Starbucks has become a coffee home for millions of people all over the world. The Starbucks Corporation has been providing high quality coffee products for over 40 years. Throughout the years this company has expanded their business domestically and internationally. Currently Starbucks is serving coffee in 75 countries with over 25,000 locations and has become the market leader in coffee retail market. This company gained a competitive advantage by utilizing their distinctive competences with their resources and capabilities to dominate the market. Starbucks used intangible resources with their brand name and reputation to expand globally. In addition, the company used related diversification to adjust to customer demands of different products that will compliment their high quality coffee. Therefore, they entered into a different industry that was related to Starbuck's business activity by providing customers with a variety of pastries, sandwiches, merchandise, and other beverages. Starbucks' business level strategy of focusing on customer needs and providing them with excellent customer service. In addition, Starbucks has become the market leader which allows them to establish a cost structure that allows them to gain superior profitability compared to their rivals.
Although Starbucks market growth in the American economy is a success, they see more potential in large populated countries such as India, Brazil and China. Starbucks domination in the domestic market and rapid expansion throughout the United States has slowed down their growth. Therefore, expanding to emerging economies such as Brazil where the coffee industry has growth potential. Other obstacles Starbucks may encounter are competitors such as Dunkin Donuts, McDonald's who focus on lower pricing strategies.
SECTION I: COMPANY HISTORY
The Starbucks Coffee Corporation started their coffee empire at Seattle's Pike Place Market in 1971. Their headquarters is located at 2401 Utah Avenue South, Suite 800
Seattle, Washington. The three coffee enthusiasts who founded the specialty coffee shop were Jerry Baldwin, Zev Siegl, and Gordon Bowker. The name Starbucks was originated from the novel Moby Dick, using the character Starbuck who was the chief mate of the ship.
In 1982 Howard Schultz began his successful career at Starbucks as director of retail operations and marketing. A year later Howard Schultz's passion for coffee sent him across the world to Italy, where he was fascinated by the Italian coffee culture. In Italy coffee was more than just a drink, it was a lifestyle. Therefore, he wanted to bring this vision for coffee to America and founded his own coffeehouse, II Giornale. Schultz brought his espresso beverage ideas to Starbucks and soon thereafter popularity started to grow in Seattle. In 1987 II Giornale acquires Starbucks and expands business throughout America. He rebranded the Starbucks name and culture where customers had a feeling of home comfort and community.
In 1992 Starbucks announces their initial public offering on the stock exchange NASDAQ with the ticker symbol SBUX. Throughout the years Starbucks has acquired companies such as Tazo Tea, Hear Music, Seattle Coffee Company, Ethos Water, Evolution Fresh, LA Boulange, and Teavana.
Starbucks Values and Vision
Starbucks Coffee Company mission statement states “To inspire and nurture the human spirit -one person, one cup, and one neighborhood at a time. Starbucks vision is to create a comfortable environment between work and home. This company's plan is to bring a welcoming feeling for everyone and providing a warm positive customer experience. Their values are centered around providing a fun and enjoyable work environment for their employees which will reflect on their work ethics and deliver a friendly personal customer experience. Starbucks is not only selling high quality coffee with a smile but so creating a relaxed atmosphere where customers will come back for more.
SECTION II: EXTERNAL ANALYSIS
Starbucks' primary market is the coffee and small snacks industry. The coffee market is a 48 billion dollar industry internationally. Of this market Starbucks holds about 36% of the market. This amounts to approximately 21 billion dollars of the total market share. Starbucks had total annual revenue of 21.315 billion dollars in their financial year of 2016. The Majority of Starbucks' revenue (83%) comes from this industry, which leads to the coffee and small snacks industry being the main source of income. The coffee and small snacks industry is relatively saturated and Starbucks' main competition comes from Dunkin Donuts, McDonald's, and Pete's Coffee. The annual growth rate of the industry is about 4%. Starbuck's has been growing at an annual rate of close to triple the industry growth rate at an average of 12% over the last two years.
