining a consistence performance in the market. For example, the chain is heavily dependent on coffee beans, which it cannot control or can hardly estimate. Also, local coffees can offer a lower price and a more tailored offer to the customers. These large coffee chains specialize so you do not have to compete on par with Starbucks. In both situations, Starbucks experiences intense competition and loses market share.  Another threat is the saturated market. Coffee markets in developed economies are already saturated and with the intensification of competition, Starbucks will find it difficult to grow in these markets. Finally, due to political, economic and climatic conditions Starbucks may experience interruptions in supply, adding significant cost to the company.

Through calculating the ratios of Starbucks, it reflects how the company has performed in a year.

Below are the ratio calculations from the years 2012- 2015:

Return on Assets (ROA) = Net Income/ AVG Total Assets

980.3/25,381 = 0.0386 = 3.86%

Total Assets Turnover = Revenue/ Total Assets

63,776.8/25,381.4 = 2.51

Financial Leverage Index= Return on Equity/ Return on Assets

ROE*= 980.3/3.86 = 253.9

Financial Leverage Index= 253.9/3.86 = 65.7

According to the proper calculations above, on ROA, Starbucks has a 3.86% efficiency in using assets to generate earnings. To be a big chain, it reflects a very small percentage on return assets. As for the Total Assets Turnover, it has a 2.51 of efficiency of assets to sales and for the Financial Leverage Index; it has a 65.7% according on how it is managing its debt. Very unexpected results for a big power global franchise as Starbucks but it was predicted to have a huge debt index as it keeps growing and investing in more store openings.

When talking about the competitive advantage of a company, means an advantage that a company has over its competitors. There are few companies in the world that generate more commitment and loyalty than Starbucks. This coffee multinational has earned the hearts of consumers, not only with a good product, and great customer service: Starbucks strategy has always sought differentiation through offering value. It is no longer just the search for apps to facilitate the payment on the mobile, nor to be a reference of customer service in social networks, nor that it was the first cafeteria that implemented the free internet access - so common today at a worldwide level, Starbucks is the result of a company philosophy that has bet on the customer as the center of its entire global strategy. And that has originated many copycats for Starbucks.

Starbucks has many competitive advantages that make it a unique business concept in the market differentiating it from its direct competitors. Some are:

1. Product customization. The possibility of choosing and personalizing coffee is a key attribute that is increasingly appreciated by consumers. This is a particularity that can be seen in which, in addition to writing the name of each consumer in plastic cups, they can choose from a large number of options to buy their coffee.

2. The type of coffee. The franchise offers two types of coffee, the robust and the Arabica considered the best for being grown in higher areas, has a more intense and refined taste for more demanding palates. The drinks are offered in 3 sizes: high (12 oz), large (16 oz) and venti (20 oz), although in some countries the short size (8 oz) is offered.