This particular case study includes several issues of Starbucks background and history, companys operations and strategy for expansion and growth, and some issues concerning conditions take place for the whole industry.
Starbucks in 2004:
Driving for Global Dominance
Presented by:
Gatos Petros
Georgiadi Despina
Moralis Despina
Vomvas Ioannis
Xenarios Nicolas
Submitted to:
Professor R. Aldous
Business Strategy
MG 4940
May 30, 2005
CASE STUDY ANALYSIS 2
Starbucks
Table of Contents
Introduction 1
. Company Profile 2
2. Current Strategy Analysis 9
3. Internal Analysis 13
3.1 Operational Strengths & Weaknesses 13
3.2 Financial Strengths & Weaknesses 16
3.3 Organizational Strengths & Weaknesses 18
3.4 Marketing Strengths & Weaknesses 20
4. External Analysis 22
4.1 Economic Characteristics 22
4.2 Competitive Analysis (Porter 5 Forces) 23
4.3 Competitor Analysis 24
4.4 Key Success Factors 25
5. SWOT Analysis 27
6. Recommendations 30
References 31
Introduction
This case study analyses the case of Starbucks Company. This is company that operates café-outlets around the world, being one of the most popular brands in café industry. It offers a large series of products and services through a variety of channels including not only Starbucks outlets, but also supermarket chains, other companies through alliances and mail posts. However, this company has been familiar due to retail outlets where operates both breweries business and retails business as well.
This particular case study includes several issues of Starbucks background and history, company's operations and strategy for expansion and growth, and some issues concerning conditions take place for the whole industry.
The point of this case study analysis is to identify and evaluate past and current Starbucks Company's position and strategy, comment about the future, in the context of analyzing internal and external company's environment and make any useful recommendations.
Main sources for the analysis will be the course textbook (Thompson et al, 2005) that provides the theoretical strategy framework, the contents of case study analysis (Thompson et al, 2005, pp. C-2 - C32), other textbooks and relevant Internet sources.
. Company Profile
Starbucks is a company that operates a large series of coffee shops on a worldwide basis. Its products are Italian-style coffees, espresso, beverages, teas, pastries and confections that have made Starbucks one of the great retailing stores of recent business history and the world's biggest specialty coffee chain (Thompson et al, 2005).
More particularly, in the context of product mix, In addition to quality coffee, Starbucks features a variety of handcrafted beverages, Tazo(r) teas, freshly baked pastries and in some markets, a selection of high quality sandwiches and salads. Starbucks merchandise includes exclusive espresso machines and coffee brewers, unique confections and other coffee and tea related items (http://www.starbucks.com/aboutus/overview.asp).
Figure 1.1: Starbucks front website, www.starbucks.com
According to company's website, Starbucks purchases and roasts high-quality whole bean coffees and sells them along with fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections, and coffee-related accessories and equipment -primarily through its company-operated retail stores (http://www.starbucks.com/aboutus/overview.asp).
Concerning alternative channels, except from its stores, and branded products it is also mentioned that in addition to sales through our company-operated retail stores, Starbucks sells whole bean coffees through a specialty sales group and supermarkets. Additionally, Starbucks produces and sells bottled Frappuccino(r) coffee drink and a line of premium ice creams through its joint venture partnerships and offers a line of innovative premium teas produced by its wholly owned subsidiary, Tazo Tea Company.
Concerning company's history, Starbucks got its start in 1971 by three academics, Jerry Baldwin, Zev Siegel and Gordon Bowker - all coffee aficionados. They believed that they could build a clientele in Seattle that would appreciate the best coffees and teas. Starbucks open its first location in Seattle's Pike Place Market. This store was an immediate success with sales exceeding expectations partly because of interest stirred by a favorable article in the Seattle times. By the early 1980s, the company had four Starbucks stores in the Seattle area and had been profitable every year since opening its doors (Thompson et al. 2005). Starbucks, named after the first mate in Herman Melville's Moby Dick, is the world's leading retailer, roaster and brand of specialty coffee with coffeehouses in North America, Europe, Middle East, Latin America and the Pacific Rim. Worldwide, approximately 33 million customers visit a Starbucks coffeehouse each week (http://www.starbucks.com/aboutus/overview.asp).
When Howard Schultz first joined the company in the early 1980s, Starbucks was already a local, highly respected roaster and retailer of whole bean and ground coffees. A business trip to Italy opened Schultz's eyes to the rich tradition of the espresso beverage. Espresso drinks became an essential element of Schultz's vision. He purchased Starbucks with the support of local investors in 1987. In addition to well-situated coffeehouses, Starbucks sells coffee and tea products through its specialty operations (http://www.starbucks.com/aboutus/overview.asp; Thompson et al, 2005).
Coffee aficionados can also find Starbucks in a variety of carefully chosen venues including United Airlines, Horizon Air, Seattle's KeyArena and Safeco Field, Chicago's Wrigley Field, University of Washington athletic venues, Experience Music Project interactive museum, Hyatt Hotels, Barnes & Noble bookstores throughout North America, and Chapters, Inc. bookstores in Canada. Since 1991, Starbucks(r) coffee has been available at licensed airport locations and travel plazas operated by HMS Host in the U.S. Licensed locations can also be found on college campuses through a licensing agreement with ARAMARK Corp., SYSCO and Sodexho. Starbucks has licensed locations in select supermarkets across the U.S. Now, Starbucks stores may be found in urban and suburban areas worldwide, as well as many rural communities throughout North America. Additionally, an expanded number of drive-thru and off-highway locations provide a convenient alternative for our customers (http://www.starbucks.com/aboutus/overview.asp).
Concerning quality issues, it has to be mentioned that Starbucks offers coffee lovers a selection of coffees from around the world. Our coffee buyers personally travel to the coffee-growing regions of Central America, Africa and Indonesia in order to select the finest arabica beans. Once these quality beans arrive at one of the Company's four roasting facilities, Starbucks professional roasters pursue the art of creating the rich signature Starbucks Roast(r). This dark roast is not just a color; it is the cumulative result of expert roasters knowing coffee and bringing balance to all of its flavor attributes (http://www.starbucks.com/aboutus/overview.asp).
