- Industry: Through decades, wireless communications in the coffee shops industry has helped owners to make their shops more efficient and to bring better value to their customers.
- Cyber cafes during the 1990s began offering internet in their coffee shops. This trend began in London with a few shops provided customers a combination of coffee, and connectivity with the world.
- In 1997, there were several thousand coffee shops with this system across North America and Western Europe. However, during that time, coffee shop owners discovered that consumers were more interested in the coffee than the possibility of getting online.
- The wireless hot-spots developed in 2000 allowing consumers to access the net using their own computers.
- Specialty coffee retailers have seen the need to provide the consumer with an environment that encourage longer visits because this brings more sales and better customer satisfaction.
- By offering hot-spots in coffee shops, owners give the customer the opportunity of making connections through coffee but also over the internet.
- Starbucks: Wireless communication go hand-on-hand with the internet development Starbucks is always seeking to improve.
- In 1998, Starbucks launched its first-generation e-commerce Web site. In the same year, the company upgraded their software to improve their performance to analyze data, deliver new features to the market in a short time.
- Starbucks’ advertising strategy is by word of mouth and by keeping their reputation among their target market. With wireless communication now the company has the opportunity to use direct marketing to advertise new products by sending text messages, emails and social network sites. (Buckstein, 2010).
- By providing Wi-Fi capability services as a draw to customers that can use the technology for personal and business purposes, keeping customers in store for longer periods of time to obtain more sales.
- Demographic Segment
-
Greater disparities in income-levels
- Environment: Through the decades income inequality has grown significantly around the world.
- The top 10 percent of people who earn $100,000 per year increased almost 9 percent in 2005. However, the other 90 percent
- The top 300,000 Americans collectively enjoy almost as much income as the bottom 150 million Americans.
- The top wealthiest 5 percent of Americans, who earn more than $180,000 added to their annual incomes. Families at the $50,000 median level slipped lower.
- The following states have the largest gaps between the rich and poor: New York, Connecticut, and Texas.
- Coffee global consumption has increased to 136.5 million bags because of rising consumers in exporting countries and growing demand in emerging markets, even with recessions and income inequality gap increasing.
- The target market for coffee varies depending on their income. For example, the top ten percent of the population would prefer an experience rather than just the product, while the lower income would try to find the less expensive product.
- Retailers such as Starbucks and Caribou target the higher incomes, and McDonald’s and Dunkin Donuts target people with lower incomes.
- Although coffee consumption is the US is increasing the income of those who buy Starbucks is declining and the gap between the “haves” and “have nots” is widening.
- Disposable income from those who buy Starbucks is decreasing in some markets but increasing in others, such as China. Starbucks has been opening new stores to obtain and retain these specific customers.
3. Economic Segment
a. Inflation rates
- Environment: High inflation rates produce consumers to have less money in their pockets, which declines the retail consumption of coffee in the developed markets such as US and Europe.
- Increase in the cost of coffee considered a commodity decreases the value of money taking more dollars to buy the same cup or bag of coffee it did in the past.
- Inflation rates impacts every aspect of coffee production and distribution, for example, transportation costs increase making it more expensive to ship coffee beans from the countries of origin, and to retailers as well as consumers.
- Due to inflation rates and labor costs production costs increase in producing countries.
- Coffee beans come from 20 countries around the world, and high inflation rates have reduced the power of coffee producers because of the fluctuating exchange rates affecting exporters and buyers.
- In emerging economies, specialty coffee is still considered a luxury beverage, and inflation rates increase the prices making demand for this coffee around the world to decrease.
- Countries that produce the coffee beans have high inflation rates because the majority are developing countries or emerging economies, and increased political and food insecurity has became characteristic of these countries.
- In 2010, many of the industry leaders such as Folger, Maxwell House, and Dunkin Donuts increased their prices because of the effect of inflation in their manufacturing process.
- Inflation causes Starbucks to increase its prices on custom drinks because of not only the high price on Arabica beans but also in dairy products, cocoa, and sugar, which are necessary for preparation of these custom beverages.
- Products sold in supermarkets such as the packed coffee beans and coffee grains are affected by inflation rates.
- Even though prices in Starbucks go up because of inflation rates, demand is not likely to decrease. There is enough consumer traffic for specialty coffee drinks that counteract the effects of inflation.
4. Political/Legal/Regulatory Trends:
a. Regulation
- Environment: Coffee is considered a form of foreign exchange and government revenue, for this reason, governments from countries that produce coffee consider regulation of coffee pricing necessary.
- Regulations are used to maintain producer’s price fixed to protect them from price fluctuations and assured them minimum price.
- An example of regulation is the first International Coffee Agreement, which main purpose was to allocate export quotas on coffee beans, to importing and exporting countries tightened if international prices fell below a particular level and separated when they rose above the level.
- The ICA did raise prices and sales declined because of these quotas it became more difficult for roasters to buy types preferred for their blends.
- Fair Trade is another regulation in action to protect the farmers from the producing coffee countries, which makes the importers pay a minimum price of $1.26 per pound to farmer cooperatives.
- Regulations, such as Fair Trade allow farmers to pay bank debts and avoid loss of land to increase the quality of coffee, which is Starbucks’ main purpose.
- Many regulations can affect the price and marketing strategy that Starbucks tries to develop, depending on the regulation there are advantages and disadvantages that come with it.
5. Sociocultural Segment
- Concern for the environment
- Environment: The biggest source of environmental damage where coffee is concerned comes during the production of the bean themselves.
- More and more companies are showing concern and are adapting green options to help protect the nature, increasing demand for green or environmental friendly products.
- Farmers “modernized” their lands by stripping shade trees and begun using chemical pesticides and fertilizers. These actions have decreased the quality of Arabica beans, making big coffee corporations to act to protect the quality of the beans.
- Foundations such as Fairtrade and Rainforest Alliance focus on the growing concern for the environment. While Fairtrade focuses on the protecting the farmers of producing coffee countries, Rainforest Alliance focuses on forbidding deforestation and educating farmers new land uses to help the environment.
- Industry: Different categories of coffee have emerged to reduce the negative environmental consequences of coffee.
- Organic coffees are produced without synthetic chemicals and with methods to preserve the land. Shade coffees are grown in forest that provide habitat for wildlife and migratory birds.
- Rainforest Alliance and Kraft Foods entered into a partnership to promote coffee production that is sustainable for the land and workers.
- Starbucks: Different ways Starbucks Corporation actively helps the environment is by supporting farmers, using recycled and reusable cups, by saving energy and water, and building green locations.
- According to their Responsibility Report, Starbucks is aware of the linkage between the success of the company and the success of farmers. For this reason, they buy Fair trade coffee.
- Starbucks’ goal for 2015 is to use 100 percent reusable or recyclable cups.
- Starbucks has nearly achieved their goal to reduce water consumption by 25% in the stores by 2015.
6. Global Segment
a. WTO
- Environment: WTO’s main function is to ensure that trade flows as smoothly and freely as possible.
- 134 countries are members of this organization that negotiates and regulates international trade agreements.
- Without the help of the WTO, countries might try to negotiate trade agreements individually, but the cost would be higher.
- Tariffs and quotas are reduced, without the organization countries would be forced to settle problems on their own, causing potential problems.
- Critics argue that free trade is meant to benefit both importers and exporters, but the prices depend on wealthier economies or corporations.
