Report on the Competitive Strategy of Starbucks
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. After opening eleven stores in the Seattle area, Starbucks began its expansion first in the northern United States and then across the rest of the country. Global expansion did not occur until Starbucks’ initial public offering (IPO) in 1992, further highlighting 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 key markets, covering most Asian countries and also moving to European, Italian and Latin-American markets. Today Starbucks has 16,635 stores in 50 countries of which 8832 are wholly owned stores and 7803 are 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 to have chosen the correct strategic path for the upcoming years. In the words of Starbucks CEO Howard Schulz, “Starbucks has never been healthier, more connected to customers and partners, or better positioned to go after tremendous business opportunities that lie ahead”.
While Starbucks has more than 75 million customers a month, this number includes just 15 million shoppers in the retailer’s rewards program. The majority of its customers visit the coffee company one to five times a month. With that in mind, Starbucks is turning its aim towards developing digital relationships with these occasional shoppers and has launched a new labor routine, which it believes will benefit service to these sometimes shoppers.’We know that many of these customers, largely those with whom we don’t have a digital relationship, do not visit as frequently and have a low awareness of either new product introductions or many of our great core offerings,’ said COO Rosalind Brewer during the company’s second quarter 2018 earnings call. Over the past year, only one in four of these non-Starbucks Rewards occasional customers were aware of the retailer’s new offerings and key promotions compared to twice that of its frequent Starbucks Rewards customers. What’s more, the customers make up nearly 50% of the volume sold in the afternoon, making them ‘a material part of our current afternoon challenges,’ according to Brewer. To this end, Starbucks is shifting its marketing strategies in the afternoon to hone in on these shoppers. And to develop a digital relationship with them, the coffee guru needs occasional customers to sign up. To start this progression, Starbucks now requires customers to provide their email addresses, first and last names, and ZIP codes to access the free Wi-Fi Starbucks’ cafes provide. “We are widening the aperture of our digital flywheel through a range of customer interaction touch points, including opening up Mobile Order and Pay to all customers, leveraging Wi-Fi sign-up in our stores, and reinventing Happy Hour through the use of the single-use digital coupon,’ said president and CEO Kevin Johnson. Starbucks will also cut the number of time-limited offerings by nearly 30% versus a year ago, shifting from singular offerings to more personalized offers per customer at the right time. “Our new approach to marketing will be centered on meaningfully strengthening customer relationships by increasingly targeting our offers to each customer,’ said Brewer. This approach includes the retailer’s new Happy Hour program, which will be used to sign up shoppers for direct digital relationships and to promote a variety of beverages throughout the year. Last year, Starbucks’ Happy Hour program was a ‘ten-day one-and-done’ offer available to everyone. Now, shoppers need to sign up for the benefits and the program will be ongoing. “What that means is that we won’t just be doing Frappuccino for ten days in May,’ said EVP and global chief strategy officer Matthew Ryan. ‘We will be able to use this very well-known device we have called Happy Hour to promote a variety of afternoon products across the year, using it not just in May, but across the year to bring customers back into our stores on an ongoing basis. Over time, we get to know customers, what they respond to, and repeat, and we’re able to personalize and do things that we could do with the Starbucks Rewards customer right now, with a much broader segment of customers. “Brewer noted the one-to-one offer will leverage Starbucks’ personalization capabilities, but other benefits include ‘more predictable and efficient scheduling of partners. “Ergo, Starbucks also launched the first change in its deployment routine in five years in February, during its second quarter. The retailer dubbed the new labor routine ‘Deployment 2.0′ and Brewer described it as moving the retailer from a one-size fits all deployment plan to a dynamic store-specific deployment solution that will continue to evolve with the business.’
‘It considers an individual store’s product and channel mix data by day-part, assigns responsibilities by role, and deploys baristas to productions positions, thereby balancing work to optimize customer connections,’ she said. ‘It is that unlock, the time for our partners to connect directly with our customers, that will help us deliver a better experience in our stores overall. “Previously, the company used the same deployment plan in all stores. Now Starbucks can look at its routine by store-specific data, using visual digital data rather than a spreadsheet approach like it was before. She also noted Starbucks believes this launch contributed to comp improvement over the quarter. Global, Americas, and U.S. comparable store sales increased 2%.’What we know about the occasional customer in the afternoon is that they don’t shop with us as frequently, and they’re not aware of our offerings as our Starbucks Rewards customers,’ said Brewer. ‘What we also know about our business in the afternoons, is that we have used our afternoons to train our new partners that were just joining as baristas, and we have heavy routines in the afternoon. And so what we learned from managing our peak in the morning and managing routines, we’re applying that to the afternoon so that we apply the right kind of labor when the customers are in the store.