Concerning purchasing coffee strategy, Starbucks model for sustaining coffee communities ensures the long-term production of high quality coffee while addressing the challenges faced by coffee farmers on various social, environmental and economic levels. The Company pays premium prices to ensure its supply of high quality coffee and to improve conditions for coffee farmers and their communities. In fiscal 2003, Starbucks paid an average of $1.20 per pound for our green (unroasted) coffee, excluding freight, approximately double the commodity market price (http://www.starbucks.com/aboutus/overview.asp; Thompson et al. 2005).
Starbucks has launched a series of new brands concerning coffee products and not only them. More particularly, in spring 1995, Frappuccino(r) blended beverage, a low-fat, creamy, iced coffee drink was introduced to Starbucks line of beverages. In summer 2004, Starbucks premiered its new Frappuccino(r) Light blended coffee beverages. Frappuccino(r) Light blended coffee was created in response to customer requests for a lighter blended coffee option with the same delicious taste. Frappuccino(r) Light blended coffee has 30-40 percent fewer calories than the original Frappuccino(r) blended coffee beverages. In 1996, the North American Coffee Partnership, a joint venture between Starbucks and Pepsi-Cola Co., began selling bottled Frappuccino(r) coffee drink. Six flavors are available in grocery channels nationwide and in select Starbucks coffeehouses. In 2002, Starbucks DoubleShot(r) joined the ready-to-drink lineup as part of the joint venture. In October 1995, Starbucks Coffee and Dreyer's Grand Ice Cream formed a joint venture to dish up a premium line of coffee ice creams. By July 1996, Starbucks became the no. 1 brand of coffee ice cream in the U.S. Currently, ice cream lovers can enjoy seven delectable flavors with favorites such as Java Chip and Coffee Almond Fudge (http://www.starbucks.com/aboutus/overview.asp).
Starbucks is considered as a pleasant company to work in. Actually, it pays strong attention to its workforce. Starbucks has approximately 80,000 partners (employees). Eligible part- and full-time partners qualify for a comprehensive benefit package that includes stock option grants through Bean Stock, Starbucks companywide stock option plan. Starbucks is committed to maintaining the quality, integrity and great taste of coffee as the company grows. "We have the most knowledgeable work force in our industry, from Dub Hay, senior vice president, Coffee, to the skilled baristas in all of our coffeehouses," says Schultz. "I take great pride, not in the number of locations we have opened, but in the growth and development of our people. "We realize our people are the cornerstone of our success, and we know that their ideas, commitment and connection to our customers are truly the essential elements in the Starbucks Experience," says Schultz. Each partner participates in an extensive training program that facilitates strong coffee knowledge, product expertise and a commitment to customer service (http://www.starbucks.com/aboutus/overview.asp).
Except from attention to its employees, Starbucks pays special focus on social responsibility issues. More particularly, Starbucks is dedicated to supporting the communities in which it does business. The company recognizes the relationship between its success and the strength and vitality of the communities where it operates. Investing in communities is not only the right thing to do, it also creates better places for all of us. At all levels of the organization, Starbucks partners strive to be good neighbors and active contributors in communities. It is part of the Starbucks culture (http://www.starbucks.com/aboutus/overview.asp).
Starbucks, having been the leader in USA market started becoming international. In 1996, Starbucks opened its first overseas location in Tokyo, Japan. Today, there are more than 500 retail locations in Japan. "It will continue to be imperative for us to build roots in local communities and establish strong alliances with local companies if we are to be successful in international markets," says Orin Smith, president and ceo. "Therefore, we will seek opportunities with companies that have expertise in the marketplace, and more importantly, share similar values, vision and business philosophy." In addition to Japan, Starbucks opened locations in Hawaii and Singapore in 1996; the Philippines in 1997; the U.K., Taiwan, Thailand, New Zealand and Malaysia in 1998; Beijing, Kuwait, South Korea and Lebanon in 1999; United Arab Emirates, Hong Kong, Shanghai, Australia, Qatar, Saudi Arabia, and Bahrain in 2000; Switzerland and Austria in 2001; Oman, Germany, Spain, Mexico, Puerto Rico, Southern China, Macau and Shenzhen, Greece and Indonesia in 2002; Turkey, Per?, Chile and Cyprus in 2003; France in 2004; and Jordan in 2005 (http://www.starbucks.com/aboutus/overview.asp; Thompson et al. 2005).
With the opening of three to four stores per day worldwide, Starbucks is becoming one of the most recognized and respected brands in the world (http://www.starbucks.com/aboutus/overview.asp; Thompson et al. 2005).
Starbucks' Mission Statement
Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.
The following six guiding principles will help us measure the appropriateness of our decisions:
. Provide a great work environment and treat each other with respect and dignity
2. Embrace diversity as an essential component in the way we ...
This is a preview of the whole essay
With the opening of three to four stores per day worldwide, Starbucks is becoming one of the most recognized and respected brands in the world (http://www.starbucks.com/aboutus/overview.asp; Thompson et al. 2005).
Starbucks' Mission Statement
Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.
The following six guiding principles will help us measure the appropriateness of our decisions:
. Provide a great work environment and treat each other with respect and dignity
2. Embrace diversity as an essential component in the way we do business.
3. Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.
4. Develop enthusiastically satisfied customers all of the time.
5. Contribute positively to our communities and our environment.
6. Recognize that profitability is essential to our future success.
Sources: Thompson et al, 2005
http://www.starbucks.com/aboutus/environment.asp
Schultz wanted the mission statement to convey a strong sense of organizational purpose and to articulate the company's fundamental belifies and quding principles. The draft was submitted to all employees for review. Actually, Starbucks management implemented a "Mission Review" to solicit and gather employees' opinions about whether the company was living up to its stated mission. A Mission Review Team was established to be submitted comments cards concerning mission statement formulation.
