Coffee is something that most of the population have on daily basis. The coffee industry is a very reliable and profitable industry as it has an incessant market and customers. Basing this fact, many companies have started coffee companies and day-by-day the industry is getting bigger. Earlier there were a very few companies competing in this industry, but as time passed by, lots of local companies started expanding their chain and eventually became competitors in the broader market.
Starbucks is one of the major competitors in this industry and is the largest coffee chain in the world and had 27,339 stores worldwide as of 2017 (Statista, 2017). Starbucks has over 50% of the market share in the coffee industry. Starbucks is known for their special varieties of coffee, such as Cappuccinos, Frappuccinos', Lattes', Macchiatos' etc., The main name that flies in our mind when we hear coffee is Starbucks, the biggest coffee chain in the industry, that is always busy. The American organization, established in 1971, holds a worldwide presence in the coffee business, having stores worldwide. In those days; the company was a solitary store in Seattle's memorable Pike Place Market yet today the Corporation claims more than 27,339 retail locations in around 70 nations, worldwide.
In 1993, Starbucks expanded like never before and moved into the East Coast by building up a nearness in Washington, D.C (Larson, 2008). Because of recession hitting the economy in 2009, the business encountered a log jam and the business income has declined by 6.6%. Customers spent less on items. The business encountered a low annualized normal development rate of 0.9% from 2008 till 2013 with present industry incomes at $29 billion in the US (IBIS, 2017). It is foreseen that by 2018, there will be huge drop in the price of coffee beans. But, due to the market that Starbucks has established for itself, there shouldn't be much of an impact on the organization.
Threat of Entry
While there are many local and smaller chains of coffee shops that are able to compete with Starbucks and standalone on their own, the threat of new entrants is moderate to low. Starbucks has built a household name and continues to be the dominant force when it comes to the coffee industry. As we see with industry rivals, the likes of McDonald's and Dunkin Donuts have been forced to compete with Starbucks, but new entrants to the industry may not have the same promise or luck. In terms of new entrants, some of the external factors that contribute to this threat are the cost of running the business, supply chain cost, as well marketing and development of the brand.
For a new entrant to pose a threat to the coffee industry, the business must get off the ground and running. Initial costs will vary because factors such as the location of a coffee shop, the size, and production equipment are all funds that need to be covered. With that being said, fixed costs and monthly expenses such as rent and the cost for staff must be factored in to construct a business model that will be profitable. If a new shop is unable to make monthly fixed expenses, the business could go under before any big breaks. Variable costs will be proportionate to the amount of goods and services that a new coffee shop will be producing and will sell. As a new business owner, increasing revenue is a main priority it's important that a new coffee shop will be able to cover the variable costs monthly as well. Starting out as a new business that is dominated by such a huge brand, struggles may initially occur as the shop will be the new kid on the block amongst heavy hitters. Investing in a new shop will be thousands of dollars, so without the right business model, an unknown new entrant may not last long amongst other popular chains.
Another factor a new entrant to the coffee industry must give significant importance to would be ergonomics. One thing that Starbucks has done well and has likely contributed to their massive success is the efficiency and productivity of its workers and baristas. Starbucks has created a formula that gets customers in and out the door efficiently and left satisfied. Bringing the attention back to a new entrant to the coffee industry, ergonomics will either make the company more productive or hinder the company's success. It is important that a coffee shops sells large quantities of their products because they will be low-priced and costs need to be covered in order to yield profits. Continuing with ergonomics, a team leader or manager needs to be established and an effective plan and workstation should be developed so that baristas can perform to the best of their abilities so that efficiency and productivity is increased. While quality products keep a customer satisfied, great customer service and positive experiences is where customer retention and increased business begin to develop. While being a new business is a challenging feat, placing significance on and understanding ergonomics can contribute to increased revenue and productivity for a new entrant.
A key important factor that a new entrant must face to the coffee industry in brand development and marketing. Starbucks has a very strong brand and image that is recognized internationally. Because of this, customer loyalty to the big brand and name may decrease the potential of customers trying out a new competitor coffee shop if they are within proximity of a Starbucks. It took years for Starbucks to become the household name that it is now, making it that much more difficult for a newcomer to make a name for itself. Now while it may difficult for a newcomer to become that overnight success, a new entrant may have the potential of becoming a local competitor or regional competitor.
