Starbucks Case Study 2007

Synopsis

In 2003, Starbucks was listed as one of the Fortune 500. Despite the ongoing recession, the company had managed a 31% increase in net revenues for the year. This was reasonable, considering they only spent about 1% of total sales on marketing. All of this, coupled with the fact that they were popular with customers and employees, was a sure recipe for success.

While their domestic figures were rosy, the international operations were losing ground. The once profitable Japanese market was declining, and the European and Middle Eastern ventures failed to gain momentum. Unfortunately, the U.S. market was experiencing saturation and the only way to grow seemed to be the overseas markets. They achieved entry through the use of wholly owned subsidiaries, licensing deals, or joint ventures.

Starbucks did not escape the common practice of adapting and integrating the business to different geographic regions, but they did stick to their guns when it came to their standard product line-up and their no-smoking policy. Surprisingly, these conditions were met with wide acceptance. Analysts felt the real challenge would be in the European marketplace, what with coffeehouses on every corner to compete with. Again, the stores did very well, mainly because of the newer, cleaner environment they provided compared to the older locations of established houses.

Business was good, but it was not without its problems. There was the political upheaval in the Middle East, followed by further tension after then CEO Howard Schultz commented on growing anti-Semitism in the region. Their integrity came under fire when certain Non-Governmental Organizations (NGO's) accused them of purchasing coffee beans under questionable social and economic conditions. These situations, together with difficult economic times globally, meant that Starbucks was likely going to take a hit somewhere. Eventually, they shut down their Israeli operations altogether.

There is speculation that the company was pouring too much capital into its complex system of joint ventures and licensing agreements, and could not get a hold of its operational costs. They decided to source some of their merchandise and disposables to less expensive suppliers as an immediate cost-cutting measure. They also decided to cut back on the number of new stores and shut down unprofitable ones. Starbucks has had to learn the hard way that external forces go far beyond a society's taste in coffee, and that too much growth can have negative effects.

Internal Analysis

Strengths:

* Strong commitment to quality and community

* Popular with their employees

* Financially secure

* Diverse workforce

* Strong brand recognition

Weaknesses:

* Narrow product line

* Limited market segment

* They only spend 1% of sales revenues on marketing

* Company has grown too quickly

* Stores are built using the same layout and dйcor, which takes away from the unique experience of visiting various locations

* Limited food offerings

External Analysis (Porter's Points)

Rivalry among existing firms:

Starbucks holds about 45% of the market share in coffee sales, due largely in part to its affiliation with PepsiCo. Domestically, McDonalds, Dunkin' Donuts, and Caribou Coffee are gaining ground with their specialty coffee products, and are major companies with no problem coming up with the capital. Internationally, Starbucks has to contend with older, more established coffee houses. Luckily for Starbucks, they have a highly recognizable brand image and a good position within the market segment.

Threat of new entrants:

As stated previously, Starbucks still has a firm hold on the coffee market despite the rise of some major competitors. They set the standard for the modern coffee house, and many try to emulate their stores' look and feel, but Starbucks still has many well-known beverages. New entrants will tend to be smaller neighborhood startups and kiosks that will appeal to local markets and should pose only a minor threat to Starbucks' loyal customer base. Internationally, coffee businesses can utilize the currently unpopular view of the U.S. and all things American to keep Starbucks from entering certain countries. Discounting anti-American sentiments, entry into the coffee business has few if any real barriers.

Threat of substitutes:

Coffee has a deeply rooted presence in American culture, but in Asia and Europe, tea is consumed as much if not more frequently. As for Starbucks' signature beverages, there is nothing about them that cannot be imitated either by other businesses or home-brewing experts. The truth is, anyone can brew a cup of coffee.

Bargaining power of buyers:

With 45% of the market share and a loyal customer base, Starbucks does well at satisfying its clientele. A sluggish economy, however, can force even the most hardcore coffee lovers to cut costs wherever possible. When people decide to start making coffee at home or going to the local joint to save some money on their favorite beverage, one would think that Starbucks would take notice, but they continue to have the highest priced coffee products on the market. With consumption at all time highs in the U.S., customers are becoming increasingly picky when it comes to their coffees. Starbucks does offer reloadable cards for purchasing products online, which many customers certainly find convenient.

Bargaining power of suppliers

Starbucks purchases their own coffee beans and uses them for their own products, but have