Starbucks Coffee’s corporate mission is “to inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time.” This mission statement reflects what the company does to keep its business running. It is clear that target consumers are given the emphasis on this corporate mission. The following components of Starbucks’s corporate mission statement influence strategic management in growing the business:
NEW MISSION: provide a great work environment with diversity and treat each other with respect and dignity. Apply high standards of excellence in purchasing, roasting and a fresh delivery of our coffee. Develop customers all the time.
Starbucks Coffee’s corporate vision is “to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.” This corporate vision statement has the following components relevant to the business:
New Vision: To become a national company with values and guiding principles that employees could be proud of
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:
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.
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:
Starbucks Coffee operates in various industries that impose different challenges in growing the business. The variety of these industries has increased over time, as the company develops more products to complement its core coffeehouse business. For example, Starbucks Corporation’s marketing mix or 4P indicates that the company has expanded its product offerings to include tea, food, and merchandise, in addition to coffee. In the context of the SWOT analysis model, this condition creates a challenging business environment where the company needs to use different sets of competencies that match various industries. Strategic consideration for the internal and external factors shown in this SWOT analysis can help increase Starbucks Coffee’s success in competing against various coffeehouse firms and other food services businesses, such as Dunkin’ Donuts, McDonald’s, Burger King, and Wendy’s.
This component of the SWOT analysis model deals with the internal factors that the company can use as strengths to address weaknesses and protect the business against competition. In this case, Starbucks Coffee’s main strengths are:
Starbucks Corporation has one of the world’s strongest and most popular brands. The company has a growing population of loyal customers, which adds to the stability of the coffeehouse business. In the SWOT analysis model, the extensive global supply chain strengthens Starbucks by supporting its operations. For example, the company has a global network of suppliers that are carefully selected based on criteria pertaining to quality, such as the quality of Arabica coffee beans. Also, the company gradually diversifies its business, such as through the acquisition or development of subsidiaries like Ethos Water, Seattle’s Best Coffee, and Teavana. Diversification minimizes the effects of market and industry risks. The internal strategic factors identified in this part of the SWOT analysis of Starbucks Corporation show that the business has strengths that promote resilience through diversification and a global supply chain.
Business weaknesses are identified in this component of the SWOT analysis. Weaknesses are internal factors that reduce or limit business capabilities. Starbucks Corporation’s weaknesses are as follows:
Starbucks has high price points that maximize profit margins but reduce the affordability of its products. This internal strategic factor is a weakness because it limits the company’s market share, especially in areas with relatively lower disposable incomes. Also, this SWOT analysis considers generalized standards a weakness that limits the flexibility of the coffee and coffeehouse chain business. For example, the company’s generalized standards for its crafted beverages reduce these products’ cultural alignment with local target markets and associated consumer preferences. In addition, many Starbucks products are imitable. For instance, small local competitors could develop beverages that are not the same as but similar to the company’s products. Even the design and ambiance of the company’s cafés are imitable. This business environment condition empowers competitors. The internal factors in this part of the SWOT analysis of Starbucks Coffee Company show that the business must develop strengths to reduce the adverse effects of imitation and the influence of high price points on the company’s market share in the global industry.
This part of the SWOT analysis model focuses on external factors that present opportunities for business growth and development. In this case, the main opportunities available to Starbucks Coffee Company are:
Starbucks Corporation can increase its revenues through expansion in developing markets. This opportunity draws attention away from the U.S. market, where most of the company’s revenues are generated. Also significant in this SWOT analysis is business diversification, which can improve Starbucks’s long-term stability. For example, through higher diversification, the company can reduce its dependence on its current industries, thereby improving overall revenue growth opportunities. Diversification is currently a minor growth strategy as shown in Starbucks Corporation’s generic competitive strategy and intensive growth strategies. The industry environment also presents the opportunity to strengthen the company’s presence and market share through partnerships or alliances with other firms. For instance, alliance with major retailers improves the distribution and market share of the company’s consumer goods, such as ready-to-drink coffee. The external strategic factors in this part of the SWOT analysis show that Starbucks can improve its industry position by developing its operations to exploit the opportunities in the global industry environment.
