Starbucks is the largest coffee brand in the world. Its revenue has grown steadily over the last five years. The company also undertook some restructuring during recent years to bring its focus back on the core and most profitable businesses. Compared to 2017, its revenue grew by around 10% in 2018. Apart from that, its financial performance during the first three quarters of 2019 has also been impressive. At the end of the third quarter of 2019, the total net revenue of the brand was $19.8 billion compared to $18.4 billion during the same period last year.
| Company | Starbucks Corp. |
| Industry | Coffee Industry |
| CEO | Kevin Johnson. |
| Founded. | 1971 |
| Headquarters. | Seattle |
| Net Revenue. | $24.72 Billion. |
| Net Income. | $4.52 Billion |
| Number of Employees. | 2,91,000 |
| Number of Stores. | 29,324 |
| Main Market. | United States. |
Starbucks is a premium coffee brand led by Howard Schultz. There are several things that the brand is well-known for including premium quality coffee, customer service, and organizational culture. Its continuous focus on product quality and service combined with international expansion has resulted in accelerating growth rate.
The United States is the largest market for Starbucks coffee. It generates the largest part of Starbucks’ revenue and the highest number of Starbucks retail stores are also located in the U.S. Over these years, the brand has smartly managed a global supply chain to ensure the continuous supply of good quality raw materials.
The number of total stores of Starbucks grew higher than 29,300 in 2018 and higher than 30,000 in 2019. Its business model is also a core strength of the brand. Starbucks runs its business through company-operated and licensed stores. The company operated stores generate most of its revenue.
Licensed stores contributed just 11% to the total revenue of the brand in 2018. The company is steadily focusing upon expanding its market share through disciplined global expansion. However, it is selectively adding new stores to its international business, opening new ones only in select areas.
Learn more about Starbucks, its strengths, weaknesses, opportunities, and threats in this SWOT analysis.
Strengths:
Brand Equity:
As the leading coffee brand in the world, Starbucks enjoys very strong brand equity. Its brand image has grown stronger with a consistent focus on product quality and customer service. These are two important strengths of the brand that have helped it build trust and gain brand recognition.
In this way, the brand was able to create a strong image without investing a large fortune in advertising or promotions. Since its foundation, Starbucks did not spend on paid promotions. (At least, this was the case until a few years ago. Compare it with the other leading beverages brands like Coca Cola, Pepsi and other FMCG brands and its marketing expenditure is not even one-tenth of theirs.)
Instead, the entire focus was upon product quality and customer experience. However, it was sufficient to build strong brand recognition through publicity and word of mouth. Good product quality and focus upon sourcing only the best quality raw materials led to higher trust among customers and resulted in steady growth over the last several years for the Starbucks coffee chain.
Growing International presence:
Starbucks’ revenue from overseas markets has grown in 2018. Its revenue from the foreign markets was $5.86 billion in 2017 and grew to $7.3 billion in 2018.
China is the second leading market for Starbucks and the company has invested in growing its footprint faster in the Chinese market in recent years. The company had announced in 2017 to acquire the remaining 50% of its business in East China which was operated through joint ventures with local firms UPEC and PCSC. The acquisition was completed in 2018.
Now, Starbucks’ business in China is run entirely through company-owned stores. This required the company to close down 1,396 licensed stores operational in China in 2017. The total number of company-run stores in the Chinese market has grown to 3,521. The ownership of total 1,477 stores was transferred to Starbucks as a part of the acquisition which includes 1,396 licensed stores operational in 2017, 84 new ones opened in 2018 and 3 that it closed in 2018. The company also opened 528 new company-owned stores in China in 2018 and closed down 24. As of 2018, Starbucks added net 1,981 new stores to its existing 1,540 company-operated stores in China. East China has special strategic importance for Starbucks.
In many other overseas markets, including Japan, Canada, Malaysia and Mexico, the number of Starbucks stores has grown in 2018. The Japanese market has only company-owned stores whose number stood at 1,218 in 2017. In 2018, the company opened 84 new stores and closed down 16. Now, the number of Starbucks stores in Japan stands at 1,286 all of which the company owns. Mexico, on the other hand, has only licensed stores, where the number of stores grew to 708 in 2018 from 632 in 2017 with the opening of 76 new stores. Canada had 1,109 company-owned and 409 licensed ones as of the end of fiscal 2018.
Organizational culture & HRM:-
The organizational culture of Starbucks has remained the center of attraction for several years. Its unique organizational culture whose core focus is customer experience has been acclaimed widely. While customers are at the center of everything that Starbucks does, the company culture is equally unique in terms of employee focus and employee engagement.