Industry Life Stage:
The coffee industry has been around for hundreds of years and thus is a very mature market. Starbucks as a company is in a very mature stage as a company. Starbucks was established in 1971 and has a presence in 75 countries. They have a 36% of the market share in a fragmented market. Along with Dunkin Donuts having a 25% market share they own about 60% of the market share. This large market share within this industry makes them the market leaders and trendsetters. These two giants heavily influence the rest of the industry, although McDonald's has come in a tried to tap the market for price conscious consumers.
The coffee industry is a very dynamic industry that is influenced by many factors including consumer incomes, consumer health trends, pricing of coffee, and public perception towards the company. Consumers have relatively low switching costs and an abundance of substitutes like home made coffee and other beverages. This gives consumers high buyer power and thus it leads to a very dynamic consumer landscape for the industry. Starbuck's has tried to combat this with introducing healthier snacks and giving a renewed importance to high quality offerings. They have also introduced Starbuck's branded coffee beans to be purchased in supermarkets.
Five Forces Model:
Supplier power is low in the market as there are many developing companies that rely on the coffee bean industry as a major component of their economy. The climate needed for growing coffee beans is very specific and therefore there are only a few places in the world where these can be grown. The best example is of Brazil where the immensely important Arabica coffee bean is grown, over 30% of the worlds production of Arabica is grown here. The Arabica bean is a premium coffee bean and represents 59% of the world's coffee consumption.
Buyer power is moderate as switching costs for consumers are relatively low to non-existent and there are an abundance of substitutes and alternatives. However, buyer power is dispersed over many buyers and thus their bargaining power becomes relatively low. There is no single purchaser of the product that has enough power to shape buying trends.
Competitive rivalry is relatively high in the market as the market share is very fragmented. The industry is heavily influenced by Starbucks and Dunkin Donuts, as together they own roughly 60% of the industry. The other large player in the market is McDonald's; they have historically tried to appeal to a more price conscious segment of the market. However, McDonald's with the launch of its McCafe brand has taken aim directly at both Starbucks and Dunkin Donuts.
The threat of substitution is very high as there are many alternatives to coffee like soft drinks, energy drinks, and teas. There is also the threat of making your own coffee at home. Starbucks is fighting this by introducing its own branded coffee beans in grocery stores so that consumers can drink Starbucks coffee even if they brew their own. This helps build strong brand loyalty, which is important for when those consumers by their coffee beans or coffee from a store outside.
The threat of new entry is high at the localized level of the market as many mom and pop coffee shops can be opened with relative ease. The start-up costs of a small coffee and snacks shop are very small and thus there are many new entrants at the localized level. These small businesses face an uphill battle due to best locations already being owned by Starbucks, Dunkin Donuts, McDonald's, and Pete's.
However, on the domestic and international levels the threat of new entrants is very low as these four corporations dominate by market share. This allows them to block new entrants from getting supply of coffee beans and other materials at lower prices to compete with them.
Industry Organized Strategic Groups:
The main organized strategic group in the coffee industry is the International Coffee Organization. Established in 1971, the ICO governs the coffee industry as a whole on the international level. With the help of International Coffee Agreement of 2007 the ICO encourages it's members to be a part of the sustainable coffee movement. This movement is to ensure the sustainability of growing coffee with importance on ethics and the environment.
Starbucks has given great importance to making sure its coffee is ethically sourced. Starbucks has been accomplishing this imitative with the help of the Coffee and Farmer Equity Practice (CAFÉ). CAFÉ helps ensure that the coffee sourced by Starbucks and other members of CAFÉ is ethically sourced using sustainable methods in accordance with Conversation International (CI). This has helped Starbucks achieve numerous initiatives that include importance of social responsibility, environmental leadership, product quality, and Economic Accountability and Transparency.
Starbucks is also a part of many other organizations that promote ethical sourcing like the Sustainable Food Laboratory, Root Capital, Global Social Compliance Programme among others.