Concerning company's strong care about social responsibility, Starbucks even developed an environmental mission statement to expand on its corporate mission statement mentioned before (Thomson et al, 2005).
Starbucks' Environmental Mission Statement
Starbucks is committed to a role of environmental leadership in all facets of our business.
We fulfill this mission by a commitment to:
. Understanding of environmental issues and sharing information with our partners.
2. Developing innovative and flexible solutions to bring about change.
3. Striving to buy, sell and use environmentally friendly products.
4. Recognizing that fiscal responsibility is essential to our environmental future.
5. Instilling environmental responsibility as a corporate value.
6. Measuring and monitoring our progress for each project.
7. Encouraging all partners to share in our mission.
Sources: Thompson et al, 2005
http://www.starbucks.com/aboutus/environment.asp
2. Current Strategy Analysis
According to Tompson et al (2005), a company's strategy indicates the choices made by top executives about how to attract and satisfy customers, how to respond to changing environmental conditions, how to compete successfully, how to grow business, how to manage internal capabilities and weaknesses and how to achieve performance targets. Case study offers a lot of useful insight about Starbucks past and current strategy.
Starbucks' Vision
According to Howard Schultz, Starbucks' CEO since 1987, company's vision was for Starbucks to become a national company with values and guiding principles that employees could be proud of. As, it will be stressed in the following, special focus will be given in human resource management. In that context, Howard Schultz indicated that he wanted to include people in the decision-making process and that he would be open and honest with company's staff. Actually, Schultz deeply believed that it was essential to build a company that valued and respected its people, inspired them, and that shared the fruits of success with those who contributed to the company's long-term value.
Moreover, Schultz's aspiration was for Starbucks to become the most respected brand name in coffee and for the company to be admired for its corporate responsibility.
Starbucks' objectives
Concerning Starbucks' objectives, there are plenty of them for several issues.
* First of all, Starbucks intend to open a series of new outlets in several USA cities. Management expected to have 15,000 Starbucks stores by year-end 2005 and 25,000 stores by 2013.
* Starbucks wanted to go abroad by opening a serious number of stores in locations outside the USA market.
* Concerning stores ownership, the objective was to belong to Starbucks in order to ensure that they will uniformly operate offering identical products and services and communicating company's values. This is why franchising was avoided.
* Concerning brand name, company's strategic intent is to establish Starbucks as the most recognized and respected brand in the world.
* Concerning operations, Starbucks objective was to operate its stores in such a way that offers to customers a unique experience and pleasant time.
* Concerning financing, Schultz insisted on equity financing. From the first time that acquired Starbucks he was searching for equity and venture capitalists investors in order to raise funds. Then, he continued to use equity finance in the context of expansion efforts. Moreover, company sometimes used its strong cash flow in order to further invest. Actually, Schultz avoided debt finance.
* Another objective had to do with workforce development. Schultz wanted to have people that will be happy to work for Starbucks and dedicate themselves to effective customers' treatment.
* Finally, another Starbucks objective was the environmental interest and social responsibility in all of the areas it operated its stores.
Starbucks' current strategy identification
According to Thompson et al (2005) there are five generic competitive strategies that Starbucks can be considered that follows. Concerning the period before Schultz becoming company's CEO, in terms of target market, Starbucks is considered to follow a focused market niche strategies, as their owners care about only coffee lovers and don't want to expand offering a variety of products transforming into breweries business. In terms of differentiation, Starbucks offers a specific series of coffee and tea products along with coffee equipment. Except from the high quality products, compared to other similar coffee shops products, there was a unique atmosphere situation inside Starbucks stores come from decoration and aromas. This meant actually, that the company differentiated both in the context of core products and in the context of store atmospherics. Therefore, combining target market and differentiation, it is concluded that Starbucks used to follow a focused strategy based on differentiation.
After Schultz assignment on CEO position at Starbucks, company strategy transformed into something different. Actually, taking into consideration Schultz' vision, in terms of target market, Starbucks can be considered to follow a broad cross-section market strategy, as national expansion is going to take place. Moreover, differentiation in the context of products lines will be continued adding much more new products in Starbucks catalogs expanding from coffees and teas to several breweries, refreshments, pastries etc. This products line expansion is fully compatible to market expansion of Starbucks. It is obvious that, since 1987, Starbucks started to follow a broad differentiation strategy.
Starbucks' strategy key elements of 2004
* Rapidly expand the number of company-owned and operated Starbucks domestically
* Locate stores in top-notch retailing sites
* Use of licensing agreements in locations where Starbucks may not have the ability to open company-owned stores
* Rapidly expanding the number of stores internationally, however formatting stores in foreign countries similar to US Starbucks format.
* Keep the price of Starbucks coffee products in a line with the price of rivals
* Broaden in-store product offerings
* Strive to exploit the growing power of Starbucks brand name with out-of-stoles sales including retail grocery sales of Starbucks coffee, Frapuccino (r) and coffee ice cream.
* Put big emphasis on store ambience and make Starbucks stores a kind of "third place" offering a "Starbucks experience" to customers.
* Use of debt finance for stores expansion
* Boost sales of whole bean coffee through internet
* Promote Starbucks website inside stores
* Display corporate social responsibility
* Outsourcing all roasting coffee activities
* Invest in coffee bean plantations in several different locations all over the world vertically integrated its business
* Promote customer-friendly service and enhance store ambience by making Starbucks a great place to work in
Conclusions
The strategic intent of Starbucks was to build a brand image that communicates both the in-store products quality differentiation and the unique atmospherics of Starbucks stores. This is called the "Starbucks experience". This is why Starbucks want to expand all over the world according to the same stores format.
