S T A R B U C K S I N C.
Strategic Management Report
A Strategic Pathfinder for STARBUCKS
Version 1.0
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Fachhochschule Osnabrück Faculty of Business Management and Social Sciences Master in International Business and Management
Strategic Management Report – A Strategic Pathfinder for STARBUCKS
Assignment for the module Strategic Management
Summer Semester 2014 Lecturer:
Mrs. Kaur-Lahrmann
Authors:
Elin Lee (598736) Marina Ristic (637822) Maximilian Franke (634580)
Submission date: 6th of June 2014
____________________________________ DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. In consideration of human and / or mechanical errors, either during the process of compiling the report or production, the author accepts no liability whatsoever for any damage resulting from errors, inaccuracies or omissions affecting any part of the publication.
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Table of Content Executive Summary ................................................................................................................................. 3 1.
Introduction ..................................................................................................................................... 5
2.
Problem Definition .......................................................................................................................... 6
3.
Report Objective.............................................................................................................................. 6
4.
Report Framework .......................................................................................................................... 6
5.
Theoretical Framework ................................................................................................................... 7
6.
Analysis of Current Situation ......................................................................................................... 14
6.1.
Internal Analysis ........................................................................................................................ 14
6.1.1.
Company Background Analysis.............................................................................................. 14
6.1.2.
Internal Characteristics Analysis............................................................................................ 19
6.1.3.
Strategy Analysis ................................................................................................................... 21
6.1.4.
Financial Performance Analysis ............................................................................................. 28
6.1.5.
Internal Factor Evaluation Matrix.......................................................................................... 30
6.2.
External Analysis........................................................................................................................ 32
6.2.1.
Macro-Environmental Analysis ............................................................................................. 32
6.2.2.
Industry Analysis.................................................................................................................... 37
6.2.3.
External Factor Evaluation Matrix ......................................................................................... 39
7.
Assessment Analysis (Fulcrum) ..................................................................................................... 41
7.1.
Current Performance Assessment............................................................................................. 41
7.2.
Expected Performance Assessment .......................................................................................... 44
7.3.
Developing Strategic Focus ....................................................................................................... 47
8.
Solution Analysis............................................................................................................................ 50
8.1.
Strategic Alternatives ................................................................................................................ 50
8.2.
Goals and Evaluation Criteria .................................................................................................... 51
8.3.
Strategy Selection...................................................................................................................... 53
9.
Recommendations......................................................................................................................... 59
Appendices ............................................................................................................................................ 63 Bibliography........................................................................................................................................... 69 Declaration ............................................................................................................................................ 73
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Executive Summary Starbucks is a global company operating in the coffee retail market since 1972. The company, which has positioned itself as a seller of premium coffee products, has greatly expanded its market position and presence in the past two decades. Today, the company is serving coffee enthusiasts in 64 countries and has grown to become the world’s largest coffee house company. Starbucks seemingly undisputed market leadership position can be attributed to the company’s clever product diversification and market expansion strategies. In response to changing consumer needs and demand, Starbucks has evolved from a mere seller of coffee products to full-fledged chain “restaurant”, offering not only coffee products but also other beverages, foods, and merchandise. Moreover, stagnating market growth in developed economies has prompted the company to move into emerging economies with high growth potential. Countries like China, India, and Brazil have been portraying increasing consumption rates of coffee products for years and are likely to surpass coffee consumption in developed countries by 2020. Despite a positive market outlook, Starbucks is in need of strategic counseling as the company faces not to be underestimated challenges in the short- to medium-term. Those challenges emanate from established competitors like McDonalds and Dunkin’ Donuts who defy Starbuck’s market leadership position by driving aggressive low-pricing strategies in established and emerging markets. Moreover, new trends in the coffee industry have opened up new segments with high growth potentials. Starbucks remains unsure how tackle new segments and what impact trends could have on its product portfolio. This report is meant to be a strategic pathfinder that aims at illuminating different strategic alternatives in the light of the many opportunities and threats that lie ahead. The report will also give advice on how to utilize internal strengths to capitalize on opportunities and how to minimize weaknesses to avoid threats. The internal position of Starbucks is strong, indicating that the company excels in utilizing strengths to create competitive advantages. Core strengths of the company are its excellent brand image, customer service, supply chain management, and financial position. With the help of the latter capabilities, Starbucks is able to retain its market leadership position, improve the ability to open new stores at top-sites, and mitigate volatilities in global coffee 3
bean prices. One major weakness is that continuous adaptations and additions to the product portfolio have resulted in various products lines becoming unprofitable (overextension). The external position of Starbucks is balanced, indicating that the company is only marginally able to respond to external forces. Since the economic downturn in 2008/2009, customers have grown more price-sensitive and low switching costs in the industry have made them more prone to move to competing brands. Moreover, saturated markets at home have increased the competitive pressure on Starbucks. Having missed the first-mover advantage in the single-serve coffee segment, Starbucks has to quarrel with a number of competitors. Despite heavy challenges in the external environment, the analysis has shown that Starbucks is well-positioned to confront expected changes in the industry. The company is advised to continue key strategies on corporate level: aggressive expansion strategy in emerging markets, product development/positioning strategies for niche markets, retrenchment strategies for unprofitable product lines, and alliances for reputable yet slow-growing product lines. Whilst the latter strategies are enough to maintain and defend current markets shares, the company must undertake additional strategic changes to achieve a sustainable market leader position in the short – to medium-term. Here it is important to increase marketing spending to raise awareness among customers, retain the premiumpricing strategy to boost brand image, establish trend-scouting facilities to foresee emerging consumer needs, and hedge against volatilities in the market prices of coffee beans by employing forward contracts or similar hedging strategies.
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1. Introduction Being the world’s largest coffee company both in terms of sales and market share, Starbucks Coffee Company (hereinafter referred to as “Starbucks”) has managed to position itself as a distinguished and successful provider of high-quality coffee products, attracting millions of customers worldwide. The company, which was founded in Seattle in 1971 as a mere roaster and retailer of whole bean and ground coffee, tea, and spices, first entered the market as a seller of brewed coffee in 1985, when Howard Schulz, former employee and current CEO, realized the huge potential of selling brewed specialty coffee. Following the opening of eleven stores in the Seattle area, Starbucks began its expansion first in the north-western United States and then across the rest of the country. Global expansion did not take place until Starbucks’ initial public offering (IPO) in 1992, which further highlighted Mr. Schulz’s intention to turn Starbucks into a truly global company. Its first international store opened in Tokyo in 1996, followed by Singapore and the Philippines. In the early 2000s, Starbucks expanded into other important key markets, covering most Asian countries and also moving into the European, Australian, and Latin-American market. Today (2011), the company has 16,635 stores in 50 countries of which 8,832 are wholly-owned stores and 7,803 licensed stores. By forming alliances with major coffee producers and retailers as well as acquiring emerging competitors, Starbucks has managed to extend and eventually consolidate its market position in recent years. The company is also following hot trends in the coffee market, such as single-serve coffee or the delivery of ready-to-be-served coffee to luxury hotel rooms. Moreover, Starbucks has realized that emerging markets, most prominently China, have huge untapped potentials that need to be exploited if the company wants to gain and maintain a competitive edge over competitors. The aggressive expansion strategy that Starbucks is currently pursuing in China can thus be understood as a clear message to competitors that it will not render the number one spot in the global coffee market without a fight. In fact, Starbucks’ future could not look any brighter. With third quarter (2011) sales figures exceeding the five percent threshold in both the USA and internationally, and new shops opening in China almost on a daily basis, the company seems have chosen the correct strategic path for the upcoming years. In the words of Starbucks’ CEO Howard Schulz,
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“Starbucks has never been healthier, more connected to customers and partners, or better positioned to go after tremendous business opportunities that lie ahead.”1
2. Problem Definition Despite the current success and seemingly undisputed market position of Starbucks, the company faces not to be underestimated challenges in the short- to medium-term. Analysts are reminded that direct competitors, such as Dunkin Brands and McDonald’s are aiming to gain and attract customers globally who otherwise may go to the pricier Starbucks stores.2 Moreover, the company remains unsure as to what impact its growth strategy in emerging market will have on corporate performance – whether perceived opportunities are really sustainable or actually short-winded. Saturated home markets and the rising importance of niche markets pose further challenges for the company. Facing uncertainty, Mr. Schultz is in need of a clear strategic plan for the short-to medium-term.
3. Report Objective This report aims at helping Mr. Schultz to better illuminate and pinpoint the different strategic paths that branch out in front of the company. In a sense, this report is meant to be a strategic pathfinder with the objective to help Starbucks better assess its current strategic position and – if necessary – propose a new strategic approach in the light of the many opportunities, threats, strengths and weaknesses that surround the company.
4. Report Framework The framework of this report reflects the phases a comprehensive strategic analysis (see appendix 1).3 In the first phase, the current situation of the Starbucks is analyzed by means of highlighting strengths and weaknesses (internal analysis) and opportunities and threats (external analysis) that have an impact on the company’s current strategic performance – both on corporate and competitive level. The effectiveness of the current strategy is determined by considering past and current financial ratios (financial analysis). In the second 1
Cf. Reed, M., Brunson, R. (2011): p. 175 Cf. Reed, M., Brunson, R. (2011): p. 175 3 Cf. Boardman, A., Vining, A. (1999): p. 3 2
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phase, the current performance of Starbucks is summarized and judged based on whether or not it fulfills corporate expectations. Depending on the outcome, a rationale for action is raised and broad strategic directions are formulated. In the third phase, several reasonable and mutually-exclusive strategic alternatives are generated. Those alternatives are analyzed based on the goals and objectives of the company. The most attractive strategic alternative (or alternatives) is determined by the degree of impact it will have on Starbucks’ performance goals and value chain. The last phase consists of the recommendation. Here, the proposed strategy (or strategies) is justified.