SECTION III – INTERNAL ANALYSIS
Mission Statement: “To inspire and nurture the human spirit - one person, one cup and one neighborhood at a time.”
Value Chain of Starbucks
Quality: They give the highest importance to the quality of their products and avoid standardization of their quality even for higher production output.
Efficiency: An emphasis on efficiency is reflected in their customer service where employees provide a fast service and an accommodating experience to each and every customer. Starbucks is known for its highly trained and knowledgeable employees. They are the main assets of the company and are provided with great benefits like stock option, retirement accounts and a strong culture.
Customer Service: Starbuck's brand is built on selling the finest quality coffee and related products, and most importantly providing each customer a unique and valuable experience, which is utilized through excellent customer service. The stores that reflect the culture of the communities in which they operate, thereby building a high degree of customer loyalty with a cult following.
Human Resource Management: The companies a values and culture rely heavily on building a very strong internal and external relationships with suppliers, which drives the successful deployment of its business strategy of organic expansion into international markets, horizontal integration through smart acquisitions and alliances.
Market Segmentation: Market Segmentation has been a huge dividing factor between Starbucks and its competitors. Starbucks targets a concentrated social class particularly the business class and middle-class people those who are working at the office and wanted to have a cup of coffee with a good atmosphere and facilities. Starbucks also segmented the geographically and demographically by selecting store locations where they can find the educated and coffee lovers. Targeting customers that are in need of a cup of coffee to and from work.
Product Differentiation: Product differentiation, however, has always been at the core for Starbucks to gain a competitive advantage. They have achieved this by branding their image as the leader in quality by providing the finest quality coffee bean coupled with state of the art brewing process to offer the finest coffee experience that is available. In addition to offering the quality coffee products as an effort to differentiate their product, they have also tried to bring more value to their customers by creating the coffee house style atmospheres for their customers to relax and enjoy their products.
Locations: Starbucks has stores in some of the most prime and strategic location across the globe. They target premium, high-traffic, high-visibility locations near a variety of settings, including downtown and suburban malls, office buildings, university campuses, grocery stores, airports and easily accessible locations next to highways. This has earned them a significant competence and advantage to be able to compete in markets. Their stores are visually appealing and designed to be hospitable acting as a “home away from home.” They provide free wifi, great service, warm atmosphere and provide an environment of community togetherness, which forms a wider part of the Starbucks Experience. With over 11,000 locations in the U.S. alone, Starbucks plans on adding more locations in the near future.
Distinctive Competencies: Customer Responsiveness
The company's human resource management value building strong internal and external relationships with suppliers, which drives the successful deployment of its business strategy of organic expansion into international markets, horizontal integration through smart acquisitions and alliances that maintains their long-term strategic objective being the most recognized and respected brands in the world. Starbucks pride themselves with providing the best and quickest service possible. For example, all locations only have 2 registers but always require a full staff of baristas to be on board. Some of the busiest Starbucks locations have proven they can provide to over 200 customers per hour. Baristas are highly trained to manage complex orders with their Beverage ID codes hand-written on every cup ordered, with over 87,000 different drink combinations that is sure to satisfy any and every customer.
Weaknesses & Threats
Competition: This is by far the biggest threat that Starbucks faces with the market being at a mature stage, there is increased pressure on Starbucks from its competitors like Dunkin' Donuts, McDonald's, Peet\'s Coffee, mom and pop specialty coffee stores. Although Starbucks is the leader in their industry, competitors like McDonald's can offer great tasting coffee to customers at a significantly cheaper price as well as covering areas in lower-class neighborhoods where Starbucks locations are noticeably absent from.
Slow Global Expansion: There is an over reliance on the markets present in the U.S. Starbucks is a global company and has a presence in 70 different countries. However roughly two-thirds of the company's revenue and profit for Starbucks comes from its domestic market ranging to 68%, while the remaining 32% of revenue and profit come from stores and locations outside of the U.S.