Continuing on with new entrant, brand development and marketing, according to Investopedia (2016), “realistically, the threat of new entrants is moderate at best. The convenience food industry is heavily saturated, and so is the market.” A new entrant to an already saturated market will be an uphill climb because that brand development isn't quite there just yet. A new coffee shop competes with Starbucks, Dunkin Donuts, and McDonald's McCafe, all brands known for their convenience factor and that have been incorporated into consumers' daily routines. Consumers do establish favorites and convenient locations pertaining to their routines, so a new coffee shop won't fair well in that aspect unless they offer some sort of unique experience that differs from the other brands. Coffee can be sold at so many different places so it can be very difficult to come up with that unique factor that distinguishes a new entrant's brand from the many other coffee shops in such a saturated market. According to Investopedia (2016), “the cost of a customer changing preferred coffee shops is minimal, but changing their habits and associated brands is a more complex and nuanced choice.” Without that unique selling point, a new entrant with a brand that has yet to develop most likely won't deter customers from their favorite, routine coffee shops.
For new entrants, another important factor to consider is economies of scale, as competition becomes very difficult for newcomers to the saturated market. With Starbucks being the huge brand that it is, it has much more negotiating power compared to newer brands that aren't nearly as established or successful. Because of this negotiating power Starbucks has, there's “lower prices, higher profit margins, or a combination thereof” (Investopedia, 2016). To put this into perspective, a new entrant may have to charge $6 for their coffee so that they can make up for the costs, however, Starbucks uses economies of scale to its advantage by buying its supplies and bulk and selling their products for cheaper. Starbucks has more opportunity to generate a profit than a new entrant in such a market. A new entrant to the coffee industry may face much adversity in the beginning as it will be an uphill battle to compete with well-established competitors, while trying to cement one's own brand into the coffee industry.
Intensity of Rivalry Amongst Existing Competitors
Starbucks faces the strong force of rivalry amongst existing competitors. This part of the Porter's Analysis shows that competition is among the most important of Starbucks' concerns. The strong force exists not only across large firms, but a variety of firms. McDonald's and Dunkin Donuts, as well as other specialty coffee companies are carrying their weight in the coffee industry. The strong force of competition is also due to the low switching cost, which means that it is easy for customers to shift from Starbucks to other brands. As with any business, competition should be part of Starbucks' focus (Greenspan, 2017).
The dynamics of the industry rivalry within the specialty coffee industry has changed dramatically over the last couple of decades. Starbucks competes with a variety of smaller scale specialty coffee shops, mostly concentrated in urban or metropolitan areas of the country. There's also a large focus from big-chain restaurants that have added a coffee focus to their business plan. All of these specialty coffee chains claim to be different from Starbucks in one way or another (Larson, 2008)
For many years, Starbucks faced almost no competition in the coffee business. It was Starbucks, the “luxury coffee”, or coffee taken as a commodity. However, with the entry of the competition mentioned previously, Starbucks is no longer the sole dominant player. These firms are a threat to Starbucks as they strive to provide “premium coffee” comparable to Starbucks' but at a lower price. Despite that, we should consider whether the Premium Roast Coffee in McDonald's or in Dunkin Donuts is actually comparable to that of Starbucks in terms of flavor, aroma and quality. There have been mixed reviews from recent surveys in the public media, suggesting that there might be some behavioral economics going on. Whether or not Starbucks coffee is better than other coffee seems to be the matter of perception rather than actual quality (Higbee, Liaw, Ting, Tjho, & Ton, 2008)
Let's look at the small, local coffee shops idea. There has been a rise in popularity of independent coffee shops across the world. While they may not be able to compete with the corporation as a whole, they can disrupt Starbucks' business. Starbucks' CFO, Scott Maw, claims, that they are “still not seeing any one competitor or even a smaller number of group of competitors being an influence on our business at any time…but what we have acknowledged ... is the collective group of independent coffee shops out there, they are doing a lot of what Starbucks has been so good at for so long" (Taylor, 2017). These independent coffee shops are a lot like independent bookstores. People go to them for sentimental reasons or for higher quality service (Bary, 2017). Like any large corporation, Starbucks does come under increased scrutiny and have to invest in corporate social responsibility activates and maintain tight control over labor practices (Geereddy, 2013). For instance, some people refuse to buy coffee from a chain; they may opt to frequent a locally owned coffee shop for ethical reasons or the "cool" factor. This trend is primarily amongst urban millennials, people in urban areas and people in smaller towns who do not have local Starbucks locations (Investopedia, 2017).
