Starbucks Coffee Company (UK) Limited is a UK-registered subsidiary of American coffee house giant Starbucks Corporation.1 Starbucks was founded in Seattle, Washington in 1971 and first came into the UK market when it acquired the Seattle Coffee Company in May 1998.2 Their mission is “to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time.”3 Starbucks manages approximately 28,000 locations across 76 countries.4 Approximately one-third of these shops are owned by the company itself, with the other half functioning under license as franchises.5
As of September 2018, Starbucks UK operate 988 shops in the United Kingdom, with only 335 of these owned by the company.6 During the year within September 2018, the company opened 15 company-operated stores and 62 licensed stores in the UK.7 Starbucks' main product offering is its coffee, of which it offers over 30 blends and single origin premium Arabica coffees.8 Approximately three-quarters of the company's total revenue is reported to come from beverage sales, with ice-cream, sandwiches, pastries, yoghurts, salads, and a variety of other snacks and beverages accounting for the rest.9
2) External Environment of the Coffee and Snacks Retail Market:
2.1) Starbuck's Industry Overview and Analysis:
Starbucks mainly operates and competes in the retail coffee and snacks store industry.10 In recent years, the demand for coffee has become more common and a regular part of several consumers' daily lives.11 The industry revenue is estimated to increase annually over the next five years within 2018-19 at a compound annual rate of 4% to reach £6.3 billion; including the forecast revenue growth of 1.7% in 2018.12 Over the same period, the number of industry establishments is expected to grow at a compound annual rate of 3.3%.13 The industry is now forecasted to grow at an annualized rate of 3.2% over the next five years, with a potential to reach £7.4 billion revenues in the UK. This growth would be mainly driven by an improving economy, increase in consumer confidence and expanding menu offerings within the industry.14 Costa dominates the industry with a market share of 15.2%, Pret A Manger with 10.9%, Starbucks with 5.6% and other competitors like Cafe Nero, AMT etc.15 taking the rest as shown in Appendix 1.
2.2) Starbuck's Industry Life Cycle and Market Share Concentration:
This industry is in a growth stage with a low concentration level. Costa, Pret A Manger and Starbucks make up only 31.7% of the market share as shown in Appendix 1, giving them very little power in deciding industry trends as is shown in the Industry Structure in Appendix 2.
2.3) Porters Five Forces Analysis of the Retail Coffee and Snacks Industry:
Threat of New Entrants: Moderate
¬ There is an average threat of new entrants into the coffee and snacks industry as the barriers to entry are not high enough to deter new entrants from entering the market. (Appendix 3).
¬ But this rather easy entry into the industry is usually offset by presently existing brands identities as Starbucks who have achieved economies of scale by lowering cost and improving productivity with a huge market share. Therefore, there is a substantially higher barrier to success for the new entrants as they try to differentiate themselves from Starbuck's product quality, its superior real estate locations, and its store ecosystem ‘experience'.16
¬ Franchising however, lowers these barriers considerably by permitting new entrants to adopt strong brands, employ successful supplier relationships and obtain key training.
Intensity of Competitive Rivalry: High
¬ The coffee and snack industry is intense with competition. Competitors of Starbucks UK include Costa, Pret A Manger, Café Nero and many other small local coffeehouses. Costa is the UK's market leader with a 15.2% market share.
¬ There are only a few products which Starbucks offers which are unique to all other competitors which have helped them gain brand loyalty amongst customers. Otherwise, many of the beverages and coffee served by Starbucks are also available be competitors.
¬ Costumers also do not have any cost of switching to other competitors. All these factor in to contribute to the intensity among rivals to being high.
Threat of Substitutes: High
¬ The products offered by Starbucks include various food items, coffee and tea all which have substitutes such as juices, water, soda and other beverages.
¬ Products such as tea and coffee can also be made by consumers at home at a lower cost.
¬ There is easy access to substitute items and therefore, there are little to no switching costs, which makes the threat of substitution high.
Bargaining Power of Buyers: High
¬ As previously mentioned, there is a high substitute availability and low switching costs.
¬ Competitive rivalry is also on the high side which means that there is an abundance of choices for consumers and therefore, a price increase is enough for customers to boycott Starbucks.
¬ These are strong factors which outshine the fact that individual customer purchases are little when compared to the total revenue of the company.