5. Theoretical Framework Backing the comprehensive strategic analysis will be a multitude of strategic management tools and methods which have been deemed relevant for solving the problem at hand. The relevance and applicability of the tools will be explained in this chapter to avoid lengthy explanations in the main body of this report. BCG MATRIX The BCG Matrix was applied in order to explore the growth potential of Starbucks’ four major product categories. The matrix divides product categories into four segments based on their market share (x-axis) and market growth (y-axis). Since it was impossible to find accurate and up-to-date market share figures for Starbucks’ product categories, the matrix was modified according to what sales growth categories portray (y-axis) and how profitable they are (x-axis). Consequently, categories were allocated to four distinct portfolio segments: 1. Stars: product categories which display high sales growth and substantially contribute to overall profits. 2. Question marks: product categories which display high sales growth, however only contribute little to overall profits. 3. Cash cows: product categories which display low sales growth but still contribute substantially to overall profits. 4. Dogs: product categories which display low sales growth and contribute little (or nothing) to overall profits. 7
PRODUCT-CUSTOMER ANALYSIS The Product-Customer Analysis was applied to highlight the relationship between Starbucks’ different product categories and customer groups. The analysis highlights which customer groups prefer which product categories, and what they value most in each product category. For Starbucks, this information can be important if the company has to decide which product lines to develop or discard. PORTER’S GENERIC STRATEGIES Porter’s Generic Strategies were used as a means of evaluating Starbucks’ current strategic stance on competitive level. This model describes how Starbuck pursues competitive advantages across its market scope. With Porter’s Generic Strategies, competitive advantage is defined either by offering lower costs than competitors or by differentiating product offerings to an extent that allows the company to command higher prices. Those strategies are applied either in a wide market context (industry-wide) or in a narrow market context (focus on selected markets). Consequently, four distinct business strategies can be determined: 1. Overall cost-leadership: the company offers lower prices than competitors to a wide selection of customer groups. 2. Differentiation: the company offers distinct and unique product categories which cannot be emulated by competitors at a higher price and to a wide selection of customer groups. 3. Cost focus: the company offers lower prices than competitors in niche markets. 4. Differentiation focus: the company offers distinct and unique product categories which cannot be emulated by competitors at a higher price in niche markets. INTERNAL FACTOR EVAULATION MATRIX (IFE) The IFE Matrix was used to evaluate major strengths and weaknesses in functional areas of Starbucks and determine whether or not the company has a strong or weak internal position. The IFE Matrix can be compiled using the following four steps:4
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Cf. Maxi-Pedia (2014a): Online publication
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1. Compile key internal factors: key internal factors are the strengths and weaknesses that can be complied from the internal analysis of Starbucks. 2. Assign weights: assign weights that range from 0.00 to 1.00 to each factor. The weights should be assigned according to each factor’s importance to Starbucks’ overall business strategy. 3. Assign ratings: assign ratings on a scale from 1 to 4. A rating of 1 represents a major weakness, a rating of 2 represents a minor weakness, a rating of 3 represents a minor strength, and a rating of 4 represents a major strength. 4. Multiply and sum: multiply the weights with the ratings and sum all products to reach the final score. The average score is 2.5. A score exceeding the average indicates a strong internal position. A score that is under the average indicates a weak internal position. PESTEL ANALYSIS The PESTEL analysis was applied to evaluate the macro environment to which Starbucks is exposed. It helps the company to better determine external factors that might have an influence on the company’s performance in the global coffee market. Originally, the PESTEL analysis has been designed to evaluate macro-environmental influences on industries in certain countries. However, since Starbucks is operating in a global environment, the PESTEL analysis was fine-tuned to determine the macro-environmental influences on the coffee industry within a global context. The analysis evaluates six macro-environmental variables: 1. Political Environment: are there any governmental regulations that would inhibit Starbucks in the global coffee market? 2. Economic Environment: has the recent economic crisis had any effect on disposable income of customers? 3. Social Environment: how has the social attitude towards coffee changed over the years? How far developed is the coffee culture? 4. Technological Environment: what key technological changes in the production and consumption of coffee have taken place over the years? 5. Ecological Environment: how important is environmental stewardship in the industry? 9
6. Legal Environment: how stringently are intellectual property rights enforced? PORTER’S FIVE FORCES The Porter’s Five Forces Model was used to determine Starbucks’ competitive position in the global coffee market. It helps Starbucks get a notion about the extent of competitive rivalry in the industry. In essence, five forces determine the attractiveness of the market: 1. Threat of established rivals: how saturated is the market with established competitors and how strong is their market position? 2. Threat of new entrants: at what pace are new entrants swarming the market and how strong are they? 3. Threat of substitutes: how well positioned are substitute products and do they pose a threat to coffee products? 4. Bargaining power of suppliers: how strong is the position of coffee bean farmers to dictate coffee bean prices? 5. Bargaining power of buyers: how strong is the position of customers to switch between different bands and demand lower prices? EXTERNAL FACTOR EVALUATION MATRIX (EFE) The EFE Matrix was used to assess Starbucks’ current business conditions. It helps Starbucks to better visualize and prioritize the opportunities and threats to which the business is exposed. The EFE Matrix can be compiled using the following four steps:5 1. Compile key external factors: key external factors are the opportunities and threats that can be complied from the external analysis of Starbucks. 2. Assign weights: assign weights that range from 0.00 to 1.00 to each factor. The weight should be assigned according to each factor’s importance to Starbucks’ overall business strategy. 3. Assign ratings: assign ratings on a scale from 1 to 4. The ratings indicate how effective the company’s current strategy responds to each factor. A rating of 1 represents a poor response, a rating of 2 represents a response below average, a
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Cf. Maxi-Pedia (2014b): Online publication
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rating of 3 represents a response above average, and a rating of 4 represents a superior response. 4. Multiply and sum: multiply the weights with the ratings and sum all products to reach the final score. The average score is 2.5. A score exceeding the average indicates a strong strategic ability to respond to external factors. A score that is under the average indicates a weak strategic ability to respond to external factors. SWOT ANALYSIS The SWOT Analysis was used to summarize internal strengths and weaknesses as well as external opportunities and threats. It helped paving the way for the ensuing TOWS Analysis by redirecting the focus on key issues within and outside the company’s boundaries. TOWS ANALYSIS The TOWS Analysis was applied to highlight four broad strategic directions from which possible strategic alternatives can be drawn. The analysis matches strengths and weaknesses with opportunities and threats in order to arrive at four mutually-exclusive strategy types:6 1. Maxi-Maxi Strategies: strategies that use strengths to maximize opportunities. 2. Maxi-Mini Strategies: strategies that use strengths to minimize threats. 3. Mini-Maxi Strategies: strategies that minimize weaknesses by taking advantage of opportunities. 4. Mini-Mini Strategies: strategies that minimize weaknesses and avoid threats. SPACE MATRIX The SPACE Matrix was used to determine which nature of strategy Starbucks should undertake in the short- to medium-term. This strategic tool is meant to formulate a strategy based on the competitive position of Starbucks. The matrix is constructed by plotting calculated values for the competitive advantage and industry strength dimensions on the X-
6
Cf. MindTools (2014): Online publication
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axis. Variables for the environmental stability and financial strength dimensions are plotted on the Y-axis. Five steps are necessary to compile a SPACE matrix:7 1. Determine values for dimensions: values for each dimensions are determined: a. Competitive advantage (CA): values for calculating the competitive advantage are taken from Current Performance Assessment Analysis. b. Industry strength (IS): values for calculating the industry strengths are taken from the Porter’s Five Forces Analysis. c. Environmental stability (ES): values for calculating the environmental stability are taken from the PESTEL Analysis. d. Financial strength (FS): values for calculating the financial stability are taken from the Financial Performance Analysis. 2. Rate the dimensions: the CA and ES dimensions are rated using a scale from -6 (worst) to -1 (best). The IS and FS dimensions are rated using a scale from +1 (worst) to +6 (best). 3. Find average scores of dimensions. 4. Add average scores: add the average score of CA to that of IS, and that of FS to ES to arrive at the total X-axis (Y-axis) score. 5. Plot scores to the graph: plot both scores to the graph and draw a line from the center to the XY-intersection. Depending into which quadrant the line points, the nature of the proposed strategy can either be aggressive (top-right quadrant), conservative (top-left quadrant), defensive (bottom-left quadrant), or competitive (bottom-right quadrant). QSP MATRIX The Quantitative Strategic Planning Matrix (QSPM) was utilized for evaluating possible strategies and comparing them as alternatives among each other. The QSPM helped to set priorities as to which strategies are more attractive for Starbucks taking into consideration their goals and objectives. Five steps are necessary to compile a QSPM:8
7 8
Cf. Maxi-Pedia (2014c): Online publication Cf. Maxi-Pedia (2014d): Online publication
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1. Provide a list with internal and external factors: strengths and weaknesses can be compiled from the IFE Matrix. Opportunities and threats are taken from the EFE Matrix. 2. Identify strategic alternatives: strategic alternatives are taken from the TOWS analysis. 3. Assign weights: weights are assigned to key internal and external factors. Those weights are taken from the IFE and EFE matrices. 4. Assign attractiveness scores: attractiveness scores are assigned based on whether the factor makes a difference in the decision about which strategy to pursue. If the answer is “yes”, then the score of 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive. If the answer is “no”, the score will be 0. 5. Calculate total attractiveness score: multiply the weights with the attractiveness scores and sum up the products. The strategic alternative with the biggest total attractiveness score portrays the most attractive strategy for the company. GRAND STRATEGY MATRIX The Grand Strategy Matrix was applied to develop strategies for Starbucks’ different business units. Product categories are allotted to four different quadrants according to their competitive position and market growth. From each quadrant, different strategies can be chosen:9 1. Quadrant I: product categories with a strong competitive position and rapid market growth. 2. Quadrant II: product categories with a weak competitive position but rapid market growth. 3. Quadrant III: product categories with a weak competitive position and slow market growth. 4. Quadrant IV: product categories with a strong competitive position but slow market growth. 9
Cf. Maxi-Pedia (2014e): Online publication
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6. Analysis of Current Situation The analysis of the current situation is meant to provide a context for any strategic analysis and should be understood first.10 It provides an insight into the internal composition as well as the external position of the company. The current situation analysis culminates in distinct strengths/weaknesses and opportunities/threats which are important key consideration when compiling the strategic alternatives in the solution analysis.
6.1.
Internal Analysis
The internal analysis is meant to provide a review of Starbucks’ organizational strengths and weaknesses. By analyzing the internal composition of the company, the reader will gain a better understanding of the company’s background, product categories, basic competencies, and strategic coordination. The analysis culminates in an Internal Factor Evaluation Matrix (IFE Matrix) which summarizes and evaluates distinct strengths and weaknesses according to their importance to Starbucks’ overall business strategy.
6.1.1.Company Background Analysis Ownership and Control Starbucks was founded as a privately-owned company by the company’s current CEO Mr. Schulz in 1971. In 1992, the company went public in order to further improve its financial position to better tackle and expand into overseas markets. The company is controlled by Mr. Schulz who serves as the chairman of the board, president, and CEO. The organization is managerially-controlled because share ownership is widely dispersed. About 75 percent of shares are held by institutional and mutual fund owners and only three percent is held by insiders.11 Vision, Mission, and Principles It is Starbucks mission “to inspire and nurture the human spirit; one person, one cup, and one neighborhood at a time.” Starbucks regards human dignity and a warm and comfortable
10 11
Cf. Boardman, A., Vining, A. (1999): p. 3 Cf. Yahoo Finance (2014): Online publication
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atmosphere as the highest value to its customers, employees, and partners. The company allows customers to personalize their beverage according to their needs, for example by adding milk content, syrup, and even temperature. According to its vision statement and principles, Starbucks not only calls its employees “partners” and treats them with respect and dignity, but it also treats its suppliers ethically, applying fair trade and fair sourcing principles as well as providing financial support. Flow of Goods Purchasing at Starbucks involves company agents who are choosing bean producers (farmers) predominantly in Africa, Latin America, and Asia. Coffee beans are selected under the highest standards of quality and the goal is to establish long-term strategic partnerships with high-performing suppliers. The beans are then exported by export agents, imported by brokers, tested on quality, roasted, and eventually packaged before they are being sent off to Starbucks stores around the world. Sales can take three distinct ways: beans are sold either directly through stores without intermediaries (retailing), to specialty retailers such as restaurants, or via the internet (direct response). In terms of marketing activities, Starbucks is relying mostly on word-of-mouth which is facilitated by the high-quality image of the company. A detailed description of the value chain can be found in appendix 2. Product Portfolio Starbucks coffee comes in two forms: one is already processed coffee comprising Starbucks VIA®, K-cup® Packs, Verismo™ System Pods, Pods, Portions, and Filter Packs. The other is by profile like blonde roast, medium roast, dark roast, flavored roast, and seasonal favorites. Starbucks' major income source is from selling beverages: it sells hot and iced coffee which makes up the lion’s share of sales (75% of total revenues in 2010). Starbucks’ beverage portfolio consists of brewed coffees like Seattle’s Best Coffee and Torrefazione Italia Coffee. Other product lines are non-coffee blended beverages like Vivano Smoothies, Tazo Tea, and Ethos Water. Starbucks sells single-serve coffee (VIA instant coffee and K-cups) through strategic partnerships, and those product lines have also been expanded abroad with success. Thus, Starbucks’ channel development segment includes whole bean and ground coffees, as well as branded products which are sold worldwide through channels such as grocery stores, warehouse clubs, retailers, and convenient stores. On the other hand, sales 15
of beverages have been decreasing in 2010 as compared to the previous year, which is mainly due to the addition of various products lines to the existing portfolio. Recently, Starbucks has added various product lines to its portfolio, which primarily consist of merchandise items such as home espresso machines, coffee brewers and grinders, coffee mugs and accessories. Music, packaged goods, books, and gift items are the newest contribution to Starbucks’ rapidly expanding product portfolio. Apart from selling beverages and merchandise, the company also sells various food products that frequently accompany the coffee experience: sandwiches, baked pastries, salads, oatmeal yogurt, parfaits and fruit cups. Moreover, in an effort to increase evening sales (people do not tend to drink coffee in the evening), Starbucks added beverages such as beer and wines as well as evening snacks like cheese plates and flatbread to the menu in 26 stores in States.12 The detailed product portfolio can be found in appendix 3. According to the product portfolio, products can be roughly divided into four major categories: beverages, foods, packaged and single-serve coffee (whole bean coffee), and coffee-making equipment and other merchandise. In order to determine which product categories are the most profitable and fastest-growing ones, the BCG matrix will be applied:
12
Starbucks homepage
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Figure 1: BCG Matrix Sales growth
Stars
Question Marks Foods
Whole bean coffee
Profitability
Beverages
Cash Cows
Merch andise
Dogs
Source: Own illustration
The BCG matrix shows that the beverage category (including all over-the-counter coffee products) is the cash cow of Starbucks. In fact, 76 percent of total sales (2010) have been generated from selling beverages. However, sales of beverages have been declining one percent from 2008. The rising stars on the horizon are food products which made up 19 percent of total sales in 2010 (2% up from 2008). Successful adaptations of the food offering (e.g. hot breakfasts and salads) have spurred sales in this category. Packaged coffee products and single-serve coffees portray a positive growth trend (1% up from 2008), however only made up about four percent of total sales in 2010. Sales in this category are expected to go up as Starbucks VIA instant coffee and K-cups are bound to make a successful entry into emerging markets in 2011. The most underperforming category is coffee-producing equipment and other merchandise. While total sales accounted for only two percent in 2010, this category is also on the downgrade as sales have been declining two percent from 2008. With the rise of single-serve coffee products, conventional coffee machines have become rather obsolete and unfashionable. 17
Customers Table 1: Product-Customer Matrix Products/Customers Beverages Foods Whole bean and soluble coffees Coffee-making equipment and other merchandise
Kids and Teens Passiveness Taste -
Young Adults Coolness Complementary -
25-40 years Social Status Nutrition Loyalty
-
Fashion, Coolness
Loyalty
Source: Own illustration
Starbucks is catering its products to three different customer groups: kids and teens, young adults, and adults (25-40 years). The company’s primary market comprises men and women between 25 and 40 years. They account for almost half (49%) of its total business sales.13 This age group perceives Starbucks as a status symbol. For them, beverages and Starbucks’ merchandise is hip and contemporary and perfectly relates with their relatively high income, professional career, and urban lifestyle. The long-term experience with Starbucks turns this age group into frequent visitors and loyal customers. Young adults comprise the age group of 18 to 24 year old customers. About 40 percent of total sales can be contributed to this group.14 Starbucks positions itself as a place where college students can hang out, work on their assignments, and meet people. Wi-Fi access, contemporary store design, and “cool” music help to retain young adults and eventually turn them into regular customers. Beverages and food products are perceived as cool and merchandise as hip and must-have. Although Starbucks is not catering directly to kids (high calorie and caffeine products), about two percent of sales can be attributed to customers age 13 to 17. While kids usually accompany their parents (passiveness), teens use Starbucks as a place to hang out with friends. They usually order non-caffeine beverages and foods because of how it tastes.
