The organisation chosen for the report is Starbucks Corp. and the report would compare it with two similar companies, one being Costa Coffee and the other being Caffé Nero.
The report would highlight the frameworks underpinning the competitive position of Starbucks and also would identify and asses the economic and the competitive position of the firm.
A financial model using appropriate ratio analysis would also be presented in a spreadsheet format identifying the industry trends and their impact on the performance of Starbucks vis-à-vis Costa Coffee and Caffé Nero.
Both quantitative and qualitative data would be made available so as to provide an insight into Starbucks sustainable performance and prospects.
Analysis of Starbucks operational, financial, organisational and marketing capabilities would be made available through application of PESTEL analysis, Porter’s 5 forces model, the Ansoff Matrix and the BCG Matrix.
The report would also discuss the issues, the problems, the opportunities and the options available to Starbucks for future business growth, followed by conclusions to draw together all the variables identified.
Recommendations would be provided for the company highlighting the direction it needs to take to ensure business profitability with comments on the suitability, acceptability and the feasibility of the options made available.
The Starbucks Company was founded in Seattle in 1971 by Gordon Bowker, Jerry Baldwin and Zev Seigel with a vision to educate American consumers about the fine coffee drinking experience. In 1987 Howard Schultz took over the Starbucks Group. Starbucks is the number one in the industry, with more than 12,000 shops in more than 35 countries. Just within a couple of years they grew from a small coffee business house to a multi-million dollar player in the coffee industry by buying the best coffee available and providing the people with an unmatched store experience.
Freshly brewed coffee is the main product offered by Starbucks along with other drinks which include cold and hot teas, cakes and pastries. The Starbucks coffee comes in a many varieties each possessing a different taste, aroma and flavour.
INDUSTRY TRENDS AND MARKET ANALYSIS
The market right now for gourmet coffee business is hot. All the multi-national fast food chains and street-corner shops want in on the boom. Many big companies are focused on the supply of specialty branded coffees and the economic stage is heating up. Specialty coffee industry is one of the fastest growing financial services globally. Growth in the coffee industry is continuously peaking, with many new overseas companies entering the market using policies offering exclusive perks and special discounts, despite the questionable quality of the coffee being used to increase the market share.
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A notable trend seen is that often a significant increase in sales occurs every time a café starts to use branded consumables. The consensus is that these coffee drinks would be a long-term trend, with focus on elevating the customer’s taste for a product that they are familiar with and then leading them to the coffee stores to buy it. Many companies are also tinkering with expanding the food menus as well including an in-store display of sandwiches, fresh baked goods and many confectionary items.
The newest trend is the drive-thru coffee stores. Starbucks has many such stores, all of which are seeing continual growth and long lines. Another trend includes customer requests for organic coffees, which has encouraged retailers to move towards the beans growing environment. The array of products offered has never been as wide, as retailers are adding more flavours to whole beans and creating variations to the basics of espresso and steamed milk. The clever retailers have added iced tea concoctions and coffee shakes to their menus to outdo competitors. Most specialty retailers now also retail whole beans and many such stores have added coffee grinders, espresso machines and other brewing supplies for add on sales.
This part of the report would analyse the working of the business by application of PESTEL analysis, Porter 5 forces and the BCG Matrix.
High taxes levied on farmers in the bean producing countries, would consequently increase the rate at which Starbuck would buy the coffee beans and any such fluctuations in the taxation policy would certainly be passed on to the consumer, who now would have to purchase the end item at a higher price.
International trade regulations and tariffs
Trade issues would affect Starbucks directly when exporting and importing goods. When the government of the trading country imposes a tariff it would not only result in an efficiency loss for Starbucks but also such large income transfers can become inconsistent with equity. This extra charge would have to be borne by the consumers.
A change in government policies has a direct impact on the taxation and legislation framework. Also the countries in political turmoil or civil war should be considered with great caution when considering probable market ventures.
Reduction in the licensing and permit costs in coffee bean producing countries would consequently lower production costs for the farmers and any such saving would subsequently pass on to Starbucks when purchasing the raw materials and finally to the customers.
High interest rates would mean putting off the investment and expansion plans of Starbucks, which would result in fewer earnings for the firm. Low interest rates should have the opposite effect.
In periods of negative growth, the consumer incomes would fall leaving less disposable income thus impacting sales for Starbucks.
Business costs will rise in times of inflation which would ultimately have to be borne by the consumer.
Competitive pricing from competitors would impact Starbucks pricing that would drive down the profit margin as they try to maintain their market share.
If the currency value falls in a bean supplying country, Starbucks would get more for the same price, when importing the goods. This saving would be passed to the end consumer.
