Starbucks Strategic Analysis

#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:


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:

Starbucks 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 Information 2013-2017

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 millenial 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

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

http://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

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.