Strategic Analysis of Starbucks Corporation

Strategic Analysis of Starbucks Corporation

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By: Amelia Jaskari

1. Introduction

Everyday millions of people around the world seek out coffee shops to get their daily dose of caffeine. Since the beginning, Starbucks set out to be a different kind of company. One not only celebrated coffee and the rich tradition, but that also brought a feeling of connection. Starbucks opened their first store in 1971 in Seattle, WA, and since then they have become a premier roaster, marketer, and retailer around the globe. The famous logo, inspired by Norse woodcutting that contained a siren, the mermaid-like figure has been with the company since its inception (although it has undergone a few redesigns). With more than 27,000 stores and 76 countries, it is clear that Starbucks has been successful with their endeavors over the years. They have developed a product mix that includes purchasing and roasting high-quality, whole bean coffees. Along with selling hand-crafted coffee, tea, and a variety of food items, through their company-operated stores. Starbucks also sells a variety of coffee and tea products and license their trademarks through other channels such as licensed stores, grocery, and foodservice accounts (Starbucks Annual Report, 2017). In addition to their Starbucks coffee brand, they market their product mix with other brand names within their portfolio of companies, which include Teavana, Tazo, Seattle’s Best Coffee, Starbucks VIA, Starbucks Refreshers, Evolution Fresh, La Boulange, and Verismo.

Starbucks’s mission is, “to inspire and nurture the human spirit- one person, one cup and one neighborhood at a time.” Holding true to that, Starbucks has been known to ethically source their high-quality coffee. They are doing this by holding responsible purchasing practices, supporting farmer loans and forest conservation programs. Starbucks is an acknowledged leader in the industry in terms of exploiting information technology and technological developments. The company has adapted mobile apps for the promotion of its brand and sales of products earlier than the competition. Starbucks app offers multiple features such as store locator, nutrition-based information and rewards program. Moreover, ‘My Starbucks Idea’ initiative allows customers “to develop their own signature drinks (hot or cold coffee), name the drink and share the new flavor with the community” (Starbucks Annual Report, 2017). This also allows customers to provide concerns on products that needs to be changed or maybe just improved.  

Starbucks primarily operates and competes in the coffee and snack shop industry. This industry is composed of establishments that prepare or serve specialty snacks and nonalcoholic beverages including ice cream, frozen yogurt, cookies, donuts, bagels, coffee, juices, smoothies, and sodas. Purchases may be consumed on-site, taken to-go or delivered (“Coffee & Snack Shops,” n.d.). Starbucks broad differentiation strategy has been continuing the disciplined expansion of their global store base, adding stores in both existing, developed markets such as the U.S., and in newer markets such as China and Asia Pacific, as well as optimizing the mix of company-operated and licensed stores in each market. In addition, by leveraging the experience gained through their traditional store model, they continue to offer consumers new coffee and other products in a variety of forms, diverse channels, and alternative store format (Starbucks Annual Report, 2017).

1. External Environment

The factors that are contributing to the growth of this industry is the rising per capita consumption of coffee, growing number of specialty coffee shops globally, and the rising urbanization and changing consumer lifestyles (“Global Specialty Coffee,” 2017). This industry is also highly sensitive to the macroeconomic factors that affect the growth in household income. A healthy economy increases consumer confidence and disposable income. The coffee industry and the coffee shop business has boomed in recent years, especially with regards to specialty coffees. From a macro view, specialty coffee consumption in the U.S. is growing and 2017 has seen a significant increase in daily specialty coffee drinkers. Furthermore, over the last 18 years, the number of daily specialty coffee drinkers has consistently increased, strengthening the consumer demand for specialty coffee. As more and more shoppers start to prioritize experience over price, consumption of gourmet and specialty coffee beverages will continue to rise. Out of the $48 billion U.S. retail coffee market, about 55% of spend will go toward specialty coffee next year (“Specialty Coffee Facts,” n.d.). This industry is in the mature stage with high competition level.

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2.1) Porter’s Five Forces Analysis [pic 3]

Threat of New Entrants: Moderate

• Market saturation: The coffee and snack shop industry, and market, is heavily saturated. Opening a new coffee shop means competing with local shops, Starbucks, Dunkin’ Donuts, as well as McDonald’s McCafé. It becomes more difficult for a new entrant to make an impact in this industry due to the familiarity and habit consumers have formed around these large companies and brands.
• Economies of scale: Starbucks has over 27,000 locations. It has more negotiating power than a new brand with a handful of coffee shops; that means lower prices, higher profit margins, or a combination thereof (Analyzing Starbucks' Threat of New Entrants, n.d.).[pic 4]

• High cost of brand development:  New entrants can compete against Starbucks because of the moderate costs of doing business and supply chain development. However, new entrants will find it difficult to compete against established brands like Starbucks because it is very costly to develop as strong of a brand as they do.

Threat of Substitutes: Moderate to High

• Many different substitutes: There are many different substitutes for coffee, which mainly entail tea, fruit juices, water, soda’s, etc. Bars and other convenient establishments could also substitute for the social experience of Starbucks.  
• Home-brew coffee: Consumers may also choose to brew their own coffee at home at the fraction of the cost of buying a specialty coffee from a place like Starbucks. Although, Starbucks is trying to counter this threat by selling coffee through other channels like super markets, there is still some pressure.

Bargaining Power of Buyers: Moderate to Low

• Substitute availability: If the perceived cost of specialty coffee starts to become too high, the likelihood of a customer going somewhere else, or choosing another product, goes up. They may also choose to home brew their own coffee instead.
• Low switching cost: The cost of switching coffee shops or brands is low, and since Starbucks’ price tag for their products is so high compared to their competitors, going to a different coffee shop or brand may actually save the customer some money.
• Distribution networks: Since Starbucks sells their products through distribution networks, you can also purchase them in supermarkets, food services, specialty retailers, and licensed outlets. So, in the end, the distributor, has bargaining power. Whether it be negotiating discounts or locating the products in unappealing areas.