Identification of the target population at which Starbuck needs to aim their products is a significant factor in the business operations. The marketing campaign undertaken would focus accordingly.
Coffee is a luxury product in some ways, so the people with the most amount of disposable income should be targeted.
A large number of workers in big cities now go out for lunch and meals. Starbucks can cash this to their advantage by promoting the shop as a place where people can eat and meet, boosting the sales.
Starbucks launched its first-generation e-commerce website in 1998. As a result, scalability and performance have improved, and the company now has the tools it needs to profile and target customers, analyse site data, and deliver new features to the market in the shortest time possible.
New materials and processes
Technology developments in coffee making machines and the computer systems that Starbucks use to operate their cash registers would enable the staff to work swiftly and efficiently. This results in customers being served quickly thus creating potential for serving more people in the day.
Rate of technological change
Technology is advancing at an astounding rate. Starbucks will need to invest majorly just to stand their ground in the always expanding and developing market, and also to try to stay ahead of competitors.
Starbucks customers create a lot of waste by disposing off the cup and the contents incorrectly. The material for the cup should be carefully selected to make it as biologically degradable as possible.
Planning permission may not be granted to Starbucks if the construction would harm the environment. The land may be protected.
Environmental pressure groups
Starbucks should be aware of the influential and physical power of groups such as Greenpeace and Friends of the Earth. Any violation of animal or environmental rights by a company is usually followed by a swift and attention-drawing protest from one of the groups. Brand image and customer bases are often irreconcilably tarnished due to the actions of these groups.
Trade and product restrictions
Starbucks need to follow the trade laws of the countries where they have established businesses. They must ensure that they are not in violation of any local laws. Some countries impose a tariff that has to be paid accordingly when importing or exporting goods and this must be taken into account as well.
Each country has different employment laws, like limiting the number of hours a person can work per week, varying levels of minimum wage etc. Starbucks should be aware of such factors when considering business expansion.
Health and Safety regulations
By not maintaining high standards they would be liable for damages if found in violation as it is a legal requirement for them to enable that their staff and customers are safe when they are in their stores.
PORTER 5 FORCES ANALYSIS
1. COMPETITIVE RIVALRY (Low)
Starbucks is the leader in retailing and roasting of specialty coffee in the world. Major competitors include Costa coffee, Caffé Nero, Seattle’s Best Coffee and secondary coffee providers such as McDonald’s, Burger King and Dunkin Donuts. The competition is nowhere near to Starbucks volume of operations and sales.
Consumption of coffee is not dependent on the price of the product but also on the differentiation between each product and several value adding variables such as the quality of customer services, brand, brand recognition and image of the company. Hence, Starbucks is not majorly sensitive to movements of other firms in this segment.
2. THREAT OF NEW ENTRANTS (Mid)
Starbuck is the world leader in its industry and has controlled access to distribution channels. Starbucks have extreme control over such distribution channels because of setting strict guidelines for the suppliers to follow. Starbucks is also constantly innovating and showing strong product differentiation to hamper the possibility of new entrants.
However, the entry barrier for the industry is relatively low and any big firm where funding is not a problem, can be a potential entrant. Some of the more current and on-going threats of new entrants are Burger King, McDonalds and Dunkin Donuts which can become a major problem in the near future.
3. BARGAINING POWER OF BUYERS (Mid)
A big threat to Starbucks is the absence of switching costs in the speciality coffee industry, customers face no switching costs in switching from Starbucks to Costa Coffee or Caffé Nero for a cup of coffee. Also a threat to Starbucks is the ability of customers to brew their own coffee. Starbucks tries to counter this threat by offering the Preferred Office Coffee Providers and also provides directions for making a perfect cup of Starbucks coffee at home, that perfect cup of course includes all ingredients which have to be purchased from Starbucks
Also with new entrants and competitors such as McDonalds who claim to offer premium roast coffee of reasonable quality for lower price, thus giving the customers some bargaining power.
4. BARGAINING POWER OF SUPPLIERS (Low)
Central and South America produce coffee which is the second largest traded commodity in the world and Starbucks depends upon outside brokers and a mutually direct contact with exporters for supply of premium coffee beans.
The quality of coffee beans sought by Starbucks is very high, proving to be a potential threat to the company. Only suppliers which meet Starbucks coffee standards are able to supply to the giant company. The supplying industry only has few firms which can deliver the quality giving them considerable bargaining powers.
However, Starbucks counters this due to its massive size and being the primary buyer and also because of the importance of Starbucks business to any individual supplier as it would account for a large percentage of the total supplier’s sales, thus reducing the bargaining power of suppliers.
5. THE THREAT OF SUBSTITUTION (Low)
Substitute products are the products that can pose as a trade-off for the product being offered by a company. In the specialty coffee industry, substitute products can be soft drinks, tea, energy drinks, fruit juices and other caffeinated drinks.
