INTRODUCTION The focus for the strategic management will cater to Starbucks Corporation in engaging to appropriate information and research ways as the corporation had began in the year 1971 when the academics English teacher , history teacher and writer opened a store called Starbucks Coffee, Tea and Spice in the touristy Pikes Place Market in Seattle. Thus, there is a need to understand the market and industry processes of Starbucks and must be able to integrate valid and reliable SWOT analysis so as to determine future strategies for business development and growth in the global market.
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INTRODUCTION
The focus for the strategic management will cater to Starbucks Corporation in engaging
to appropriate information and research ways as the corporation had began in the year
1971 when the academics English teacher , history teacher and writer opened a store
called Starbucks Coffee, Tea and Spice in the touristy Pikes Place Market in Seattle.
Thus, there is a need to understand the market and industry processes of Starbucks
and must be able to integrate valid and reliable SWOT analysis so as to determine
future strategies for business development and growth in the global market.
SWOT ANALYSIS
Starbucks Corporation is a specialty coffee retailer, producing and selling a wide variety
of hot and cold beverages, as well as pastries and confections, through 8500 coffee
shops across 32 countries worldwide. The company recorded an increase in revenues
and profits. It faces the threat of reduction in margins due to rising dairy costs.
Strengths
Global presence
Starbucks has a widespread global presence. The company operates about 8500
retail store locations, the majority of which are company owned and operated across 32
countries worldwide. The company’s widespread presence provides it with widespread
brand recognition and a strong customer base.
A disciplined innovator
Starbucks is a disciplined innovator. The company effectively manages its innovation
time line generating consistency in same store sales. In fiscal 2002, the company
introduced new Frappuccino Blended Beverages, and in 2003, the "Iced Shaken"
refreshments product line was launched. In 2004, it introduced the new Frappuccino
Light blended coffee. Starbucks’ ability to roll out new products relatively quickly is a
considerable competitive advantage for the company.
Increase in revenues and profits
The company recorded revenues of $5294.2 million during the fiscal year ended
September 2004, an increase of 29.9% over 2003. The company’s revenues grew at a
compounded annual growth rate of 25% from fiscal 2000 and fiscal 2004. Furthermore,
the operating profit of the company during fiscal 2004 was $610 million, an increase of
43.7% over fiscal 2003. Its net earnings also increased by 46% in fiscal 2004. This
significant rise in revenues and profits provides the company with a strong financial
base and enables it to undertake new business ventures.
Clustering of company units
With the continued growth of the coffee market, the company has looked to expand its
business, including those areas where it has an established presence. Working on the
basis that a key driver of business is the convenience of the company’s outlet location,
Starbucks has targeted clustering its units so as to dominate particular areas. The
financial reward derived from this practice has been found to be considerable, as new
outlets have not been found to eat into the business of existing outlets. A continued
strategy of unit clustering, and a focus on stores that have convenient access for
pedestrians and drivers, represents further opportunity for Starbucks to capture an
increasing share of the coffee market.
Source: (January 2005). :
Weaknesses
Reliance on US market
Starbucks’, headquartered in Seattle, derives approximately 85% of its revenue from its
domestic US market. Given the company is an international brand with wide ranging
operations, it should be looking to generate a greater proportion of revenues from
outside the US. Such is Starbucks’ reliance on this market, the company entire
performance will be materially affected should the company’s US unit under-perform, as
a result of economic conditions or increased levels of competition.
Reliance on beverage innovation
An important long-term risk to the company’s stock is a lower valuation caused by a
slowdown in US sale store growth. Starbucks’ store sales growth has been largely
driven by beverage innovation, but there are questions over how long this can last.
Diminishing return from beverage innovation, one of the company’s competitive
strengths, would have a significant adverse effect on the company’s performance.
Lower revenues and income per employee
The company generates lower revenues and income per employee as compared to the
industry average. Its revenue per employee was $71,544 during fiscal 2004, as
compared to the industry average of $110,841. Furthermore its net income per
employee is $5294 as compared to the industry average of $9500. The company’s
lower returns per employee as compared to the industry average reflects adversely
upon its employee efficiency.
Lower return on equity than peers
The company’s five year average returns on equity have been lower than the industry
average. Its five year average return on equity was 13.65% as compared to the industry
average of 15.09%. The company would need to effectively manage its finances to
ensure that returns are at par or higher than industry average.
Problems in some international operations
The company has been facing certain difficulties in some of its international operations.
Starbucks’ has faced problems of expansion, with a number of openings failing to be
successful. Starbucks has experienced continued same-store sales sluggishness in its
Japanese operations. Also, in 2003 Starbucks Coffee International ended its joint
venture with the Delek Group of Israel. Following this decision, Shalom Coffee
Company, the joint venture between Starbucks Coffee International and the Delek
Group, closed its six Starbucks stores in Tel Aviv. This adversely affects the
international operations of the company and thus the growth prospects in the region.