Imitable products: Despite Starbucks affinity for high-quality products, their drink and snacks are highly imitable. If the company's recipes, techniques of growing coffee beans or any other information regarding their R&D departments became public knowledge, company's could easily mimic Starbucks products in both taste and aesthetics.
SECTION IV: BUSINESS-LEVEL STRATEGIES
Starbucks is one of the few companies that has been able to maintain a great competitive advantage over its rivals. Utilizing the Porter's Generic Strategies, Starbucks offers a plethora of techniques that overall shape the success of the company within the Coffee industry. When developing the success of the conglomerate, one can look at it's effectiveness in broad differentiation, remaining a dominant force in cost leadership, while also elevating itself in a high profit-system that could be the result of their play in market segmentation. Being able to thrive in a high-demand and high-volume system, Starbucks seems to be a force that won\'t disappear anytime soon.
- Broad Differentiation:
Starbucks has been able to elevate very successfully through their technique in differentiation. Something they've been able to truly dominate in their market is their ability to generate very unique drinks with flavors that are mutually exclusive to their company while also promoting a very high quality “Customer Experience.” According to their website, Starbucks has over 87,000 drink combinations. This allows customers the ability to customize their drinks to an almost unlimited possibility while also making it specific to their taste, creating the illusion of making their drinks perfectly. They've also managed to recruit baristas that can socially interact with their customers. Maintaining a strong relationship with their loyal clients keeps them able to set the standard to how they can effectively promote new products without negatively affecting their relationship and a consistency in these customers continually coming back for more.
Starbucks also created a Supplier Diversity Program. With this program, diverse-owned businesses are able to collaborate with Starbucks, exchanging new coffee products and technological equipment for assets, while also being recorded as an official supplier for this mega-company. This promotes a differentiation for the company as they continue to find new and unique products while also remaining an edge in the coffee market. Through this use of continuously searching for innovation while also satisfying a need to their customers, Starbucks has been able to create an intangible value. This value produces a loyalty to the company, giving them the opportunity to sell their products at a premium and their customers wanting to purchase their goods. The customer loyalty is the proven successful result of their business strategy, also perpetuating a protection from environmental threats, such as competition from rival companies and making the entry to the coffee market much more difficult.
Not as dominant but still very effective, Starbucks has been able to shine as a cost leader. According to Lillian Cunningham from the Washington Post, Starbucks has managed to lower their costs at a more efficient level than any other coffee retailer. This was achieved through their success from their marketing team, but mainly through their continuous improvement in their level of production. Briefly, the marketing team is able to captivate the community through their use of the powerful web. Creating a website (MyStarbucksIdea.com), marketing analysts are able to record customers in which they can reflect their daily customer-to-barista exchanges, submit ideas for new products, while also recording polls into which drinks are the crowd favorite. This allows the company to generate what could be holiday favorites to recognize which drinks to promote at what time, while also providing better feedback to their customers, allowing them the opportunity to always improve.
Now what really allows them to thrive as a cost leader is through their increase in the level of production. With their advanced technology they've managed to uptick their production while also reducing time, this helps them enjoy more of a competitive advantage over their competition, including smaller companies that may not be able to keep up, this also justifies their reach within the economies of scale. Having more volume production also trickles down to their per cup costs decreasing, only increasing more profits for the company. These lower overall costs will also decrease the threat of suppliers, as the company will able to absorb the increased costs by having the higher assets to take care of their digression. This circulates back to the company being able to effectively hold a position in keeping their costs low while their profits high, overall granting them the most success within the coffee industry.
As shown in the graph, Starbucks has been able to improve in decreasing their operating expenses, at a very effective rate every single year, this gives them the push remain at the top of the coffee industry.
