Business Model of Starbucks

Starbucks is the premier coffee brand of the world that was formed in 1985. It is the most recognized and respected brand in the coffee industry. However, the company has achieved its strong reputation and market-leading position in the industry without investing a fortune in marketing. It proves the focus of the company on quality and superior customer experience. Today, it sells its products in 81 markets and continues to focus upon disciplined expansion to grow its market share and customer base. While the US is the core market of Starbucks, the company continues to grow its presence in newer higher growth markets like China. Starbucks entered the Chinese market in 1999 and since then the company has expanded its presence in China to 180 cities where it operates around 4,300 stores.

Apart from its flagship Starbucks brand, the company also sells its products and services under the following brands: Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve, and Princi. The company purchases and roasts high-quality coffees that it sells, along with handcrafted coffee, tea, and other beverages and a variety of high-quality food items through its company-operated stores. In 2019, the total number of Starbucks stores reached 31,256 of which 15,834 or around 51% were company-operated stores and the rest were licensed stores.

Reportable Business Segments of Starbucks:

The company has divided its business into three reportable segments that include the Americas, International, and channel development. The Americas segment is the largest reportable segment of all the three reportable segments that accounts for the largest part of the company’s revenue. This segment includes the operations of the company in the US, Canada, and Latin America. The Americas segment accounted for around 69% of the company’s revenue in 2019, followed by International 23% and Channel development 8%. In 2019, the Americas segment generated $18,259 million in net revenue compared to $16,748.6 million in 2018. The international segment generated $6.2 billion in net revenue in 2019 compared to $5.6 billion in 2018.  The channel development segment generated around $2 billion in revenue in 2019 compared to $2.3 billion in 2018. The total net revenue of the company grew to $26.5 billion in 2019 compared to $24.7 billion in 2018.  Starbucks’ Americas and international segments both include company-operated and licensed stores. The Americas segment is the most mature business segment of Starbucks which has achieved a significant scale.

Company operated versus licensed stores:

 The Starbucks business model includes both company-operated and licensed stores. The mix of Starbucks company-operated and licensed stores in a market depends on several factors including the availability of attractive locations. Apart from that the complexity of the local market environment, its profitability as well as the size of the market for Starbucks, and the ability of the company to leverage its local infrastructure within a geographic region. 

How does the company operated store model of Starbucks operate?

The company operated stores are the biggest source of revenue for Starbucks. In 2019, the company-operated stores of Starbucks generated around 81% of its revenue. The company operated stores of Starbucks are generally located in areas that see higher traffic and highly visible locations. The global retail strategy of Starbucks focuses on disciplined growth by opening retail stores selectively in new and existing markets. Apart from that the company also focuses on growing sales inside its existing stores. The number of total company-operated stores of Starbucks in 2019 was 15,834, out of which 9,974 were in the Americas segment and 5,860 in the International segment. The company has been able to locate its stores strategically by varying the size and format of stores according to locations.  Some of the most common location types where these stores are located include downtown and suburban retail centers, office buildings, university campuses, and in select rural and off-highway locations.

The company is continuously expanding its stores and particularly the drive-thru and alternative formats. The Drive-Thru formats of Starbucks stores provide a higher degree of convenience and access. The alternative store formats however are focused on providing an elevated Starbucks experience for the customers. The company has divided the products sold in its company-operated stores into four categories that include beverages,  food, packaged and single-serve coffees, teas, and other products. Beverages and food are the largest two segments of products sold inside the Starbucks company-operated stores. In 2019 and 2018, beverages accounted for 74% of the retail sales of the company, and Food accounted for 20%. The other two segments accounted for 1% and 5% of the retail sales of the coffee brand respectively.

How does the licensed store model of Starbucks operate?