- Others argue that WTO of liberalization a positive effect is related to better liquidity, under the liberalized trading arrangements, coffee buyers pay readily.
- The WTO has helped retailers such as Starbucks to pay less for the coffee beans imported from producing countries because of the lower governmental barriers. Tariffs, quotas among other have decreased.
- Starbucks entered China market before the country was part of the WTO, dealing with the nation’s rigid business policies. In 2001 however, China entered the WTO and began to conduct business under these rules making it easier for big corporations to enter the market.
- Starbucks has been able to take advantage of the lower tariffs for foreign investments helping it to open more stores in an important market.
- After protesters destroyed various Starbucks stores arguing the negative impact of the WTO, Starbucks Corporation, agreed to start buying fair trade coffee. Fair trade coffee beans assure higher life quality for farmers from the producing countries.
7. Physical Environment Segment:
a. Environmentally-friendly policies:
- Environment: Since the quality of the product is the most important fact for the coffee industry, corporations and activist groups have developed different policies to protect the environment.
- The Fairtrade coffee certification originated after activists argued against free trade because it negatively affected farmers. This certification allows consumers to recognize products that follow environmental, labour, and developmental standards.
- Rainforest Alliance began to label coffee that followed “shade growing” standards. This helps the environment by preserving rainforest and allowing migratory birds to create a habitat.
- Industry: These types of certifications helps sellers and retailers to increase their brand image, reduce risk of activists to boycott their stores, and to build credibility.
- On 2010, Caribou Coffee signed a pledge committing to 100 percent Rainforest Alliance certification for all its coffee.
- Green Mountain Coffee Roaster Inc. installed a 100kW photovoltaic array on the roof of the Waterbury VT Distribution center (www.gmcr.com).
- Starbucks: The Corporation has created many policies to protect the environment.
- Starbucks offers front-of-the-house recycling in various markets, as well as working with local authorities in major cities to help increase commercial recycling opportunities across the US.
- Continue to include water-saving technology such as mechanical dishwaters use less than one gallon of water per cycle.
- On 2009, Starbucks started to open environmentally friendly stores made with local materials and resembles the neighborhoods they are located. First store to open located in Seattle, with a coffee bar that includes scrap leather from show and automobile factories.
B. INDUSTRY ANALYSIS
- Threat of New Entrants/Barriers to Entry
- Economies of Scale
- Low- The specialty industry does not put a high premium on economies of scale.
- Even though, companies with national distribution in the coffee industry at large experience some discounts through bulk purchases and superior infrastructures, their advantages are small.
- Product Differentiation
- High- Products within the industry are greatly differentiated, with varying degrees of quality, convenience, differences on atmosphere and ambiance on the retail stores and customer service.
- The coffee beverages and food items that Starbucks sells are not identical to the other retailers such as the famous Frapuccinos. By differentiating not only the consumable products, Starbucks has created “The Starbucks Experience.”
- Customers identify Starbucks with premium quality of coffee beans and a welcoming and relaxed setting. This makes it more difficult for new competitors to entry the industry.
- Capital Requirements
- Low- To open only one specialty coffee retailer the capital requirements are low because the major cost include real estate and coffee-related equipment.
- McDonalds and Dunkin Donuts were able to add specialty coffee to their existing services to enter the specialty coffee market because of the relatively low cost to enter the industry.
- Starbucks now is at risk of losing market share because of the availability of a lower cost specialty coffee after the entrance to the market of McDonalds and Dunkin Donuts.
- Switching Costs
- Low- With the saturation of competitors switching cost for buyers is very low. The customer can switch from one coffee brand to the other.
- The quality of the product depends on the customer, for some can mean the flavor of the coffee, for others can mean the ambiance of the retailer. Starbucks tries to give the best experience for their customers in order to increase the switching costs for them.
- Access to Distribution
- High- Since there are many competitors in the industry the availability of distribution is high.
- Large corporations such as Starbucks, Dunking Donuts and McDonalds have national and international channels through which they can transport their specialty coffee at relatively low cost.
- Caribou Coffee uses the Coca Cola distribution channels, giving it an advantage among other retailers.
- Cost disadvantages independent of scale
- High- Many cost advantages can be gained by establishing one’s position in an industry early.
- The advantages of being the first movers come from product technology, favorable access to raw material, and favorable locations.
- The firms that establish themselves early in the specialty coffee industry, obtained access to the highest quality in Arabica beans, and its stores are located in key places.
- Government Policy
- High- There are many policies towards the production of coffee beans and trade that can affect new competitors.
- In order to maintain a good brand image, quality and credibility among customers, there are many certifications from activists around the world that protect the farmers and the environment. Many of the major competitors among the industry have to spend money on securing that they go through all the requirements.
- Expected Retaliation
- High- When a company enters the market, the other companies respond to competitive and vigorous strategies because all of them have an existing market share in the industry.
- In many occasions Starbucks has been accused of cannibalizing sales of small coffee shops by placing its stores near them and paying extra for real estate in order to take them out of business.
- Overall, the threat of new entrants to the industry is relatively low and there is a profit potential. Depending on the size of the company trying to enter the specialty coffee industry the difficulties with it; Anyone can open a coffee shop, but only big companies such as McDonalds can compete directly with Starbucks.
-
Bargaining Power of Suppliers (Overall not powerful)
- Few large companies
- Not powerful- there are always new qualifying several suppliers willing to provide coffee beans and other raw materials to the specialty coffee companies.
- There are different coffee bean farmers around Latin America and Africa that supply coffee beans to the industry.
- Starbucks purchases from multiple coffee-producing regions around the world (Starbucks).
- More concentrated than industry to which it sells
- Powerful- The suppliers are more concentrated than the firms they sell. The specialty coffee industry is comprised by many industries that require some of the same raw materials, making the suppliers dependent of raw materials such as coffee beans and dairy products.
- Starbucks gets its coffee beans from farms located in Costa Rica and Rwanda, and other materials such as dairy products come from six suppliers.
- No satisfactory substitutes
- Powerful- Arabica coffee being the most important factor on specialty coffee industry there are no satisfactory substitutes available, giving suppliers competitive advantage.
- Even though Starbucks is selling tea, its industry is specialty coffee, which the main material is Arabica beans. For this reason, Starbucks tries to maintain a very close relationship with its suppliers.
- Industry firms not significant to suppliers
- Not powerful- Suppliers and specialty coffee industry depend on each other and none of them will succeed without the other.
- Supplier’s goods are critical
- Powerful- If Starbucks’ suppliers or any of its future suppliers are unable to obtain the coffee beans, they could substantially unable to perform under their contracts. Arabica beans can be affected by the weather and political and economic conditions.
- High switching costs
- Powerful: For companies such as Starbucks, that have close relationships with its suppliers and have invested a lot of money to help the farmers and communities around the coffee farms it would be costly to switch from one community to another.
- The quality of the type of bean companies try to purchase depends on the geographical factors the coffee farms are located. These factors cannot be found everywhere and can be costly to find a similar location.
- Threat of forward integration
- Not powerful: The majority of the suppliers for coffee are farmers in developing countries making it difficult for suppliers to enter the market and distribute their own raw material.
- Competing against Starbucks, McDonalds and big companies that posses more than coffee to be successful will make it hard for the suppliers trying to expand forward.