It is true that Schultz contributed substantially to Starbucks success, as he put the vision for the company and formulated the most suitable strategies in order Starbucks grow over time. More particularly, he managed to organize the company in such a way that gave strong motives to employees, communicate effectively with them and change the corporate culture so that customers would be the first that enjoyed the high morale of Starbucks environment.
However, a few questions exist first for the financing scheme of company (only equity capital) and second for the selection of supermarkets for selling Starbucks products as an alternative channel. Although these issues, Schultz grade must be higher above average as he managed to make his vision reality. This is reflected to company's financial statement showing growing sales, profits, and assets figures.
3. Internal Analysis
According to Tompson et al (2005), a company's internal environment consists of its resource capabilities, relative cost position and competitive strength versus competitors. Internal environment is considered as a controlled variable (Johnson & Scholes, 1999), as its elements depend fully on the company's activities.
Therefore, given the external environment, which consists of macro-environment (Papadakis, 1999) and industry environment (Johnson & Scholes, 1999; Tompson et al, 2005), a company should exploit its strengths and improve its weaknesses in order to grow or even to survive. It is obvious that strengths and weaknesses characterized company's internal environment.
Concerning Starbucks internal environment, it can be mentioned that all strong points of the Company stem from Howard Schultz's innovative ideas and concepts applied in the context of operations, product and services mix along with powerful human resources management.
3.1 Operational Strengths & Weaknesses
After the acquisition completion between Starbucks and Il Giornale operations were complementary to each other. More particularly, Starbucks stores were equipped with espresso machines in the context of broader product mix offering beyond classical coffee and tea variety. Additionally, they were remodeled to look more Italian than Old World nautical. Similarly, Il Giornale green replaced the traditional Starbucks brown.
Inside Starbucks customers used to have a very positive experience. The main reason for that, except from the core broader product mix, was the special treatment that customers received by stores staff. Actually, store employees were knowledgeable about Starbucks products, paid attention to detail in preparing the company's espresso drinks, possessed the skills and personality to deliver consistent pleasing customer service.
Starbucks was not only a simple coffee shop that sold products, but also a high quality service-provider. One desire of Starbucks was to generate enthusiastic commitment on behalf of its employees and, thus, provide higher levels of customer service.
People that used as stores staff tend to be young enough in order to express more enthusiasm, communicating more effectively company's value. This is why a lot of employees were part-timers.
Employees paid special attention of what pleased customers. This is a special task of stores employees except of their usual tasks in operating a store. Employees tried to build strong relationship with customer in the context of retaining them and increase loyalty.
Starbucks wanted to continue the tradition of high quality coffee offering. More particularly, Starbucks kept pursuing the perfect cup of coffee by buying the best beans and roasting them to perfection. Moreover, Schultz was adamant about not selling artificially flavored coffee beans.
Concerning flavored coffees, Starbucks applied a sophisticated recipe. More particularly, Starbucks would provide flavored coffee by adding hazelnut syrup to the drink, rather than by adding hazelnut flavoring to the coffee beans during roasting.
Operations were flexible enough in order to offer what customers wanted. Through careful observation from company's stores' people it was possible to detect customers preferences and wants. For example, Starbucks product mix was further broadened including lattes with nonfat milk.
Store operations adjusted in order to satisfy more customers' needs. More particularly, after the first stores operated for only standing up customers, special seating areas were added to help make Starbucks a desirable gathering place where customers could meet and chat or simply enjoy a peaceful interlude in their day.
Comfortable store environment was developed in company's stores. More particularly, a lot of stores had fireplaces, leather chairs, newspapers, couches and lots of ambience.
Inside Starbucks stores customers could use new technology features. More particularly, customers using a Wi-Fi notebook computer while at Starbucks locations equipped with wireless broadband Internet service could surf the Web or take advantage of special Starbucks sponsored multimedia promotions. The obvious objective was the repeated sales by heightening the "third place" Starbucks experience, and enticing customers into perhaps buying a second latte or espresso while catching up on e-mail, listening to digital music, putting the finishing touches on a presentation or assessing their corporate intranet.
Starbucks created a superb atmospherics inside its stores. Actually, management considered that this atmospherics would serve both in further building company's brand image and used as a key differentiation tool for competitive advantage. The company wanted to ensure that store fixtures, merchandise displays, the colors, the artwork, the banners, the music and the aromas all blended to create a consistent, inviting, stimulating environment that evoked the romance of coffee, and that rewarded customers with ceremony, stories, and surprise. It is worthwhile to mention that stores operations, among others, allowed inside stores smell coffee only.
Baristas became familiar with regular customer learning their names and their favorite drinks. Actually, this made customer show stronger commitment to Starbucks and, of course, loyalty. This baristas' behavior can be considered to be in the context of their training and top management encouraging to stores' personnel to treat customers properly.
All licensing shops communicated Starbucks brand name. Actually, all these shops had to follow Starbucks' detailed operating procedures and all managers and employees working at these stores received the same training given to Starbucks managers and store employees.
Starbucks had built strong relationships with coffee suppliers. Actually, company's personnel traveled regularly to coffee-producing countries building strong relationship with growers and exporters and monitoring the whole conditions concerning coffee production.
Starbucks spent time in order to ensure that it purchased the best quality. Company's personnel were searching out varieties and sources that would meet its exacting standard of quality and flavor. Starbucks purchased only high-quality arabica coffee beans.
Starbucks purchasing strategy secured the company from price risks. Due to high coffee price volatility, the company used fixed price purchase commitments to limit its exposure to fluctuating coffee prices in upcoming periods.
Starbucks paid special attention to coffee roasting operations. Actually, the company considered the roasting of its coffee beans to be something of an art form entailing trial and error testing of different combinations of time and temperature to get the most out of each type of bean and blend.
Starbucks coffee beans used fresh in order company's coffee drinks to be made. Actually, Starbucks coffee beans didn't keep their excellent quality if packaged. This is why Schultz didn't want Starbucks to pursue supermarket sales. The reason was because this would mean pouring beans into clear plastic bins where they could get stale, thus compromising the company's legacy of fresh, dark-roasting, full-flavor coffee.
