Starbucks Strategic Analysis

#Strategic Analysis of Starbucks Corporation

#INTRODUCTION:

Starbucks is a premium coffee brand that roasts markets and sells premium coffee around the world. Formed in 1985, STARBUCKS (NASDAQ: SBUX) is operating across 75 countries. The coffee brand is known best for its premium quality coffee. However, apart from that, it is known for its great customer service and great stores that offer the customers a stress free environment.  The brand is known for many more extraordinary things as well. It aims to become one of the most prestigious and recognized brands of the world. To achieve its objective the brand has focused on disciplined expansion in key markets including developed and fast developing as well as optimization of its licensed and owned store base. Starbucks purchases and roasts high quality coffee that it sells along with  hand roasted coffee, tea and other beverages. The number of total Starbucks stores operational as of October 2017 was 27,339. Out of these more than 16,500 were operational across the Americas. The company has managed an optimum balance of licensed and owned stores globally.  Apart from these things, the brand is also known for doing ethical business. It sources its cocoa ethically and also maintains its focus on high ethical standards inside the organisation. Read more about Starbucks and its business strategy in this strategic analysis.

#SWOT ANALYSIS:

STRENGTHS:

Brand Image:

Starbucks has maintained a strong brand image as an ethical business brand. Apart from its premium products, it is well known as a customer centric brand. Its main focus remains on creating highest customer satisfaction. However, it does that without compromising on ethics. The company has formed strict rules related to work ethics. Its image of a premium brand is also support by good quality customer service. If the brand is a favourite of millions around the world, the reason is its dedication to customer satisfaction. A strong brand image is a critical strength which  helps at many points. Apart from higher sales and revenue it also controls marketing costs and helps brands find faster growth as in the case of Starbucks corporation.

Premium quality coffee:

Starbucks sources only premium quality coffee from the best producers. Its Arabica beans are very different from the regular Arabica beans and the company goes to great lengths to ensure that it sources only the best. Best quality beans are found at higher altitudes. To source the best Arabica coffee Starbucks has formed deep rooted relationships with coffee farmers. Apart from picking cherries when they are at their peak, the brand also roasts them deeper to bring out the best taste which can be felt in each cup of coffee.  Everyday experts taste thousands of cups to ensure that  only the perfect taste reaches the customers.

Global presence:

Starbucks is a global brand that sells its products across 75 countries. It sources its cocoa from several corners of the world. Americas are its main market and the brand earns a very large part of its revenue from the American markets. However, apart form America, it is also focusing on growing its business in the fast developing markets. The geographical segments that  its business is divided into include Americas, CAP and EMEA. The Americas include United States, Canada & Latin America. CAP means the China and Asia Pacific markets. EMEA includes Europe, Middle East and Africa. Starbucks has the highest number of stores in Americas followed by China and Asia Pacific.

Large product portfolio:

Starbucks has maintained a large and diverse product portfolio that includes premium quality and hand roasted coffee as well as other beverages. The company also sells tea and other beverages and a variety of high-quality food items, including snack offerings, through company-operated stores. It sells a variety of coffee and tea products and licenses its trademarks through other channels like licensed stores, grocery and foodservice accounts. In addition to its flagship Starbucks Coffee brand, it sells goods and services under several brands including: Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange and Ethos.

Customer loyalty:

Starbucks enjoys very high level of customer loyalty. It has been able to build a strong image which has resulted in a  large and loyal customer base. The main factors that have led to high level popularity and loyalty are its premium quality products and high standards of customer service as well as work ethics.

Financially strong:

Starbucks is a financially strong brand and the result is that it is able to invest in high quality raw materials and excellently designed stores to welcome its customers. Total net revenues of the brand reached 22.4 Billion dollars rising from 21.3 Billion dollars. Operating income of the brand saw a slight decline in 2017 falling from 4.17 Billion to 4.13 Billion.