Employees at Starbucks receive special customer service training and the company maintains a very cordial environment inside its stores. Moreover, the brand has featured among the top 100 in several Forbes’ lists including ‘World’s Best Employers’ for 2019 and ‘Best Employers for Women’ 2019. It has also been recognized for its efforts to create an inclusive work environment that values diversity and inclusion. It ranks at number 35 in Forbes list of ‘World’s Most Valuable Brands’. Forbes also ranked it 31st in its list of the ‘Best Brands for Women in 2019’.
The organizational culture at Starbucks is one of the most fundamental drivers of organizational productivity and performance. It has built a culture of coffee and respect. However, Starbucks has also been recognized for its focus on ethics and equality. In this way, the culture of Starbucks sets it apart from the huge crowd of beverage brands.
Cultural excellence has been recognized to be a fundamental driver of HR performance in the 21st century. The leadership at Starbucks ensures that the staff remains committed to ethics and equality in all the regions of the world where the company operates.
The number of employees at Starbucks, as of September 2018 was 2,91,000. In the United States, it employed 1,91,000 people and approximately 1,00,000 outside the U.S. The company focuses on employee engagement throughout its global operations. It has created several rewards to maximize worker satisfaction.
Product quality :-
A strong supply chain that spans several regions of the world is also a fundamental strength of Starbucks coffee. Its supply chain plays a central role in maintaining the quality standards. As a coffee brand, Starbucks has always brought the best coffee flavors for its customers to the stores.
Premium product quality is not just a driver of revenue but also a part of the company’s positioning strategy. It has also helped the brand earn a distinct place for itself in the market and far above all the competitors. Strong commitment to product quality has turned Starbucks into the world’s most renowned premium coffee brand.
To maintain its quality standards and offer its customers the best coffee in the world, Starbucks sources from select suppliers that produce the best quality Arabica coffee. The company has adopted C.A.F.E. practices which is an extensive checklist to determine the right suppliers and the right produce. It is committed to sourcing 100% of its coffee ethically.
The company purchased more than 600 million pounds of green Arabica Coffee in 2016, 99% of which had passed the CAFE Practices checklist. The brand is also investing in policies and practices that empower the community of coffee growing farmers including its own suppliers located around the world. By forming long term and strong relationships with its suppliers, the company has been able to ensure continuous supply of good quality coffee beans.
Business model :-
Starbucks has a strong business model which is as profitable as it is stable. In the recent years, the brand has also undertaken some restructuring and made changes that would help it focus on its core and most profitable offerings.
At the core of its business model is a premium coffee experience and a distinct culture that makes Starbucks and its business unique. This business model has helped the coffee brand acquire faster growth.
With time, customer trends have changed and to maintain the profitability of its business, the company has focused on its core and most profitable business segments. For this purpose, it has done a lot of restructuring and optimization of its store mix. In some leading geographic markets, its business is now run fully through company-owned stores and in others only through licensed or through a mix of both. This allows Starbucks greater control on its business and profitability.
The business of Starbucks is divided into five reportable segments including the three leading geographical segments – Americas, China/Asia Pacific (CAP) and EMEA (Europe, Middle East & Africa). Americas are the largest operating segment on the basis of revenue followed by CAP. The other two reportable segments include channel development and corporate and others. Revenue distribution for 2018 was as follows:
- Americas (68%),
- CAP (18%),
- EMEA (4%),
- Channel Development (9%) and
- Corporate and Other (1%).
Strong financial performance:-
The financial performance of Starbucks has steadily improved over the last several years.
The net revenue of the brand rose by more than 2 billion from fiscal 2017 to fiscal 2018. Total net revenue for 2018 grew to $24.72 billion from $22.4 billion in 2017.
In 2018, net earnings attributable to Starbucks reached $4.5 billion or 18.3% of the net revenue of the brand, rising from $2.9 billion in 2017 or 12.9% of the net revenue of the company.
Earnings per share grew to $3.24 in 2018 from $1.97 in 2017.
The bottom line of Starbucks coffee is strong and there are several factors behind it. Its business model, international growth and quality as well as HRM, all have helped Starbucks sustain its growth momentum.
Net Revenues of Starbucks grew from both its domestic and overseas markets during 2018.
Revenue from overseas markets grew driven mainly by growth in the Chinese market.
U.S. revenue of Starbucks also rose to $ 17,409.4 million compared to $16,527.1 million in 2017.