Starbucks didn't express any special capabilities applying mail order sales and using dot-com business. This is why the company discontinued mail order section along with divesting all its dot-com business.
3.2 Financial Strengths & Weaknesses
Starbucks managed to better control of average store opening costs. More particularly, the company centralized buying, developed standard contracts and fixed fees for certain items and consolidated work under those contractors who displayed good cost-control practices.
Starbucks had a huge debt capacity, as during the early start-up years the company avoided debt and financed new stores entirely with equity capital. Actually, this capacity, along with profitability improvement and balance sheet strengthen, made Schultz softened so that Starbucks completed some debt offerings.
Starbucks enjoyed strong internal cash flows for 1997-2004 periods. This cash-flow stream allowed the company to finance virtually all of its store expansion with internal funds.
Last five years (1998-2003) Starbucks enjoy increasing financial figures in terms both of income statements (total net sales, net earnings, earnings per share) and of balance sheet items (total assets, shareholders equity).
Long-term debt decreases as a percentage of total assets. Actually, in absolute dollar values long-term debt follows a decreasing pattern since 1999. Therefore, equity finance has greater portion overtime.
Share price follows an increasing pattern for the (1992-2003) period, according to case study data (Thompson et al, 2005). According to recent share price data (http://finance.yahoo.com/q/bc?s=SBUX), Starbucks share price was increased until the end of 2004. Thereafter, share price seems to follow a cyclical nontrending pattern around .45$ - 0.60$.
Figure 3.1, Starbucks share price (May 2004 - May 2005)
Source: http://finance.yahoo.com/q/bc?s=SBUX
Number of new openings is increasing over time from year to year. Therefore, the number of Starbucks stores is increasing with increasing rate annually.
Starbucks offered zero dividends for (1998-2003) period. This can be explained by use of internal funds for financing company's store expansion. However, Starbucks could exploit their large debt capacity in order to finance some part of investments and have cash available to pay some dividends.
3.3 Organizational Strengths & Weaknesses
The consolidation of companies after the acquisition was considered as successful enough in the context of culture issue. In order to symbolize the merging of the two companies and the two cultures, a new logo was created and melded the designs of Starbucks logo and Il Giornale logo.
One of Starbucks core competencies was identifying suitable retailing sites for its new stores. Actually, the company was regarded as having the best real estate team in the coffee bar industry, along with a sophisticated system for identifying not only the most attractive individual city blocks but also the exact store location that was best. In that context, it also worked hard at building effective relationships with local real estate representative in areas where it was opening multiple store locations.
Starbucks possessed an excellent know-how along with an excellent capability of passing this know-how in the context of local partner/ licensee use for international expansion. This effective know-how passing strengthened more company's effort for brand building around the world.
Concerning organizational culture, Starbucks encourage employees to express their opinions and contribute to decision-making procedure. Company's top management creates a culture where all employees feel that they are respected both as humans and as workers and are able to free express their ideas and opinions through formal procedures (see Mission Statement construction and annual Partner View concept).
Starbucks paid special focus on human resources management. On that context, a special health case insurance program was initiated for all employees including part-timers. By that program, workforce commitment had been tighter. Additionally, morale was increasing and employees were far more eager to contribute substantially to company's success. Moreover, except from that insurance program, the new compensation plan gave strong motives to employees to become partners rather than simple employees. That was another reason for employee to become a key success factor for Starbucks.
Due to Starbucks initiates to employees, the result was that it allowed to the company to attract motivated people with above-average skills and good work habits. Turnover rates were too low compared to similar business because Starbucks was considered as an attractive place to work in.
Starbuck provides also organizational capabilities in order to keep employee morale in high levels during the ongoing years. More particularly, company's management was concerned by field reports of stores that were suffering from slumping employee morale and store manager burnout. It is worthwhile to mention that Starbucks was named by Fortune magazine as one of the "100 Best Companies to Work for" in most of the years since 1998 until 2002.
Morale is very high to all stores among the staff. This high morale passes to customers that find people working in Starbucks having fun. All this creates a pleasant experience to customers and motivates them to become loyal ones.
One other strong point of Starbucks was the effective employee training. More particularly, training program included both technical issues concerning all the variety of drinks and breweries preparation, and organizational issues concerning the culture of company, the way they will manage customers and generally operate a store in order to communicate Starbucks' values and benefits.
After a few years of consolidated Starbucks starting up, the company created its own in-house team of architects and designers in order to ensure that each store would convey the right image and character.
A "stores of the future" project team was formed to raise Starbucks store design to a still higher level and come up with the next generation of Starbucks stores.
There was a vision of what a Starbucks store should be like. This vision included concepts as an authentic coffee experience that conveyed the artistry of espresso making, a place to think and imagine, a spot where people could gather and talk over a great cup of coffee, a confronting refuge that provided a sense of community, a third place for people to congregate beyond work or the home, a place that welcomes people and rewards them for coming and a layout that could accommodate both fast service and quiet moments.
Starbucks used systems in order to control services standards quality inside stores. This is why the company used mystery shoppers who posed as customers and rated each location on a series of criteria.
Starbucks paid special attention to corporate and social responsibility issues. The company take special care about the environment hosted its stores. It had found the "Starbucks Foundation" and contributed substantially to other foundations efforts. This effort could be considered actually as complementary to its advertising absence (see next).
Starbucks lacked experienced management. Even Schultz had never led a growth effort of such magnitude and was just learning what the job of CEO was all about. Moreover, other Starbucks employees had only the experience of managing or being part of a six-store organization.
Starbucks didn't own the sites they operate its stores. Therefore, they were limited enough in terms of how they could redesign and rebuild stores spaces as they would desire.