13 14
Cf. O’Farrell, R. (n.d.): Online publication Cf. O’Farrell, R. (n.d.): Online publication
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Acquisitions and Alliances Since its foundation in 1971, Starbucks has acquired or formed alliances with a number of companies. The most prominent acquisitions of Starbucks include the purchase of Tazo Tea Company in 1999, which allowed Starbucks to add various tea products to its portfolio, the Seattle Coffee Company in 2003, which further expanded Starbucks’ presence in the US coffee market and also opened the way into the wholesale sector, and the Coffee Equipment Company in 2008, which granted Starbucks the right to use the innovative Clover Brewing System. Key alliances include the partnership with Target, which allowed Starbucks to sell its coffee in highly frequented cafés in Target Stores, the Green Mountain Coffee Roasters, providing Starbucks with access to the fast-growing single-serve coffee market, and Tata Coffee of India, which will lead to Starbucks gaining a threshold in the aspiring Indian coffee market and also providing the company with access to high-quality Arabian coffee beans. Acquisitions and alliance can therefore be seen as important measures to diversify the product portfolio (e.g. Tazo Tea), gaining market share (e.g. Seattle Coffee Company), penetrating new segments (e.g. Green Mountain Coffee Roasters), gaining access to intellectual property (e.g. Coffee Equipment Company), and expanding into new markets (e.g. Tata).
6.1.2.Internal Characteristics Analysis Resources, Skills, and Attributes
Starbucks expects its staffs to excel in customer relationship management. Employees are strongly committed and motivated to share their coffee knowledge, product expertise, and service with customers. In the recruitment process, the company makes sure that baristas have the ability to build relationships, work in teams, and portray interpersonal (communication) skills.15 Next to offering qualified customer service, Starbucks is showing social, ethical, and environmental stewardship. A detailed description of Starbucks’ Global Responsibility Program can be found in the appendix 4. Despite Starbucks’ active
15
Cf. Starbucks Website (2014a): Online publication
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participation in environmental programs, the company has been criticized by environmental experts for pouring millions of gallons of water down the drain at its coffee stores. 16 In addition, Starbucks offers more than 30 different blends of coffee and its single-origin premium Arabica coffee fulfills the highest standards in premium coffee making. Farmers are selected according the highest quality standards, and only the best beans are processed into Starbucks coffee. The Starbucks Roast® is a special roasting technique which not only provides the coffee with a distinct, dark color but also contributes to achieving a unique and highly recognized flavor.17 Starbucks has further enhanced its brewing skills by acquiring the Clover® Brewing System of the Coffee Equipment Company, and the strategic partnership with Green Mountain Coffee (maker of the K-cups) has opened the way into the fast-growing single-serve coffee market. The company’s brand power and recognition are strong, and Starbucks is generally perceived as a high-quality and trendy coffee store. Nonetheless, one study of Starbucks’ brand awareness revealed that people have difficulties connecting the logo (portraying a mermaid) to coffee and that the actual coffee experience is not as attractive as the spiritual atmosphere of the stores.18 In recent years, Starbucks has been aggressively extending its product portfolio by adding different foods, drinks, and merchandise products to the store shelves. Next to the fact that sales of merchandise and other coffee-making equipment have been declining over the past years (from 4% in 2008 to 2% in 201019), overloading store shelves with merchandises can also have a negative effect on brand identity. Especially the sales of food products could reduce the consumption of coffee, which, after all, is Starbucks’ cash cow. Organization Howard Schulz serves as the chairman of the board, president, and CEO of Starbucks. Appendix 5 shows the organizational chart of the company. Starbucks’ overseas markets are divided into regions (Asia Pacific, Europe, Middle East, North- and South America). However, regions are not headed by their own regional headquarters but individual stores (whether 16
Cf. Balakrishnan, A. (2008): Online publication Cf. Starbucks Website (2014b): Online publication 18 Cf. Dahlin, P. (2008): p. 47 19 Cf. Starbucks Corporation (2010): p. 4 17
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licensed or not) report directly to the international headquarter which oversees all operations. This centralized control over stores allows Starbucks to implement far-reaching decisions in a prompt and accurate manner. The downturn of centralized control is that it might complicate the implementation of regional strategies that are necessary to respond to local consumer needs. Especially for companies that seek rapid overseas expansion, knowing the local market and its needs is imperative for establishing a long-lasting presence. Therefore, Starbucks prefers to penetrate new markets by means of prominent, local retailers who dispose of in-depth market knowledge and access. Licensees, as the company claims, provide improved, and at times the only access to desirable retail space.20 Hence, it comes as no surprise that 63 percent of international stores are licensed, while about 60 percent of US-based stores are company-owned.21 Starbucks maintains a high level of control over licensed stores by imposing company guidelines such as operating standards, store development procedures, and training classes for employees. This high level of control is necessary to preserve the global image of Starbucks and to thwart intellectual property theft. The organizational structure within a store is vertically organized. The store manager, who reports to the district manager, and who is represented by the assistant store manager, is giving orders to the shift supervisor who is responsible for the baristas. The baristas are the face of Starbucks as they are in direct contact with customers. Their dedication towards creating a friendly and carefree atmosphere is very important for the image that Starbucks is trying to display to customers.
6.1.3.Strategy Analysis In this section, Starbucks’ corporate and business level strategy will be scrutinized. Corporate level strategy concerns the scope of the firm, the general direction the company is heading towards in the medium- to long-run. The business or competitive strategy concerns how well the business competes, that is, how the business generates money in the short-run.22
20
Cf. Starbucks Corporation (2010): p. 5 Cf. Starbucks Corporation (2010): p. 3 22 Cf. Boardman, A., Vining, A. (1999): p. 14 21
21
Corporate Level Strategy As the world’s leading coffee company, Starbucks is striving to defend and, if procurable, expand its current market position against rising competitors. Consequently, Starbucks’ longterm strategy is tailored to fending off competitors both at home and abroad and expanding current market shares. The company has understood that its seemingly unrivaled market position in the past two decades will no longer be tolerated by competition. Especially McDonalds and Dunkin’ Donuts are going great lengths to dethrone Starbucks as the world’s number one. With this in mind, Starbucks undertakes several long-run strategic actions to contain competition. 1. Partnership Strategies Starbucks is a company with tradition and can be seen as a co-initiator of the global coffee frenzy that started in the late 60s/early 70s (see appendix 6). Despite its history and excellent capabilities in coffee-making, the company has to revert to external help to further grow in the market. Alliances with key strategic partners have helped Starbucks to gain access to new market segments, expand into new overseas markets, and obtain intellectual property such as the Clover Brewing System. Acquisitions of direct (e.g. Seattle’s Best Coffee Company) or indirect competitors (e.g. Tazo Tea or Teavana) helped Starbucks to level the competitive landscape and diversify its product portfolio. Also in the future, Starbucks is expected to utilize alliances and acquisitions to spur expansion in emerging markets. 2. Global Market Expansion Strategies In 1994, two years after the IPO, Starbucks initiated its global expansion program by opening its first store in Japan. With additional capital backing the expansion strategy, the company set out to conquer the world in a breathtaking fashion. Within ten years it managed to more than decuple the number of stores to 8,569 in 2004 (see appendix 7). Most of this growth was fueled by overseas expansion, which in the beginning was limited to developed continents such as Europe and Australia. Expansion into developing countries started in the early 2000s despite slow growth rates resulting from low incomes of potential customer groups. With the global financial crisis hitting the company hard and sales coming to a still stand in 2008, Starbucks redirected its attention to emerging markets which came out of the crisis relatively unscathed. Especially China and India, and to a lesser extend Brazil, have 22
captured the interest of the company. In 2010, Starbucks had locations in 35 Chinese cities and Mr. Schulz proclaimed that the company plans to double the number of cities soon. In 2011, Starbucks will be opening more than 100 new stores in Brazil, which turns out to be the second-largest coffee-consuming country in the world.23 According to Mr. Schulz, India could one day rival China in the consumption of coffee.24 Starbucks’ alliance with Tata Group (also owner of India’s biggest coffee chain Eight O’clock Coffee Company) can therefore be seen as a long-run strategic partnership to secure access to this promising growth market. Starbucks will also be aggressively expanding its coffee line in its home market, the United States. Here, the company sees a potential $377 million market for flavored coffee.25 The long-term strategic objective will be to further consolidate the 75 percent domestic market share that the company has achieved a far. 3. Product Portfolio Diversification Strategies In order to increase sales and also to hedge against possible slumps in coffee consumption, Starbucks has been expanding its product portfolio over the years. Having started as a mere seller of coffee products in 1971, the company is now catering a wide variety of product categories to its customers, ranging from foods and teas to coffee-making equipment and music CDs. The company wants to further diversify its product portfolio to “upgrade the customer experience.”26 The success of this product portfolio diversification strategy is debatable; while sales of food products have been increasing by two percentage points from 2008 to 2010, sales of merchandise and coffee-making equipment have been decreasing by two percent over the same period.27 4. Market Segment Diversification Strategies With new products being added to the existing brand portfolio, it is inevitable for Starbucks to penetrate new market segments. The acquisition of Hear Music allowed the company to play and sell “hip” music in its stores. Starbucks also entered the bottled water market by acquiring Ethos water. While the latter two acquisitions portray two markets that have little to do with coffee, Starbucks also kept track of hot trends within the coffee market. For 23
Cf. Reed, M., Brunson, R. (2011): p. 168 Cf. Reed, M., Brunson, R. (2011): p. 168 25 Cf. Reed, M., Brunson, R. (2011): p. 168 26 Cf. Reed, M., Brunson, R. (2011): p. 175 27 Cf. Reed, M., Brunson, R. (2011): p. 173 24
23
example, the alliance with Keurig allowed the company to deliver K-cups to the fast-growing single-serve coffee segment. By signing a deal with Courtesy Products, a provider of in-room coffee service in hotels, Starbucks is further advancing its position in the luxury coffee segment. This alliance will allow the company to cater its instant coffee to as many as 500,000 luxury hotel rooms in the United States.28 The implementation of market segment diversification strategy will bring Starbucks closer to becoming a full-fledged chain restaurant, similar to Burger King, McDonalds, or Subway. 5. Social and Environmental Stewardship With growing popularity comes growing responsibility. Starbucks has realized this and consequently launched its Global Responsibility Program which is also part of its long-term strategy. The ulterior motive behind the Global Responsibility Program is to enhance Starbucks’ corporate image as a caring, clean, and sustainable company that goes great lengths to invest in communities and minimize its environmental footprint. Albeit criticism concerning the company’s handling of waste water, Starbucks’ strategy seems to be working out as the company has been frequently awarded for its good corporate responsibility management.29 6. Brand Modernization Strategy Starbucks is modernizing its brand in an effort to attract younger customer groups. As it was mentioned in the Background Analysis (see chapter 6.1.1), young adults make up 40 percent of sales. In order to turn them into loyal customers, the company must ensure that young customers (mostly students) feel at home when they enter a Starbucks store. In the era of internet, offering Wi-Fi is indispensable and Starbucks has realized this as one of the first companies when it launched its first Wi-Fi stores in as early as 2002.30 The company is also following other technological trends, such as mobile payment which allows customers to pay with their smart phones.31 In 2011, Starbucks unveiled a new logo, leaving out the writing “Starbucks Coffee”. This revamp gives the company freedom and flexibility to think beyond coffee without losing its heritage. After all, with more than ten percent of total sales coming
28
Cf. Reed, M., Brunson, R. (2011): p. 171 Cf. Connor, M. (2013): Online publication 30 Cf. Morio, L. (2004): Online publication 31 Cf. Reed, M., Brunson, R. (2011): p. 168 29
24
from non-coffee products, a company logo referring to “coffee” could cause brand confusion among customers. 7. Centralization Strategy Last but not least, Starbucks is trying to increase the number of wholly-owned company stores. As it was mentioned before, Starbucks’ strategy stipulates the establishment of licensed stores in new markets in order to better react to local changes in consumer needs. However, once enough market knowledge has been accumulated, the company would like to regain full control over its stores. In Switzerland and Austria, Starbucks is currently negotiating full ownership of its retail operations.32 Full control over retail operations not only reduces the risk of intellectual property theft (which is particularly prominent in China), but also increases revenues. Product sales to and royalty and license fee revenues from licensed stores only account for roughly 10 percent of total net revenues,33 while companyowned stores generate 84 percent of Starbucks’ revenues worldwide.34 Business Level Strategy Without going too much into detail concerning the business strategy of every single region, this section focuses on describing how Starbucks creates demand and how it gains a competitive edge over competitors. Here it is useful to describe Starbucks’ strategic stance and value chain.35 1. Strategic Stance When consulting Porter’s generic strategies, it becomes apparent that Starbucks is driving a differentiation strategy which is defined as offering a wide range of products (as opposed to offering low prices) to a broad customer group (as opposed to a narrow customer group). According to the definition, a company that drives a differentiation strategy “seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium
32
Cf. Reed, M., Brunson, R. (2011): p. 175 Cf. Starbucks Corporation (2010): p. 5 34 Cf. Reed, M., Brunson, R. (2011): p. 171 35 Cf. Boardman, A., Vining, A. (1999): p. 14 33
25
price.”36 This applies for Starbucks as the company seeks to be unique in its industry by positioning itself as a premium producer of coffee products. Customers value the high quality of coffee products, the friendly and cozy atmosphere, and contemporary image of the company. Based on the latter, Starbucks is able to charge a premium price for its products. The company is creating demand by product differentiation. This can best be depicted by looking at the change in competitive scope. While the company started with a relatively simple business model, that is as a mere seller of coffee products, it has evolved into a business model that is more similar to that of a restaurant, offering different types of foods and drinks. In other words, customers no longer come to Starbucks just for the coffee experience but also to enjoy pastries, sandwiches, or “chill” to good music. Starbucks continuously adds quality (vertical differentiation) to its products and service via advanced process technology (e.g. Starbucks Roast®, Clover® Brewing System) and product technology (e.g. K-cups). The careful selection of high-quality Arabica coffee beans coming from reputable farmers ensures superiority of the input materials. As a result, the company is more production-oriented than marketing-oriented. As it was mentioned before, Starbucks is relying on word-of-mouth instead of spending millions on conventional marketing activities. This also means that the company is highly processoriented, as the process of how the coffee is made is more important than the final product. In terms of technology, Starbucks is both a leader and follower. For example, the Starbucks Roast® has set new quality standards when it comes to roasting coffee beans. Concerning single-serve coffee, Starbucks has sold the K-Cups (which were not even invented by Starbucks) long after Nespresso had launched its Grands Crus. 2. Value Chain Strategy The value chain describes all functional activities of a company and therefore is responsible for generating profit or loss. The value chain strategy can be broadly divided into the production, organizational, and financial strategies. The marketing and retail strategies have already been discussed in the previous sections.