Well managed supply chain:

Starbucks has managed its supply chain very well. It needs high quality cocoa for preparing coffee which it sources from around the world. A well managed supply chain is one of its most critical strengths that supports its worldwide operations. It has a dedicated team of experts in roasting, planning, warehouse management, packaging, maintenance, engineering and logistics. The brand focuses on continuous improvement and lean principles down its supply chain.

Weaknesses:

Low focus on marketing:

Traditionally, Starbucks has not spent much on marketing. It has mainly relied on word of mouth and publicity for marketing. In the recent years, it has started spending on advertising and promotions. However, its marketing expenditure is still very low as compared to the other beverage brands. Its brand awareness and recognition could be even higher given it had focused on strategic marketing of its brand and products.

High operating expenses:

The operating expenses of Starbucks have kept growing higher. Its operating expenses in 2017 rose to 18.6 Billion dollars from 17.5 Billion dollars in 2016. Its operating expenses in 2017 were 83.3% of its entire revenue.

Premium pricing:

The premium pricing strategy of Starbucks can be a weakness leading to erosion of customer base. The brand targets mainly the high end customers. Its customer base could grow faster, if the prices of its products were lower. However, Starbucks does this to maintain a premium image among its customers. Changing the pricing strategy can result in brand dilution. However, decreasing the prices can also have major benefits like access to a larger customer base.

Opportunities:

Digital marketing opportunities:

Digital technology has brought several new opportunities for brands and marketers which they can use to better market their brands and engage their customers. Starbucks can use AI and digital technology for establishing deeper connection with its audience. It can also use digital technology and explore new channels to engage its customers and increase customer satisfaction.

Asian markets:

Asian markets are among the fastest growing markets in the world currently. These markets have brought several unique opportunities for the brand. Starbucks is focusing on increasing its presence in the Chinese markets and for that  it is investing in opening new stores and marketing for increased brand awareness and faster expansion. India is also an attractive market where the brand can find faster growth.

Acquisitions and partnerships:

Acquisitions and partnerships can also offer the brand  opportunities of faster growth. Starbucks can acquire other smaller food and beverage brands and grow its product portfolio and business. It can also partner other brands for cobranding and to access a larger pool of customers.

Threats:

Growing competition in the beverage industry:

Competition in the beverage industry has increased a lot. Apart from coffee there are other beverage and fast food brands too competing with Starbucks. It seems that due to the higher pressure of competition, the brand raised its expenditure on advertising and promotions.

Rising operational costs:

The operational costs of Starbucks have kept rising year over year. Apart form the cost of raw material, the cost of labor has also increased. Other costs like that of supply chain management are also adding to operational costs and causing a reduction in operating income. In 2017, the brand’s operational costs were higher than 83% of its total revenue.

Regulatory pressures:

Around the world regulatory pressures have grown leading to higher legal and regulatory pressures on the international  business organizations. These pressures are not just leading to compliance costs but also making international expansion difficult. Starbucks also ensures that its business is in compliance with all the local and international laws.

Changing customer trends:

Customer trends keep changing fast. People are now looking for healthier products. Fast changing trends alter people’s preferences and affect their taste. This can prove costly for brands like Starbucks as they have to alter their menu as per their changing trends.

#PESTEL ANALYSIS:

POLITICAL:

Political forces have grown increasingly important in the context of business in the twenty first century. Several things have changed in the international political environment. Worldwide political and government agencies have grown highly strict in terms of their control of local and international business. Higher oversight and control has resulted from several factors including lack of ethics and corruption. However, the degree of regulation may have increased manifold in this century. Political factors affect businesses in many more ways too. Political stability in a market results in economic stability which can be great for businesses. On the other hand, political chaos causes economic instability and can lead to disruption of supply chain and sales and distribution network. Moreover, trade relationships between various nations also affect stability of the business environment. The recent trade wars between US and China re affecting their business relationships and in turn the businesses based in these two nations. Starbucks is a global brand that operates across the world in 75 nations. While its main markets are the Americas, it has also maintained an impressive presence in China and Asia Pacific. Americas are generally a stable market. Asia Pacific has also remained politically stable in the recent years. A stable political environment proves profitable for Starbucks.