¬ However, certain customers are less price sensitive and will continue to purchase from Starbucks regardless of a price increase based on the addictive nature of coffee and the particular taste preference of a customer.
Bargaining Power of Suppliers: Low
¬ The main involvements into the Starbucks value chain of is coffee beans and premium Arabica coffee. These products are grown in select regions all over the world and are standard inputs.17
¬ Starbucks works with many suppliers around the globe and the high variety of suppliers weakens their bargaining power as Starbucks is able to substitute between suppliers at low switching costs.
¬ Being the world's largest coffee retailer, the importance of doing business with Starbucks for any individual supplier is overriding because of the high volume of order.
¬ The bargaining power of suppliers is further weakened because of the large overall supply.
3) Internal Analysis of Starbucks Corporation:
3.1) Core Competence and Key Strategies of Starbucks:
Starbuck's main core competence and key strategy has been its ability to successfully leverage its basic product differentiation strategies by producing a premium product mix of snacks and beverages of high quality and standard. Its other core competence could be its absolute customer service and value-based approach for building strong internal and external relationships with suppliers, which drives the successful positioning of its business strategy into international markets as well as alliances and acquisitions which help to uphold their long-term strategic objective of being one of the most known and appreciated brands in the world. All these strategies have resulted in substantial competitive advantage for Starbucks over its competitors.
3.2) SWOT Analysis of Starbucks Corporation:
Starbucks is one of the worlds the biggest, strongest and most popular coffee brands with a significant geographical presence across the globe and maintain a 5.6% market share in the United Kingdom (Appendix 1) and has operations in 76 countries with a carefully selected array of global suppliers. Starbucks is also the most recognisable coffeehouse brand and is ranked 57th in the best global brands of 2018.18 Starbucks also diversifies its business minimising risks. These factors all show that the business has strengths in its strong brand image, high quality of products, extensive supply chain and moderate diversification through subsidiaries all which promote resilience.
In order to be consistent with its brand positioning, Starbucks follows a premium pricing. This increases profit margins but can also be a weakness because limits the company's market share. While such pricing policy appeals to middle to end customers, in times of economic sluggishness, many working class customers are willing forgo paying premium and switching to less expensive competitors. Another weakness is the imitability and high availability of substitutes for most of the products offered. For example, competitors or new entrants could develop beverages which bear similarities to Starbucks's and bars and local pubs could substitute for the ‘social experience' inn which they advertise.
There are many opportunities for Starbucks to grow and expand in Africa, Asia and Europe. This is an opportunity draw attention away from US where they have over 14,000 locations and the most of their revenues are generated. 19 An expansion in developing markets such as middle-class China and India would be of great opportunity for the company. Another good opportunity would be to introduce new unique products and higher diversification in order to reduce dependence on its existing industries, thus generally improving opportunities for revenue growth. Starbucks could also consider collaborating or setting up alliances with other firms which could in turn, improve distribution and raise market share.
The last element in the SWOT analysis of Starbucks is the threats which are facing the company. The first and most significant threat is the treat of existing rivalry. Competition is fierce in the coffee and snacks industry much like any other with its main threats in the UK being Pret a Manger and Costa which both have higher market shares of 10.9% and 15.2% consecutively (Appendix 1). Another threat is that of imitation. In lights of Starbuck's weaknesses as presented above, the threat of imitation involves competing firms which attempt to copy the look, taste and feel of products offered by Starbucks.
3.3) Starbucks VRIO Analysis: Shown in Appendix 4. The VRIO framework is used to analyse in detail the competitive position of Starbucks Corporation and its strategic positioning.
4) Future Recommendations:
As presented in the SWOT analysis above, Starbucks have certain weaknesses and opportunities which they could improve. They should therefore aim to develop their strengths in order to reduce the adverse effect of its weaknesses such as imitation, over saturation in the US markets and the influence of high price points on the company's market share in the global industry. The emerging markets of Brazil, India, China, South Africa and Mexico with a growing middle-class population continue to offer substantial prospects to improve new stores and serve more customers. Although, Starbucks has previously made significant headway into the Chinese market, there still is a lot of possible growth available. Starbucks also have great opportunities in selling packaged coffee and other beverages by collaborating with big box retailers to get the best shelf space. Another recommendation would be for Starbucks to make significant investments in advertising and marketing initiatives in the face of increased competition in the market. From Starbuck's global 10-K report, it can be seen that Starbucks invest very little in their advertising and marketing initiatives.
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