36
Cf. University of Cambridge (2014): Online publication
26
Starbucks outsources the entire production process to suppliers. From farming to packaging, Starbucks is not directly involved. Instead, it focuses on forming long-lasting strategic partnerships with farmers, exporters, brokers, roasters, warehouses, and packaging manufacturers. Nonetheless, the production process is heavily controlled and supervised by the company’s key account managers. Starbucks has a direct saying in how beans are selected, roasted, and packaged. This is important to guarantee top quality and maintain a unique brand image. The outsourcing strategy allows Starbucks to cut costs by delegating production processes to companies that have a better expertise in each process. It also allows the company to focus its attention to selling (retailing) its products, which, as it was mentioned before, is done via wholly-owned and licensed stores, as well as online. The organizational strategy describes how Starbucks is handling staff decisions. It was already mentioned that Starbucks is looking for interpersonal skills in potential employees. The company works to provide satisfying jobs, a positive work environment, appropriate work schedules, and fair compensation and benefits.37 These activities are part of Starbucks’ strategy to deploy human resources in order to gain a competitive advantage. The company uses the following outlets to advertise openings: the job center on the corporate website, college campus recruiting, internships, employment websites, newspaper classified ads, Facebook and twitter, local job fairs, in-store recruiting posters, and informative “business cards.” Applicants then go through a series of employment tests and interviews. A typical assessment center is not applied. Employees receive both off-the-job and on-the-job training, depending on which position they occupy. Starbucks uses stock options as an incentive to add value to the company. All employees can earn “bean stock”, which is the company’s stock-option plan. If the company does well and its stock goes up, employees make a profit. In fact, Starbucks is quite generous in offering benefits to employees – even part-time workers, which make up two-thirds of the company’s workforce, receive social security and Medicare.38 Therefore it comes as no surprise that Starbucks is constantly listed in the Financial Time’s Top 100 Best Companies to Work For.39 In order to comply with its objectives to maintain the number one position in the global coffee market, Starbucks is aiming to continuously increase profits of both its U.S. and 37
Cf. Flat World Knowledge (2012): Online publication Cf. Flat World Knowledge (2012): Online publication 39 Cf. Fortune (2012): Online publication 38
27
international businesses. To achieve this, the short-term financial strategy stipulates an increase in store revenues and a reduction in operating expenses without forfeiting quality and keeping the selling price of products stable. From the 2010 perspective, Starbucks seems to have fulfilled its objective as net earnings increased from $391 million in 2009 to $948 million in 2010 (an increase of 142%).40 The majority of this unprecedented increase in profits can be attributed to the revitalization program that the company launched following the financial crisis in 2008 and 2009. In an effort to reduce operating expenses and fixed asset costs, Starbucks closed 600 unprofitable stores in 2009. As a result, operating expenses fell from $9,993 million in 2008 to $9,436 million in 2010.41 At the same time, the company was able to increase revenues from $8,772 million to $8,964 million over the same period.42 The increase in sales can be attributed to growing sales figures from overseas markets and success of single-serve coffee products (K-cups and VIA instant coffee). The financial strategy also stipulates a decrease in short-term debt to make Starbucks more flexible in undertaking prompt financial decisions. From 2008 to 2010, the company reduced short-term debt from $714 million to 0.43
6.1.4.Financial Performance Analysis The financial performance analysis looks at key financial performance indicators, commonly referred to as ratios. The most important ratios, namely profitability, liquidity, leverage, and activity (operational efficiency) are covered to determine the financial health and sustainability of Starbucks. Table 2: Ratio Analysis In millions USD
2010
2009 Growth $9,774.6
2008
Sales
$10,707.4
Sales growth rate
9.54%
-5.86%
-
Net income
$948.3
$390.8
$315.5
Net income growth
142.66%
23.87%
_
$10,383.0
40
Cf. Starbucks Corporation (2010): p. 20 Cf. Starbucks Corporation (2010): p. 20 42 Cf. Starbucks Corporation (2010): p. 20 43 Cf. Starbucks Corporation (2010): p. 20 41
28
rate Net earnings-diluted
$1.24
$0.52
$0.43
Profitability
Gross profit margin
Operating income margin ROA ROE
58.36%
55.36%
55.26%
13.26%
5.75%
4.85%
14.85%
7.01%
5.56%
25.81%
12.83%
12.67%
Leverage ratio Debt-to-total-assetsratio
42.46
45.39
56.09
Debt-to-Equity-Ratio
0.74
0.83
1.28
Long-term-debt-to Equity ratio
0.13
0.15
0.18
44.95
15.3
9.6
Times-Interest-Earned ratio Equity multiplier
1.74
Inventory Turnover Days‘ sales in inventory Receivables turnover Days‘ sales in receivables NWC turnover
8.21
1.83 Activity Ratio 6.50
2.28 6.70
44.46
56.15
54.40
35.37
36.07
31.51
10.32
10.12
11.58
9.18
8.57
-19.84
Fixed Asset Turnover
4.43
3.85
3.51
Total assets turnover
1.68
Current ratio Quick ratio Cash ratio NWC to total asset ratio
2.36
1.75 Liquidity ratio 2.20
1.83 1.78
2.15
1.94
1.57
0.43
0.24
0.08
0.58
0.55
0.44
Source: Starbucks’ Annual Report 2010
From a financial point of view, Starbucks has become more profitable over the past three years (2008-2010). Net income went up 143 percent from 2009, and the company shared 29
the profit with shareholders as shown by earnings per share diluted (EPSd) more than doubling from $0.52 (2009) to $1.24 (2010). In fact, all profitability ratios of 2010 portray a higher value relative to 2009, emphasizing the company’s ability to generate earnings as compared to its expenses and other relevant costs incurred during the given time period. Starbucks’ leverage capabilities have also improved from 2008 to 2010, as the most important leverage metrics have been declining in the given time period. This means that Starbucks is able to raise more capital by raising debt (leveraging). It is also a sign that the company has managed to reduce total liabilities (mainly by paying off debt) and increase equity (mainly by raising common stock). This indicates that Starbucks prefers to finance new investments with new capital instead of issuing new debt. The inventory turnover of Starbucks has been increasing from 6.70 in 2009 to 8.21 in 2010, indicating that Starbucks was able to increase the number of times inventory is sold or used. In other words, the company managed to reduce stock by either forecasting sales more accurately or selling more products. The days sales of inventory (DSI) ratio further supports the latter, indicating that Starbucks takes less time to turn inventory into sales. Starbucks’ Net Working Capital (NWC) turnover ratio increased from -19.84 in 2008 to 9.18 in 2010, indicating that the company has improved its ability to generate sales compared to the money it uses to fund the sales. This means that the company was able to increase current assets (e.g. cash, accounts receivables, inventory) and reduce current liabilities (e.g. shortterm debt, accounts payables). On the bottom line it can be said that Starbucks has improved its capabilities of converting different accounts on its balance sheet (in this analysis most assets and liabilities were considered) into cash or sales. Concerning the liquidity of Starbucks, it can be concluded that all important liquidity ratios have been increasing from 2008 to 2010, indicating that Starbucks’ ability to pay off its short-term debt obligations has improved. Put into other words, the margin of safety to cover short-term debts is better than in previous years.
6.1.5.Internal Factor Evaluation Matrix The Internal Factor Evaluation (IFE) Matrix will be utilized to evaluate the major internal strengths and weaknesses in functional areas of Starbucks. 30
Table 3: IFE Matrix Key Internal Factors Strengths Successful and popular product lines such as VIA instant coffee, K-cups, Frappuccino, or Paninis Access to premium and highquality Arabica beans obtained through Fair Trade and strong supplier relationships Strong supply chain management Strong intellectual property (Starbucks Roast®, Clover® Brewing System) Healthy financial situation (positive ratios) Highly recognizable brand image and comfortable store atmosphere Highly motivated, professional workforce and good customer service (Top employer company) Strong and reputable strategic partners (Tata, Target, Green Mountain, etc.) Variety of flavors Weaknesses Overextension of product portfolio causes brand confusion and loss of brand identity High prices increase competitive pressure Environmental issues concerning waste water jeopardize brand image TOTAL
Weight
Rating (1-4)
Weighted Score
0.15
4
0.6
0.1
4
0.4
0.1 0.05
4 4
0.4 0.2
0.1
3
0.3
0.1
4
0.4
0.05
4
0.2
0.05
3
0.15
0.05
3
0.15
0.1
1
0.1
0.1
1
0.1
0.05
2
0.1
1.00
3.10
Source: Own illustration
The IFE Matrix has resulted in a final score of 3.10, which scores significantly above 2.5 and thus indicates a strong internal position.
31
6.2.
External Analysis
The external analysis will unravel potential opportunities and threats that exist in the environment to which Starbucks is exposed. It provides an insight into the global coffee market and will give the reader an impression on how competitive the industry is. The analysis culminates in an External Factor Evaluation Matrix (EFE Matrix) which summarizes and evaluates distinct opportunities and threats according to their importance to Starbucks’ overall business strategy.