ECONOMIC:

Economic factors are among the most important in the context of business. It is because they affect businesses directly whether big or small.  The world has been through a recession some years ago. The period of recession was a very difficult period for the international businesses. Employment level had tumbled globally leading to fall in people’s income and level of spending. This was having an adverse impact on businesses and their income. Large businesses were forced to cut down costs. Most large companies were engaged in lay offs to reduce their labor costs. Since employment was down middle class customers were spending less on lifestyle and premium priced items. All these factors had a negative impact on the income of international businesses. Now the world economy is back on track and people’s income level as well as employment have risen. This has led to higher spending as people have higher dispensable income. the post recessionary period is also remarkable for the rise of the middle class. Competition and premium pricing of Starbucks are also some important factors affecting the demand of its products. Since Starbucks only sells premium quality products, its customer base is also limited to the higher end segment of the market. This can have an adverse impact on sales of the brand in the times of economic fluctuations. Apart from that currency fluctuations and a stronger dollar also affect businesses like Starbucks adversely.

SOCIAL:

Social factors have also acquired  larger importance in the context of business. Sociocultural factors are affecting various dimension of business including their sales and marketing as well as supply chain management. Having a socially responsible image is important for any brand. A socially responsible image leads to higher customer loyalty and popularity. Changing social trends affect businesses and they have to alter their product and marketing strategies accordingly. The 21st century has seen major sociocultural changes happening. After globalization, now brands are focusing more on executing localized strategies to win their customers and to grow their business. Localized branding and marketing strategies can help you grow popular with local audience. Companies are also focusing on local sourcing for improving the condition of employment in local economies. In this way socio cultural factors are now an integral part of business sales and marketing strategies of international businesses including Starbucks.

TECHNOLOGICAL:

Technology is now a central factor affecting business and apart from being a source of competitive advantage it is also a major differentiator industry wide. This is true about nearly every industry including the coffee industry. Starbucks invests heavily in Information Technology. It uses IT to facilitate work processes at several points including point-of-sale, web and mobile platforms, including online and mobile payment systems and rewards programs, and for administrative functions, including human resources, payroll, accounting and internal and external communications. IT and digital technology have become central to the functioning of businesses efficiently. Starbucks also uses digital technology like its website, blog and the social media for marketing and brand awareness.  The brand also uses other forms of technology down its manufacturing and supply chain. So, overall technology plays a critical role in the functioning of Starbucks’ day to day business.

ENVIRONMENTAL:

Environmental factors are now increasingly central to business as government and private agencies are watching the environmental impact if businesses globally. Starbucks is highly cautious about doing business sustainably and playing an accountable role in the society and community.  It also invest heavily n environmental protection and community empowerment. Apart from recycling and waste reduction, the brand has also focused on energy conservation in its system for managing its environmental footprint. It has continued to focus upon reducing the amount of water it uses by continuously evaluating its store design, equipment and operations. It is making its stores as green as possible by using responsible building materials as well as energy efficient design.  It also organizes regular programs on environmental awareness and trains its employees in community service. Starbucks does its business ethically and has retained its focus on environmental protection.

LEGAL:

Law has taken a stricter position around the globe with respect to international businesses in the recent years. The level of oversight and control of businesses by legal agencies globally has increased a lot. Several of international businesses have got to be at the receiving end in the recent years. The level of fines for violations have also increased and the stance taken by EU is particularly ver strict. In case of Starbucks too, it focuses a lot on compliance in all its markets. Compliance and ethics are important issues and therefore the company trains its employs well in both the areas. Compliance issues can pose major challenges before enterprises in today’s world. Apart from higher operational costs, it can also lead to reduced profitability. In case of violations, fines can be very high and from labor to environment there are several laws in each area to be complied with. Overall, the role and importance of legal factors in the business industry has grown manifold. Law is keenly observing businesses around the globe to ensure they remain engaged in ethical practices. However, in several areas it can become a challenge to business growth and expansion.