-
Bargaining Power of Buyers (Overall Powerful)
- Purchase large portion of industry’s output
- Not powerful- In the specialty coffee industry the buyer represents individual buyers or customers. The typical customer does not typically buy in large volumes but buys in small portions.
- Product sales accounts for significant seller annual revenue
- Powerful: Even though no individual buyer represents a large fraction of sales revenue, specialty coffee industry would not be anything without the sales they make in their retail stores.
- According to Starbucks 10k, company-operated retail in 2010 was $8,963 million against $10,707 million of the total revenues.
- Low switching costs
- Powerful- Many of the specialty coffee customers are loyal to coffee. However, if prices per cup are very high they can switch from coffee to other industries easily and without any cost.
- For the reason that the largest purchasers of specialty coffee are individual consumers, they do not face any switching costs.
- Industry products are undifferentiated or standardized
- Not powerful- Products purchased at specialty coffee retailers are highly differentiated and unique.
- Variety of products can be seen in the Starbucks menu. Frapuccinos, ice-coffee, espresso, and cappuccinos can be purchased in many retailers.
- Differentiation of products also accounts the experience, and customer service received while visiting the store. In order to differentiate its products, Starbucks created the “Starbucks Experience.”
- Threat of backward integration
- Not powerful- Past buyers of the big corporations own many specialty coffee shops now. However, they are focusing on a niche market in the community.
- Like mentioned before the typical buyer of Starbucks coffee is an individual buyer, competing against corporations such as Starbucks make the industry not appealing.
- Threat of Substitute Products
- Other substitutes
- Primary substitute product posing potential threat to specialty coffee is the caffeinated soft drinks (sodas, energy drinks etc) produced by Coca Cola and Pepsi. However, differences in taste and demographics make customers unlikely to substitute directly coffee for caffeinated soft drink or vice versa.
- A cup of coffee is irreplaceable to some, but tea can be considered as a substitute for coffee. However, many of the specialty coffee retailers have made partnerships or acquisitions to tea companies to offer this product in their product line.
- We can also say another substitute for specialty coffee can be normal coffee.
- Switching costs
- Low switching costs- There are very low switching costs since other beverage industries can satisfy the customer’s need for a drink, and costs very little to switch from one beverage to another.
- That is why it is important to differentiate the product along with other factors around that certain product.
- Price comparison
- A can of soda varies from $0.50-1.00 depending on where is bought. In comparison, a cup of specialty coffee in Starbucks is $2.50.
- Depending on what retailer the specialty coffee is bought, other substitutes are going to be relatively less expensive.
- Equal quality/performance
- It is hard to compare these substitutes with the quality of coffee. There are different processes that need to be taken in order to obtain a can of soda or energy drink.
- Quality depends on the consumer each industry is targeting, and it is the perception of the customer. There are many demographic discrepancies between these substitutes and specialty coffee.
- Normal coffee can have more impact as a substitute for specialty coffee. Basic coffee is considered to be of significantly lower quality than specialty coffee.
- Intensity of Rivalry Among Competitors
- Numerous or equally balanced competitors
- High- There are numerous competitors but they are not equally balanced. Starbucks has no clear competition; however, the closest competitors include coffee shops, doughnut chops, and restaurants.
- With 17,000 stores worldwide and revenues of $10,707 million, Starbucks holds a dominant position in the specialty coffeehouse market and has no single rival in the sector. The closest competitor is Caribou Coffee, which has 415 stores in the US. Among other competitors are the thousand of independent or small-chain coffee shops around the world.
- Fast industry growth
- High-The specialty coffee industry has been the fastest growing industry within the coffee industry, it grows 5%-10% per year and sells 4 million bags of coffee beans.
- According to the NPD Group a market research company, specialty coffee accounts for 653 million of 1.4 billion total coffee servings in the quick restaurant segment during 2009.
- Because of the younger consumer and the introduction of specialty coffeehouses internationally has made this industry to grow rapidly.
- In recent years however, the industry growth has slowed down but competitors have increased.
- High fixed costs
- High-Since many of the specialty coffeehouses are located in strategic points in order to get profitability and increase their marketing strategy by being located in the right spots for the customers, they have to pay high mortgages and other fixed costs.
- Energy used for the coffee equipment, water used to clean and to make the beverages, among other fixed costs are very high for companies such as Starbucks, Caribou Coffee and McDonalds that have many stores around the US and the world.
- High differentiation
- High-Even though coffee can taste the same, specialty coffeehouses are innovative in order to differentiate their product. They purchase their raw materials in locations depending on the type of flavor they prefer.
- Brand differentiation is very important in the specialty coffee industry because brand shows the quality and the image they want to portray and build credibility to the consumer.
- Low switching costs
- Low- Even if some companies can create customer loyalty the customers can freely switch from one specialty coffee brands to the other.
- High strategic stakes
- High-Strategic stakes became higher as larger and larger companies entered the industry, pushing some companies such as McDonals’s and Dunkin’ Donuts to differentiate themselves through price superiority.
- Low exit barriers
- Low-Exit barriers are relatively low because there are no investments in machinery or inventory needed.
- In this industry, the most important investment is to purchase premium beans, and purchasing the coffee equipment to produce the beverages.
- The equipment purchased can be easily resold as can any property that was purchased. Most of the time coffee shops simply rent their locations, reducing the exit barriers even more.
- Overall, intensity of rivalry among competitors is high because of the slowing growth of the industry, low switch costs, among the other factors.
C. COMPETITOR ANALYSIS
The specialty coffee industry is highly competitive and continually evolving as participants strive to distinguish themselves within their market and compete within a larger coffee industry.
- Competitor’s Strategies and Core Competencies
- Peet’s Coffee and Tea Inc.
- Business Level Strategy: Differentiation. They claim that consumers can taste the difference in their “Roaster-to-cup” freshness because of the deep-roasted flavor.
- Their differentiated quality is founded on their bean selectivity, freshness standards, and artisan-roasting style (Peet’s Coffee and Tea Inc.)
- They sell 28 types of coffee, 16 blends and 12 single origin coffees such as Colombia, Guatemala, Sumatra and Kenya Co. also provides seasonal coffees and whole leaf and bagged tea.
- Their specialty segment includes: grocery, home delivery, foodservice and office of the whole bean coffee sales.
- Customers: With all the variety of beverages and food that Peet’s offers, mainly people 16-70 and middle to upper class are loyal customers of this brand. They appeal to mostly liberal-minded customers including baby boomers because of their Berkeley radical-chic image.
- Distribution: Peet’s sells its coffee through multiple channels of distribution.
- Retail: sells whole beans, beverages and tea.
- Grocery: sells its products through grocery stores, mass merchandisers, and club stores.
- Home delivery: Provides customers with roasted coffee and hand-packed tea shipment directly from its roaster.
- Foodservice and office: Work with sales managers to obtain accounts in locations such as airports, grocery store, or college campus.
- Marketing: A brand that is known for having an “individualistic” identity because of its uniqueness.
- Their marketing strategy is to increase sales but also to increase brand awareness by using eMarketing tools to execute their objectives.
- Sales: During 2010, Peet’s Coffee and Tea Inc. had sales of $333,808,000. It operates in retail, grocery, home delivery, and food services and revenues are increasing each year.