6.2.1.Macro-Environmental Analysis In order to gauge the impact of the macro environment on Starbucks’ business, the PESTEL analysis will be utilized. Emphasis will be paid to emerging markets, most particularly China and India since those two countries are expected to be the growth markets in terms of coffee consumption in the future. Political Environment The political influence on coffee markets is generally not as pronounced as it is with other markets. Coffee is generally perceived as a beverage that is harmless to the consumer’s health and thus is not subject to extensive political debate. In China, the government is rigorously promoting the establishment of a coffee culture. Having endured the collapse of the tea bubble in 2008, Chinese tea farmers in the Yunnan Province (China’s major coffee production area) switched from growing tea leaves to sowing coffee seeds.44 The government plans to expand the coffee plantation area in that region to over one million mu (approx. 66,667 hectares) to capture a market value about RMB 10 billion (US$ 1.61 billion).45 In 2010, Starbucks inked a Memorandum of Understanding (MOU) agreement with Yunnan Academy of Agricultural Science (YAAS) and People’s Government of Pu’er City to support local farmers in the promotion of responsible coffeegrowing practices and the development of localized coffee. Moreover, the company, with support of the government, will introduce Starbucks Coffee and Farmer Equity (CAFÉ)
44 45
Cf. The Economist (2012): Online publication Cf. Barlow, N. (2013): Online publication
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Practices in China.46 This MOA will provide Starbucks with the opportunity to gain a permanent foothold in the Chinese coffee market. A possible threat to Starbucks is the unpredictability of government decisions. Since China is a one-party dictatorship, analysts warn that a new regime could close the marketplace and even nationalized properties overnight.47 However, since China has entered the WTO in 2001, foreign investment has been welcomed with open arms. India is on the verge of becoming the second biggest country in terms of coffee consumption. Starbucks arrives to India at a time when the government is trying to attract more foreign retail investment, but is slow in loosening restrictions.48 Stringent limitations on foreign ownership have inhibited many international companies from setting up their branches. Unlike those companies, Starbucks seems to have a less difficult time in gaining a foothold in the highly profitable Indian coffee market. It can retain 100 percent of ownership of its outlets with the requirement that a part of its products come from Indian producers – which, essentially, will not be problem since the Arabica coffee beans will be sourced from Indian farmers anyways.49 The joint venture with conglomerate Tata Group will further help Starbucks to circumvent possible political bottlenecks. Economic Environment The financial crisis of 2008 has left its hefty mark on many, mostly western companies. Also Starbucks suffered from the global downturn and profit plummeted to an all-time low in September 2008 ($316 million). Increasing (fixed) costs forced the company to shut-down 600 unprofitable stores (net opening of stores in 2009: -474).50 But also declining revenues added to the slump in profits; in the U.S., sales went down seven percent from 2008.51 During the crisis years, disposable income of the U.S. stagnated and then fell a few percentage points until it gained pace again in 2010.52 Price-sensitive customers went from pricier Starbucks stores to competitors which were able to offer coffee at a lower price. Surprisingly, revenue growth was mostly positive in emerging markets, in particular in China 46
Cf. New Statesman (2010): Online publication Cf. Khairulyakub (2011): Online publication 48 Cf. Li, Z. (2012): Online publication 49 Cf. Li, Z. (2012): Online publication 50 Cf. Starbucks Corporation (2010): p. 3 51 Cf. Starbucks Corporation (2010): p. 30 52 Cf. Trading Economics (2014a): Online publication 47
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and India. This observation goes hand in hand with the fact that the disposable income of the latter countries continued to rise during crises years.53,54 The economic situation of developed countries can be highly volatile, especially during crises. The recent financial crisis has shown that emerging markets remain relatively unscathed by economic turmoil in developed markets. Strong economic growth, political stability, and rising living standards make emerging markets less prone to crises. For Starbucks, investing in growth markets such as China and India is important to hedge against volatile sales in already established, mostly western markets. Social Environment The coffee culture experienced an upswing in the early 1960 (see appendix 6). Coffee is historically produced in Latin America, Central Africa, and South Asia. However, most of its production was exported to western countries, particularly to the United States where it became in vogue following the Second World War. Aggressively promoted by the PanAmerican Coffee Bureau in 1952, the “coffee break” became an inherent part of the American workplace.55 Nowadays, the coffee culture has shifted from self-made coffee to single-serve coffee. While coffee has become an established beverage in western societies, it has only just begun to make an appearance in developing countries, particularly in countries where it is produced. Especially in Asian countries, which have been known for predominantly consuming tea, drinking coffee has become a social status. In India, it became cool to drink coffee due to the influence of western cultures and fashionable international brands, such as Starbucks. Moreover, coffee houses have become an alternative sanctuary and social hangout or India’s youth in a culture that has generally shun bar-going, particularly for young women.56 Growing disposable income, urbanization, and coffee drinking becoming a fashion have spurred the expansion of the domestic coffee market in India. The customer base generally comprises young age groups (15 – 30 years old), and the company who is able to offer good coffee at an affordable price will have a competitive edge over competitors.
53
Cf. Trading Economics (2014b): Online publication Cf. Trading Economics (2014c): Online publication 55 Cf. Pendergrast, M. (2001): p. 85 56 Cf. Li, Z. (2012): Online publication 54
34
Also in China, the coffee culture has just recently experienced an upsurge. While coffee was disdained as a capitalist product under Mao, it reemerged on the streets of Shanghai in the late 1980s.57 Although coffee is produced in the rural regions of Yunnan, consumption primarily rests on the developing demand among eastern China’s growing urban middle class. However, China does not have the kind of pervasive coffee culture that is found in many parts of the West. While young urbanites patronize cafes as an outward sign of their engagement with global trends (status symbol), their coffee-drinking is less a habit and more about seeking a certain kind of experience.58 Technological Environment The technological environment surrounding coffee consumption has changed over the years. While typical coffee was originally grounded at roasteries, in grocery stores, or at home using burr grinder, blade grinder, or mortars, and then brewed by means of coffee percolators or automatic coffeemakers, nowadays instant coffee and single-serve coffee, which is served in small capsules (or “pods”), is usually brewed in special machines at home. Coffee capsules and instant coffee packs have revolutionized the technological landscape of coffee making equipment. In the old days, coffee making was a rather time-consuming and arduous task which required skill, practice, and the right equipment. Nowadays, people can get a good cup of coffee by simply pouring instant coffee into a cup of boiled water, or by putting a capsule into a machine. In today’s fast-moving world, this easy and uncomplicated way of making coffee has become the norm. Making coffee the old-fashioned way has become more of a trend among true coffee connoisseurs. This change in technological environment has promoted Starbucks to move into the singleserve coffee market by introducing the VIA instant coffee and K-cup lines. The first-mover advantage, however, was reserved for Nestlé which introduced its Nespresso line in the early 2000s. Nonetheless, the fast-growing instant coffee market, which displays annual growth rates of seven to ten percent, is certainly big enough to host a number of players.59
57
Cf. Cunningham, E. (2010): Online publication Cf. Cunningham, E. (2010): Online publication 59 Cf. Global Coffee Report (2013): Online publication 58
35
Environmental Environment Environmental stewardship has become a priority for coffee makers, and producing “green” and fair coffee is an important attribute for improving the brand image among consumers and environmentalists. The production of coffee has a distinct impact on forests, biodiversity, and water usage and companies like Starbucks actively try to reduce their environmental footprint. Another big question is whether the profits of big coffee chains are trickling down to the people who actually grow the beans. Traditionally, complexities within the supply chain have meant that the 100 million people growing coffee around the world have been excluded from the huge profit making potential of coffee. On average, third world coffee farmers receive a paltry of ten percent of the eventual retail price.60 Along with the negative effect this has on the living conditions of farmers, the drive for increased output has had a knock-on effect on the environment as well, with monocropping and sun grown coffee now being the norm.61 It must also be taken into consideration that most coffee growing regions are home to delicate ecosystems, which increases the potential for serious damage. Governments around the world have been urging coffee producers to adopt fair trade and environmentally-friendly practices. However, the implementation and execution of fair trade norms is not practiced thoroughly by governments, particularly in developing countries. Fortunately, companies have taken the implementation of such norms into their own hands and established their own responsibility guidelines. Starbucks, for example, carries out ethical sourcing practices and drives an environmental responsibility program to support local farmers and protect the environment. Legal Environment It is essential to understand the intellectual property right laws and licensing issues when entering emerging market. For Starbucks it is important to make use of intellectual property protection laws because the technology which the company uses (e.g. Starbucks Roast®) is an essential component of the company’s competitive advantage. Especially in China, western companies have frequently experienced infringements on their intellectual property rights. Intellectual property which has not been thoroughly protected
60 61
Cf. Blacksell, G. (2011): Online publication Cf. Blacksell, G. (2011): Online publication
36
has often been copied by direct, mostly local competitors. Upon first entering the Chinese market in 1999, Starbucks has managed to secure all of its major trademarks within four years.62 Some local companies have overstepped legal boundaries in their effort to mimic Starbucks’ popular and successful branding strategy, and have consequently been sued by Starbucks – with success. Just like in China, India’s intellectual property legislation covers every significant aspect of the protection of intellectual property if the property is registered in a prompt and proper manner.63 Potential shortcomings of the IP legislation in India are bureaucratic delay in the enforcement of IP laws, backlog of cases at both the civil and criminal courts, and lack of transparency, particularly at local level. Also the large number of small players infringing on IP rights puts a financial burden on the government, which can result in court cases being dropped without clear reasons.64
6.2.2.Industry Analysis The attractiveness of the global coffee industry will be analyzed by means of applying Porter’s Five Forces. Figure 2: Porter’s Five Forces Threat of Established Rivals 5 4 3 Bargaining Power of Suppliers
2 1 0
Threat of Substitutes
Threat of New Entrants
Bargaining Power of Buyers
Source: Own illustration
62
Cf. DeVault, G. (n.d.): Online publication Cf. Intellectual Property Office (2013): p.7 64 Cf. Intellectual Property Office (2013): p.7 63
37
The spider diagram depicted above shows the competitive rivalry in the global coffee industry. The forces that exceed a score of three can be defined as potential threats that need to be considered by Starbucks. Threat of Established Rivals (HIGH) The rivalry among exiting competitors is high. Starbucks is competing against major competitors such as McDonalds, Dunkin Donuts, Costa, or Caribou Coffee. In addition to that, the company has to compete with countless smaller coffee shops and cafes. The competitive advantage that competitors have over Starbucks is that they offer their (coffee) products at a cheaper price. In appendix 8, a price comparison on the basis of two popular beverages (hot black coffee and iced mocha) between Starbucks, Dunkin Donuts, and McDonalds can be found. Despite the fact that only two products have been compared, it becomes obvious that Starbucks is the pricier stores of the three. The coffee war is particularly acute in emerging markets. While Starbucks targets the upper income level Chinese with beverages costing up to RMB30 (about US$5), Nestlé’s Nescafé instant coffee, for example, can cost as little as RMB1.5 (about US$0.10) per package.65 Other competitors, such as McDonalds and Dunkin Donuts, pursue similar pricing strategies with which not so much the high income segments are targeted but rather the rising middle income class (urbanites). Competitors are also aggressively expanding their presence in emerging market. British coffee chain Costa Coffee entered China in 2006 and currently has over 250 stores with the objective to increase the number to 500 stores by 2016 – accounting for 8.9 percent market share of the coffee retail market.66 McDonalds can currently boast of 1,500 outlets in China. Small competitors such as Taiwanese 85 Degrees and Hong Kong-based Pacific Coffee are also planning on making a market entry into China soon.67 Starbucks’ current market share of 66 percent of the total coffee retail sector in China is therefore crumbling. Threat of New Entrants (LOW) The threat of new entrants to the industry to compete with Starbucks is low because the coffee market is highly saturated with established players. Moreover, a substantial amount of financial resources associated with buildings and properties are required in order to enter 65
Cf. Barlow, N. (2013): Online publication Cf. Barlow, N. (2013): Online publication 67 Cf. Barlow, N. (2013): Online publication 66
38
the industry.68 In developing markets, the threat of new entrant is marginally higher because fast market growth and poor execution of intellectual property rights allow small coffee startups to gain a foothold in the market. Bargaining Power of Buyers (HIGH) The bargaining power of customer is high because there are no or relatively small switching costs for customers. Monetary switching costs, such as transportation and the actual cost of coffee are low because customer can essentially buy a coffee at every gas station or supermarket. In fact, customers can switch to competitors with ease and Starbucks must be careful to not lose customers to cheaper competitors. On the other hand, non-monetary, or emotional switching costs are high because other brands might not meet customer expectations. Threat of Substitutes (MEDIUM) The threat of substitute products is medium. Typical substitute products for coffee are tea, juices, soft drinks, water and energy drinks. Pubs and bars can be seen as alternative locations to meet people and spend time outside of university or work. Nonetheless, the Starbucks atmosphere is unique and hard to replicate by bars and pubs. Bargaining Power of Suppliers (HIGH) The bargaining power of supplier is high. The law of supply and demand states that when demand exceeds supply, producers are able to offer higher prices. This is the case with today’s coffee market. The demand for coffee is high and the supply limited because coffee can only be produced in certain geographical areas. Moreover, fair trade laws have obliged coffee companies to pay farmers adequate prices for their outputs. All this increases the bargaining power of suppliers.
6.2.3.External Factor Evaluation Matrix The External Factor Evaluation (EFE) Matrix will be utilized to evaluate the major external opportunities and threats in the global coffee market.
68
Cf. Dudovskiy, J. (2014): Online publication
39
Table 4: External Factor Evaluation Matrix Key External Factors Opportunities Expansion to emerging markets, in particular to China, India, and Brazil High growth potential of singleserve (instant) coffee market both in the U.S. and abroad High potential for flavored coffee in the US market ($US 377 million) High potential for courtesy coffee products Threats High bargaining power of suppliers raises prices of coffee beans Trademark infringements, particularly in emerging markets Increased competition from local coffee companies and international entrants in emerging markets Saturated markets in developed economies Increasing price sensitivity of Starbucks customers Negative publicity because of water treatment Total
Weight
Rating (1-4)
Weighted Score
0.2
4
0.8
0.1
3
0.3
0.05
2
0.1
0.05
2
0.1
0.15
4
0.6
0.1
3
0.3
0.15
1
0.15
0.05
2
0.1
0.1
1
0.1
0.05
3
0.15
1.00
2.7
Source: Own illustration
The EFE Matrix has resulted in a final score of 2.7, which scores slightly above the average score of 2.5 meaning that with its current strategic orientation Starbucks is only marginally able to respond to external factors.
