Starbucks: An Overview

Starbucks Corporation was established in Seattle in the United States in 1971. The company is one of the world’s largest roaster and retailer of quality coffee. Starbucks Corporation has over 190000 employees and has stores in over 62 countries (Geereddy, 2012 p.2). The product mix of the entity is tea, fresh food items, roasted and high premium coffee and other varieties of beverages as indicated in appendix 1. The company also licenses its trademark to other stores, grocery, and foodservice firms in various countries. Starbucks undertakes the marketing of its products using different brand names in its subsidiary companies, for instance, Tazo, Refreshers, and Verismo. The company has improved its financial performance over the ways because of its rapid expansion globally and product diversification. For instance, in 2013, Starbucks Corporation had total revenue of $14.9 billion (Geereddy, 2012 p.2). However, it has been facing various challenges including falling share prices that is attributed to the declining customer base, market shift, and changing consumer preferences.

2. Terms of Reference

The strategy report seeks to analyze and prioritize the various problems that Starbucks Corporation faces during its operations across the globe. Different models are used for the internal and external analysis of the company such as SWOT and the Porters 5 market forces. Recommendations for the company’s future strategic development is provided in the report to help the management team to address the challenges facing the company.

3. Prioritization of the Main Issues Confronting Starbucks Ltd

3.1 SWOT Analysis

Strengths

Starbucks Corporation has a strong market position and an internationally recognized brand (Leshner, Camacho & Damassa, 2007 p.11). The company has increased its geographical presence across the globe due to its strong brand in the market. The brand recognition of the company concerning its coffee segment increases its competitive advantage in the market (Appendix 3). The established brand has been used as a business opportunity leading to an expanded investment portfolio. The entity licenses other businesses to use its brand at a fee thus boosting the revenue capacity and market presence of the company. Starbucks Corporation has an extensive distribution and supply chain channel across the globe leading to the continuity of its operations. It sells high-quality products and has an aesthetic appeal of its stores thus attracting more customers. For instance, Starbucks’ coffee shops are strategically placed in various locations such as high traffic areas, office buildings, colleges, and off-highway places. The company has a diverse product mix thus has numerous revenue access as illustrated in Appendix 1.

Weaknesses

Starbucks sells considerably expensive products by taking advantage of its established brand in the market (Leshner, Camacho & Damassa, 2007 p.11). However, the high prices reduce its consumer base. There are huge costs incurred in operating the numerous stores in multiple locations. The rapid expansion of stores has caused overcrowding of Starbucks’ stores which limits its growth in the long run. The firm has a negative corporate image concerning its treatment of workers.

Opportunities

There are emerging markets in which the company can expand its operations. The company’s international strategy is promising as it has established a strong brand hence can easily gain entry into new markets (Geereddy, 2012 p.3). For instance, the company has more opportunities in the Indian market which it entered recently. Starbucks can use its size, experience in the industry, and financial capacity to find new markets abroad. There are opportunities to expand the product mix because of the increased research and development. The company has started investing in tea and fresh juice through the acquisition of other firms hence it has more opportunities in the competitive market. Use of technology such as mobile apps to market Starbucks products presents it with opportunity for future growth (Cheng, 2018). The company can integrate its payment and marketing methods in the mobile applications to facilitate e-commerce that is continuously shaping the way of conducting business in the technological age.

Threats

There is increased competition in the market leading to a decline in the customer base for the enterprise. Intense competition has become a threat for Starbucks as the competitors such as McDonald’s, Costa Coffee, and Dunkin Brands intensify their products in the market (Geereddy, 2012 p.2) There is an increased price fluctuation in the coffee market due to the climate change that has affected coffee farming in various exporting countries such as Kenya and Ghana. There is an increased market saturation for coffee products across the globe leading to a decline in the prices of the commodities (Cheng, 2018). There are changes in the market trends and consumer tastes and preferences as more people prefer to make their coffee at home. Consumers are changing their tastes towards healthy products with the intensified health campaigns in various locations leading to a drop in the consumption of coffee products.

3.2 The Five Porters Model of Starbucks

A moderate threat of new entrants

The risk of new entrants in the market is average as there are barriers to entry which discourage new firms from entering the market (Geereddy, 2012 p.3) However, the barriers to entry are not so high since new companies have adopted new techniques of entering the market, for instance, through acquisitions. The initial investment capital to enter the industry for new firms is moderate because of the available leasing options for stores and equipment. Therefore, small coffee shops can compete favorably with Starbucks in the market.

