Starbucks (NASDAQ: SBUX) is the largest coffeehouse chain globally, with 32,660 stores operational at the end of fiscal 2020. The company is known for premium quality coffee and a focus on customer service. Apart from that, it has also been recognized for its ethical business practices and excellent organizational culture. The company has made several acquisitions in its history to cement its position in the industry.
Starbucks, instead of only selling coffee, focused on the entire experience to distinguish its brand. Starbucks stores are designed to offer customers a superior coffee experience. With time, the company has continued to expand its business globally. Its position in China has continued to grow stronger, which has emerged as its second-largest market after the United States.
However, 2020 proved challenging for the company as the pandemic wreaked havoc worldwide and negatively affected sales and revenues. A significant number of Starbucks stores worldwide, including company-owned and licensed stores, remained closed during the pandemic causing the net revenues to decline by 11%.
The pandemic has brought a new set of challenges before the coffee brand. Things have started improving in 2021, but the challenge is not fully over yet. Digital technology has helped the QSR industry during the pandemic, and many of them were able to survive the blow without much difficulty and experienced growth in sales. However, there are some complexities associated with the operating model of Starbucks. Due to these complexities, the situation became more difficult for Starbucks.
We will analyze Starbucks’ leading strengths and weaknesses in this post, apart from its leading opportunities and threats.
|Company Name||Starbucks (NASDAQ: SBUX)|
|Headquarters||Seattle, Washington, United States|
|Net Revenues (2020)||$23.5 Billion|
|Net Income (2020)||$928.3 million|
Among the leading strengths of Starbucks is its brand image. The company has maintained a strong image in the global market. It has differentiated its brand from its rivals by focusing on product quality, innovative marketing, and customer service. A stronger brand image has resulted in higher sales and revenues, lower marketing expenses, and stronger customer loyalty for Starbucks.
Market Leader in the United States:
Starbucks is the leader in the United States market. Based on the number of stores, its market share was 40% in 2020, followed by Dunkin Donuts. The United States is also the largest market for Starbucks products. It accounted for around 72% of the company’s net revenues in 2020.
Extensive international presence:
Starbucks has expanded internationally for business growth. The total number of Starbucks stores in 2020 was 32,660. Its number of stores operational in the Americas was 18,354, while those operational internationally were 14,306. China is its leading international market, followed by Japan and Canada.
Supply chain management:
Starbucks sources its coffee from various locations in the world. The company has managed a strong supply chain and sources premium quality beans from farmers across the world. The company also supports its suppliers through training and education. The company has established a network of more than 16,000 suppliers.
HRM and organizational culture:
Starbucks has maintained a unique organizational culture that is focused on employee development and growth. It has established a culture that drives performance but is equally human in approach. The company also focused on establishing a culture of inclusion and diversity.
Innovative marketing strategy:
Starbucks has not relied on the general promotional techniques most brands in the QSR industry use. It has focused on creating a unique brand and building growth through customer satisfaction. Rather than marketing heavily, Starbucks focuses on maintaining the quality of its products and level of customer service.
In recent years, the company has increased its use of digital channels for promotions and customer engagement. The company is using social media to strengthen customer relationships. Traditionally, the company has not spent much on advertising and promotions. However, in recent years, it has started devoting a small budget to marketing, which is still considerably smaller than beverage brands like Coca-Cola or Pepsi.
Product quality is an important driver of sales performance and customer loyalty in the QSR and beverages industries. Since its beginning, Starbucks did not depend on marketing to grow sales and revenues. However, compared to rivals like Dunkin Donuts, it was able to acquire much faster growth. The reason was its focus on product quality and customer service. Higher customer satisfaction led to superior word of mouth and greater consumer loyalty. The company has maintained a consistent focus on product quality to maintain its market leadership and worldwide trust.
Starbucks is a premium coffee brand that sells only premium coffee products. However, its main target market is affluent urban buyers. This limits the market potential of the brand. If the company managed to introduce a large range of competitively priced products, it could grow its customer base faster across the world in all its markets.
Pandemic’s impact on operating model:
The pandemic had a severe negative impact on the business of Starbucks. The company experienced a strong decline in sales and revenues. While several leading QSR brands survived the impact of the pandemic more easily compared to Starbucks and were able to grow sales, Starbucks had difficulty managing sales during the pandemic. Nobody wants lukewarm coffee, and so online delivery of Coffee is rather a complex course of action. While sales declined by 11%, the operating margin of the company also dipped. According to its annual report, its operating margin for 2020 was only 6.6% compared to 15.4% in 2019.
Availability of lower-priced substitutes:
The availability of lower-priced substitutes for the premium coffee products of Starbucks has grown in the market. Apart from some global brands like McCafe by McDonald’s and Dunkin Donuts, other local coffee brands compete with Starbucks. Due to the availability of substitutes at highly competitive prices, customers can gravitate towards the other brands. For example, McCafe also offers a nice assortment of cold and hot coffee products that compare with Starbucks in terms of quality. Due to these substitutes, the pressure related to maintaining consumer loyalty is higher on Starbucks.
While it may be difficult for a brand like Starbucks to diversify very far from its core products, the company can still broaden its product portfolio, which it has tried to in recent years. The company has added snacks and other products to its product portfolio. Diversifying its product portfolio can help the company attract and retain more customers.
Business growth through partnerships and acquisitions:
Starbucks can also grow its business through partnerships and acquisitions. The business can partner with other brands for marketing and sales. Some years ago, the company partnered with Spotify. The digital co-branding strategy proved to be a win-win arrangement for both brands. Spotify has also cemented its position in the industry through the acquisition of smaller brands.
Digital sales and marketing:
The focus on digital has grown with the pandemic. While the company has already taken many steps in the past in this direction, it seems Starbucks needs to further adapt its operating model to boost digital sales. Digital marketing will remain a critical driver of sales in the future and therefore requires higher focus by the brand.
Starbucks has established itself as a premium coffee brand, and therefore, it might be difficult for the brand to reduce prices since it can hurt the brand image. However, the company might expand its customer base if it can penetrate the middle-class consumer base in various countries. Starbucks can also launch another brand that offers products at more competitive prices.
Focus on developing markets:
The developing markets offer a significant opportunity before Starbucks. International businesses, including fast food and beverages brands, are increasingly focusing on the developing markets and growing their presence in these markets to increase their profitability. Starbucks can also invest in emerging markets to grow its market share faster.
The competitive pressure on Starbucks has kept increasing with time. There are several coffee brands in the United States, including McCafe, Dunkin Donuts, Caribou Coffee, and more. With increased competition, the company also has to focus more on promotions and customer retention.
Pandemic and the resulting recession:
The recession that followed the pandemic caused people to spend less on premium and luxury products. Periods that see higher unemployment and lower economic growth drive lower consumer spending. Starbucks also experienced a decline in sales. The impact of the pandemic may remain there for the next few years.
Rising costs of raw material:
The costs of raw materials have continued to grow every year. Apart from coffee beans and tea, there are more products that Starbucks sources from its suppliers. The company has not been able to pass on all the costs to the consumers resulting in higher pressure on its profit margins.