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7. Assessment Analysis (Fulcrum) On the basis of the current situation analysis, it will be determined whether Starbucks’ current strategy is appropriate and sustainable for the future. The question is: what will happen if the existing strategy (see chapter 6.1.3) continuous?
7.1. Current Performance Assessment The current performance assessment summarizes the current situation analysis of the previous chapter and determines whether Starbucks has a problem, and if so, what is the nature of the real problem? This can be done by posing four meaningful questions that will lead to accurate and perspective answers.
Is the global coffee industry attractive for Starbucks?
The attractiveness of the global coffee industry can be seen as relatively high. Positive market growth in emerging markets requires Starbucks to shift the strategic focus away from saturated markets in developed economies (mostly the U.S. and Europe) to ascending economies such as China, India, and Brazil. The market presence (number of stores) must be increased incessantly in order to protect market share not only against international competitors which swarm emerging markets at a rapid pace, but also against local coffee companies which have the home field- and price advantage. In developed countries, niche segments, such as the flavored coffee and courtesy coffee segments, deserve more attention, as well as “hot” coffee trends, such as single-serve coffee. Market attractiveness is moderated by high bargaining power of buyers and sellers.
What are key success factors in the global coffee market and does Starbucks have them?
Key success factors are a combination of important facts that are required in order to accomplish one or more desirable business goals.69 For Starbucks, key success factors are based on its numerous capabilities which distinguish the company from competitors. Three particular capabilities can be highlighted to have the biggest impact on Starbucks’ market success. 69
Cf. Business Dictionary (2014): Online publication
41
1. Market leadership Starbucks is occupying the market leadership position in many developed and emerging markets. For example, the company can boast of market share of 75 percent in the U.S. market.70 In China, Starbucks holds a market share of nearly 70 percent.71 Being the leader of the market allows Starbucks to set industry trends which the company has done in the past with beverages like the Frappuccino.72 In other words, the higher the market share the higher the control over competitors and influence on customers. 2. Superior store locations Starbucks is able to locate their stores in areas with much higher foot traffic and better local demographic compositions, such as in close proximity to places of interests or landmarks. Through this, Starbucks is able to attract more customers and also improve its quality image. In addition to that, the store atmosphere enjoys a unique perception among customers. 3. Supply chain management One of Starbucks’ strongest key success factors is its own supply chain operations. In a time where coffee prices are rising and ethical sourcing practices becoming the norm, the company has managed to form long-lasting and mutually-beneficial partnerships with farmers around the world. Starbucks’ transportation rates are the best in the industry, and the ability to protect the integrity of their coffee beans from detrimental effects of oxygen and time through a closed loop system of packaging is unprecedented in the industry.73 Key success factors are continuously nurtured by and guided by Starbucks’ six principles, which, in short, leverage customer loyalty, premium quality coffee, and homey atmosphere of its stores to fend off competitors.
Does the strategy fit the environment, or is incongruent?
Starbucks’ current strategy orientation has been highlighted at great length in chapter 6.1.3. The EFE matrix has shown that the company is only marginally able to respond to external factors. This means that with its current strategic orientation, Starbucks is able to sufficiently 70
Cf. Reed, M., Brunson, R. (2011): p. 168 Cf. Burkitt, L. (2010): Online publication 72 Cf. The Jeebboo Gazette (2012): Online publication 73 Cf. The Jeebboo Gazette (2012): Online publication 71
42
cover most of the external factors but not all of them. In other words, Starbucks’ current strategy is appropriate, nonetheless it requires fine-tuning to be sustainable in the short- to medium-run.
Does Starbucks have a competitive advantage?
The key success factors of Starbucks have been briefly discussed in the penultimate paragraph. In order to determine the competitive advantages of Starbucks, one must combine the key success factors with the company’s strengths and see if some of the strengths really help a key success factor stand out from competitors. Starbucks’ successful and popular product lines (e.g. VIA instant coffee, Frappuccino) and highly recognizable brand have helped the company to conquer market share in established and emerging markets. The company continuous to attract customers by further differentiating its product portfolio (e.g. beer will attract beer drinkers) and expanding into niche markets (e.g. courtesy coffee products for luxury hotels). Those strengths help Starbucks to maintain its current market leader position. The highly recognizable and popular brand image as well as strong financial muscle helps Starbucks to locate stores at highly-frequented and exclusive shopping sites in major cities around the world. Being perceived as a luxury coffee house, Starbucks stores fit perfectly between stores like Versace and Gucci. Moreover, Starbucks has the necessary financial means to rent store room in those areas. While direct competitors, such as McDonalds and Dunkin Donuts, also have the necessary financial means, they are not perceived as luxury coffee companies but rather as fast-food chains. Starbucks therefore has a competitive advantage in selling coffee to high-end customers in high-end places. Unlike other competitors, Starbucks maintains an effective and efficient relationship with coffee bean suppliers by implementing fair trade and ethical sourcing principles. This reduces the bargaining power of suppliers substantially and can have a positive influence on the price development of coffee beans. Other competitors have to deal with rising resource prices which have a negative impact on their margins.
43
Hence, it can be said that Starbucks is able to utilize its strengths to turn key success factors into comparative advantages. This is also why Starbucks has been testified with a rather strong internal position (see IFE Matrix).
7.2. Expected Performance Assessment This assessment summarizes expected performance in the future if the current strategy is maintained. Based on the current situation analysis, a most-likely-scenario for the industry will be developed to determine which changes will take place to the external environment. The main question is: will Starbucks’ current strategy be sustainable if the industry develops a certain way? When trying to build a scenario, four key drivers usually play an important role in determining the future attractiveness of the industry: change in long-term industry growth rate, change in product and marketing innovation, change in competitive intensity, and change in consumer needs.74 Change in long-term industry growth rate The average annual growth rate of the global coffee market accounts for about two to three percent.75 This rate is not likely to change in the short-run as stagnating growth rates in developed countries balance out increasing growth rates in emerging countries. In the medium-run, however, growth rates are expected to pick up as increasing coffee consumption in highly populous markets such as China, India, and Brazil outpaces consumption in developed countries. It is therefore interesting to look at the market development in emerging economies: In China, coffee consumption level is increasing at a rate of 25 to 30 percent (ten times more than the average world rate).76 The rising middle class with higher incomes can be considered the major growth engine. In India, annual growth in consumption accounts for five to six percent.77 Just like in China, a rising middle class with increasing disposable income is driving the growth. Comparable to India, coffee consumption in Brazil is increasing at an
74
Cf. Huntley, F. (n.d.): Online publication Cf. Brown, N. (2012): Online publication 76 Cf. Hong, D. (2013): Online publication 77 Cf. Kulkarni, M. (2013): Online publication 75
44
annual rate of approximately five percent.78 Economic stability and higher wages have led to an expanding middle-class which accounted for 42 percent in total coffee consumption in 2009.79 A study of Rabobank has shown that by 2020, emerging markets will account for 50 percent of global coffee consumption.80 Equally important are growth rates in certain market segments. The shift from multi-serve coffee to single-serve coffee is going to accelerate in the future. The at-home and out-ofhome coffee consumption will be changed by single-serve systems, such as Starbucks’ Verismo and Keurig Brewers. Currently, sales of single-serve coffee account for only eight percent of total coffee sales, but saw an increase of 31.3 percent from the previous year indicating strong growth figures for the future.81 Single-serve coffee is predominantly sold in developed countries, where it can be seen as a new and efficient alternative to making coffee the old-fashioned way. However, also in emerging markets, single-serve coffee products are increasingly gaining attractiveness among customers. Starbucks will be able to quench increasing coffee demand in the future because of its comparative advantage in sourcing coffee beans from loyal and high-quality bean producers as well as by key strategic partnerships with local coffee retailers that help Starbucks to distribute its products globally. Change in Product and Marketing Innovation Innovation is expected to drive market share gains and gross profits. Consumer preference for convenience and quality will drive innovation in single-serve brewing technology.82 Moreover, it will be important to further extend the product portfolio by adding new products (categories) to quench emerging customer needs. As a consequence, traditional coffee companies that started out as mere coffee stores are going to transform into fullscale restaurants over time. Equally important is the role of service innovation. With access to high-quality Arabica coffee beans widening, the quality gap between competitors is closing. Sometimes, the service
78
Cf. Bartender (2013): Online publication Cf. Bartender (2013): Online publication 80 Cf. Rabobank (2013): slide 7 81 Cf. Geller, M., Dalal, M. (2012): Online publication 82 Cf. Rabobank (2013): slide 7 79
45
offering is the only possible way to gain a competitive edge over market contenders. In the future, the coffee store is no longer going to be a place where one buys a cup of coffee or sandwich, but a sanctuary where people can go to escape the daily grind, meet friends, or simply enjoy a good reading. Coffee stores are therefore going to turn into places where people actually feel at home. As result, many coffee companies offer cozy and comfortable sitting areas, Wi-Fi access, and music. With competition in the global coffee market increasing, it will be ever more difficult to attract customer or tap into new customer groups. Spending on marketing activities is therefore expected to grow. Companies that have previously relied on the power of their brand image must be careful to not underinvest in marketing activities. Starbucks’ strong intellectual property and extensive R&D activities will help the company to keep up with product innovation in the future. Its service capabilities are unrivaled beyond any doubt. Starbucks’ has Wi-Fi connections in all of its stores and strives to improve the purchasing procedure by providing mobile payment. Only in terms marketing activities there is room for improvement. Change in Competitive Intensity As it was mentioned before, the competitive intensity is bound to increase – especially in emerging markets. Starbuck, who is enjoying leadership positions in the majority of its markets, is not sufficiently prepared to counteract new entrants both from the domestic and international field. The reason for this is the premium price it charges for its coffee products. Despite the increase in disposable income, only high-end customers will be able to afford Starbucks products (see price comparison in appendix 8) on a sustainable basis, meaning that customer will come back frequently to repurchase products. However, in emerging markets it is the middle-class that is responsible for increasing coffee consumption. Competitors like McDonalds and Dunkin Donuts are better positioned to respond to the price expectations of this customer segment. In terms of niche competition, Starbucks must be careful to not miss out on upcoming trends. The company has underestimated the profit potential of single-serve coffee and has only recently joined the market when most of the “cake” was already divided among other
46
competitors. For example, in China, Nestlé capitalized on its first mover advantage and now dominates the market for single-serve coffee.83 Change in Consumer Needs Consumer needs change over time and companies must be keen to tailor their product offerings to emerging needs. One conspicuous change in consumer needs has happened in the past decade and will carry on well into the next; the need for fast coffee. With time being of essence, consumers are in need of coffee that is ready to serve within seconds. This particular need has promoted the emergence of instant coffees and single-serve coffees. Another change in consumer needs is the rising emphasis on fair trade. With the rise of the internet, consumers have the chance to carefully follow social responsibility practices of companies online, and rumors and scandals, such as the waste water scandal of Starbucks, gain publicity a lot faster. According to the market study of Rabobank, the “premiumization” of the coffee market is another ascending consumer trend. Especially in developed markets, customers are willing to pay extra money for premium coffee and premium offerings supported by fair trade, health benefits, and organic and origin.84 In developing countries, consumers demand coffee at a reasonable price and with a western image. Starbucks’ current strategic orientation is able to capture most consumer trends that are expected to make an impact on the coffee market in the future. However, the company seems to have problems foreseeing emerging trends.
7.3. Developing Strategic Focus In order to develop strategic focus, it is important to first summarize the strengths and weaknesses of Starbucks and the opportunities and threats the company is exposed to. This will be done by means of applying a simple SWOT analysis:
83 84
Cf. Doherty, D. (2012): Online publication Cf. Rabobank (2013): slide 7
47
Table 5: SWOT Analysis Strengths 1. Successful and popular products lines 2. Access to high-quality Arabica coffee beans 3. Strong supply chain management 4. Strong intellectual property and R&D capabilities 5. Strong financial muscle 6. Strong brand image 7. Strong customer service 8. Strong and reputable partners 9. Variety of flavors Weaknesses 1. Overextension of product portfolio 2. High prices of products 3. Environmental issues
Opportunities 1. High growth rates in emerging markets (China, India, Brazil) 2. High growth potential of the single-serve coffee market 3. High growth potential for flavored coffee in the U.S. 4. High growth potential for courtesy coffee products
Threats 1. High bargaining power of suppliers 2. Trademark infringements in emerging markets 3. Increasing competition from local competitors and new entrants in emerging markets 4. Saturated market in developed economies 5. Increasing price sensitivity of customers
Source: Own illustration
Based on the SWOT analysis, a TOWS analysis can be compiled to provide the necessary strategic focus.