High threat of substitutes

There is a threat of substitute products in the market as illustrated in Appendix 2. For instance, tea, fresh fruit juices, and energy drinks are potential substitute items which have reduced the consumption of coffee products. Consumers also make their coffee at home as a cost reduction strategy thus reducing the customer base for Starbucks’ products.

Low bargaining power of buyers

There are many buyers in the global market for coffee products hence no one can influence the prices charged in the industry (Geereddy, 2012 p.2). The product mix and influential brand of Starbucks in the market enable it to attract buyers irrespective of its costs thus reducing the buyer power. Furthermore, the company prices its products in the prevailing market price that is used by competitors hence buyers have little influence on its decisions.

Moderate bargaining power of suppliers

There is an average influence of suppliers on Starbucks as it is dependent on coffee beans that are grown in various parts of the world (Geereddy, 2012 p.2). Starbucks is highly essential for suppliers because of its vast chain of stores in different locations hence reducing the supplier power. Through the coffee and farmer equity initiative, suppliers have an equal partnership status thus reducing the power of Starbucks over them.

High competitive rivalry

The level of competition in the industry is high as there are large companies such as Dunkin Brands which have intensified their operations in the market. Buyers do not incur switching costs thus increasing the rate of competition (Geereddy, 2012 p.2). The growth rate of firms in the industry is relatively low due to changing tastes and preferences and the rise of substitute products which forces companies to compete for the available market.

3.3 Product Portfolio

Starbucks has a wide range of products in different markets (Appendix 1). The company has undertaken product diversification initiatives over the past few years to increase its revenue in the competitive market. Starbucks not only provides coffee products but has also ventured into the provision of household accessories such as mugs and coffee brewing machines (Starbucks, n.d.). However, the rising level of competition and changing consumer tastes and preferences are threatening the growth of the firm.

Coffee and tea

Starbucks provides over thirty-one blends of origin premium coffees. Coffee is the leading product offered by the company because of its established brand (Starbucks, n.d.). Starbucks has diversified its coffee leading to more brands that have increased its market share. The brands include Starbucks VIA, Coffee K-cup, Teavana, and Tazo tea filter bags. The organization also provides ready to drink products such as bottled Frappuccino, Starbucks Discoveries Energy Coffee Drinks, and Starbucks Iced coffee.

Handcrafted beverages

The company provides freshly brewed coffee and hot and iced espresso beverages (Starbucks, n.d.). Starbucks also provides consumers with non-coffee drinks such as the Starbucks Refreshers, smoothies, and teas. Frappuccino is also becoming one of the leading brands of Starbucks coffee in the market.

Household merchandise

The enterprise also deals in coffee and tea brewing equipment that are used in households (Starbucks, n.d.). It supplies mugs branded in its name, and other home accessories thus diversifying its products to cushion it against the risks of intense competition. Starbucks provides books to consumers thus obtaining additional revenue while using its underutilized spaces in the stores as bookshelves.

Fresh food

Starbucks Corporation has ventured into the provision of baked pastries, sandwiches, fresh fruit salads, yogurt, and fruit cups in its stores

4. Current Strategy

Focus on Quality Products

Starbucks focuses on selling high-quality whole bean coffees and beverages. The company has taken numerous efforts to comply with the coffee standards by strictly controlling the purchase of its coffee, roasting, packaging, and supplying the products in the market (Higbee et al., n.d. p.16). The firm ensures it has well-trained coffee baristas to improve the quality of the products with the aim of maximizing customer satisfaction. Starbucks aims at expanding its market base through the food service initiative in which it sells whole and ground coffees to educational institutions, hospitals, restaurants, airlines, and office coffee distributors. The firm has entered into contracts with Foodservice’s distribution firms thus transferring the risks to its distributors.

Credit Card Program

Starbucks Corporation has a privilege credit card program which its customers can use in any store. The card users are provided with the opportunity to qualify for rewards when they use them. The company has come up with a bonus reward system including free refills and milk options (Higbee et al., n.d. p.14). Therefore, customers can get complimentary drinks and other rewards thus encouraging customers to visit the stores for coffee.

Expansion of Other Business Segments

Starbucks has concentrated its efforts towards expanding its other business segments such as selling books, music, and films while slowly abandoning its core business which is coffee products (Higbee et al., n.d. p.14). The strategy towards other sections has been necessitated by the rise in the level of competition in the coffee and snacks industry. For instance, its leading competitors such as Dunkin Donuts have intensified their advertisements and the opening of shops next to Starbucks stores.