3.4 Marketing Strengths & Weaknesses
Starbucks offered a high variety of coffee and tea drinks inside its stores. More particularly, its stores offered a choice of regular or decaffeinated coffee beverages, a special "coffee of the day", an assortment of made-to-order Italian style hot and cold espresso drinks, and hot and ice teas.
Starbucks offered a wide selection of fresh roasted whole-bean coffees. More particularly, these beans could ground or not on the premises for take-home in distinctive packages. Actually, Starbucks was differentiated by selling coffee for take-home use.
Starbucks offered a high variety of other products related and not with coffee shop. More particularly, stores' visitors could buy from a series of selections like fresh pastries, juices, coffee-making equipment, coffee mugs and other accessories, and music CDs. Starbucks used to launch seasonal products tighten to special occasions (like Christmas etc.).
Starbucks exploited its brand name by launching branded products. Frappuccino (r) was a very successful Starbuck product sold even in bottled version. Additionally, a new line of coffee ice cream was launched under Starbucks brand name.
By introducing Duetto Visa Card, Starbucks offered to its customers a flexible and alternative payment method. Starbucks visitors, then, felt comfortable to enter company's stores without caring how much money they have or how much money they will spend. Moreover, Duetto cardholder will definitely prefer Starbucks when wanting to have a cup of coffee or to spend some leisure time in a pleasant location.
Starbucks enjoys of a positive word-of-mouth. Actually, company's strategic efforts are to build the brand cup by cup with customers. It is known that word-of-mouth advertising is highly effective and free of charge.
Starbucks enjoys of a live advertising come from the appeal of its storefronts. Given the qualitative store design and the "Starbucks everywhere" approach, locations storefronts are actual an effective advertising.
Starbucks used alternative distribution channels expanding its sales potential. More particularly, a strategic joint venture between Starbucks and PepsiCo allowed to the company to use PepsiCo distributions channels to distribute new products like cold coffee drinks. Additionally, Starbucks had a licensing agreement with Kraft Foods to market and distribute Starbucks coffee beans in mass merchandising channels across USA.
Starbucks lacks in advertising efforts. Actually, it spends very little money on advertising. However, it should communicate not only its brand, but also new stores open and new locations of Starbucks at least.
Use of alternative distribution channels may make consumers feel confusing about Starbucks brand name. This use entailed several risks. The first risk was that through alternative channels Starbucks had no control over how customers would perceive Starbucks brand when they encountered it in grocery aisles. The other risk had to do with coffee preparation at home in a sense that consumers used poor equipment or inappropriate brewing methods. Therefore, this may damage Starbucks reputation.
4. External Analysis
4.1 Economic Characteristics
Starbucks belongs to the specialty coffee industry. Retail sales of this industry accounted to only $45 millions in 1969, whereas they jumped in $2 billions in 1994 exhibiting a large growth and indicating a high market potential. Much of these specialty coffee sales stemmed from sales in coffee bars or shops of coffee-beans retailers.
Actually, a great market opportunity seemed to exist for that industry given that there was a wider consumer awareness of and appreciation for fine coffee, and an emergence of coffee bars featuring a blossoming number of premium coffee beverages. Moreover, people applied an adoption of a healthier lifestyle that prompted some consumers to replace alcohol with coffee.
Another reason of increasing specialty coffee consumption was because coffee's image changed from one of just a breakfast or after-dinner beverage to a drink that could be enjoyed anytime in the company of others. Actually, many coffee drinkers took to the idea of coffee bars where they could enjoy a high-caliber coffee beverage and sit back and relax with friends or business associates.
Economically speaking, some specialty coffee industry experts expected the gourmet coffee market in the USA to be saturated by 2005. However, the international market was much more wide open as of early 2004.
In 2003, there were an estimated of 14,000 specialty coffee outlets in the USA. Some industry observers predicted that there would be as many as 18,000 locations selling specialty coffee drinks by 2015.
Another important economic characteristic of the industry has to do with suppliers. Coffee prices are subjected to high volatility due to weather conditions mostly and therefore, coffee purchasers exposed to price risk that may squeeze their profit margins some times.
However, coffee producers are numerous around the world and coffee supply was huge in 2002 dropping coffee prices in historical lows. Specialty coffee market represented about 10% of worldwide production.
Concerning specialty market potential, the National Coffee Association report that regular coffee still accounted for 87% of all coffee consumed in USA in 2002, left enough space for believing that this statistic was that the gourmet coffee segment was still emerging.
4.2 Competitive Analysis (Porter's 5 Forces)
Figure 4.1, Specialty Coffee Industry Competitive Analysis
Potential Entrants (Threat of entrants)
Barriers to entry seem to be low enough concerning specialty coffee industry. Therefore, the threat of entrants is big for Starbucks.
* Concerning economies of scale, operation of more and more stores is able to be more economic.
* Concerning capital requirements and expenditures, there are not so huge. Moreover, financing is not such a hard task
* Concerning access to distribution channels, it is easy enough to find locations to open a store, get a license etc.
* There are a lot of famous companies caring to enter specialty coffee industry (like McDonalds etc).
Suppliers (bargaining power)
Suppliers' bargaining power cannot be considered as high, in general, mainly because coffee suppliers are so many all over the world. Moreover, opportunities for suppliers' differentiation are almost nonexistent.
However, bad weather conditions may limit supply and increase supplier bargaining power in the short run.
Competitive Rivalry
* Threat of entrants is likely
* Substitutes threat is highly likely
* Buyers seem to exercise control in an extent having the option to select stores
Buyers (bargaining power)
Buyers' bargaining power can be considered as high because:
* There are alternative sources of supply (alternative channels) due to low barriers to entrance.
* The cost of switching supplier involves low risk, as selecting where drinking a coffee or where buying coffee for home are not such important decisions.
Substitutes (Threat of substitutes)
There is a great threat of substitutes for specialty coffee market:
* There is indirect competition come from other stores that upgrade their coffee serving like restaurants etc.