#FIVE FORCES ANALYSIS:

BARGAINING POWER OF SUPPLIERS:

The bargaining power of suppliers in case of Starbucks is low. the brand itself works to ensure that its su[pliers get  nothing less than fair value. However, while these suppliers are scattered worldwide, they are also much smaller in size and strength. Starbucks is a large brand with financial clout. Moreover, Starbucks ensures ethical sourcing and selects its suppliers carefully. All these factors lead to lower bargaining power for Starbucks suppliers.

BARGAINING POWER OF CUSTOMERS:

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The  bargaining power of customers in the twenty first century has grown much higher as compared to earlier. It is because of several factors. Apart from rising competition, the rise of digital technology is also responsible for these changes. Today, the level of competition in the food and beverages industry is very high which has led to higher control in the hands of the customers. Moreover, the premium pricing strategy of Starbucks also makes every customer valuable. It is also why the brand focuses on both premium quality and premium customer service. It has implemented several customer retention programs too.

THREAT OF SUBSTITUTE PRODUCTS:

The threat from substitute products for Starbucks is moderately high. It is because of the significant competition in the coffee industry. The food and beverages industry is marked by intense competition. There are several rands offering matching products. However, the threat gets moderated by the premium quality of Starbucks products and the extraordinary customer service that the brand offers. Overall, the threat from substitute products in case of Starbucks remains moderately high.

THREAT OF NEW ENTRANTS:

The threat of new  entrants in the coffee industry is moderate. It is because of the low barriers to entry.  A brand can start its business locally with a small financial investment. Starting a local brand does not require major investments in product, processes or marketing and human resources. However, to grow into an international brand requires considerable investment as well as focus on quality and human resources. All these factors make it difficult for new brands to rise in the coffee industry which is already marked by heavy competition. The overall threat from new players remains moderate.

COMPETITIVE RIVALRY in THE INDUSTRY:

Competitive rivalry in the coffee industry has grown moderately high. The number of brands that  roast and/or sell coffee has grown.  In this competitive market some of the factor that  moderate the competitive pressure for Starbucks are brand image,  premium quality, and customer service. Overall, the competitive threat for Starbucks is moderately high. It is the largest coffeehouse chain of the world based on the number of stores. Its global presence also moderates the competitive threat before the brand.

#VALUE CHAIN ANALYSIS:

Value chain covers the entire range of activities that  add value to the product or service from product conception to product delivery, marketing and after sales service. The concept of Value chain was given by Harvard Professor Michael E Porter. All the activities down the value chain add value to the product and a value chain analysis helps get a better glimpse of how each step can be better optimized to add value to the final product.  Optimization of the value chain helps control costs  and bring higher efficiency. It can also help generate unique sources of competitive advantage.  This is a value chain analysis of  Starbucks Corporation.

PRIMARY ACTIVITIES:

Inbound logistics:

Starbucks sources from suppliers all around the world and the brand has managed excellent relationships with its suppliers to ensure continuous supply of high quality raw material.  The company  undertook some major reorganization in 2008 to optimize its supply chain and manage its logistics better. It created  a single global logistics system for its global supply chain. the company sources beans from Latin America, Africa and Asia which are brought to US and Europe in ocean containers.  From the ports, these beans are brought to the roasting sites, storage sites and warehouses. Several of its facilities worldwide act as roasting, warehouses and  distribution facilities. Starbucks also uses external logistics and supply chain partners to manage its inbound logistics.

Outbound logistics:

Starbucks has more than 27000 stores worldwide. It ships roasted coffee beans in large amounts regularly  from its warehouses and distribution centers to the retail stores for final sales. Apart from the company owned regional distribution centers, the brad uses third party logistics providers to serve its retail stores. It serves its retail stores through its larger distribution centers or the smaller distribution centers called Central distribution centers.  the largest number of Starbucks distribution centers are located in US. A dedicated fleet of trucks carries products from these central distribution centers carry products regularly to the company retail stores and other retail outlets selling Starbucks branded products.