In addition to these small, local coffee shops, two of the largest companies in the world have entered the specialty coffee segment for Starbucks to compete against. The first of these competitors is Dunkin Donuts, who claims to be "the world's largest coffee and baked goods chain." Dunkin focused on selling donuts for 40 years and figured out it wasn't going to work. They shifted to a ‘coffee first' model in the 1990s and declared war on Starbucks in 2006. Since then, the franchise has put enormous emphasis on their coffee beverages. They serve coffee beverages in an assortment of types and styles including espresso, cappuccino and latte.
When Starbucks recently temporarily shut down 7,100 of their stores to retrain their baristas, Dunkin Donuts responded by extending their hours of operation and offering small lattes, cappuccinos and espresso drinks for under a dollar. The other major competitor facing Starbucks is the fast food chain, McDonald's. McDonald's introduced low priced ‘premium coffee' and joined the Starbucks/Dunkin Donuts war in its early stages. The key to McDonald's success has been the consistency, coupled with their quick service and low prices. Knowing that they couldn't compete with Starbucks' atmosphere and experience, McDonald's invested $700 million in its "plan to win" strategy. The project has led to the gutting of many locations by tearing out the molded plastic booths and replacing them with extra-large leather chairs. To help with improving the ambience and atmosphere, stores replaced the bright color schemes with more contemporary muted tones and softer lighting. As larger and larger companies enter the industry, the strategic stakes become higher, pushing some companies such as Dunkin' Donuts and McDonald's to differentiate themselves through price superiority (Higbee, Liaw, Ting, Tjho, & Ton, 2008). In summary, the current the competition amongst big chain and small, local coffee shops remains very high (White, 2017).
Starbucks is more than a coffee shop; the company sells its products in supermarkets, leverages mobile technology, and thrives from the overall “Starbucks' Experience”. In the case of supermarkets, Starbucks' business could be affected by the pricing that the markets can offer its customers. The customer who pays a premium for Starbucks coffee in the supermarket may not be as affected by economic conditions as other shoppers who opt for whatever is on sale. However, the switching cost is low across the coffee industry. When Starbucks coffee is placed beside several other brands, such as Dunkin or McCafe, a shopper could easily choose another brand when there is a sale (Investopedia, 2017). Starbucks efficiently leverages mobile technology with its mobile application, which is keeping people tied to the company's ecosystem. Ordering in advance via Starbucks' smartphone app is a convenience that probably shouldn't be ignored (Bary, 2017). They make significant investments in technology to support their growth every year (Geereddy, 2013). This high level of integrating technology into sales processes represents one of the solid sources of value for Starbucks Coffee. The company has successfully implemented mobile order and pay system for its products and currently, about 8% of all orders are placed via mobile phones (Dudovskiy, 2013). The “Starbucks Experience” expands with each location. 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 retail centers, office buildings, university campuses, and in select rural and off-highway locations across the world. Their stores are visually appealing and have a ‘cool' factor attached to it with being designed to reflect the unique character of the neighborhood they serve in. They provide free wifi, great music, great service, warm atmosphere and provide an environment of community meeting spot, which forms a wider part of the “Starbucks' Experience”. The main aim for the firm is to make their stores a ‘third place' besides home and work (Geereddy, 2013). Howard Schultz, CEO of Starbucks, said, “Starbucks is something beyond a cup of coffee” about the philosophy of a Starbucks experience and it certainly resonated with people around the world (Chris, 2016).
The main factor that regulates the competition for Starbucks is its market share. It has the highest market share followed by Dunkin and McCafe. However, the premium quality and product based differentiation that Starbucks uses also give it some edge over its competitors. However, the industry has matured and growth rate has moderated as a high number of players are competing for market share. Still, overall there is always space in this industry for new players, which adds to the intensity of competition in it. Starbucks has to focus on the “Starbucks' Experience” to grow and maintain the cult-like following (Pratap, 2017).
Starbucks has effectively leveraged their foundation of product differentiation strategies by offering a premium product mix of high quality beverages and snacks. They have developed not only a strong brand, but a cult-like following that is built on selling the finest quality products and by providing each customer a unique “Starbucks' Experience”, which is derived from supreme customer service and well-maintained, unique stores that reflect the culture of the communities in which they operate, thereby building that cult –like customer loyalty that can compete on a micro and macro scale. They will continue with their long-term strategic objective of being one of the most recognized and respected brands in the world (Geereddy, 2013).