* There is competition also come from food companies that sell specialty coffee in supermarket and in other retailers (Kraft, Procter & Gamble etc).
4.3 Competitor Analysis
Specialty coffee industry could be considered as a high fragmented market. Indeed, no other specialty coffee rival had even as many as 250 stores. However, there were at least 20 small local and regional chains that aspired to compete against Starbucks in their local market arenas.
To mention a few of Starbucks competitors, they are Tully's Coffee (98 stores in 4 states), Gloria Jean's (280 mall locations in 35 states and several foreign countries), New World Coffee (30 locations), Brew HaHa (15 locations in Delaware and Pennsylvania), Bad Ass Coffee (about 30 locations in 10 states and Canada), Caribou Coffee (241 locations in 9 states), Cup Coffee (the largest chain based in Canada), and Qwiky's (India).
Although no one of these rivals seems to be threat for Starbucks, a consolidation among several of them could be a respective competitor. Actually, it had been anticipated in the late 1990s that some local and regional chains would merge to better position themselves as an alternative to Starbucks. However, such consolidation had not occurred as of 2003. This doesn't mean that threat for Starbucks doesn't exist any longer.
Another threat was that numerous retail entrepreneurs had picked up on the growing popularity of specialty coffees and opened coffee bars in high pedestrian traffic locations to serve espresso, cappuccino, lattes and other coffee drinks.
Concerning famous companies in food sectors, McDonalds announced it would begin opening a new type of stores called McCafe featuring premium coffee and made-to-order specialty drinks in a café-style setting with Internet access also available. Additionally to McDonalds, Krispy Kreme Doughnuts had recently upgraded the number and quality of the coffee drinks it offered at its locations.
Indirect competitors of Starbucks were nationwide coffee manufacturers such as Kraft General Foods (the parent of Maxwell House), Procter & Gamble (the marketer of Folger's and Millstone brands), and Nestle. All of them distributed their coffees through supermarkets. Actually, both General Foods and Procter & Gamble had introduced premium blends of their branded coffees on supermarket selves pricing them several dollars below Starbucks offerings. Moreover, there were dozens of specialty coffee companies that sold whole-bean coffees in supermarkets (brands like Green Mountain, Allegro, Peaberry, Brothers and Millstone). Due to low switching costs, consumers purchasing their coffee supplies in supermarkets could easy substitute whatever specialty coffee brand for Starbucks.
Concerning about other Starbucks rivals, it has to be mentioned that growing numbers of restaurants were upgrading the quality of the coffee they served.
4.4 Key Success Factors
Excellent core product facilities: offering a variety of several coffee and tea drinks, lattes, juices, refreshments, pastries etc it can make customers to prefer a particular coffee shop where he or she feels free to select whatever he or she desires from a series of options.
Excellent service provided by store staff: each customer will prefer enjoy his or her favorite drink and sweet in a place where service is fast and qualitative. Moreover, he or she will feel more comfortable if he or she is known about his or her name and, of course, his or her preferences in advance.
Store atmospherics: it is obvious that atmospherics plays a critical role in retailing. Actually, each coffee drinker will enjoy his beverage better seated in comfortable chairs or couches, exposed to beautiful decoration and listening something pleasant as background. Moreover, staff behavior contributes substantially to the creation of an effective atmospherics.
Effective human resource management: a large portion of coffee shop operations comes straight from its staff, as these are who both prepare and serve the core products (coffees) and contribute to the creation of a pleasant atmospherics. This is why companies belong to specialty coffee industry operating outlets should pay strong attention to human resource development in terms of recruiting the suitable people, training them properly and giving them the right motives for treat customers as it should have to.
Additional services offering: in order to boost sales some additional services should be provided in order to motive coffee drinkers to prefer a specific brand chain, to visit its stores more, to stay longer time and to order more drinks. This is why Internet services connections are currently provided by some coffee shops chain.
Brand image building: as virtually all consumer use to buy brand products and services, it is almost certain that they will prefer visit branded coffee shops to enjoy their coffee and spend some leisure time. Moreover, brand image communicate to coffee drinkers that quality standards, variety of coffee drinks, and the total pleasant experience received will be the same across all stores under the same brand.
5. SWOT Analysis
SWOT analysis is a very powerful strategy analysis tool that combines the internal and the external environments of a company (Johnson & Scholes, 1999; Thompson et al, 2005).
Based on case study data (Thompson et al, 2005) and data come from Starbucks 2004 Annual report, a SWOT analysis of company is conducted.