Operations:

Starbucks is a global brand with operations in 75 countries. The brand has a large number of facilities located globally to carry out its operations including retail stores and supply chain facilities.  The company owns its roasting facilities but it has leased a major part of its warehousing and distribution to external partners. Its headquarters are in Seattle, Washington, United States. The brand has 27,339 retail stores operational across the world (as of October 1, 2017). the locations of some of its major facilities are listed below:

Rancho Cucamonga, —- Manufacturing

Augusta, GA  —– Manufacturing

Auburn, WA — Warehouse and distribution

San Francisco —- Warehouse and distribution

Stratford —– Warehouse and distribution

Samutprakarn, Thailand — Warehouse and distribution

Minden, NV (Carson Valley) —– Roasting and distribution

Kent, WA —- Roasting and distribution

Amsterdam, Netherlands — Roasting and distribution

York, PA —– Roasting, distribution and warehouse

Gaston, SC (Sandy Run) —- Roasting and distribution

Lebanon, TN —- Distribution center

Seattle, WA —- Corporate administrative

Marketing and sales:

Traditionally, Starbucks has not undertaken major marketing activities as most brands do for promotions. It has relied on word of mouth and publicity for marketing. It has also been heavily successful in this area because of its premium product quality, excellent customer service and well designed stores. these stores have always attracted premium customers in large numbers. Apart from that its ethical image has also been a major support for its marketing strategy. However, during the recent years, the level of competition in the industry has grown which has led to Starbucks increasing its spending on advertising and promotions. Compared to the other beverages and coffee brands, its marketing expenses are still limited and hardly touch even half a billion dollars. It sells its products through a  mix of company owned and licensed stores. Apart from that customers can buy its products online as well as a limited range at Walmart, target and other retail stores.

Service:

Starbucks has managed excellent level of customer service. It trains its baristas and employees to serve its customers well and generate highest level of customer satisfaction. Customer service is one of the major priorities of Starbucks which has traditionally been known for managing a customer friendly environment inside its stores.

SUPPORT ACTIVITIES:

HRM:

Human resource management is also an important focus at Starbucks. Apart from hiring and retaining the best talents, it also nurtures a unique culture. It calls its employees partners since they share the brand’s success. As of 2017, the brand had 277,000  employees of which 185,000 were employed in United States alone. It has implemented several training programs and important benefits for higher employee satisfaction. A culture of integrity and inclusion ensures a non discriminatory work environment. Employees are also trained in ethics and compliance.

Infrastructure:

Starbucks has managed a global infrastructure that includes its several manufacturing, roasting and distribution facilities as well as retail stores. Led by Howard Schultz, the company is growing its global presence continuously through growth in the number of stores.

Technology:

Technology has grown increasingly central to the functioning of Starbucks. Apart from the various types of technologies that  the brand uses for roasting and down its supply chain the brand has maintained extensive focus on Information technology. Investment in IT has brought higher efficiency and productivity. Starbucks uses IT at several points including point-of-sale, web and mobile platforms, including online and mobile payment systems and rewards programs, and for administrative functions, including human resources, payroll, accounting and internal and external communications. It is also using digital technology proactively for the purpose of marketing.

Procurement:

Starbucks procures raw material from numerous suppliers across the globe. Its procurement function is also known as Global Sourcing and Supplier relations. However, continuous growth can make it difficult to retain a consistent supply  of high quality raw materials. Therefore, its global sourcing function is continuously on the look out for new suppliers. he company has also formed rules for the selection of suppliers who must be able to meet the quality expectations as well as other standards related to HRM and diversity.

#CORE COMPETENCIES:

Customer loyalty:

Starbucks enjoys very high level of customer loyalty. Some of the factors that have helped it build such high level of loyalty include its premium quality, customer service and an ethical brand image.

Premium quality:

Starbucks’ focus on premium quality is also an important core competency of the brand. It has always sourced the best quality coffee from around the world. the brand sources coffee from best sources and roasts it deeper to bring out the flavour.