Pressure from Substitute Product:
Starbucks is innovating themselves to retain its market share with different line of products. Besides coffee, Starbucks has a few other line of products like tea, pastries and merchandise products like (Mugs, gift cards, instant coffee etc.,) and with the acquisition of The Coffee Connection in 1994 company made very successful in keeping the consumer more attracted (paramore, 2017). Even the company has been keeping its pace in innovation, there is always heavy pressure to company from the substitute products, even though Starbucks is a “to go” place for coffee but with slight change in the prices has huge impact on the customer they always makes them look for other alternatives (Investopedia ,2017 ).
Many coffee consumers think about tea, hot chocolate, and caffeinated beverages to be sensible substitutes. Nevertheless, consumer can pick to blend their own flavor rather than get it from a Starbucks store. Since these substitutions do precisely the indistinguishable job as store-bought coffee, customers will not incur additional costs in switching products. Availability of subsites is very high, customers can quickly change to replacements since there are lots of substitutes available and it all depends on the different factors especially cost. In addition, many of these replacements cost significantly less than Starbucks products (Greenspan,2017).
Starbucks added more like “cool factor” especially college students but many vendors are trying to attract the same customer with creative and innovative drinks as alternatives with more on budget friendly compared to Starbucks. Products like Chick-Fila's iced coffee, Peace Tea are direct competitors to Starbucks on its respective line of products (The Odyssey Online, 2017). Besides the traditional drinks, the competitors started new strategy of adding “Healthier Drinks” especially from the small group of independent stores which are direct competition to Starbucks are substitute products with healthier and costs less than the Starbuck store coffee. (The Odyssey Online, 2017).
The willingness of clients to change across different product, the primary substitute products posing a threat to the specialty coffee industry are the caffeinated soft drinks. Cause of the health issues related to carbonated soft drinks, Coffee has slowly gained taste over carbonated soft drinks, showing coffee as a comparatively healthy option. Conscious spending of buyers will enable them to choose alternative products that give them same feel for lesser price. As there is no switching cost involved customers will be willing to try different alternative products that are healthy and price effective. Starbucks should increase its product line and introduce other customer favorite substitute products, to sustain its customer base.
Even with the high competition from the vendors especially small groups as well the major vendor McDonald's and Dunkin Donuts Starbucks is sustaining in the market with its product differentiation strategy by maintain the stabilized prices without sacrificing the product quality, brand impact on the customers (Starbucks, 2017).
As stated above a consumer have a number choices to buy a coffee most of the people tend to buy in Starbucks with which they say “Coffee experience is more important that actual coffee quality” (Anon, 2017).Starbucks excelled in creating the coffee experience the customer is looking, Starbucks market share shows the customer are happy with the brand loyalty and experience and preferring Starbucks instead of its substitute products.
Bargaining Power of Buyers
When specialty coffee was first being produced, its target consumer segment was the upper income class. Over the past decade or so, there has been additional growth that has developed across consumers with middle or lower incomes. A change in consumer habits has been brought on by the accumulation of knowledge by the buyers regarding specialty coffee. As buyers have become more sophisticated and purchasing is based on better information, a natural tendency for specialty coffee to be treated more like a commodity has developed. Stopping for coffee has become a habitual morning routine and walking into work with a coffee cup is somewhat of a status symbol (Larsaon, 2008).
In the past, buyers did not really have bargaining power when it came to premium coffee such as Starbucks. They were in their own space for a long while, but they have competition now. With McDonalds offering a premium roast coffee for lower price, buyers now have more bargaining power than they've had in the past (Higbee, Liaw, Ting, Tjho, & Ton, 2008). Buyers can easily shift away from Starbucks to McDonald's or other options because it is now affordable to do so (Greenspan, 2017). The costs of switching coffee shops or brands are minimal, and because many of Starbucks' products are priced at a premium to its competitors, going to a different coffee shop or changing brands may even mean its customers save money by going somewhere else. If the company's patrons do not feel they are getting a good deal or a good product and experience for the price, they will go somewhere else (Investopedia, 2016).
