Starbucks Case Analysis

Starbucks Case Analysis

I. Company Overview

Starbucks was founded in 1971 in Seattle Washington. Their prime product was the selling of whole bean coffee in one Seattle store. By 1982, the business had grown to include five stores selling coffee beans, a roasting facility, and a wholesale business for local restaurants. Howard Schultz was recruited to be the manager of retail and marketing in the early Ð''80s. Schultz got the idea for the current Starbucks format from a trip to Italy where coffee was a major draw for Italian cafes. He bought Starbucks from the original owners for $4 million in 1987 and set about expanding his concept.

The initial focus of Starbucks expansion was the premium customer who valued the "Starbucks experience" Ð'- great coffee, first-rate music, and a comfortable and upbeat meeting place. Starbucks grew rapidly in the U.S. with over 10,000 retail stores representing 79% of their total revenue. Recently, Starbucks has attempted to reach the middle class market and expand through additional distribution channels such as grocery, joint ventures, and online through the StarbucksStore.com website. Additional expansion has been achieved through international markets including Japan, the U.K., China, and Mexico bringing the total international retail locations to over 1600. Finally, Starbucks has expanded into entertainment using vehicles such as books, music products, and film to add revenue.

Starbucks has been voted one of Fortune's top 100 companies to work for in 2007 and has been lauded as one of the few companies that offer comprehensive benefits to their part time employees. They also have an extensive corporate social responsibility program that supports literacy programs in the U.S. and China and sustainable coffee production in coffee growing regions such as Guatemala and Costa Rica. Their mission statement today is "Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow".

II. Problem Statement

The Starbucks concept is near saturation in the U.S. market Ð'- some analysts give Starbucks only two years at most before that comes to fruition. Starbucks must expand globally to maintain the returns they've experienced over the last decade. The chain only operates 1200 international outlets which leaves plenty of white space for expansion. Starbucks expects to grow the number of its stores worldwide, to 10,000 in three years, but there are huge risks in global expansion. One major factor is that unlike its U.S. locations, Starbucks international outlets are operated with local partners who can help identify locations, sift through tax issues, and give Starbucks more local community appeal. The addition of a partner, however, reduces the company's share of the profits to only 20% to 50%. It also makes it harder than in the U.S. to control costs Ð'- a major profit killer overseas has been real estate and labor costs far higher than those in the U.S.

Another potential issue with global expansion is backlash against American companies worldwide. Some see the Starbucks expansion as corporate colonialism, American

idealism, and even an attempt to change foreign cultures. Especially in a time of war, Starbucks remains a symbol of America to many cultures worldwide. Much like McDonalds has experienced in international markets, Starbucks too has been boycotted by antiwar protesters in Lebanon and criticized in New Zealand by advocates for higher coffee prices to growers. Starbucks even had to pull out of Israel due to the risk of terrorist attacks.

Finally, in emerging countries such as Mexico, China and India, the ability of the customer to pay $3 for a cup of coffee is not guaranteed. In these countries, most local coffee versions retail at $.50 per cup. The question of whether Starbucks should alter its uniform pricing policy in emerging markets is a valid one.

III. SWOT Analysis

Strengths

Ð'* Leader in premium coffee market share

Ð'* Widespread global presence and brand recognitionÐ'- the company operates over 8500 retail store locations across 32 countries worldwide including Japan, England, and Mexico

Ð'* Quality Products and a well recognized brand in the coffee industry. Starbucks is committed to have the best quality products; they have formed relationships with the farmers, who are also considered their partners, to ensure that they provide nothing to the best to their customers

Ð'* Employee retention - Starbucks was one of the Fortune Top 100 Companies to Work For in 2005. Stock option plan provides ownership to all levels of the company

Ð'* Partnerships to provide brand extension Ð'- Starbucks has entered into new areas and channels via partnership with other companies to either increase retail opportunities (Borders and Kroger) or complement their product offering (Apple)

Ð'* Distribution channels - CafÐ"©s and carts in hospitals, banks, office buildings, supermarkets, and shopping centers, e.g. Nordstrom, Barnes & Noble, United Airlines, and Target

Weaknesses

Ð'* Declining stock price

Ð'* Rising energy and labor costs as well as increase in supply costs (coffee beans, milk)

Ð'* Lack of diversification in stores outside U.S. Ð'Ñ* of stores are currently in the U.S. which makes Starbucks reliant on U.S. economy and susceptible to USD devaluations.

Ð'* Sales growth slowing Ð'- stores open for more than one year having difficulty maintaining