Global expansion:

Starbucks is operational across 75 countries. It is also the largest coffeehouse chain based on the number of operational stores.

Human resource management:

Starbucks is an ethical brand that has managed its human resources well. It trains them well in several areas apart from customer service and ethics as well as compliance.

Brand image:

Starbucks has maintained an excellent image as a global coffee brand. It has maintained a premium image which is related to its premium products and service. Apart from that its focus has also been on ethics and community service which has helped it earn a strong image.

#VRIO ANALYSIS:

#BUSINESS STRATEGY:

Premium Quality and Global Expansion:

The central pillar of Starbucks’ business strategy is is premium quality products. It as always brought the best quality coffee to its customers. Its focus on quality has earned it heavy customer loyalty and high level popularity around the globe. A strong brand image has resulted in strong sales and revenue growth.  The brand sources best quality Arabica coffee found at altitudes from around the world. It has also brought  a large portfolio of products that includes coffee, tea and other beverages and snacks.

Starbucks has focused on global expansion for revenue growth. Its  biggest market are the Americas followed by China and the Asia Pacific region. The company is working to expand its market by adding to the number of stores in its developed and fast developing markets. It has also worked on optimizing the mix of company owned and licensed stores.  The current proportion of licensed and company owned stores is 51% and 49%. Total 27,339 Starbucks stores were operational worldwide as of October 2017.

#FINANCIAL ANALYSIS:

Starbucks’ financial performance has continued to grow better year by year. Its revenue has continuously increased over the previous several years. Rising from 14.9 Billion dollars in 2013, its net revenue has reached 22.4 Billion dollars in 2017. From 2016 to 2017, there was a net growth of 5% in the revenues of the brand. Its global comparable store sales also grew by 3%.  US comparable store sales increased by 3% whereas in China there was a growth of 7% in comparable store sales. Net Earnings attributable to Starbucks rose to 2.9 Billion dollars in 2017 from 2.8 Billion dollars the previous year. The company’s GAAP Operating income declined 0.9% to 4.1 Billion dollars compared to the previous year. Non GAAP operating income on the other hand grew by 7.8% to 4.4 Billion dollars. GAAP EPS grew 3.7% versus the prior year to $1.97. Non GAAP EPS grew 11.4% to $2.06 versus the previous year.

#SUGGESTIONS:

• Starbucks must focus on international growth to reduce its dependence on the US markets. For this purpose the brand must focus on growing its range of stores in emerging markets like China, India and Brazil. The rise of the middle class in these economies offers great growth opportunities for the brand and a chance to increase its customer base and market share. Local partnerships will help Starbucks find faster growth in these areas.
• The core product of Starbucks is coffee but the brand must also focus on teas and juices for faster growth. these products also offer great opportunities of sales growth.
• Tastes and preferences of the consumers are changing and people are looking for healthier options. The millennial generation is especially very health conscious. Starbucks must tailor its offerings to suit the health conscious generation’s taste.
• In the US market too, it must try tapping into the rural customer base.
• The brand has kept its investment in marketing and advertising very low. In the last five years since it started spending on advertising and promotions, it limited its advertising expenditure to lower than half a billion. Starbucks must raise its investment in this area to grow its market share and customer base as well as sales and revenue faster.
• It must try to improve customer engagement and loyalty by investing in digital technology and AI. Tailored experiences can help it improve the level of customer experience.
• A large part of its customer segment uses mobile apps for purchases. Starbucks should focus on this area for more growth.

SOURCES:

STARBUCKS ANNUAL REPORT 2017

https://www.starbucks.in/responsibility/environment

https://www.starbucks.in/coffee/ethical-sourcing/coffee-quality

https://www.starbucks.com/careers/find-a-job/manufacturing-and-distribution

https://en.wikipedia.org/wiki/List_of_coffee_companies

https://www.starbucks.com/business/suppliers

Starbucks financial results Q4 and full year 2017

https://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf

https://www.starbucks.com/careers/working-at-starbucks/culture-and-values