Individually, these buyers do not wield much power, as the value per transaction is relatively low, but collectively they do. The typical purchases are small, but they tend to be a daily ritual for many. Taken as a whole, Starbucks' customers have many of the same preferences: a more upscale, convenient food experience in a comfortable environment at a good price. The customer base is looking for that “Starbucks' Experience”. In turn, Starbucks has to make sure the perception of its brand, its products and its stores meet those preferences. This means continually updating its menu with new items, music selection and the controversial seasonal cups that are really a genius marketing gimmick (Investopedia, 2016).
Even though there are low switching costs with high availability of substitute products, industry leaders like Starbucks price its product mix in relation to rivals stores with prevailing market price elasticity and competitive premium pricing. Starbucks has a cult-like following status among consumers and they have also implemented rewards programs like the Starbucks Card to drive loyalty. The Starbucks Card has led to an increase and the frequency of store visits by cardholders (Geereddy, 2013). It can also be integrated with their mobile application. Starbucks is an acknowledged leader in the industry in terms of exploiting information technology and technological developments. The Starbucks app offers multiple features such as store locator, nutrition-based information and rewards program. Moreover, ‘My Starbucks Signature' initiative allows buyers to develop their own signature drinks, name the drink and share the new flavor with the community. These things are all part of the “Starbucks' Experience” to entice buyers to stay loyal (Dudovskiy, 2017).
Today, a large majority of commuters pass by a variety of stores offering coffee each morning. Superior customer service is the core source of Starbucks' competitive advantage (Dudovskiy, 2017). Coffee drinkers have too many options and switching costs are low; one of Starbucks' top-priorities must be a focus on the bargaining power of buyers (Greenspan, 2017).
Bargaining Power of Suppliers
Starbucks has its own market share and loyal customers. In such a situation, starbucks can actually take advantage of it's suppliers. However, it keeps up a Fair exchange affirmed coffee under its coffee and farmer equity (C.A.F.E) program, by which the suppliers are given a reasonable association status, which yields them some tolerably, low power. Interestingly, providers offering coffee machines have higher haggling power in light of the fact that there are relatively few providers offering these machines. Essentially, providers have direct risk in this industry. Notwithstanding the diverse coffee beans Starbucks utilizes as a part of its restaurants, there is additionally a vast amount of milk expected to make each one of those strength drinks.
At first glance, this may influence it to appear as though the Starbucks' providers would have a considerable measure of power however look further at the relationship Starbucks has with those suppliers. It purchases coffee beans, however the organization does all its own roasting and blending. As such, it might require Arabica beans from select areas however it won't make any difference to the organization whether those beans are given by Company A or Company B, as long as the quality is steady. In like manner, Starbucks utilizes substantial amounts of milk. It doesn't make a difference which dairy supplies it. (Investopedia, 2017)
As starbucks is a huge organization, which has established its own brand in several countries across the world, none of the suppliers would step out of the on-going deals which are fair for both the parties. Because, Starbucks gives business to these suppliers and they make money with it. But, in case if any supplier wants to step out of the deal, they would be at loss, because Starbucks has already got it's brand name which helps them in finding a new supplier within no time. If any supplier steps out of the deal, it'll be really tough for them to find another company to buy their products at the large amount, that starbucks is buying. So, because of starbucks' brand name, none of the suppliers would take the risk of stepping out of the ongoing partnerships and dealerships. Hence, the bargaining power of starbucks' suppliers is not that great for the suppliers.
Starbucks has an excellent growth opportunity in improving the Tea and Fresh juice products lines in Asian countries. Recently Starbucks has introduced the tea segment in China and India and expecting a profit of 3 Billion dollars in sales in next few years (Fortune, 2017).
Starbucks can build up these tea segment as new line of products along with the coffee.
As the lifestyle and consumer preferences changes towards more snacks and beverages choices, Starbucks must tailor its menu's and expand to provide product offerings in its mixture depending on the locality and the people's preferences.
Starbucks growth strategy is saturated in the U.S. market and right now it is expected to find a Starbucks for every 3.1 miles (Franck, 2017). Starbuck rate for growth is too high that itself impacting sales of each other. Starbuck company can make strategic move in concentrate on getting additional penetration into untapped rural markets which could potentially improves the sales.
Starbucks growth is beverage products that are brewed and it's packed coffee packs and company should build even better relationships to get more superior shelf space and boost the efficiency of this distribution stations.
...(download the rest of the essay above)