Opening More Stores

Starbucks Corporation is opening more stores despite the rising competition and market saturation. The entity is committed to expanding its market presence both locally and globally (Higbee et al., n.d. p.14). The company has a drive-through initiative in which it is extending the spaces of its stores and providing ample parking facilities to enable customers to visit the stores frequently.

Sustainability of Strategy

Feasibility

The expansion strategy of Starbucks Corporation is feasible since it has the financial capacity and strong brand name. The company therefore expands its market position across the globe by increasing the number of its stores. Starbucks is expected to increase its revenue earnings and global presence by opening new stores in the international market (Higbee et al., n.d. p.14). The strategy is viable as it opens new opportunities for the growth of the corporation thus compensating the increased loss of revenue in the domestic market due to the intensified competition.

Suitability

The strategy of introducing credit card privilege is a suitable marketing strategy for the company. The use of credit card and reward system encourage customers to visit Starbucks stores thus increasing its consumer base despite the high level of competition. However, other competitors have also established reward systems to attract more customers from the market (Higbee et al., n.d. p.14). Therefore, the privilege credit card system acts as a marketing strategy for the company, and since its adoption, the number of card users has increased over time signaling its success in the long run. The drive-through approach and expansion of the stores to provide more space for shoppers is a suitable strategy as it is likely to attract more customers, especially along the highways.

Acceptability

The Starbucks strategy of concentrating on other business segments such as bookstores and music at the expense of its core business is likely to affect the company’s sales revenue. Consumers and other stakeholders may have the perception that the firm has given up on its core trade which is the provision of coffee products. Therefore, aggressive advertising of its music and films business segment while abandoning the coffee business may not be accepted by stakeholders in the long run. However, the company’s commitment to providing quality and refined coffee products is acceptable since it is likely to improve its competitive advantage (Higbee et al., n.d. p.15). The focus on quality coffee aims at strengthening the entity’s core business segment in the market hence making it acceptable to all stakeholders such as shareholders, employees, and the management.

5. Future Development-Strategic Direction

Ansoff Matrix Analysis

Market penetration and development

The matrix is used to determine the strategic direction of Starbucks Corporation. It represents the product and available options in the market for the organization. In the present market, Starbucks sells its products in hotels, grocery stores, education institutions, businesses, and airlines. However, the company can expand its market to industrial areas, sports grounds, malls, and the large cafeteria. It should open new stores in the international markets (Haskova, 2015 p.16). The firm can also gain entry into Egypt, Middle East, Russia and the Indian market as illustrated in Appendix 4.

Product development and diversification

The company should undertake product development strategies. Fresh lunch programs should be introduced in its stores with the focus on Fiesta chicken salad, cheese platter, and fresh fruit salad (Haskova, 2015 p.16). Starbucks should undertake product diversification program to cushion itself from the intense competition experienced in the coffee market. For instance, it should venture into selling music CDs, children clothing, coffee mugs, utensils, chocolate and wedding cakes as illustrated in Appendix 4.

Analysis Using the BCG Matrix

Starbucks should introduce a business unit that specializes in tea since its consumption is high in the European markets such as Britain and Ireland. Coffee is already a cash cow for the company as shown in Appendix 5 thus requires little investment. The company should focus on the sale of tea to increase its market share globally. Research and development should be undertaken in the tea segment so that it improves its brand (Haskova, 2015 p.15). Coffee is already the leading source of revenue and can provide more income without additional investment. The introduction of tea would fall under the question mark quadrant thus indicating that it has a low market share but a high potential business growth rate in the long run. When the tea is introduced in the European market, the company is likely to expand its revenue as the product is expected to shift to the star category of the BCG matrix and later join the cash cow.

Speed and Scope of Change

No change option

Starbucks Corporation can consider a no change option in which its current strategy decisions stay in place (Shahi et al., 2007 p.19). The U.S. stores should remain under the ownership of the company, and its current opening of new stores should be undertaken. The strategic expansion in the global markets should continue to increase the Starbucks’ market share.

Moderate change option

The company should not rely on its current strategy to enable its future growth. Alternatives should be considered to improve Starbucks current state of affairs (Shahi et al., 2007 p.21). For instance, stores should be clustered to facilitate their easy management and reduction in the costs of operations. The company should lease out some of its stores to other firms to reduce the market saturation attributed to the high number of coffee outlets. Starbucks should license schools, military barracks, and other private firms to run its stores using its brand name with the aim of reducing overhead costs and potential risks.