Here innovation would play a huge role. To counter this Starbucks have given their menus a complete revamp and have differentiated so many of their products which are now part of the main product line. The menu includes various teas, hot and cold coffee, baked goods and various confectionary items.
The only true direct substitute for specialty coffee would be the basic coffee, which is of lower quality than specialty and as such does not present any threat.
RELATIVE MARKET SHARE
STARS ( Growth Strategy )
Market Penetration and Development
Backward, Forward or Horizontal Integration
CASH COWS ( Stability Strategy )
Product Development and Differentiation
Hotels, Schools, Airlines, Grocery Stores, Businesses, and Industries Cafeteria
New Bold Fresh Lunch Programmes and Salads e.g. fiesta chicken salad, fruit and cheese platter
Opening of stores all over the world. Expansion strategies into Brazil, Russia, Romania and India.
Music CD’s, Clothing, Coffee Mugs and other accessories.
STARBUCKS FINANCIAL ANALYSIS
This part of the report would highlight the financial position of Starbucks using the annual reports and comprehensive ratio analysis for the financial years 2008, 2009 and 2010 which are enclosed in the appendix.
In fiscal 2008, Starbucks experienced declining store sales in its stores, primarily due to lower customer traffic. The weaker traffic was caused due to number of on-going factors in the global economy such as the higher costs of gas, food, personal debt and rising levels of unemployment along with reduced access to consumer credit.
In fiscal year 2008, store sales declined a margin of 8%. Consolidated operating income was $503.9 million in fiscal 2008, and operating margin for the year was 4.9% compared with 11.2% in the prior year. The 260 basis points of the decrease in operating margin were due to the restructuring charges, primarily related to the significant US store closures.
EPS for fiscal 2008 was $0.43, compared to EPS of $0.86 per share earned in the previous year year. Restructuring charges and costs associated with the execution of the transformation agenda impacted EPS by approximately $0.28 per share in fiscal 2008.
Financial year 2009 was a tough year for Starbucks. The recessionary economic environment stressed the consumer spending in the US and internationally, which impacted store sales, operating income, company revenues, and the operating margins negatively.
Starbucks countered the affects and created a business model less dependent on high revenue growth to drive profitability margins. The strategy was to rationalize the global company operated store portfolio to reduce the cost structure and renewing the focus on customer service excellence.
Starbucks had to close down about1000 stores. Steps that targeted reductions in the cost structure in FY 2009 proceeded according to plan, with full year costs of $581 million removed from the cost portfolio.
The company created a strong financial foundation, with no short term debt outstanding at the end of FY 2009, with cash and liquid investments totalling more than $640 million. The strong financial position and the continuing strong cash flow generation allowed Starbucks the financial flexibility to implement the restructuring efforts.
In fiscal 2010, revenues increased to a record $10.7 billion. Operating income increased by $857 million from ¬scal 2009 to $1.4 billion. The full-year operating margin of 13.3 % represented the highest full-year consolidated operating margin in Starbucks history. Fiscal 2010 ended with the highest full-year comparable store sales growth that Starbucks have seen in the recent past, while the earnings per share also grew more than double from ¬scal 2009.
BENCHMARKING WITH COSTA COFFEE AND CAFFÉ NERO
Starbucks is a US chain whereas both Costa Coffee and Caffé Nero were established in the UK. Costa Coffee was setup in London in 1971 by Bruno and Sergio Costa and acquired by Whitbread PLC in 1995. Caffé Nero was established by Gerry Ford in 1997 in the UK.
The comparison would be carried out using the financial information of the three firms which is available in the appendix. The comparison would majorly be based on the UK market.
There are 1,175 Costa Coffee shops in Britain as compared to 731 of Starbucks and 440 of Caffé Nero. A comprehensive business analysis of Starbucks has already been supplied in the above report; this part would focus on the business analysis of Caffé Nero and Costa Coffee individually followed by a coherent conclusion of the findings.
According to the financial data available operating profit grew by 59.5% to £36.2 million; 312 new stores were acquired or opened and like for like sales increased by 5.6%. Costa operates in 24 countries and is the number two international coffee shop operator with more than 1,600 stores. Sales performance improved strongly across the year, confirming the brand’s resilience, even in a recessionary environment.
The groups 60% equity is held by the Ford family, the rest 30% by a private equity firm Paladin and 10% with the management. Caffè Nero has recently completed a £140m refinancing to fund the business’s future growth goals.