- Advertising: Peet’s uses multi-media channels to consistently advertise their identity through blogsite, Twitter, Facebook, YouTube among other ways of eMarketing.
- By friending, liking, and following its customers in Facebook and Twitter, Peet’s tries to build and maintain a close relationship with its customers.
- Financial: Majority of its retail stores are located in the west, mostly California.
- According to their 10k, net revenue for 2010 increased because of continued expansion of their retail stores.
- Starbucks
- Sara Lee Corp.
- Green Mountain Coffee Roasters Inc.
- Farmer Bros Co.
- Peet’s unique Direct Store Delivery (DSD) system is a major competitive advantage in the grocery aisle.
- The #1 specialty bagged coffee in California, and #2 in the western US.
- Peet’s offers its customers with home delivery with their favorite premium coffee beans.
- Caribou Coffee
- Business Level Strategy: Differentiation. The company claims to provide the highest quality handcrafted beverages, foods, and coffee lifestyle items.
- Deliver its customer with a unique blend of expertise, fun and authentic human connection in a welcoming coffeehouse environment.
- Continue to introduce new premium products, such as real chocolate beverages, distinctive teas and wholesome oatmeal.
- Customers: By adopting a differentiated business level strategy Caribou aimed at securing a loyal ‘niche’ customer base that seeks a more defined product ‘experience.
- The type of customer Caribou focuses on, is 17-75 year olds, middle and upper class. They go to Caribou to find their own space away from home.
- Southwest, Four Season Hotels and Resorts, Zappos.com, Enterprise, are among of the many customers Caribou caters.
- Distribution: Caribou sells high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, different venues and online customers. Blended coffees are sold in their retail stores.
- Caribou Coffee uses the distribution system of Coca Cola after entering a strategic partnership with them.
- Marketing: Caribou emphasizes greatly in brand awareness because their brand reflects the company’s culture and values.
- Their marketing efforts reflect their passion for quality beans, and passion for human connection.
- Created their “Caribouisms” which are writings on their cups of coffee with a sampling of the company philosophies.
- Their greater marketing strategy is customer service. Caribou is known for their customer service ranking before than Starbucks in many customer satisfaction researches.
- Sales: Net sales for year 2010 were $227,224,000
- Advertising: Focuses greatly on customer service, and ambience and environment Caribou offers to the consumer.
- By designing coffee cups with creative designs while promoting their company’s values is a way of brand awareness and advertising.
- Financial: According to 2011’s financial statement, Caribou’s revenues totaled $311,873,000.
- It includes around 1,642 worldwide (approximately full-time) with a share price of 16.36.
- Starbucks
- Dunkin’ Donuts
- Brinker International, Inc.
- Chipotle Mexican Grill Inc.
- Dedicated to innovation by introducing new product lines of new coffee varieties across 6,700 US sales outlets.
- Aesthetics, perceived premium quality of coffee, customer service and performance.
- Dunkin’ Donuts
- Business Level Strategy: Integrated Cost-Leadership: Dunkin Donuts positions itself as one of the lowest price in the coffee industry.
- 57% of the chain’s sales are beverages, and the rest made up of bagels, muffins, and breakfast sandwiches.
- Dunkin Donuts does not offer ambiance, environment or Wi-Fi, they offer speed.
- Offers a similar quality on specialty coffee beans, it comes from Latin American and African countries.
- Customers: The younger demographics of the coffee industry that cannot afford Starbucks, Caribou, and Peet’s Coffee prices.
- Middle and lower income level customers.
- Customers that perceive quality as having a good product with a low price and fast.
- Distribution: As part of Dunkin’ Brands, combine with Baskin Robbins the brand has over 16,000 points of distribution in 57 countries.
- Dunkin Donuts holds as the largest distributor of coffee-by-the-cup.
- Marketing: The strategy focuses on busy-people-on-the-go.
- Dunkin’ Donuts customers perceive themselves as authentic and true to themselves, they take pride in knowing who they are and feel comfortable on their own skin.
- Dunkin’ promotes its product and service in YoutTube, Twitter, and Facebook among other social networks and web pages.
- Sales: For Year End 2010, total global system wide sales of $6 billion.
- Since Dunkin’ Donuts is owned by Dunkin’ Brands, this amount includes Baskin Robins among other services provided the brand.
- Advertising: “America Runs on Dunkin’” the company logo used in various advertising campaigns that includes TV commercials, radio, print, and online.
- Financial: Known to be the largest distributor of coffee-by-the-cup.
- Dunkin’ Donuts sells more than 285 million cups of iced coffee.
- Dunkin’ Brands total revenue is of $628,198,000
- Net income is $34,442,000
- Number of employees of 1,128 (Year en Average Staff 12/31/2011).
- Whole Foods
- Stater Bros. Holdings Inc.
- Starbucks
- Krispy Kream
- America’s largest retailer of coffee-by-the-cup, serving 1 billion cup of brewed coffee each year.
- First national brand to sell espresso beverages that are made exclusively with Fair Trade Certifies coffee.
- The NPD Group/CREST named Dunkin’ Donuts as the #1 foodservice retailer of hot brewed, flavored and iced coffee in America.
D. ENVIRONMENTAL TRENDS
1. Industry Life Cycle
- Growth Stage
- The specialty coffee industry is in the growth stage but entering mature stage because some characteristics show the growth of the industry and others show the entrance of the industry to the mature stage.
- Some of the characteristics of this industry that help conclude it is in the growth stage and beginning of mature stage are the following:
- Price still at high levels with specialty coffeehouses such as Starbucks, Caribou and Peet’s Coffee and Tea. However, the entrance of McDonalds and Dunkin’ Donuts with a more reasonable price in the specialty coffee are signs of the beginning of maturity stage.
- Sales volume is increasing significantly with the support of free trade that allows companies to purchase cheaper raw materials and enter new markets.
- Profitability is rising year by year (even during the recession)
- Public awareness has been increasing for decades, there are many brands in the market covering all the demographics, and geographical areas making brand awareness very high.
- Because of low entry barriers many competitors have entered the specialty coffee industry. Many have entered with low prices and with similar quality of the coffee bean.
- Standard Cycle Market
- It mainly influenced because appeals to the mass market because their capabilities where the competitive advantage is based, are in risk of being easily and less costly imitated.
- There is incremental innovation with new blends, services and products such as Frappucinoss, iced-coffee and many other products.
- Rivalry between companies is intense, for this reason, companies are expanding to other emerging markets to find more market share.
- Summary
Starbucks faces an increase in competition from companies such as Dunkin’ Donuts, McDonalds, Caribou, and many other specialty coffee shops. Many of these companies have competitive advantages that make them more competitive such as delivering the product at a lower cost with similar quality and loyal pool of customers. The specialty coffee industry is in the growth stage but beginning to mature because of high brand awareness but companies such as Starbucks and Peet’s Coffee and Tea still charge high prices.
E. STRATEGIC ANALYSIS
- Key Success Factors
- Technology-Related KSF
- Even though the specialty coffee industry is not as technologically advanced as other industries, Starbucks has been innovating with the use of technology on its retailing stores.
- Starbucks launched in 2011 a mobile payment system in many stores nationwide. An application lets customers track rewards and reload balance, using PayPal or functions as a card.
- One third of Starbucks’ customers use smart phones, and this application is available for BlackBerry and iOS giving customers a better customer service.