Threats against the business are identified in this part of the SWOT analysis. Threats are external factors that reduce or limit business performance. In this company analysis case, the following are the main threats relevant to Starbucks Coffee Company:
Starbucks Corporation competes against a wide variety of firms in the international market. For example, the company competes against major restaurant chains that offer low-cost coffee products. This external strategic factor threatens Starbucks because such competitors can reduce the company’s market share by competing based on low prices. Also, this SWOT analysis considers imitation as a major threat to the coffeehouse business. In light of the company’s weaknesses, the threat of imitation involves firms that try to copy the taste, look and feel of Starbucks products. In addition, the industry environment is subject to independent coffeehouse movements. These movements are sociocultural efforts that support the operations of small independent local coffeehouses and oppose the expansion of multinational coffeehouse chains. Such socio-cultural trends influence consumer perception and purchasing behaviors, as shown in the PESTEL/PESTLE analysis of Starbucks Corporation. Successful marketing campaigns and branding strategies are needed to counteract the effects of these trends. This part of the SWOT analysis of Starbucks Coffee Company identifies external strategic factors that impose challenges to international expansion and market penetration.
Business model: American restaurant chains typically favor one of two business models: the standard retail business model or the franchise model. Starbucks (SBUX) has historically used the standard model. To this day, the majority of its net revenue is generated by the retail locations the company owns. While this business model typically hinders domestic expansion, Starbucks conquered this hurdle in the late 20th century, before the domestic coffee industry flooded with large-scale vendors Plus, Starbucks has targeted highly populated areas with large volumes of foot traffic. However, our globalizing world has spurred an economic trend toward expansion into emerging markets. Starbucks is accommodating this trend by loosening its licensing agreement requirements, using pieces of the franchise model to rapidly expose itself to developing markets’ share. This business model has allowed Starbucks to be the first coffee firm to put retail locations in each of the BRIC nations and many more. During FY2013, 23% of Starbucks’ revenues originated outside of the United States, compared to Dunkin’ Donuts’s (DNKN) 3% international revenue stream. While Starbucks’ margins are slimmer than those of Dunkin’s franchise model, Starbucks enjoys a larger global presence and more control over its day-to-day operations via the retail model.
Starbucks’ (SBUX) main cost driver is its price per pound of coffee beans. The two most consumed coffee beans are Arabica and Robusta blends, which Starbucks sources from numerous continents to keep up with demand. Arabica is the most consumed coffee bean species due to its milder flavor compared to Robusta. Starbucks primarily purchase Arabica beans because the weaker flavor mixes more easily to create the 30 blends used across all product platforms.
Starbucks’ massive market capitalization allows it to leverage economies of scale. Unfortunately, there are no accurate dollar amounts available concerning the cost Starbucks pays to produce one cup of regular coffee. Amateur speculative estimates range from $0.20 to $0.75. Starbucks’ cost structure is relatively straightforward, resembling those of typical “high-end” fast-casual restaurants, such as Panera (PNRA) or Chipotle (CMG). This means slim margins attributable to industry competition (SBUX’s 2013 profit margin is 0.06% due to an unfavorable litigation outcome involving Kraft Foods). Healthy companies in this industry boast strong operating cash flows and high capital expenditures attributable to kitchen maintenance and vertical integration efforts. Cash flows from financing activities differ at the firms’ discretion. Starbucks has recently been repurchasing its own shares and paying dividends to increase returns to investors. Others seek capital to fund international expansion attempts and capital expenses.
Starbucks segmentation, targeting, and positioning comprise marketing decisions directed at identifying appropriate groups of people among the general public as future customers for the business and targeting this segment via positioning products and services that resonate well with their needs and wants. In simple terms, segmentation, targeting and positioning refer to deciding whom to sell to, and positioning products and services accordingly.
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