The business more than 500 outlets in the UK and internationally and has registered 54 consecutive quarters of positive like-for-like stores growth, it is forecast to generate £32m in earnings before interest, tax, depreciation and amortisation (EBITDA) for the 12 months to May 2011. Revenue for the same period is forecast to reach £170m, an increase of 12% on the previous year. The new financial structure would provide the Group with a financial platform to support its growth ambitions and expansion plans both in the UK and internationally.
Nero has a lot of ups including strong brand positioning, intensive marketing campaigns and a clear differentiation point. However, there are some weaknesses, one of them being lack of experience in going international, thus some problems could arise while penetrating foreign markets.
Though both the companies Costa and Nero are well established in the UK market, Starbucks is the industry leader in the world and is a major competition to them in the UK. Financial turnover of the Starbucks Group is so massive that it provides them with all the capital requirements to innovate and differentiate their product from the 2 competitors; it already has established a sizeable market share in the UK, but still needs to take over Costa Coffee which it should be able to do in the near future, looking at the financial figures provided and the international global strategy adopted by the group which seems very promising.
ISSUES FACING STARBUCKS
A major challenge that Starbucks is dealing with is the current financial crunch in the world economy forcing them to call closures of many stores around the world.
Also another challenge that Starbucks is facing is with is competitors. There are many coffee shops all over the world and to be able to stand out and to generate loyal customers is very important. Their main competitors are McDonald’s, Dunkin Donuts, and Nestle in the US and brands like Costa Coffee and Caffè Nero in the UK, the two major markets for Starbucks. It is critical for Starbucks are aware of their competitors and know what they are currently doing.
Also Starbuck coffees are priced higher than other market competitors because of Starbucks only purchasing the highest quality coffee beans for their product, thus increasing the price of the drink. As Starbucks have many competitors, this can be a potential advantage to for such competitors.
Also Starbucks inadequate marketing strategy on advertising is a hindrance in the business growth opportunities. They prefer to build the brand by promoting the drinks cup-by-cup with customers. The advertisement ends until they drink the coffee, reducing the chances to attract valuable customers.
Starbucks also does not emphasize on distributing their products to supermarket because of being concerned with the quality of the coffee; if the coffees were packaged into plastic bags.
Also the rigorous expansion strategy followed by Starbucks can take a toll on the firms brand image. As a company grows there would be a tendency to focus heavily on increasing the output and store locations, thus focussing less on the quality and brand image. Starbucks needs to stay with its values and ideals that have made it successful.
Also Starbucks policy of not franchising can be a cause of concern for the firm. Franchising would allow the company to open many new stores with less risk, and make considerable profits in doing so. Because of this the firm’s research and development costs would fall making use of the franchisee knowledge of the local market in terms of geographic, psychographics, demographics, and the local country regulations.
CONCLUSION AND RECCOMENDATIONS
Starbucks has to effectively pursue a Focus-Based Strategy in conjunction with differentiation and cost leadership based strategy. Being a lower cost store will increase the difference between Starbucks and provide it with a competitive edge. At present, Starbucks competitors are attempting to specialize in the coffee business, therefore Starbucks must pursue focus strategy to increase its strength.
Starbucks must reduce their product price by producing a new product of coffee using cheaper beans or can come out with special discounts and promotions to reduce cost, thus increasing sales enabling Starbucks to enter new low cost markets and increase profitability. Also needs to focus on building alliances in new markets/countries to reduce management focus and benefit from the local and experience curves.
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Should focus on advertising the brand through internet services for users to access, do road shows, hand out brochures etc. so that consumers become more aware of the brand’s strong international presence and brand name. Market penetration and market development will help increase the sales. Access unexplored distribution channels like making available packaged Starbucks coffee for consumers by displaying it nationwide in various convenience and shopping stores and not only Starbucks stores.
Starbucks must adopt twin policies of Product Development and Product-Market Diversification to counter the stiff competition in international markets. There needs to be concentration of efforts in the product development so as to focus majorly on making the existing products better. Product and market diversification can be modelled through research and development coupled with creativity and innovation. Product differentiation would be an excellent defence against the threat of the bargaining power of buyers. Developing new products lines may offset such potential risks.
A strategy should be formulated to tackle the competition by entering into long-term contracts and agreements with the food service companies which could be the potential competitors. This way their coffee would be sold at these competitors outlets providing access to more markets and increase sales while decreasing the competition.
Starbucks must be a first mover into markets with their new products and ideas. Being a first mover into developing international markets would be the appropriate way for Starbucks to build their customer loyalty and upholding its image as the innovative company that it is.
Starbucks should also locate the store operations in possible high traffic and visibility areas. The company should take adequate care in picking such locations. It is of prime importance that Starbucks international stores reflect their trademark uniqueness in their location and layout. Having locations in a variety of areas will ensure large market exposure.
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