Revenue from the foreign markets grew to $7310.1 million in 2018 from $5,859.7 million in 2017.
Overall, the brand also saw its net sales growing for all product categories excluding packaged & single-serve coffees and teas.
Well Managed Manufacturing distribution and supply chain:
Well-managed manufacturing and distribution chains are also among the leading strengths of the brand which sources from suppliers located in various corners of the world. The company has 14 leading manufacturing, roasting, warehousing and distribution plants. Apart from these, the company has leased spaces in various corners of the world for warehousing and distribution.
Starbucks has also partnered with other leading brands for sales, marketing and distribution of its products including Nestle and Pepsi. Pepsi has been a partner since 2015 and in 2018, Starbucks formed the Global Coffee Alliance with Nestle.
Weaknesses:-
Dependence on the U.S. market :-
The U.S. market is the core market for Starbucks coffee. It accounted for more than 70% of the company’s revenue in 2018. While Starbucks’ net sales are growing from overseas markets, still the brand depends heavily on the U.S. segment.
To reduce its dependence upon the U.S., the company would need to achieve enormous growth in the Asian markets and specifically China.
The number of Starbucks stores is also the highest in the U.S. As of the end fiscal 2018, there were 8,575 total company-operated stores in the United States and 6,031 licensed stores.
On the one hand, it is good for the bottom line, since the U.S. is also the largest market for coffee brands, on the other economic fluctuations and other changes in this market could have a severe impact on the revenues and profit margins.
Operational expenses:-
Starbucks is committed to quality. However, this has also resulted in higher operational expenses for Starbucks.
Total operating expenses of Starbucks grew to $21.14 billion in 2018 or 85.5% of total net revenues for the year.
In a single year, the operating expenses of the brand have grown by around $2.5 billion whereas revenue grew by only around $2.3 billion. 2017 operating expenses of Starbucks were $18.64 billion.
Cost of sales including occupancy costs as well as store operating expenses increased significantly for Starbucks in 2018 compared to the previous year. The growth in operating expenses was driven to a large extent by the opening of more company-owned stores in the Chinese market as well as higher restructuring and impairment costs. Growth in other expenses including employee salaries and benefits also caused growth in operating expenses.
Operating margin, as well as consolidated operating income of Starbucks, were also lower in 2018 compared to 2017. Operating margin declined to 15.7% in 2018 from 18.5% in 2017. The consolidated operating income of Starbucks also came down to $3.9 billion in 2018 from $4.1 billion in 2017.
Premium pricing:-
Starbucks sells only premium products including beverages and snacks. The premium pricing strategy of Starbucks, on the one hand, is good for profit margins, on the other, it limits the customer base to only the higher end of the market. Starbucks is now focusing on the Asian market. However, growing its customer base faster would have been easier, if the brand had used a more competitive pricing strategy.
The situation can become all the more challenging in times of economic fluctuation. However, maintaining its premium pricing is important to maintain the premium image of the brand. Increased promotional expenses and operating expenses have shrunk its profit margins in 2018.
Faster growth in the Asian markets requires prices to be more competitive. Starbucks sources the best quality Arabica beans from suppliers in various corners of the world. Store operating expenses of the brand are also high because of the premium customer experience it offers.
Starbucks could add more customers from the middle class by following a competitive pricing strategy. There are other related challenges too which originate from higher prices and affect the bottom line including taxes, employee expenses and maintaining a premium brand image.
Opportunities:-
International expansion : –
The U.S. market still holds a lot of potential. In recent years, the coffee industry has enjoyed an impressive growth rate in America. As per research by Allegra, the U.S. coffee market has grown to a total valuation of $45.4 billion in 2018 and the number of total coffee outlets in the U.S. to 35,616. Industry leaders are positive about growth in the U.S. and expect the number of outlets to grow to 40,800 by 2023 with a 5 years CAGR growth rate of 2.8%.
Starbucks holds the lion’s share in the U.S. coffee market at 40.1% followed by Dunkin Donuts and Tim Hortons. Together, the big three hold 68.1% of the total branded coffee market share. However, while the U.S. is an excellent market for coffee brands, opportunities also abound outside U.S. International expansion can bring much faster growth for Starbucks.
China, as well as several other Asian markets too, have a large base of customers. Starbucks has maintained a strong presence in major markets and is investing aggressively in growing its number of stores while also retaining its focus on core products. Several regions in the Asia Pacific have seen impressive economic growth in the recent period and this can be an opportunity for leading coffee and beverage brands including Starbucks, Dunkin Donuts and Tim Hortons.