Radical change option

Starbucks should take drastic changes in its business activities. Franchising should be undertaken by the company to gain entry into the international markets such as India (Shahi et al., 2007 p.19). Starbucks should consider franchising its business segments to local firms to reduce the cost of operations while establishing a strong brand in the markets. Aggressive acquisition strategy should be undertaken on the competitors to reduce the level of competition in the market.

6. Conclusion

Starbucks Corporation has been experiencing challenges in the U.S. and international market due to the increased competition from rival firms such as Dunkin Donuts. The company’s current strategy in the market is the continued opening of new stores, focus on other business segments such as books and music CDs. The company is also keen on improving the quality of its coffee and has used its strong brand position and market leadership to expand its operations in the international markets with the latest being India. Starbucks Corporation should undertake various strategies to improve its growth in the future. For instance, it should focus on tea sales in the European market. Acquisition and franchising strategies should be undertaken to increase the market position while reducing the cost of operations.

References

Cheng, A., 2018. There Are Bigger Challenges Facing Starbucks. [Online] Available at < https://www.forbes.com/sites/andriacheng/2018/01/26/there-are-the-bigger-challenges-facing-starbucks/#6045f7ab14ae > [Accessed 4 October 2018]

Geereddy, N., 2012. Strategic analysis of the Starbucks Corporation. Harward [Електронний ресурс].–Режим доступу: http://scholar.

Haskova, K., 2015. Starbucks Marketing Analysis. CRIS-Bulletin of the Centre for Research and Interdisciplinary Study, 2015(1), pp.11-29.

Higbee, Z., Liaw, C.Y., Ting, C., Tjho, K. and Ton, M., the Future of Starbucks.

Leshner, H., Camacho, C., & Damassa, S., 2007. Strategic Report for Starbucks Corporation. Harkness Consulting. [Online] Available at < http://economics-files.pomona.edu/jlikens/SeniorSeminars/harknessconsulting2008/pdfs/Starbucks.pdf> [Accessed 4 October 2018]

Shahi, T., Omar, J., Aufschlager, M., Schmerling, T. and Gassner, S., 2007. Case Study Report: How Starbucks Corp. Should Improve its Business? International Marketing.

Starbucks. n.d., Starbucks Company Profile. [Online] Available at [Accessed 4 October 2018]

Appendices

Appendix 1

List of Starbucks product mix

Food Products:

Coffee

Medium roast

Tazo tea

Fresh food

Sandwiches

Household Merchandise

Mugs and other household accessories

Brewing equipment for coffee and tea

Books

Gift commodities

Fresh food products

Pastries

Salads

Oatmeal

Fruit cups

Yogurt

Consumer products

Whole bean and ground coffee

Starbucks ready brew

Handcrafted beverages

Starbucks refreshers

Source: Starbucks Company Profile. [Online] Available at https://www.starbucks.com/about-us/company-information/starbucks-company-profile

Appendix 2

The Porters five forces for Starbucks Corporation

Force

Level of threat to Starbucks revenue

Competitive rivalry

High

New entrants

Moderate

Substitutes

Moderate

Supplier power

Moderate

Buyer power

Low

Appendix 3

SWOT analysis of Starbucks Corporation

Strengths

Weaknesses

Strong market brand

Fast store openings

Large size and financial strength

Market leader

Low employee satisfaction

Market saturation

Declining corporate image

Opportunities

Threats

Investment in new markets

The use of mobile apps for marketing

New store openings

Rising competition

Change in consumer preferences and tastes

Declining supply of coffee

Appendix 4

Ansoff analysis of Starbucks Corporation

Present product

New product

Present Market

Market Penetration: Grocery stores, education institutions, businesses, industrial areas, airlines, cafeteria, hospitals, sports grounds.

Product development

New fresh lunch program, chicken salad, cheese platter, fresh juice, energy drinks, hamburgers, yogurt.

New Market

Market Development

Opening more stores across the globe.

Gaining entry in the Middle East, India, Brazil, Egypt

Product Diversification

Music CDs, Children clothing, school bags, coffee mugs, chocolate, wedding cakes, gift cards, movie shops.

Appendix 5

The BCG matrix analysis of Starbucks

Question marks

Tea

products

Stars

Dogs

Cash cow

Coffee

Products

Low High

Relative Market Share