- Manufacturing-Related KSF
- Conducting research into roasting and blending under different time and temperature conditions allows Starbucks to build signature-roasting curves, which are built into proprietary computer software allowing extended shell life to 26 weeks.
- Starbucks has 5 company-owned coffee roasting plants (Nevada, Pennsylvania, South Carolina, Washington, and the Netherlands), 24 co-manufacturers (US, Canada, Europe, Asia, and Latin America), and 1 tea processing plant (Portland,USA).
- Distribution-Related KSF
- Starbucks operates its own distribution system, in order to reduce risk of coffee price and supply, Starbucks enters into long-term price contracts with its suppliers.
- Created a single global distribution system, with 0 regional distribution center, 48 central distribution centers and 6 “green coffee” warehouses around the world.
- Marketing-Related KSF
- Starbucks’ customer is educated that normally reads newspapers, for this reason, Starbucks does advertising on a local level rather than nationwide through print mediums.
- The major advantage of its marketing strategy is brand image. Starbucks has created a branded experience that can satisfy the connoisseur, be accessible to all and irresistible with its appeal.
- Created a need for a customer that before Starbucks existed people would not think of this need. The Starbucks Experience is reflected through their logo, and their marketing strategy overall.
- Skills and Capabilities-Related KSF
- Product innovation is very important in the specialty coffee industry, Starbucks has innovated the industry by launching the Frappuccino line, Blonde Roast Coffee, ready to drink beverages in grocery stores, ice-coffee drinks, acquiring Tazo tea, and recently offering a new green coffee extract energy drink.
- Starbucks has a close relationship with its key suppliers by placing its own people inside of distribution centers to control operations and forge stronger relationships.
- Recently Starbucks started to create a greener supply chain, by selecting the best modes, service partners and equipment.
- Other types of KSF
- In order to reach its target customers, Starbucks has locations with high visibility, high traffic and convenient locations such as shopping malls, corners, bar districts, and popular business towers.
- These locations attract attention because commuters are delighted to stop at a convenient place to get his/her cup of coffee. The location brings brand recognition and reputation while increasing store traffic and sales.
- Strategies
- Business Level
- Differentiation Strategy:
- Starbucks brand is associated with an image of exclusivity, prestige, and high prices.
- Customers are willing to pay four dollars or more for their Starbucks drinks because it is trendy and represents a luxury experience.
- The Starbucks is a place where customers expect great customer service, good coffee quality beverages, free WiFi, peaceful music and their “hang out” place where they can relax and enjoy a good cup of coffee.
- The majority of the time Starbucks advertises by being in a great location, with their brand name and with word-of-mouth.
b. Competitive Strategy:
- First Movers: Saw the need for specialty coffee in the market, and opened specialty coffee shops where people could drink coffee and chat with friends. Also, distributed the Arabica bean through different channels.
- Peet’s Coffee and Tea
- Starbucks
- Tim Hortons
- Late Movers (Laggards in the specialty coffee market)
- Dunkin’ Donuts
- Green Coffee Roasters
- McDonald’s
*These are the most recognized brands in the United States and abroad. However, many more competitors are owned privately and locally.
c. Corporate Level:
- Market Development: Starbucks educated the consumer about specialty coffee.
- In order to expand its market Starbucks has opened more than 7,000 shops around the world. Since the US and Canada were already saturated with shops, Starbucks opened its first shop In Tokyo, Japan in 1996.
- New Expansions:
- Czech Republic
- Brazil
- China
- The Netherlands
- Product Development: To adapt to the needs and wants of the customer, Starbucks has created different products such as: Frappucinnos, iced coffee, TAZO tea, among other products that offer an additional benefit to the customer.
- Horizontal Integration: Acquisitions of Seattle’s Best, Torrefazione Italia, and Coffee People.
- Vertical Integration: Starbucks operates multiple roasting and distribution facilities.
- Seattle Coffee Co.
- Evolution First
- Pasqua Inc.
- Coffee Equipment Company
- Diversification: Starbucks has a low level of diversification. They level of diversification is dominant-business level.
- The US and International business segments are composed by coffee and drinks associated products and Global Consumer Product Group business segment represents other non-associated coffee products.
- The total Starbucks revenue for 2010 was $11,524,600 (thousands), the sum between the US and International segment totaled $10,664,100(thousands).
- 92.53% of Starbucks’ revenues come from a single business. 7.47% comes from other products such as music, bagged beans, and ready-to-drink beverages.
- Owning almost 17,000 stores around the world, Starbucks has had to find different modes of entry domestically and internationally.
- Acquisitions:
- 1994- Acquisition of The Coffee Connection.
- 1998- Acquisition of entity interest of Seattle Coffee Company (UK)
- 1999- Acquisition of the net assets of Tazo, L.L.C, premium tea.
- 2000- Acquisition of Typanum Inc, music retailer.
- 2005- Acquired all of the assets of Ethos Brands LLC, bottled water.
- 2008- Acquired Coffee Vision and Coffee Vision Atlantic, Inc.
- 2011- 50% ownership Marinopolous Holdings S.A.R.L.
- 2007- 50%-50% agreement with Concord Music Group, Inc., to form StarCon LLC.
- 2010- 49% with Cafes Sereira do Brasil Participacoes S.A. Brazil.
- 2010- 50% with Johnson Coffee Corporation, Urban Coffee Opportunities.
- 2004- Licensed operations in Singapore.
- 2005- Licensed operations in Southern China and Chile.
- 2006- Licensed operations Hawaii and Puerto Rico.
- Coffee Concepts Limited Hong Kong
- Emerald City C.V. Netherlands
- SBI Nevada, Inc. US
- SCI Ventures, S.L. US
- Alki Limited Partnership UK
- AmRest Coffee s.r.o. Czech Republic.
SUMMARY:
Starbucks’ advantage among the competitors is its brand image. This has allowed Co. to keep its differentiation strategy in a commodity market, even with competitors that are following the cost-leadership strategy and have a good brand image. Customers go to Starbucks to get the Starbucks Experience, which is great customer service, status, luxury, relaxation with a specialty cup of coffee. Only 4% of Starbucks’ revenues is allocated to advertising because of the popularity and trendiness Starbucks has among its target market. Starbucks has an advantage in technology by using it to attract and keep customers with free WiFi as well as phone payment. Owning roasting plants and its own distribution channels, allows Starbucks to be more efficient and make more sales. Even though, Starbucks has had many obstacles going abroad, with the acquisitions and joint ventures it has made it easier to enter a new market. Starbucks is always innovating.
F. PERFORMANCE APPRAISAL: RATIOS
SIC/NAICS Codes:
a. 2095-Roasted Coffee
b. 311920- Coffee and Tea Manufacturing
Industry Name: Specialty Coffee
Source of Ratios: Many of the ratios were listed in the Business Company Resource Database as well as Factiva Database. Those that were not listed were calculated based on the financial statements provided in Mergent Online database and Starbucks website.
*0.00 Starbucks did not pay dividends those years.
The industry shareholders’ equity return ratios were calculated by getting the average from Green Mountain Coffee Roasters, Peet’s Coffee and Tea, Coffee Holdings, Inc., and Starbucks shareholders’ equity return ratios.
- Ratio Definition:
-
Profitability Ratio: Net profit margin
- Return on sales measure of net income dollars generated by each dollar of sales.