48
Weaknesses (W)
Strengths (S)
Table 6: TOWS Analysis Opportunities (O) SO “Maxi-Maxi” Strategy
Threats (T) ST “Maxi-Mini” Strategy
1. Utilize financial power and brand image to spur expansion in emerging markets (S5,6; O1) 2. Utilize strong intellectual properties and strategic partnerships to tap into/further expand in the singleserve coffee market (S4.8; O2) 3. Utilize the wide variety of flavors and successful product lines to penetrate the flavored coffee market in the U.S. (S1,9; O3) 4. Utilize high quality, brand image, and customer service to penetrate the courtesy coffee market in the U.S. (S2,6,7; O4) WO “Mini-Maxi” Strategy 1. Redirect focus to profitable niche markets to avoid overextension of portfolio in unprofitable market segments (W1; O2,3,4) 2. Tackle middle-class customer in emerging market by adjusting prices to affordable levels (W2; O1)
1. Utilize strong supply chain/supplier relationship management to reduce bargaining power of supplier (S3, T1) 2. Focus on quality, customer service, brand reputation, and key strategic partners to counter low-price offering of competitors (S2,6,7,8; T3) 3. Utilize strong intellectual property and R&D capabilities to penetrate niche segments in saturated developed markets (S4; T4)
WT “Mini-Mini” Strategy 1. Discard unprofitable product lines to avoid portfolio overextension and foster profitable product lines to exploit niche market (W1; T4) 2. Lower prices in reaction to increasing price sensitivity of customers (W2; T5)
Source: Own illustration
The TOWS analysis has highlighted four, broad strategic directions from which possible strategic alternatives can be drawn.
49
8. Solution Analysis The objective of the solution analysis is to come up with a final strategy (or strategies) for Starbucks to help it improve its competitive position in the short- to medium-term. Three steps a necessary to achieve this: generate strategic alternatives, determine the goals and evaluation criteria, select the final strategy or strategies.
8.1. Strategic Alternatives The strategic alternatives are taken from the TOWS analysis which has been compiled in the previous chapter. 1. SO Alternative The SO alternative is the most aggressive strategy, as it utilizes internal strengths to capitalize on opportunities. The main objective of this alternative is to aggressively expand operations in emerging markets by flexing the financial muscle and utilizing brand superiority as well as key strategic partnerships to gain a permanent and preferably unrivaled foothold in the market (market leadership). In developed, already saturated markets, the alternative envisages a strong focus on niche segments such as the single-serve coffee segment. Technologies that are necessary to succeed in niche segments must be either developed by using own R&D capabilities or acquired from competitors. Furthermore, it is important to promote the high-quality and one-of-a-kind image of the Starbucks brand, meaning that prices should not be lowered but kept stable to not deteriorate the brand image. 2. ST Alternative The ST alternative takes a more conservative stance as it utilizes strengths to minimize threats. In other words, it suggests the retention of the status quo. Current market share must be defended by foreseeing threats and eliminating them before they become an issue. The preeminent threat of rising coffee bean prices must be constrained by nurturing good relationships with supplier, focusing on fair trade and ethical sourcing practices. Similar to the SO alternative, the ST alternative also suggest to counter the low-price strategy of competitors by sticking to the high-quality and exclusive brand image. Good customer 50
service and a unique and state-of-art store atmosphere should be sufficient to justify the extra price customer pay for Starbucks products. 3. WO Alternative The WO alternative denies Starbucks’ current strategic approach and suggests a turnabout in the pricing strategy. In response to the rising middle-class in emerging markets, the product prices must be adjusted according to the customer’s budget. This does not mean undercutting the prices of competitors, but it will no longer allow Starbucks to charge a premium price for its products. Also, niche segments should be tackled in a more precise and slim-cut manner, meaning that certain product categories should be discarded (e.g. merchandise) to free up financial resources that are necessary to boost expansion in key segments, such as the flavored coffee market or the courtesy coffee market. 4. WT Alternative The WT alternative is the most defensive strategy, as it suggests getting on the same level with competitors. On the one hand, this alternative would allow Starbucks to enter the highly profitable and fast growing middle-class segment in emerging markets. On the other hand, the company would be exposed to a severe price war and loose its high-quality brand image among customers. Similar to the WO alternative, the WT alternative stipulates that all unprofitable product categories (dogs) should be discarded and that emphasis should be put on highly profitable and fast-growing products (stars).
8.2. Goals and Evaluation Criteria In this section, the goals of Starbucks are highlighted. In order to select the right strategy for the company, it is important to know what the company wants to achieve in the future. Goals are then translated into specific performance criteria which take the form of objectives. Those short- to medium-term objectives should be specific, measurable, achievable, realistic, and time-bound (SMART principle).
51
Table 7: Starbucks‘ Goals and Objectives Goals Expand market position in the China-AsiaPacific (CAP) market (in particular India, Japan, and Korea) Build China as a second home market outside the United States
Expand market leader position in the Americas
Develop current position in the fast-growing single-serve coffee market
Become the first coffee company to offer mobile payment Improve and develop ethical sourcing practices
Enter the courtesy coffee market in the United States
Objectives Open 1,500 stores in China until 2015 Double the number of cities until 201585 Acquire full ownership of all stores in China from joint venture partner Maxim’s Caterers Limited to expand control in central, southern, and western China86 Expand number of stores in Japan to 1,000 by 201387 Expand number of stores in Korea to 500 by 201388 Complete the joint venture with Tata Group in 2011 to increase market presence in India89 Open 3,000 stores until 201590 Acquire Peet’s Coffee and Tea Incorporated in 2011 to consolidate and grow market share91 Further increase presence in Brazil by opening 100 stores in 201192 Enter into expanded, long-term strategic partnership with Green Mountain Coffee to increase sales of K-Cup packs and Keurig Brewers93 Launch mobile payment system for BlackBerry and iPhone in all U.S.-based stores in 201194 Extension of line of credit for farmers to $20 million by 201595 Purchase of coffee which is 100% sourced according to the ethical criteria of C.A.F.E by 201396 Establish partnership with in-room market leader Courtsey Products in 2011
85
Cf. Vanderborg, C. (2013): Online publication Cf. Zhihao, T. (2011): Online publication 87 Cf. Chowdhury, S. (2012): Online publication 88 Cf. Chowdhury, S. (2012): Online publication 89 Cf. Canterbee, J. (2011): Online publication 90 Cf. Vanderborg, C. (2013): Online publication 91 Cf. Reed, M., Brunson, R. (2011): p. 186 92 Cf. Reed, M., Brunson, R. (2011): p. 186 93 Cf. The Motley Fool (2013): Online publication 94 Cf. Hardy, E. (2011): Online publication 95 Cf. Starbucks Corporation (2013): p. 8 96 Cf. Starbucks Corporation (2013): p. 4 86
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Increase the number of wholly-owned company stores
Improve and accelerate supply chain activities Improve customer loyalty
Improve and develop current position in the tea market
Extend product portfolio, especially the food and beverage lines
to gain access to 500,000 luxury and premium hotel rooms in the United States97 Acquire full ownership of stores in Switzerland and Austria in 201198 Acquire full ownership of stores in mainland China by buying stores from Maxim’s caterer99 Build 100,000 distribution centers in 20 countries by 2015100 Introduce My Starbucks Rewards by 2013101 Acquire Atlanta-based tea store chain Teavana Holding Incorporated in 2012 to expand in the $40 million global tea market and claim a leading position102 By the end of 2013, Starbucks customer in the U.S. will be able to enjoy La Boulange products and Evolution Fresh juices in company-operated stores103
Source: Own illustration
8.3. Strategy Selection The selection of the most suitable strategy (or strategies) for Starbucks is based on the evaluation of the alternatives while taking into consideration the goals and objectives of the company. As in the strategy analysis, there will be a distinction between corporate level and business (competitive) level strategies. Corporate Level Strategies The SPACE matrix will be utilized to determine which nature of corporate strategy Starbucks should undertake. The dimensions and evaluation of the SPACE matrix can be found in appendix 9.
97
Cf. Courtesy Products (2011): Online publication Cf. Starbucks Website (2011): Online publication 99 Cf. China (2011): Online publication 100 Cf. Chowdhury, S. (2012): Online publication 101 Cf. Chowdhury, S. (2012): Online publication 102 Cf. Chowdhury, S. (2012): Online publication 103 Cf. Chowdhury, S. (2012): Online publication 98
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Figure 3: SPACE Matrix
Source: Own illustration
The SPACE matrix shows that Starbucks should drive an aggressive strategy for the short- to medium-term. As a result, the WO and WT alternatives can be eliminated as they take on an extremely defensive/conservative stance by trying to emulate low pricing strategies of competitors. The question remains as to whether Starbucks should expand or simply maintain current market shares (SO versus ST). In order to determine which strategic alternative is the most suitable one for Starbucks, the QSPM Matrix will be applied.
54
Table 8: QSPM Matrix Alternative 1 (SO)
Alternative 2 (ST)
Expand Market Share
Maintain Market Share
Total Total Attractiveness Attractiveness Attractiveness Score Weight Score Score
Weight
Attract Score
Successful and popular product lines Access to high-quality Arabica coffee beans
0,15
4
0,6
0,15
2
0,3
0,1
4
0,4
0,1
2
0,2
Strong supply chain management Strong intellectual property and R&D capabilities
0,1
4
0,4
0,1
3
0,3
0,05
4
0,2
0,05
4
0,2
Strong financial muscle
0,1
4
0,4
0,1
2
0,2
Strong brand image
0,1
3
0,3
0,1
3
0,3
Reputable customer service
0,05
3
0,15
0,05
2
0,1
Strong and reputable partners
0,05
4
0,2
0,05
1
0,05
Variety of flavors
0,05
0
0
0,05
0
0
Overextension of product portfolio
0,1
0
0
0,1
4
0,4
High prices of products
0,1
4
0,4
0,1
4
0,4
Environmental issues
0,05
1
0,05
0,05
3
0,15
Key Factors Strengths
Weaknesses
Sum Weights
1
1
Opportunities High growth rates in emerging markets High growth potential of single-serve coffee market High growth potential for flavored coffee in the U.S. High growth potential for courtesy coffee products
0,2
4
0,8
0,2
1
0,2
0,1
4
0,4
0,1
2
0,2
0,05
4
0,2
0,05
2
0,1
0,05
4
0,2
0,05
2
0,1
High bargaining power of suppliers Trademark infringements in emerging markets Increasing competition from local competitors and new entrants in emerging markets Saturated market in developed economies
0,15
3
0,45
0,15
4
0,6
0,1
4
0,4
0,1
4
0,4
0,15
4
0,6
0,15
4
0,6
0,1
3
0,3
0,1
4
0,4
Increasing price sensitivity of customers
0,1
3
0,3
0,1
4
0,4
Threats
Sum Weights Sum Total Attractiveness Score Source: Own illustration
1
1
6,75
5,6
>
The QSPM Matrix clearly shows that Starbucks should drive an aggressive expansion strategy both in domestic and foreign markets. Maintaining current market shares and trying to foresee and then dodge attacks from competitors is not an option. 55
Business Level Strategies In contrast to corporate level strategies, which concern the scope of the firm, business level strategies deal with product categories and their profit-making potential. The BCG matrix (see chapter 6.1.1) has already highlighted the profitability of Starbucks’ four major product categories. The Grand Strategy Matrix will be applied to determine which product strategies are most appropriate for each category on the basis of competitive position and market growth. Figure 4: Grand Strategy Matrix
Rapid Market Growth
Weak competitive position
Quadrant II
Quadrant I
Market development Market penetration Product development Horizontal integration Divestiture Liquidation
Market development Market penetration Product development Integration (any direction) Related diversification
Quadrant III
Quadrant IV
Retrenchment Related diversification Unrelated diversification Horizontal integration Divestiture Liquidation
Joint Ventures Strategic alliances Merger Acquisition Related diversification Unrelated diversification
Strong competitive position
Slow Market Growth
Source: Own illustration
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1. Strategy for Quadrant I Products that have a strong competitive position and experience rapid market growth fall into quadrant I. For Starbucks, such products are typically beverages and foods that enjoy a high acceptance among customers. Examples are the Frappuccino and the Panini, but also juices and teas (e.g. Chai). In order to consolidate the market position and boost growth, Starbucks needs to further develop those product categories. This can be done by adding flavors, ingredients, or temperature. Starbucks has already applied this strategy on domestic scale by introducing the Caramel Ribbon Crunch Frappuccino® blended beverage or the Vegie Panini. 2. Strategy for Quadrant II Products that have a weak competitive position and experience rapid market growth fall into quadrant II. For Starbucks, product lines such as the K-Cup and VIA instant coffee are good examples. Having missed out on the first-mover advantage, such products have to quarrel with strong competitive brands (e.g. Nestlé). Hence, their competitive position is weak yet fast market growth rates in the single-serve coffee sector make them highly profitable. It is therefore important to further develop the market by redirecting financial resources and R&D capabilities to making niche products more attractive in the eyes of consumers. Marketing campaigns that highlight product qualities or appearance make-overs are possible options to better the competitive position of such products and turn them into stars (quadrant I). 3. Strategy for Quadrant III Products that have a weak competitive position and experience slow (or no) market growth fall into quadrant III. Being portrayed as dogs in the BCG-matrix, such products are merchandise and traditional coffee-making equipment. As it was shown in the internal analysis, sales of merchandise products have been declining over the past years (despite the company’s excellent brand image). Sales of traditional coffee making equipment have been declining as well, mainly because of the single-serve coffee frenzy. Clinching to such products can have a negative impact on profit. Possible strategic alternatives are therefore retrenchment and even complete liquidation of product lines. The retrenchment alternative suggests slimming down the merchandise offering, only keeping items with positive sales 57
figures (e.g. stainless coffee mugs and tumblers or Verismo® Machines) and getting rid of unprofitable product lines (e.g. music CDs). Liquidation suggests offering no merchandise and solely focus on selling beverage and food products. 4. Strategy for Quadrant IV Products that have a strong competitive position and experience slow market growth fall into quadrant IV. For Starbucks, an example would be the classical ground and whole bean coffee with its different blends. Ground and whole bean coffee have been around almost since the foundation of the company. Customer have been buying traditional coffee for decades and Starbucks’ ground and whole bean coffee products enjoy a high reputation among customer due to their high-quality image. However, over the past years sales of traditional coffee have stagnated due to the appearance of single-serve coffee products and changes in consumer needs. What Starbucks could do to boost sales of traditional coffee products is to form strategic alliances with large restaurant chains, hotel chains, or specialty and premium retailers that sell freshly-brewed coffee to customers. This retail strategy has already been successfully applied in the early stages of Starbucks’ expansion and needs to be further developed to boost sales of traditional coffee products.