Source: (January 2005).
Opportunities
Growth in coffee market
The specialty coffee sector accounts for roughly 15% of the US retail coffee market,
which is worth $21 billion. By 2005, the retail coffee market is expected to be worth $22
billion, and the specialty coffee sector will grow to account for 41 percent of this market.
Starbucks has a market share of over 40 percent of the specialty coffee market and the
anticipated growth in this category will offer the company considerable opportunities for
further growth and expansion in the near future.
New product
Starbucks has expanded its beverage categories by signing an agreement with the wine
and spirits group Jim Beam Brands to develop and market a Starbucks branded coffee
liqueur drink. The link up with Jim Beam Brands will give Starbucks access to a
nationwide sales and distribution network, and a partner with proven track record in
product development and marketing. In the US, cordials and liqueurs represent a $4-5
billion opportunity and approximately 20 million cases. Liqueurs flavored with coffee or
often mixed with coffee represent a substantial segment of the liqueur market.
Additionally, US specialty coffee consumption is on the rise. Furthermore, research
indicates that there is a significant overlap between consumers of liqueurs and
consumers loyal to the Starbucks brand which provides the company a strong revenue
potential.
Market expansion
The company is targeting 15,000 international stores in the next few years. Starbucks
expects major expansion potential in China. The company is also looking towards
markets such as Brazil, India, Russia for expansion opportunities. Starbucks sees China
as its next big international opportunity. Citing its large urban population, rising economy
and increase in coffee consumption, Starbucks estimates that China could ultimately be
one of its largest markets. In China, the company will continue to focus on current
markets such as Beijing and Shanghai along with rapid expansion in new cities. This
would provide the company with new opportunities for revenue growth.
Source: (January 2005).
Threats
Volatile coffee markets
The supply and prices of coffee experience high volatility. The company’s requirements
for quality standard coffee exposes it to multiple factors in the producing countries,
including weather, political and economic conditions which may adversely affect the
company’s business. Green coffee prices have been affected in the past, and may be
affected in the future, by the actions of organizations and associations that have in the
past attempted to influence prices of green coffee through agreements establishing
export quotas or restricting global coffee supplies. The actions of these associations
could cause a degree of disruption to Starbuck’s operations.
Rising dairy costs
The company faces the threat of rising dairy costs. Dairy prices have risen considerably
and this could adversely affect Starbucks’ margins. Raw milk prices in 2004 are
expected to be above the 2003 levels. Milk and other dairy products
represent between 3% and 5% of sales, and sustained increase in prices could
affect the company’s margins.
Slowing US retail sales
The company faces long-term concerns regarding its US store growth potential. If
current growth continues, saturation levels within the North American retail division will
be reached within five years. This represents a considerable concern for Starbucks,
given that over the last two years, domestic retail has been the source of about 75% of
the company’s revenue growth and an even greater proportion of profit growth. Before
reaching saturation point, US retail sales growth will slow considerably over the next
three to five years, further increasing the pressure on the international division to justify
the company’s investment in expansion.
Competition
The global coffee market is a very competitive sector, and Starbucks must compete
against the likes of restaurants, coffee shops, and street carts. A major competitor, with
substantially greater financial, marketing and operating resources than Starbucks, could
enter this market at any time and compete directly against the company. The US
specialty coffee market continues to grow, and an increasing number of firms are
looking to enter the market. Starbucks must be aware of competition on all levels and
maintain its operational performance if it is to retain its status as the world’s leading
specialty coffee retailer.
Source: (January 2005).
RESOURCES LED AND MARKET LED STRATEGIC DEVELOPMENT
Moreover, Mr. strongly believed that Starbucks’ success was heavily dependent on
customers having a very positive experience in its stores. This meant having store
employees who were knowledgeable about the company’s products, who paid attention
to detail, who eagerly communicated the company’s passion for coffee, and who had
the skills and personality to deliver consistently pleasing customer service. Many of the
baristas were in their 20s and worked part-time, going to college or pursuing other
career activities on the side. The challenge to Starbucks, in ’s view, was how to attract,
motivate and reward store employees in a manner that would make Starbucks a
company that people would want to work for and that would result in higher levels of
performance. Thus, wanted to cement the trust that had been building between
management and the company’s workforce. The company’s profitability had improved to
the point where could pursue another employee program he believed would have a
positive long-term effect on the success of Starbucks a stock option plan for all
employees.12 Schultz wanted to turn all Starbucks employees into partners, give them
a chance to share in the success of the company and make clear the connection
between their contributions and the company’s market value.
Starbucks believed that its efforts to make the company an attractive, caring place to
work were responsible for its relatively low turnover rates. Whereas most national
retailers and fast-food chains had turnover rates for store employees ranging from 150
to 400 percent a year, the turnover rates for Starbucks’ baristas ran about 65 percent.