- This ratio is desirable to be high, competitive forces within the industry, economic conditions, use old debt financing, and operating characteristics such as high fixed cost will cause the net profit margin to vary between and within industries.
-
Liquidity Ratio: Quick Ratio (Acid-Test)
- It relates to the most liquid assets to current liabilities. Inventory is removed from current assets when computing the quick ratio.
- Inventory may be slow-moving or possibly obsolete, and some parts may be given to other creditors.
- The guideline for the minimum acid-test ratio is 1.00. Some industries find that ration less than 1.00 is adequate, while others need a ration greater than 1.00.
-
Leverage Ratios: Debt to Equity Ratio
- It determines the entity’s long-term debt-paying ability. It compares the total with the total shareholder’s equity.
- It helps to determine how well creditors are protected in case of insolvency.
- The lower the ratio, the better the company’s debt position, from the perspective of long-term paying ability.
-
Activity Ratios: Accounts Receivable Turnover
- Indicates the liquidity of the receivables. It can be misleading depending on the nature of the business and seasonality of its revenues.
- It is better to have a turnover lower than the company, meaning your customers are taking less time to pay its debt, and you are getting cash faster.
-
Shareholders’ Return Ratios: Cash Flow per Share
- It expresses the relationship between the operating cash flows minus preferred dividends dividing it with common shares outstanding.
- In observing cash flow, investors can identify problems with a business’ liquidity. This is an important observation because while the company may be profitable, it can still fail due to shortage of cash.
- Having a high cash flow per share is better because it provides a measure of a firm’s financial strength and is frequently used by analysts in valuing a firm’s stock.
- Trend Analysis
-
Profitability Ratio: Net profit margin
- According to the trend presented for years 2008 to 2010, Starbucks’ net profit margin has increased with time. During 2008, the company showed a return on sales of 3.04, increasing to 4.00 in 2009, and a big increased happened in 2010 with 8.83.
- Some of the reasons that the net profit margin had a big increase in 2010 from 2009, was because of the opening of many stores around Europe, Asia, and the US as well as the introduction of the new product Starbucks VIA among others.
- Liquidity Ratio: Acid-Test (Quick Ratio)
- Starbucks’ quick ratio has maintained steady throughout the years. In 2008 with 0.3 an increase on 2009 to 1.00 and slight decrease in 2020 to 0.99.
- In the latter quarter of 2009, the Company reduced its total short-term borrowings to a zero balance due to strong operating cash flows and lower capital spending on new Company-operated stores.
-
Leverage Ratios: Debt to Equity Ratio
- The debt to equity ratio for Starbucks in 2009 had a big drop to 0.18 from 0.52 in 2008; in 2010, it decreased to 0.15.
- According to this quantitative analysis, the debt to equity ratio is low enough to guarantee the creditors good solvency and capability to pay off its debts.
- Starbucks is in a good debt position until the date.
-
Activity Ratio: Accounts Receivable Turnover
- Accounts receivable turnover ratio for Starbucks has been steady, in 2008 with 33.63 increasing in 2009 to 32.55 with an increase in 2010 to 37.33
- This growth could indicate an increase in non-credit sales but it definitely tells us that they are getting their money faster.
-
Shareholders’ Return Ratios: Cash Flow per Share
- The cash flow per share ratio for Starbucks has had a steady increase from 1.73 in 2008 to 2.25 in 2010.
- Cash flows from operations are considerably higher in the first fiscal quarter than the remainder of the year because is driven by cash received as Starbucks Cards are purchased and loaded during the holiday season.
- Cash flows can be affected by the timing of the opening of new stores and the closing of existing stores.
- Comparison to Industry Ratios
-
Profitability Ratios: Net Profit Margin
- For the years 2008 to 2010, the average industry ratios are 2.55, 3.30, and 4.72 respectively showing an increase pattern with the time.
- Comparing the industry’s net profit margin with Starbucks’s, help understand the performance that the specific company had during the years.
- This ratio shows us how Starbucks’ has been performing better than the industry average, even during the recession years. This maybe a consequence of first-mover advantage, differentiation strategy, product innovation implemented since the Company started.
-
Liquidity Ratios: Quick Ratio (Acid-Test ratio)
- The acid-test ratio for the industry in the three years is 0.3 in 2008, 1 in 2009, and 0.70 in 2010.
- This ratio comparison with Starbucks’ shows how the industry has been performing similarly as Starbucks. However, there was an increase of 1 in 2009 for the industry, some reasons might be during that year the recession affected many companies from the specialty coffee industry.
-
Leverage Ratios: Debt to Equity Ratio
- Industry’s debt to equity ratio includes 0.86 in 2008, 0.62 in 2009, and 0.38 in 2010, showing a decrease over the years.
- Starbucks demonstrates its debt paying abilities when compared to the industry. The lower the debt ratio, the better to the debt position of the company. Starbucks’ debt equity ratio is significantly below the industry average.
-
Activity Ratios: Accounts Receivable Turnover
- Specialty coffee industry’s account receivable turnover includes in 2008 28,8 days, 2009 27 days, and 2010 21 days. This shows a decrease in days that takes to get decrease accounts receivable.
- Starbucks is slower to turnover accounts receivables as we can notices because it is significantly above the average of the industry and it keeps increasing.
-
Shareholder’s Return Ratios: Cash Flows per Share
- The cash flow per share ratio for the specialty coffee companies showed the following pattern in years 2008, 2009, and 2010: 0.88, 1.37, 1.08.
- In 2009 there was an increase in cash flows but it decrease in 2010 to a 1.08. Starbucks has an advantage over the industry showing that it keeps being above average.
- Interpretation
-
Profitability Ratios: Net Profit Margin
- The ratio is desirable to be high, competitive forces within the industry, economic conditions, use of debt financing, and operating characteristics such as high fixed cost will cause the net profit margin to vary between and within industries.
- Even with the economic condition during these three years, the net profit margin has increased in the industry as well as Starbucks.
- Expansion to other market, operational improvements implemented throughout 2009 in Starbucks’ supply chain and company stores has helped increase its net profit margin.
-
Liquidity Ratios: Quick Ratio (Acid-Test Ratio)
- With cash flows from 2009 used the free cash flow to reduce its short-term borrowings from $713 million from 2008 to a zero balance at the end of 2009.
- The company invests cash flows in its core business and new business platforms. Opening new stores all over the US and internationally has increased the liquidity ratio in 2010.
-
Leverage Ratios: Debt to Equity Ratio
- The lower the ratio, the better the company’s debt position, from the perspective of long-term paying ability.
- Starbucks does not depend heavily in long-term debt than others in the industry. Starbucks long-term debt is about $1 billion and $1.5 billion in current liabilities.
-
Activity Ratios: Accounts Receivable Turnover Ratio
- It is better to have a turnover lower than the industry, meaning your customers are taking less time to pay its debt and you are getting cash faster.
- Some of the causes for the increase of payment times are the lack of incentives from the firms to the customers such as discounts or extra service.
-
Shareholder’s Return Ratios: Cash Flow per Share Ratio
- A corporation’s cash flow from operation, before investing and financing activities, divided by the weigthed average number of common shares outstanding for the year. Investing includes sale or purchase of land, factories, building etc.