The licensed stores constituted around 49% of the total Starbucks stores in 2019. They accounted for around 11% of the net revenue of the company in fiscal 2019. While the licensed stores generally have a lower gross margin, they offer a higher operating margin as compared to the company-operated stores. Under its licensed store operations model, the company receives a margin on branded products and supplies that it sells to its licensed operators apart from royalty on retail sales. The licensed operators bear the operating costs and capital investments which more than offsets then lower revenues that the company received from its licensed stores. As a part of its licensed store arrangement, the company leverages the expertise of its local partners and also shares its operating and store development experience. Sometimes, the only access to the desired retail space is possible through licensed partners. Most of them are experienced retailers with an in-depth market knowledge and access. As a part of the licensed arrangement, the company sells coffee, tea, food, and related products to licensees which they sell to customers. Starbucks, in turn, receives royalties and license fees from the licensees. Apart from that the company also sells certain equipment like coffee brewers and espresso machines to its licensees for use in their operations. However, the employees working for the licensed partners of Starbucks inside the licensed stores are required to follow the same procedures and attend similar training classes as the employees working inside the company-operated stores. The company also operates stores based on the traditional franchising model in some of the international markets.  The financial results of these stores are included with the other licensed stores in the annual report of the company. 

Other Sources of Revenue:

The other revenues of the company are primarily recorded in the channel development segment of the company. It includes the sales of packaged coffee, tea, and ready to drink beverages to customers outside its company-operated and licensed stores. Before Starbucks established the global coffee alliance during the fourth quarter of 2018, its revenues included domestic and international sales of packaged coffee, tea, and ready-to-drink products to grocery, warehouse club, and specialty retail stores and through institutional food-service companies. However, since the establishment of the alliance, its other revenues include product sales to and licensing revenue from Nestlé under this arrangement and the amortization of the up-front prepaid royalty. The company has also entered into collaborative relationships with companies including  PepsiCo, Inc., Anheuser-Busch InBev, Tingyi Holding Corp., Arla Foods, and others. However, their results are excluded from the global coffee alliance. 

How Starbucks sources its raw material?

The company has maintained rigorous quality standards to ensure that the coffee sold inside the Starbucks stores is of the highest quality. The company controls substantially all of the coffee purchasing, roasting, and packaging and the global distribution of coffee used throughout Starbucks operations. The company purchases green coffee beans from various coffee-producing regions throughout the world. After that the company roasts them to its standards for many blends and single origin coffees. The company has managed strong supplier relationships to maintain a continuous supply of good quality coffee. It also operates nine farmer support centers that have agronomists as well as sustainability experts as their staff. These experts work with the coffee farming communities to promote the best practices in coffee production designed to improve coffee quality and yield. The company purchases other products sold inside the stores like tea and ready to drink beverages from several specialty suppliers and usually under long term supply contracts. It purchases food products from national, local, and regional sources. 

Business Performance of Starbucks During 2019

The total net revenues of the company grew by 2019 compared to the previous year. In 2019, the net revenue of Starbucks grew to $26.5 billion compared to $24.7 billion during 2018. Growth in revenue was mainly driven by the growth in revenue across the company-operated stores. Over the past 12 months, the company opened net 947 new stores which drove the growth in incremental revenue apart from a  5% growth in comparable-store sales. Comparable store sales grew mainly due to a 3% increase in average ticket and a 2% increase in comparable transactions. Revenue of the company also grew from licensed stores driving a small increase in overall revenue of around $223 million.

 The consolidated operating income of the company also grew in 2019 compared to the previous year. In 2019, the consolidated operating income of the company increased to $4.1 billion compared to $3.9 billion in 2018. The operating margin of the company however fell compared to the last year falling down to 15.4% in 2019 from 15.7% in 2018. 

Earnings per share of Starbucks decreased in 2019 compared to the previous year. In 2019, the EPS of Starbucks declined to $2.92 compared to $3.24 in 2018. Capital expenditures of the company also declined in 2019 compared to the previous year. In fiscal 2019, the capital expenditures of the company declined to $1.8 billion compared to $2 billion in 2018. However, Starbucks returned $12 billion to shareholders in fiscal 2019 compared to $8.9 billion in fiscal 2018.

Conclusion:

The business model of Starbucks has several sources of competitive advantage. While its business model is outstanding, its core strength is its focus on quality and supply chain management. The company does not invest a lot in marketing but still continues to remain the most recognized and respected brand in the coffee industry. Continued focus upon outstanding quality and customer experience has led to strengthening competitive advantage and growth in revenue. However, its supply chain innovation strategy has helped the brand manage its vast international business empire successfully. As a result the company earns strong word of mouth and has to invest nearly nothing in promotions.

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.