Bargaining Power of Suppliers: Low to Moderate

• High variety of suppliers: Starbucks is a large business. The company has over 28,000 locations worldwide, which comes with a lot of product that needs to be produced. From coffee, tea to fruit smoothies, food items, and especially milk. Although they have many different suppliers, these suppliers don’t have too much power. Part of this is due to Starbucks doing all their own roasting and blending, leaving just the quality of the bean in the supplier’s hands. As well as their milk, as long as Starbucks receives the large quantities of milk, assuming the quality is consistent, it does not matter where it comes from.
• Fair trade: Most of the coffee that Starbucks offers is “fair trade”, in other words, purchased through the company’s Coffee and Farmer Equity Program, meaning they offer its coffee suppliers fair prices for the products they buy and gives them a sort of partnership status. Generally speaking, Starbucks pays more for coffee than it necessarily needs to in order to support fair trade, giving their suppliers a moderate amount of power.

Intensity of Competitive Rivalry: Moderate to High

• Low switching cost: Customers do not have any cost of switching to other competitors, which creates high intensity in rivalry. Which makes it important for Starbucks to keep their competitive advantage as they continue to differentiate their products among their competitors. [pic 5]
• Convenient coffee: Competition in this industry comes from companies that target coffee drinking consumers, as well as those that happen to serve hot beverages and snacks in a comfortable atmosphere. Starbucks faces competition in the global marketplace from Dunkin Donuts, Caribou Coffee, McDonald’s, and Tim Hortons, along with thousands of small local coffee shops.
• Niche players: Although these players will not be able to contend with Starbucks, they do gear towards Starbucks’ customers. For instance, some people refuse to buy coffee from a chain and would rather go to a local coffee shop; either for ethical reasons or the current trend that surrounds them. This niche trend is especially popular among young coffee drinkers, or people who are in locations that does not have a Starbucks. In this category, there are regional competitors such as Peet’s Coffee on the West coast of the US or Costa Coffee in Europe.

2.2) PESTEL Analysis

Political Factors

• Regional Integration of markets: The trend of regional integration presents an opportunity for Starbucks to continually expand around the globe.
• Improving governmental support for infrastructure: Around the world many governments are improving their infrastructure, this creates more markets and suppliers for Starbucks to access.
• Bureaucratic red tape in developing countries: Starbucks faces concerns over sourcing of its raw materials that has attracted the attention of the politicians in the West and in the countries from where it sources its raw materials. This is the reason why Starbucks is keen on adhering to social and environmental norms and to follow sourcing strategies that are appropriate and in conformance to the “Fair Trade” practices that have been agreed upon by global corporations and the governments of the developing and the developed countries (PESTLE Analysis of Starbucks, n.d.).
• Tariffs: Starbucks has most of their coffee beans imported from other countries, increases or decreases in tariffs, taxes imposed on imported goods or services can have a serious effect on the financial stability of the company.

Economic Conditions

•  As seen in the figure above, high growth of developing countries creates potential for Starbucks to develop more revenue and profit.
• Declining unemployment rates: The decline in the unemployment rates will increase consumer spending and disposable income.
• Rising labor cost in suppliers’ countries: Starbucks heavily relies on their international trade with their suppliers. The rise in labor cost threatens Starbucks because it will crease the cost for necessary ingredients.  
• Consumer spending and sentiment: The improving sentiment of consumer spending and rising household income, will further help customers absorb price increases that will likely continue into the future.

Sociocultural Forces

• Growing coffee culture: The current trend towards specialty coffee increases their revenues.
• Increasing health consciousness: This gives Starbucks an opportunity to expand the depth of their healthy options for their product mix.
• Growing middle class: The middle class growing means more demand due to the increase of disposable income.
• Now that the baby boomer generation is tapering off, Starbucks will have to focus more on the Gen X and the millennials as a part of their strategy.  

Technological Forces

• Rising mobile purchases: Gives Starbucks an opportunity to work on their loyalty rewards program, improve their mobile app and linked services, to gain more revenue through these mobile purchases.

• Technology transfers to coffee farmers: The new technology that coffee farmers are using gives Starbucks the opportunity to improve the efficiency of their supply chain.
• Rising availability to specialty coffee machines for home use: Unfortunately, there has been a rise in the availability to premium specialty coffee machines, which increases the threat of substitution of Starbucks products.

Environmental Forces

• Business sustainability trend: This trend focuses on business processes that ensure minimal environmental impact, which is an opportunity to enhance performance in this area.
• Growing popular support for responsible sourcing: Along with the business sustainability trend, this is an opportunity for improvement on Starbucks’ end. This ensures responsible sourcing emphasizing corporate social responsibility, which Starbucks already enforces.  
• Growing popular support for environmentally friendly products: Starbucks already has responsible sourcing policies but has the opportunity to offer more of its products in recyclable packaging.

Legal/Regulatory Forces

• Product safety regulations and GMO regulations outside the United States: Starbucks is already performing well in these aspects.
• Increasing employment regulations: Employment regulations, especially in developing countries, makes it difficult to access labor markets. This also increases the spending for human resources.

        2.3) Value Net

        Over the years Starbucks has been able to develop many positive relationships with a multitude of businesses. They have been able to turn some of their complementors into partnerships. Some of their partnerships includes Bank One, to help offer their Starbucks Card Duetto Visa. Along with, T-Mobile Hotspot, service which allows the customers to have access to wireless internet for free. Coffee makers is a huge complementor for Starbucks’ retailing side of business. They teamed up and made a coffee maker called Verismo.