- Since Starbucks has great locations and many companies would like to obtain these locations, in 2009 when Starbucks closed many of its stores around the world, it received cash in-flows increasing its cash flow per share.
- Many competitors have been trying to get in the same level as Starbucks trying to invest in good locations and new equipment to provide the best service, maybe this reason could affected the average of the industry to be lower than Starbucks’.
- Ratio’s Graph
-
Profitability Ratio: Net Profit Margin
-
Liquidity Ratio: Quick Ratio (Acid-Test Ratio)
-
Leverage Ratios: Debt to Equity Ratio
-
Activity Ratios: Accounts Receivable Turnover
-
Shareholder’s Return Ratio: Cash Flow per Share
III. SWOT ANALYSIS
- STARBUCKS’ STRENGTHS
- Brand Recognition:
- It has an established logo, a highly developed brand, intellectual property, strong media presence. It is one of the world’s most instantly recognizable brands with a huge following.
- Using cost-effective ways of marketing, it hardly relies on advertising and instead word-of-mouth and appeal of storefronts serve as powerful brand ambassadors over the world.
- The brand portrays quality of products, consistency of service, and excellence in catering to customer satisfaction with the “Starbucks Experience.”
- In 2011, Starbucks decided to innovate its logo by the lettering off the mermaid. Even though, this is a risky move for Starbucks, it has been very successful proving the recognition the green mermaid has over the world. The strategy helps expand Starbucks all over the world, without concerning of language barriers consequently becomes more communicable all over the world.
- Strong Financial Performance:
- The strong financial position helps achieve financial stability and necessary internal funding necessary to expand its operations as well as diversify into new market and new products.
- According to its financial statements and the nature of the business, the company reported an operating profit of $1,419.4 million during the fiscal year 2010, an increase of 152.56% over 2009 (Business Company and Resource Center).
- By increasing the operating profit, the company increased the net profit levels making it an attractive investment. The operating margin has increased 751 basis points over 2009 indicating management’s focus on improving profitability.
- Location, Location, Location:
- Retail stores are Starbucks’ dominant business, 92.53% of its profit comes from retail stores sales. For this reason, Starbucks chooses to place its shops in the best locations, such as corners, shopping malls, college campuses, among others.
- It focuses on locations that provide convenient access for both pedestrians and drivers, and locations that are positioned at high-traffic and high-visibility points. Also, it has opened stores in rural areas and off-highway locations to serve a broader array of customers outside the metropolitan areas.
- In the fiscal year 2010, Starbucks had a total of 8,833 company-operated retail stores and 8,025 licensed stores. In order to achieve efficiency and better its customer service, Starbucks has opened many retail-stores with a Drive-thru window.
- STARBUCKS’ WEAKNESSES
- Overdependence on the US Market:
- The majority of the sales and revenue generation come from the US market. Even though, Starbucks has expanded throughout the world, the US market represents the majority of its customers.
- The company’s operations are principally located in the US. During the fiscal year 2010, Starbucks generated about 78% of its total sales from the US segment, while its International segment accounted for just 22%.
-
Overdependence on Coffee Products:
- Starbucks’ revenues come from the sale of coffee, which means that escalating coffee bean prices will directly affect Starbucks’ prices. Natural disasters that would hit the Arabica coffee beans plantation decreasing the supply, will automatically increase the prices of the beans.
- New competitors such as Dunking Donuts and McDonald’s base their product line in food and then coffee. However, the difference between the strategies for these two companies and Starbucks is very clear.
- Product Recalls:
- In 2009, the US Consumer Product Safety Commission, announced the recall of about 530,000 Starbucks Barista Blade Grinders after the company received reports of grinders failing to turn off or turning on unexpectedly.
- Products recalls have high unexpected expenditures, and causes and impact on the goodwill and brand image of the company as well as the business.
- STARBUCKS’ OPPORTUNITIES
- Strategic Growth Initiatives:
- The company is entering in new strategic initiatives to expand worldwide. In 2009, Starbucks China entered into an agreement with the Yunnan government for jointly planting coffee in the region.
- Due to the launch of Starbucks VIA Ready Brew the CPG segment’s net revenue increased by approximately $22 million.
- The global instant-coffee market is valued at $17 billion, tapping a huge market in the UK since instant coffee represents over 80% of all coffee brewed.
- Focus on Emerging Economies:
- Concentrating on markets such as Brazil, Russia, India, and China it is very important since they are a few of emerging markets right now. The Co. expects China to be the second largest market after the US.
- Starbucks has opened almost 745 stores in China, and is concentrating its consumer packaged goods in Japan. The Chinese economy is expected to grow at 10.5% in 2010 and 9.6% in 2011 due to the increasing domestic demand.
- The company entered into a Memorandum of Understanding with Tata Coffee Limited, one of the biggest providers of Arabica beans in India.
- New Products and Services:
- Products such as Fair Trade products can be retailed more in the retail stores. By launching VIA Ready Brew, Starbucks opened a door to a new market.
- Brand franchising to manufactures of other goods and services it is a big opportunity for Starbucks.
- Purchasing companies such as Seattle’s Best, XM Café, and Tazo Tea, Starbucks used a different brand name to get business in different market niche.
- STARBUCKS’ THREATS
- Supply of High Quality Arabica Coffee Beans:
- Starbucks roasts Arabica coffee beans come from various regions to produce different regions to produce different types of blends of coffee. The political and economic situation in regions where Starbucks purchases the beans could become unstable, which can affect the ability to buy coffee from those parts.
- Frequent substitutions and changes in coffee product lines could lead to cost increases, customer alienation and fluctuations in the gross margins. Political crisis in coffee growing regions could result in a decrease in the availability of high-quality Arabica beans needed for the growth of the business.
- Starbucks has its own farm in order to control rapid changes in the coffee beans’ prices, exposing to natural disasters that can threaten its farms.
- Government Regulations:
- Starbucks is subjected to various regulations by federal governmental agencies, with respect to production processes, product quality, packaging, labeling, storage, and distribution.
- Advertisement has its certain regulation by the Federal Trade Commission.
- It is also subject to certain health and safety regulations such as those issued under the Occupational Safety and Health Act, failure to comply regulations exposes the company to new liabilities or can result in decline in its profitability.
- Intense Competition:
- Quick service restaurants and specialty shops are Starbucks’ competitors. The market is highly competitive and it is expected to intensify over the years, which can result in price reductions.
- Starbucks Specialty operations face significant competition from established wholesale and mail order suppliers. In addition, other competitors include coffee sold through supermarket, and specialty coffee retailers that are growing in the whole been coffee segment.
- Starbucks’ major competitors include, McDonald’s Corporation, Green Mountain Coffee Roasters, Aroma Café, Barista Café Republic Caribou Coffee, and Costa Coffee.
- If the company does not maintain the product quality and consumer loyalty, the intense competition could reduce the sales volume affecting the market position.
IV. STRATEGIC FORMULATION
- One of the strategies I recommend Starbucks is to analyze each region they are competing and evaluate if they really need to open more store in the US. Even though the locations they place their stores are strategically placed in high-traffic areas, some stores are cannibalizing themselves.
- With the new times of healthy food, I recommend Starbucks to sell organic coffe in order to improve its image. Using more organic ingredients or diversifying their menu would provide fresh healthy coffee substitutes attracting new customers, and increasing the frequency of visits to customers that necessarily do not like caffeine at all times of the day.
