Starbucks Case Study 2007

Starbucks Case Study 2007

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Synopsis
In 2003, Starbucks was listed as one of the Fortune 500. Despite the ongoing recession, the company had managed a 31% increase in net revenues for the year. This was reasonable, considering they only spent about 1% of total sales on marketing. All of this, coupled with the fact that they were popular with customers and employees, was a sure recipe for success.
While their domestic figures were rosy, the international operations were losing ground. The once profitable Japanese market was declining, and the European and Middle Eastern ventures failed to gain momentum. Unfortunately, the U.S. market was experiencing saturation and the only way to grow seemed to be the overseas markets. They achieved entry through the use of wholly owned subsidiaries, licensing deals, or joint ventures.
Starbucks did not escape the common practice of adapting and integrating the business to different geographic regions, but they did stick to their guns when it came to their standard product line-up and their no-smoking policy. Surprisingly, these conditions were met with wide acceptance. Analysts felt the real challenge would be in the European marketplace, what with coffeehouses on every corner to compete with. Again, the stores did very well, mainly because of the newer, cleaner environment they provided compared to the older locations of established houses.
Business was good, but it was not without its problems. There was the political upheaval in the Middle East, followed by further tension after then CEO Howard Schultz commented on growing anti-Semitism in the region. Their integrity came under fire when certain Non-Governmental Organizations (NGO's) accused them of purchasing coffee beans under questionable social and economic conditions. These situations, together with difficult economic times globally, meant that Starbucks was likely going to take a hit somewhere. Eventually, they shut down their Israeli operations altogether.
There is speculation that the company was pouring too much capital into its complex system of joint ventures and licensing agreements, and could not get a hold of its operational costs. They decided to source some of their merchandise and disposables to less expensive suppliers as an immediate cost-cutting measure. They also decided to cut back on the number of new stores and shut down unprofitable ones. Starbucks has had to learn the hard way that external forces go far beyond a society's taste in coffee, and that too much growth can have negative effects.

Internal Analysis
Strengths:
· Strong commitment to quality and community
· Popular with their employees

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· Financially secure
· Diverse workforce
· Strong brand recognition

Weaknesses:
· Narrow product line
· Limited market segment
· They only spend 1% of sales revenues on marketing
· Company has grown too quickly
· Stores are built using the same layout and décor, which takes away from the unique experience of visiting various locations
· Limited food offerings

External Analysis (Porter's Points)
Rivalry among existing firms:
Starbucks holds about 45% of the market share in coffee sales, due largely in part to its affiliation with PepsiCo. Domestically, McDonalds, Dunkin' Donuts, and Caribou Coffee are gaining ground with their specialty coffee products, and are major companies with no problem coming up with the capital. Internationally, Starbucks has to contend with older, more established coffee houses. Luckily for Starbucks, they have a highly recognizable brand image and a good position within the market segment.

Threat of new entrants:
As stated previously, Starbucks still has a firm hold on the coffee market despite the rise of some major competitors. They set the standard for the modern coffee house, and many try to emulate their stores' look and feel, but Starbucks still has many well-known beverages. New entrants will tend to be smaller neighborhood startups and kiosks that will appeal to local markets and should pose only a minor threat to Starbucks' loyal customer base. Internationally, coffee businesses can utilize the currently unpopular view of the U.S. and all things American to keep Starbucks from entering certain countries. Discounting anti-American sentiments, entry into the coffee business has few if any real barriers.

Threat of substitutes:
Coffee has a deeply rooted presence in American culture, but in Asia and Europe, tea is consumed as much if not more frequently. As for Starbucks' signature beverages, there is nothing about them that cannot be imitated either by other businesses or home-brewing experts. The truth is, anyone can brew a cup of coffee.

Bargaining power of buyers:
With 45% of the market share and a loyal customer base, Starbucks does well at satisfying its clientele. A sluggish economy, however, can force even the most hardcore coffee lovers to cut costs wherever possible. When people decide to start making coffee at home or going to the local joint to save some money on their favorite beverage, one would think that Starbucks would take notice, but they continue to have the highest priced coffee products on the market. With consumption at all time highs in the U.S., customers are becoming increasingly picky when it comes to their coffees. Starbucks does offer reloadable cards for purchasing products online, which many customers certainly find convenient.

Bargaining power of suppliers
Starbucks purchases their own coffee beans and uses them for their own products, but have been accused in the past of obtaining their beans from non-certifiable sources. They are very much under scrutiny from environmentalists and watchdog groups worldwide, which act to educate and protect the rights of the lower income growers in distant countries. Also, as the market for specialty beans continues to grow, growers will demand higher prices for their harvests.

Finding of fact #1
Starbucks has saturated the U.S. market.
The company's strategy of early saturation as a means of establishing a dominant market share did its job; they now have 45% of the market share for the coffee beverage segment and highly recognizable brand. The only problem with saturation is that it increases the likelihood of cannibalization as demand decreases. Starbucks countered this by thinking internationally, but there is another way to mix it up here at home. The company needs to go small scale in the form of vending machines. Machines with mermaid logos and oak trim can be placed in executive cafeterias and office lobbies, and could be located near existing stores to facilitate rapid servicing and refilling. This could help ease the long lines at the stores built within one block of each other. Vending machines could have global implications as well, in that it would be easier to close down a machine rather than a whole property if the market went sour.

Finding of fact #2
Starbucks does not offer franchise opportunities.
Most of the international business the company does is through joint ventures or licensing agreements. The problem they have with these types of agreements is that they cannot thoroughly contain their costs. If they were to allow franchising opportunities, they could sell the rights and the properties to those who know their particular geographic area best, which would work well in the unpredictable foreign markets. They could take their cue from McDonalds, who lay down the ground rules for operation standards and staffing. If the franchisee cannot abide by rules set forth by Starbucks, they lose their designation as a Starbucks location and are responsible for the real estate and its contents. Franchising would keep administrative costs down because they wouldn't need to keep constant tabs on changes to the numerous licensing agreements.

Finding of Fact #3
Starbucks is losing market share to competitors like McDonalds and Dunkin' Donuts.
According to an article in Drinks Business Review, Starbucks is seeing a drop in traffic through its domestic operations, despite a 35% increase in reported profits [2]. The article goes on to mention that McDonalds is investing in higher quality beans, and that Dunkin' Donuts is just getting better at making coffee [2]. The biggest pitfall when being compared to these two competitors is that McDonalds and Dunkin's Donuts both have extensive food offerings; something that Starbucks hasn't come close to equaling. Consumers generally attach McDonalds and Dunkin' Donuts to the need for food, while thinking of only coffee from Starbucks. Now, the public is aware of McDonalds' and Dunkin' Donuts' increasing ability to pour affordable, and tasty, specialty coffee drinks.
Starbucks needs to step up the food portion of the business. Everyone knows they sell coffee, so now they need to market themselves as the place to eat breakfast and lunch. They will need to spend more than the meager 1% of its sales revenues on marketing, poking a bit of fun at themselves in the process.

Sources:
1. Wheelen, Thomas L. and Hunger David J. "Strategic Management and Business Policy."Pearson Prentice Hall. 11th edition. 2008

2. McRorie, Vicky. "Starbucks: caffeine high reaches new low." Drinks Business Review 16 Nov 2007 19 Nov 2007 .
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