Starbucks’ turnover for store managers was about 25 percent compared to about 50
percent for other chain retailers. There was evidence that Schultz’s approaches, values,
and principles were affecting company performance in the intended manner. One
Starbucks store manager commented, "Morale is very high in my store among the staff.
I’ve worked for a lot of companies, but I’ve never seen this level of respect. It’s a
company that’s very true to its workers, and it shows. Our customers always comment
that we’re happy and having fun. In fact, a lot of people ask if they can work here." The
expansion process, Starbucks created zone vice presidents to direct the development of
each region and to implant the Starbucks culture in the newly opened stores.
Cited From:
Available at:
Business Level-Strategy:
The business strategy of Starbucks' is identical to the corporate level strategy since the company is a single business
company, focusing on only coffee-related products and retail stores.
Corporate Level-Strategy:
Starbucks corporate strategy has been to establish itself as the premier purveyor of the finest coffee in the world,
while maintaining their uncompromised principles as the grow. The firm principles of the company are seen with its
maintenance of a great and proven work environment for every staff member in its retail stores. It upholds diversity
and promises the highest standards for its products. The company satisfies customers and gives back to the
community and the environment. Also, Starbucks persists to be profitable and it is. They live by a strict, slow growth
policy completely dominating a market before setting its sights further abroad. This strategy has gained them the
advantage of being one of the fastest growing companies in the country.
Structure and Control Systems:
Starbucks believes that their employees are one of their important assets in that their only sustainable advantage is
the quality of their workforce. They have accomplished building a national retail company by creating pride in the
labor produced through an empowering corporate culture, exceptional employee benefits, and employee stock
ownership programs. The culture towards employees is laid back and supportive. Employees are empowered by
management to make decisions without management referral and are encouraged to think of themselves as a part of
the business. Management stands behind these decisions. Starbucks has avoided a hierarchical organizational
structure and has no formal organizational chart. The company has both functional and product based divisions.
There is some overlap in these divisions with some employees reporting to two division heads.
Starbucks has become a well-known company for selling the highest quality coffee beans and best tasting coffee
products. It was one of the first companies to realize that the real money to be made was in beverage retailing, not
just coffee beans. Starbucks created a coffee for the coffee connoisseurs and go to great lengths to acquire only the
highest quality of coffee beans. They have set new precedence by outbidding the European buyers for an exclusive
crop of coffee beans, which produces one of the best coffees in the world. Roasters of Starbucks coffees are
extensively trained for one year. Starbucks has the distinction of being the public's educator on Expresso. They have
also recently started to expand to packaged and prepared tea in response to the growing demand for this product.
There are no other national coffee bar competitors in the same scale as Starbucks. Starbucks is the only competitor
in the coffee bar market that has a recognized brand image. The difference between Starbucks and other
coffeehouses is that they own all their stores and do not franchise. Starbucks stores operates in most metropolitan
areas of the United States and also has a direct mail business to serve customers in every state. They have
introduced gourmet flavored decaffeinated coffees as well as specialty flavors and whole bean coffees for the faithful
coffee drinkers. They have also added light lunch fare to their menu. Starbucks had recently expanded its emphasis
internationally as well as there are opportunities waiting in possible joint ventures with other corporations to design
new product associations with Starbucks' coffee.
MERITS OF POTENTIAL FUTURE STRATEGIES
Starbucks has become a great successful company in the coffee bean and beverage business and its strategy has
been very effective. From the beginning, Schultz, the company's owner, has professed a strict, slow growing policy.
He feels it is also important to keep all the stores company owned to improve and grow the business further. To
further grow, Starbucks will need to expand further in other areas of the United States as well as internationally.
Future joint ventures will expand the products into grocery and convenience store shelves through bottled beverages
and ice cream flavors. Other joint ventures will allow further expansion into the brewery business, which will produce
beer with Starbucks' coffee beans. Other partnerships will bring new products for Starbucks, such as jazz CDs, and
tandem units with bagel bakeries. As the company expands, the culture and corporate strategy must be maintained
for success. This will ensure the health of the organization throughout any future expansion. Starbucks Corporation
purchases and roasts high quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-
style espresso beverages, cold blended beverages, a variety of pastries and confections, coffee-related accessories
and equipment, and a line of premium teas, primarily through its Company-operated retail stores. In addition to sales
through its Company-operated retail stores, Starbucks sells coffee and tea products through other channels of
distribution.
Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino coffee drink and a line
of premium ice creams. The Company's objective is to establish Starbucks as the most recognized and respected
brand in the world. Starbucks specialty operations strive to develop the Starbucks brand outside the Company-
operated retail store environment through a number of channels. Starbucks specialty operations include retail store