Figure 5.1, SWOT analysis for Netflix
Strengths
Weaknesses
Operational
* Operations of Starbucks & Il Giornale were complementary to each other
* Starbucks customers used to have a very positive experience
* Starbucks was a high quality service-provider
* People that used as stores staff tend to be young enough
* Employees paid special attention of what pleased customers
* Starbucks wanted to continue the tradition of high quality coffee offering
* Concerning flavored coffees, Starbucks applied a sophisticated recipe
* Operations were flexible enough in order to offer what customers wanted
* Store operations adjusted in order to satisfy more customers' needs
* Comfortable store environment was developed in company's stores
* Inside Starbucks stores customers could use new technology features
* Starbucks created a superb atmospherics inside its stores
* Baristas became familiar with regular customer learning their names and their favorite drinks
* All licensing shops communicated Starbucks brand name
* Starbucks had built strong relationships with coffee suppliers
* Starbucks spent time in order to ensure that it purchased the best quality
* Starbucks purchasing strategy secured the company from price risks
* Starbucks paid special attention to coffee roasting operations
Financial
* Starbucks managed to better control of average store opening costs
* Starbucks had a huge debt capacity
* Starbucks enjoyed strong internal cash flows for 1997-2004 periods
* Last five years (1998-2003) Starbucks enjoy increasing financial figures
* Long-term debt decreases as a percentage of total assets
* Share price follows an increasing pattern
* Number of new openings is increasing over time from year to year
Operational
* Starbucks coffee beans didn't keep their excellent quality if packaged
* Starbucks didn't express any special capabilities applying mail order sales and using dot-com business
Financial
* Starbucks offered zero dividends for (1998-2003) period
Strengths
Weaknesses
Organizational
* Successful culture consolidation
* Suitable identification of retailing sites for Starbucks new stores
* Excellent capability of passing this know-how
* Starbucks encourage employees to express their opinions and contribute to decision-making procedure
* Starbucks paid special focus on human resources management
* Ability to attract motivated people with above-average skills and good work habits
* Keep employee morale in high levels
* Employees' high morale passes to customers
* Effective employee training
* Starbucks created its own in-house team of architects and designers
* A "stores of the future" project team was formed
* Vision of what a Starbucks store should be like
* Starbucks used systems in order to control services standards quality inside stores
* Starbucks paid special attention to corporate and social responsibility issues
Marketing
* Starbucks offered a high variety of coffee and tea drinks inside its stores
* Starbucks offered a wide selection of fresh roasted whole-bean coffees
* Starbucks offered a high variety of other products related and not with coffee shop
* Starbucks exploited its brand name by launching branded products
* Duetto Visa Card introduction
* Starbucks enjoys of a positive word-of-mouth
* Starbucks enjoys of a live advertising come from the appeal of its storefronts
* Starbucks used alternative distribution channels expanding its sales potential
Organizational
* Starbucks lacked experienced management
* Starbucks didn't own the sites they operate its stores
Marketing
* Starbucks lacks in advertising efforts
* Use of alternative distribution channels may make consumers feel confusing about Starbucks brand name
Opportunities
Threats
* Retail sales of specialty coffee industry had experienced a great jump during the last 30 years
* There was a wider consumer awareness of and appreciation for fine coffee
* Emergence of coffee bars featuring a blossoming number of premium coffee beverages
* People's adoption of a healthier lifestyle that prompted some consumers to replace alcohol with coffee
* Coffee's image changed to a drink that could be enjoyed anytime in the company of others
* Coffee producers are numerous around the world
* Gourmet coffee segment was still emerging
* Specialty coffee industry experts expected the gourmet coffee market in the USA to be saturated by 2005
* Coffee prices are subjected to high volatility due to weather conditions
* Consolidation of current small rivals to form fewer but bigger ones rivals
* Numerous retail entrepreneurs had picked up on the growing popularity of specialty coffees and opened coffee bars in high pedestrian traffic locations
* Entrance of branded chain in specialty market (McDonalds)
* Restaurants had upgraded its coffee servings
* Starbucks Brand confusion due to supermarket retail sales
Sources: Starbucks Annual Report (2004)
Thompson et al, (2005)
It is obvious that Starbucks have a lot of operational and organizational strengths. These are actually the main reasons of Starbucks success along with market opportunities concerning the growth of specialty coffee industry.
Concerning the future and the possible threats, competition is considered to be the most important threat along with some possible brand confusion due to supermarket sales. This SWOT analysis revealed that Starbucks really posses numerous strong points in several issues. However, they should keep operate their stores in the same concept and take special care to brand image issues stem from other distribution channels, especially supermarkets sales.
Competition cannot be considered so important threat as the whole specialty coffee market seems to be emerging and, thus, leaving space for other players and as Starbucks have already built their good reputation from coffee drinkers.
6. Recommendations
The pre-requested to sustain and strengthen competitive position for a business is actually to realize the concept of continuous improvement and new offers. However, the other important thing is the effective implementation (Johnson & Scholes, 1999). This means that each business should carefully understand internal and external environment, then formulate the right actions and finally apply them efficiently and effectively. For the case of Starbucks we have the following recommendations to present:
* Recommendations don't always have to do with something new. Basically, Starbucks needs to keep on doing what it is already doing. There are not any special -internal mostly- problems to be solved. Actually, the company seems to be in the right direction.
* In this context, ongoing expansion in USA market is included applying the "Starbucks Everywhere" approach.
* Starbucks should work in such a way to make foreign operations profitable as quickly as possible. It is recommended market research in every national market in order to reveal useful insights concerning regional peculiarities that may offer opportunities or threats to Starbucks. For example, these peculiarities may favor a particular coffee product against other in specific countries etc.
* Concentrate on open company-own stores in order to have the opportunity to form internal spaces as it is desired.
* Stop selling out-of-stores products, especially in groceries. This actually confuses consumers about Starbucks brand name. It is recommended for Starbucks to fully divest out-of-stores production facilities, where there are traditional strong players, and fully concentrate to stores expansion in order to face increasing competition come from new -big and smaller- players entering the market. Money saved from out-of-stores activities can be invested for further stores expansion
* In some big Starbucks stores with high traffic, waitresses should be hired in order to avoid long queues in cashiers while customers ordering.
* Formulate an ambitious sales promotion plan that attracts new customers, and mainly keep existing Starbucks lovers in stores more frequently and for a longer time.
Bibliography
[1] Company Overview (2005), http://www.starbucks.com/aboutus/overview.asp?, accessed in May 25th 2005
[2] Johnson, G. Scholes, K. (1999) "Exploring Corporate Strategy" 5th edition, Prentice Hall
[3] Mission Statement (2005), http://www.starbucks.com/aboutus/environment.asp, accessed in May 25th 2005
[4] Papadakis, V. (1999) "Business Strategy" Benos Editions
[5] SBUX: Basic Chart for STARBUCKS CP -Yahoo! Finance (2005), http://finance.yahoo.com/q/bc?s=SBUX, accessed in May 25th 2005
[6] Starbucks Annual Report (2004)
[7] Starbucks Homepage (2005), http://www.starbucks.com, accessed in May 25th 2005
[8] Thompson, A.A. Strickland, A.J. Gamble, J.E. (2005) "Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases" 14th edition, McGraw Hill International Edition
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