- Market Segmentation:
When looking at Starbucks, one must recognize their use of market segmentation. Starbucks began their illustrious company within very rich areas, usually proclaiming more towards regions that have customers that are in cities to work or go to school. This is all proclaimed through the process of the age aspect, something Starbucks targets quite frequently. The age tool is one in which Starbucks aims to supply regions with customers within a range of 18-45. This is usually a very precise range due to their analytics stating that many of their customers will come in more frequently in between this age, as many students or young workers will need something to either refresh them in the morning or revive them throughout the day, most usually coming in multiple times. Another segment that Starbucks tends to look at is that in behavioral. What this pertains to is the consumers that tend to come in during holiday specific times or ones that want to build on their loyalty programs that we offer, an example would be our card membership. These customers are more solely to come in respectively throughout the day or the week, usually being one of the more important factors to the company. Providing top box service while also pushing for loyalty on their customers, Starbucks has effectively shown their success in market. While targeting these communities and also following the guidelines in their segmentation strategy, Starbucks has also been able to successfully open shops within cities that will only give them more positive return.
(The model above shows an estimated percentage to Starbucks various targeting within the coffee market.)
SECTION V: ADDITIONAL STRATEGIC ISSUES
Technology can be said to be a very important part of Starbucks' products and services. The dominant technology that has, and is used in the company to provide the most sales would be the mobile app. An app is more convenient for coffee drinkers. It doesn\'t swell your wallet, there\'s little possibility of abandoning it at home or in your other coat, and it\'s less demanding to handle than a credit card. For Starbucks, the application accelerates the in-store installment handle, permitting baristas to serve more clients at peak times, vastly increasing the overall sales. Starbucks is even working on an order-ahead app feature to further dial up efficiency. Apps are personal. A Starbucks card will not be able to notify you when your favorite seasonal drink is back. The Starbucks app directly interacts with coffee drinkers, conveying customized offers on particular days or times, and alarming clients about forthcoming advancements at their nearby store. This customized way to deal with showcasing and upselling, advantages Starbucks\' main concern. Unlike like a coffee card, apps give profitable information. An always-on device not only opens a 1:1 customer communication channel, it allows the Starbucks marketing team to target in-app and monitor their effectiveness via their point-of-sale integration. The company's mobile transactions have earned so much that the total exceeded 1 billion dollars in 2013. This is about five million dollars per week which consists of 14 percent of the sales.
Technical standards are of the utmost importance in Starbucks. The technology standards are that they are working to be the leader in the Wi-Fi hotspot performance and have been switching from AT&T to google high speed internet. This is because Google claims that its offering is 10 times faster than the old AT&T Wi-Fi -- and 100 times faster in Google Fiber cities. Google Wi-Fi is expected to be installed in every U.S. Starbucks store by the end of the year. The dominant technology would be the delivery system. This can be seen as customers can now order things online instead of in person. This cuts out the wait time in line for those of us that have a busy schedule and do not have time to be standing there waiting for the order to be made. This lets you go in, pick up your order and go on about your day through the speed of the service. Your order would have been made by the time that you arrived. Going off this we can also say that the importance of the Just in time method that Starbucks has adopted lets them keep all their inventory fresh. They will get the next order of products right as they run out so that they will never be overstocked or out of products. Though there are other companies out there that are also keeping up with Starbucks none of them can keep up with the fast pace change of Starbucks.
There has been a significant paradigm shift in Starbucks according to Daniel S. Williams. Daniel comments that there is a rising trend in the nature of direct rewards instead of the emerged indirect method. Plainly put, s technological incorporations take an even greater precedent, the ability to digitally store rewards—even track exact customer purchases (the ‘Big Data' of today's society)—has, as a by-product, led to what is often cited as a more “personalized” system of generating rewards according to customer tastes, and by items typically bought over time. This may be true; what strikes me (at least in my continued patronage of Starbucks which I do not foresee ending anytime soon) is this seems somewhat in tension with the mission statement of Starbucks citing it is “One a company that not only celebrated coffee and the rich tradition, but that also brought a feeling of connection” since 1971. Starbucks also happens to be one of the leaders leading in dynamism due to the vastness of its retail chain.
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