Digital marketing : –
Traditionally, Starbucks has not relied upon paid marketing tactics to grow market share and customer base. If it was not for the increased competition in the market and other challenges that have grown with time, the brand’s investment in paid advertising would have remained around zero. In the recent years, it has started investing in advertising but its total advertising costs are a very small percentage of its total operating expenses. Advertising expenses fell in 2018 compared to the previous year, coming down to $260.3 million from $282.6 million in 2017.
The world of digital marketing has expanded a lot over the past several years. For fashion, food and beverage brands there are several low-cost opportunities including social media promotions and blogging as well as video advertising. Social media accounts are one of the central engagement channels for coffee and beverage brands. Starbucks uses these channels to grow follower engagement and for promotions as well as seasonal campaigns.
However, for deeper engagement, it might need to learn from fashion and entertainment brands and the use of microsites for attracting new customers and familiarizing them with the company culture as well as the product range. The company has a nice looking blog that gives the followers a regular glimpse of its culture, supply chain and product mix as well as ongoing developments in other areas including human resource management and supplier relationships.
Partnerships with other brands:-
Starbucks partnered Pepsico in 2015 for the sales and marketing of a limited range of its products in Latin America. The two entered into an agreement for the sales, marketing and distribution of “Starbucks ready-to-drink (RTD) coffee and energy beverages including Starbucks Frappuccino chilled coffee drinks, Starbucks Double Shot Espresso and Cream, and Starbucks Refreshers beverages in Latin American market”.
In 2018, Starbucks has entered into an agreement with Nestle for the sales and marketing of its consumer packaged goods (“CPG”) and foodservice products. Starbucks also received an upfront prepaid royalty payment of approximately $7 billion. Such partnerships have helped Starbucks extend its presence throughout the globe. More such partnerships will help the company grow its sales and revenue as well as marketing reach.
Threats : –
Operational costs:-
Growing operational costs are one of the leading challenges before the company. Due to the growth in operating expenses, operating income of Starbucks is reduced. In 2018, the total operating expenses of Starbucks grew to $21,137.4 million and operating income came down to $ 3,883.3 million. Operating expenses were higher in 2018 and operating income lower as compared to 2017.
In 2017, operating expenses were $18,643.5 million and operating income $ 4,134.7 million in 2017. In 2019 also the operating expenses of Starbucks have risen and operating income remained flat. Total operating expenses for the first three quarters has grown to $16,973.1 million compared to $15,702.5 million in the same period last year. The operating margin of the brand also dropped in 2018 versus the previous year.
Regulational barriers:-
Regulation barriers have grown larger in the food and beverage industry over the last several years. This has led to a need to focus on compliance and quality in all the markets where Starbucks operates. On the one hand, these barriers add to the operational costs of the brands, on the other, they can also reduce the growth rate. Higher costs of compliance and higher operational costs reduce profit margins. Tight regulation often becomes a barrier to fast growth.
Customer trends:-
Changing customer trends can shift demand patterns. Last year, Starbucks made several changes to its product mix. This was in response to changing consumer trends. People want more health-friendly products. Changes in the beverage mix also affected the company’s operating margins in 2018. Starbucks needs to remain ready for such changes to maintain its market-leading position and retain its customer base. However, a large group of experts works at Starbucks to take care of new product development. The company regularly introduces new flavors to delight its customers.
Conclusion:
Starbucks has acquired fast growth in recent years through planned expansion and partnerships. In 2018, it acquired its East China business and converted the entire Chinese business into a company-operated model. It has also continued to optimize its mix of company-owned and licensed stores. In some of its markets, the brand has also adopted a wholly licensed model. Operating expenses of Starbucks have grown but so have its revenue and number of stores worldwide. Its partnership with Nestle and Pepsico have helped it expand its marketing and distribution reach. The U.S. coffee market has experienced impressive growth during past five years. It is the largest market of Starbucks products. However, Starbucks is also focusing on the Asian markets which can be a strong source of revenue in the coming years. Digital marketing and customer engagement can also help Starbucks which has traditionally refrained from investing in marketing. There are challenges ahead for the brand. However, it can easily sustain with the help of a strong supply chain and distribution network.
Sources:
Abhijeet Pratap is a passionate blogger with seven years of experience in the field. Specializing in business management and digital marketing, he has developed a keen understanding of the intricacies of these domains. Through his insightful articles, Abhijeet shares his knowledge, helping readers navigate the complexities of modern business landscapes and digital strategies.