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9. Recommendations Based on the assessment and solution analysis, the following key strategies can be recommended to Starbucks: Market penetration strategy: Starbucks should opt for an aggressive expansion strategy in emerging markets. The aggressive strategic choice can be justified because Starbucks has a strong competitive position which can be perfectly utilized in a fast-growing market. The company should utilize its internal strengths to develop market share in emerging economies, in particular India and Brazil. It is further recommended to enter new markets with the help of key strategic partners since they dispose of the necessary market knowledge and political ties which can greatly facilitate the entry. Moreover, the licensing strategy should be continued for new markets since it allows local store managers to tailor store format, product mixes, and price points to the needs, lifestyles, and tastes of local customers and communities. Market development strategy in China: Starbucks has already made significant inroads into China. However, there still remains a lot of untapped potential which the company can capitalize on. In China it is important to develop marketing strategies that appeal to younger generations who fantasize about western coffee culture as a symbol of modern lifestyle.104 Moreover, the importance of partnering up with local retailers to gain market presence cannot be stressed enough. Since China is not a homogenous market (it is far too big for that), Starbucks is advised to nurture existing partnerships as each partner contributes different strengths and local expertise that can help Starbucks gain an understanding of the different tastes and preferences of local Chinese customers. Once the market is consolidated, Starbucks is advised to continue its centralization strategy of buying back stores from local partners to increase profits and reduce the threat of intellectual property theft. Market segment development strategy: Starbucks should apply a market segment development strategy for niche markets in developed economies, in particular the single-serve-, courtesy-, and flavored coffee segments. Those segments portray
104
Cf. Wang, H. (2012): Online publication
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positive growth rates and must be exploited if the company plans to increase market shares in established markets. Product development strategy: on business level, the company is advised to further develop successful product lines (Frappuccino, Paninis) so that they do not loose attractiveness in the eyes of customers. Starbucks also has great growth potential in Tea and Fresh Juice products, and the company is advised to build up those product lines alongside their core coffee and food products. Product positioning strategy: trendy products such as K-cups and VIA instant coffee packs need to be better positioned in their respective segments in order to fully exploit profit potentials. The company is advised to build better relationships with specialty retailers or convenient stores to clinch premium shelf space for such product lines to increase customer awareness. Moreover, tailored marketing campaigns are necessary to highlight the benefits such products have over competitors. Retrenchment Strategy: Starbucks should consider slimming-down unprofitable product categories, such as merchandise and traditional coffee equipment. This will free up additional financial resources which is necessary to further drive the extension of profitable and currently “hip” product lines. A liquidation strategy for the entire merchandise category is not recommendable as certain products still enjoy high demand among customers (e.g. tumblers and Verismo® machines). Alliances: typical question mark products, such as ground and whole bean coffee products, should not be given up on since they portray the heart of Starbuck product portfolio. Growth in this segment can be revived by forming alliances with key strategic retail partners (e.g. Tata Group or Kraft Foods) who dispose of the necessary market spread to distribute traditional coffee products. Most of the strategies that were recommended are already considered in the company’s short- to medium-term objectives (see chapter 8.2), indicating that Starbucks is aware of potential external threats and opportunities. In other words, Starbucks’ current strategic orientation is appropriate for the company to persist in the market, nonetheless it requires fine-tuning to be sustainable in the short- to medium-term. Following additional recommendations can be made to help Starbucks improve and sustain its current strategic orientation: 60
Aggressive marketing campaign in emerging markets: room for improvement exists in the implementation of marketing campaigns in developing countries. Unlike in developed markets where Starbucks has already made a name for itself, in emerging markets Starbuck cannot rely on world-of-mouth marketing as it first has to establish and consolidate its presence. It is therefore recommended to increase the marketing budget for growth markets. Marketing campaigns featuring the western, highquality, and “hip” image of Starbucks can help the company offset the low-price advantage of competitors. Also in developed markets it is necessary to step up advertising. In contrast to emerging markets, which require a rather all-embracing marketing strategy, the marketing strategy for developed countries should be finetuned to specific niche markets. Premium-pricing strategy: it is advisable to aggressively expand the number of stores at home and abroad in order to not fall behind competitors, who, based on the their low-cost advantage, are able to attract more customers particularly from the fastgrowing and highly coffee-conscious middle-class in emerging economies. Aggressive expansion does not mean undercutting competitors. On the contrary, Starbucks should hold on to its high-quality image. Lowering prices would most likely mediocritize Starbucks’ excellent brand image and reputation as a provider of premium coffee and exceptional service. The company has shown that customers still value good service, high quality, and a cozy store atmosphere and that they are willing to pay an extra price to feel “special”. Especially in emerging markets, pushing for market share by cutting prices is a losing strategy as new entrants can never “outcut” the prices of local competitors.105 Trend-scouting departments: in the last decade Starbucks has failed to foresee and capitalize on emerging trends in the coffee market. It is advisable for the company to establish trend-scouting facilities to better unravel changes in consumer expectations and behavior. Price hedging strategy: there have been wide fluctuations in the market prices of high-quality Arabica coffee beans. Although Starbucks has been able to mollify extensive price peaks with its excellent supply chain management orientation, the company could further mitigate price volatility by applying effective hedging 105
Cf. Wang, H. (2012): Online publication
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strategies. One option could be to use future contracts for purchasing future quantities at an agreed on price in the present. This will provide Starbucks with more financial leeway.
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Appendices Appendix 1: Comprehensive Strategic Analysis Framework
I. Current Situation Analysis
III. Solution Analysis
II. Assessment Analysis
Internal Characteristics (background, organization)
Current Strategy (corporate and competitive level)
IV. Recommendation
Goals and Evaluation Criteria
Past and Current Financial Performance Analysis
Summary of Current Performance
Expected Performance of Current Strategy
Propose Strategic Direction + Solution Analysis
Strategic Alternatives
Strategic Choice (corporate and competitive level)
Recommendation and justification of strategy selection
External influences (Macroenvironmental, industry)
Source: Own illustration
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Appendix 2: Value Chain Inbound
Operations
•Farm •Exporter •Broker •Testing •Roasting •Warehouse •Packaging
•Companyoperated stores •Licensed stores
Outbound •Retailing •Speciality •Direct response
Marketing •Word-ofmouth •in-store adds
Service •customer satisfaction •individuality •atmoshpere
Source: Own illustration
Appendix 3: Product Portfolio Product Categories Beverages
Bottled Drinks Brewed Coffee Evolution Fresh™ Chocolate Beverages Espresso Beverages Frappuccino® Blended Beverages Kids’ Drinks and others Smoothies Starbucks Refreshers™ Beverages Teas Iced Teas
Food
Packaged and single- Coffee-making serve coffees equipment and other merchandise Profile Brewing Equipment Bakery Coffee presses Starbucks Petites Blonde Roast Medium Roast Coffeemakers Bistro Boxes Dark Roast Espresso Hot Breakfast Machines Flavored Coffee Sandwiches, Paninis and Salads Seasonal Favorites Grinders Form Teapots and Tea Yogurt and Fruits Kettles Whole Bean La Boulange Other Merchandise Coffee Evolution Hot Cocoa and Ground Coffee Harvest™ Treats Starbucks VIA® Mugs and K-Cup® Packs Tumblers Pods, Portions Music CDs and Filter Packs Verismo® System Starbucks Gifts Syrups and Sauces Espresso Macchiato Beverages Latte Beverages Mocha Beverages Cappuccino Beverages Americano Beverages Espresso Beverages Starbucks Reserve® Coffee 64
Zambia Peaberry Terranova Estate Kona Coffee Parry Estate Sumatra Blue Batak Sun Dried Ethiopia Yirgacheffe Finca Nuevo Mexico
Source: http://www.starbucks.com/
Appendix 4: Starbucks’ Global Responsibility Program106 Community Community Service: Hosting community service projects Thriving Neighborhoods: hosting get-togethers and charity events Volunteer Canada Partnership: 10 cent donation per returned tumbler to Volunteer Canada Youth Action: Starbucks Youth Action™ Grants encourage teens to make a difference Starbucks Foundation: Supporting Coffee, Tea, Cocoa communities, access to clean water, fostering education in China, and rebuilding the gulf coast Ethos® Water Fund: 5 cent donation for each bought bottle of Ethos water People with disabilities: Starbucks is complying with the Accessibility for Ontarians and Disabilities Act
Ethical Sourcing Coffee: Coffee and Farmer Equity (C.A.F..E) Practices helps farmers to grow coffee in a way that is both better for people and the planet Farmer Support: Loan programs have committed over $15 million to a variety of farmers Tea: Community Health and Advancement Initiative (CHAI) targets the needs of tea- and spice-growing communities with health services and economic development Cocoa: Starbucks collaborates with The World Cocoa Foundation, adheres to the Cocoa Practice Guidelines, and supports the ECHOES Alliance with a contribution of $200,000 over three years
Environment Recycling and Reducing Waste: Starbucks recycles waste directly in stores, uses greener and reusable cups, and engages in composting practices Energy: Starbucks is purchasing renewable energy that represents 20% of the total electricity used in the Starbucks stores Water: Starbucks’ dipper well system is reducing the consumption of water Green Building: Starbucks is building energy-efficient stores according to the LEED® certification Climate Change: Starbucks partnership with Conservation International helps to improves coffee production, conserve and restore natural habitat, and facilitates access to forest carbon markets
Source: http://www.starbucks.com/ 106
http://www.starbucks.ca/responsibility
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Appendix 5: Organizational Chart CEO Howard Schulz
CFO T. Alstead President SB Coffe U.S. C. Burrows
Executive V.P. P. Boggs
President SB Coffee Int. J. Culver
President Global Food Service J. Hansberry
President Global Development A. Rubinfeld
Seattle's Best Coffee M. Gass
CMO A. Scrivner
Source: Own illustration
Appendix 6: Global Coffee Consumption (millions of 60 kg bags) 100 90 80 70
Starbucks funded 60 50 40 30 20 10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
1870
1860
1850
0
Source: UNCTAD
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Appendix 7: Store development 1971 to 2010 18000 16000 14000 12000 10000 8000 6000
4000 2000
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
0
Source: http://globalassets.starbucks.com/assets/c60c79d6c3a247e284640f17f1806283.pdf
Appendix 8: Price Comparison between Starbucks, McDonalds, and Dunkin Donut Beverage/Company Hot Black Coffee Iced Mocha
Starbucks $1.95 $3.95
McDonalds $1.69 $2.99
Dunkin Donut $1.89 $2.29
Source: http://www.tampabay.com/features/food/general/coffee-wars-taste-test-of-starbucks-mcdonalds-7eleven-and-dunkin-donuts/1012417
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Appendix 9: Dimensions and Evaluation of SPACE Matrix
Source: Own illustration
Competitive Advantage (CA): As it was mentioned in the Current Performance Assessment Analysis (chapter 7.1), Starbucks has a competitive advantage in market leadership, superior store location, supply chain management, and brand image. Financial Strength (FS): As it was analyzed in the Financial Performance Analysis (chapter 6.1.4), Starbucks ratios are generally healthy. Especially the profitability and liquidity ratios have improved substantially since the downturn in 2008. Industry Strength (IS): Based on Porter’s Five Forces (chapter 6.2.2), it can be concluded that the industry is indeed competitive and that high bargaining power of suppliers and buyers will make it even more competitive in the future. Nonetheless, potentially high growth rates (especially in emerging markets) make the global coffee market highly profitable. Environmental Stability (ES): Based on the PESTEL analysis (chapter 6.2.1), it can be concluded that the macro environment is generally positive for Starbucks. The world economy is gradually recovering from the 2008/2009 recession and coffee consumption is gradually increasing. Higher technological and environmental standards portray challenges for Starbucks in the future. Also, intellectual property infringements in developing countries have to be dealt with. 68
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Declaration I guarantee that I have done this work myself and have not used any sources or aids other than the ones stated.
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