- Starbucks international marketing strategy can be improved by doing more research about the markets they are about to enter. I recommend that Starbucks enter with caution insuring proper social and cultural analysis. Stores have been closed around the world because local shops know what the market wants with cheap food and coffee.
- Extending its menu selection to include drink originally from the countries, such as different types of tea for China incorporating tapioca, little ball of jelly or wine in many European countries. The extension of menu can increase customer satisfaction and also help Starbucks not to depend in coffee products.
- Starbucks is known by trying to be a sustainable company. However, by not reaching its socially responsible goals in 2010, the company can start showing more concern for the communities the stores are located. This could help Starbucks to increase public image and brand equity.
V. STRATEGIC ALTERNATIVE IMPLEMENTATION
- In order to sell organic coffee, Starbucks can purchase farms in places that organic or green coffee grows. At the same time, it can purchase coffee from places where deforestation is not an issue in order to obtain better quality coffee beans.
- Starbucks can start a transnational international strategy in order to increase brand image and brand equity among new markets planning to open stores or distribute its products. Keeping the global menu with coffee products but also adding special products and services from the country.
- More variety of teas, alcohol, food or different services that will help Starbucks compete with local shops while keeping the price they are charging adding the Starbucks Experience. This can be done because of the advanced and efficient distribution channels Starbucks has.
- Creating scholarships or community service projects can be implemented in order to increase brand image.
- With the new stores that are going to be opening, Starbucks should design them in a way that can bring the neighborhood feeling back in order to keep the Starbucks Experience, since this is the factor that allows the company to keep its differentiation strategy.
VI. EPILOGUE
- Strategic Milestones
- Adapting to European customers:
- Research has helped Starbucks know that Europe cannot be treated as one but as different countries and different cultures.
- In England Starbucks are opening more drive-through locations because they like to drink takeaway coffee. In comparison, in France Starbucks created a lighter espresso roast because found Starbucks’ espresso as charred.
- Different features of the infrastructure of the shops are going to be added to new stores. For example, in Amsterdam Starbucks opened a space made from local woods and avant-garde architecture, including a stage for poetry readings.
- Technological advances in drive-thrus
- Starbucks drive-thrus will have a scanner that makes it easier for customers to scan their cards themselves.
- This will help Starbucks drive-thrus to be quicker and more efficient, with apps that allow the customer to fund their Starbucks app via different payments providers. This app will also allow customers to learn more about their favorite blends.
- Strategic relationship with Green Mountain Coffee Roasters
- This month, Starbucks and Green Mountain Coffee Roasters announced the expansion of a strategic relationship for the manufacturing, marketing, and distribution and sale of Starbucks-branded Vue packs for use in GMCR’s Keuring Bue Brewer.
- Financial Milestones
- Fiscal First Quarter 2012
- Total revenues increased 16% to a record #3.4 billion.
- Global comparable store sales increased 9% driven by a 7% increase in traffic.
- Starbucks opened 241 new stores globally, reaching 500 stores in both mainland China and Latin America.
- EPS increased 11% to a record $0.50 per share, compared to $0.45 per share in Q1 FY11 (starbucks.com)
VII. CASE “STARBUCKS: A Luxury from Bean to Cup”
Introduction
- Starbucks is a publicly-held US corporation in the specialty coffee sector. It sells specialty coffee beverages and food in its retailers. It also sells whole coffee beans in supermarkets or within its retail stores.
- It is the largest specialty coffee shops in the world with total revenues of $12B in 2010.
- Starbucks was founded in Seattle, Washington on 1971 by Gordon Bowker, Jerry Baldwin, and Zev Siegl.
History
- Founded in Seattle, Washington on 1971 by Gordon Bowker, Jerry Baldwin, and Zev Siegl.
- The first store was open at the Seattle’s Pike Place Market and got the name “Starbucks” from the coffee loving first mate in Moby Dick.
- They used to buy their coffee from Peet’s Coffee in their first nine months.
- By 1982, 5 retailers were opened a wholesale facility that distributed coffee to local restaurants.
- Same year Howard Schultz was hired as marketing and sales manager.
- In 1986, Shultz opened his first coffee bar, inspired by a visit to Italy and their coffee bars, in Columbia Seafirst Center. It was called II Gionale.
- In 1987, II Gionale changed name to Starbucks, leading to the establishment of Starbucks Corporation.
- The company spent little advertising since their reputation grew by word-of-mouth.
- In 1991, it established an employee stock option program including part-timers, being the first privately owned company to do this.
- Starbucks went public in 1992; common stocks are traded in NASDAQ stock market under the symbol SBUX.
- By the 1990s, the company began to build relationships with Nordstrom and Barnes and Nobles selling coffes in these two chains.
- First east coast location was opened in 1993 in Washington DC.
- In 1995, Starbucks debuted its frozen coffee drink called Frapuccino, it was a success, which lead to a partnership with Pepsi-Cola to develop ready-to-drink beverages.
- By 2005, Starbucks has around 11,131 retailer stores nationally, and around 5,727 worldwide.
- 2005-2011, Starbucks expanded all over the world acquiring and partnering with many international companies.
So, what is it for Starbucks? Coffee!
- Starbucks is an international company with retail stores in more than 40 countries around the world as well as the US.
- Regulations, such as Fair Trade allow farmers to pay bank debts and avoid loss of land to increase the quality of coffee, which is Starbucks’ main purpose.
- Starbucks is aware of the linkage between the success of the company and the success of farmers. For this reason, they buy Fair trade coffee.
- The company entered into a Memorandum of Understanding with Tata Coffee Limited, one of the biggest providers of Arabica beans in India.
Expansion… is it the right answer?
- Starbucks: Because of the US and global income disparity, many of the target market for Starbucks has disposable income to buy luxury specialty coffee.
- Starbucks depends greatly in the US sales, expanding to emerging economies such as BRIC countries could allow Starbucks to obtain greater market share and brand awareness.
- C.A.F.E., Fairtrade, among other organizations that allow coffee makers and shops to purchase coffee beans from farms that are sustainable, as well as the fair treatment of the farmers.
- These types of certifications helps sellers and retailers to increase their brand image, reduce risk of activists to boycott their stores, and to build credibility.
- On 2009, Starbucks started to open environmentally friendly stores made with local materials and resembles the neighborhoods they are located. First store to open located in Seattle, with a coffee bar that includes scrap leather from show and automobile factories.
- Continue expansions to many other countries Starbucks has not yet reaches, is part of the goal for 2012.
Well… the answer is YES!
- Starbucks faces an increase in competition from big food corporations such as McDonald’s and Dunkin Donuts around the world. These companies have competitive advantages that make them more competitive such as cost-leadership strategies taking part of target markets Starbucks in not able to reach.
- Due to the nature of the business, specialty coffee industry is in the growing stage because price still at high levels with specialty coffeehouses such as Starbucks, Caribou and Peet’s Coffee and Tea. However, the entrance of McDonalds and Dunkin’ Donuts with a more reasonable price in the specialty coffee are signs of the beginning of maturity stage.
- Starbucks vision summarizes environment exciding for differentiation. All of its internal operations focus in the importance of product quality and environmentally responsibility.
- Product quality and brand image are a must in Starbucks operations around the world.
- Now ask yourself: Are you ready to drink the best cup of coffee you ever had?
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