CORE PROBLEM /ISSUE
Starbucks is the premier roaster and retailer of specialty coffee operating in more than 50 countries in the world. Starbucks Corporation was founded in 1971. It buys high quality coffee beans and roasts them to be sold through retail markets. Starbucks locations also sell tea and fresh food items. The products are licensed and the company sells ready-to-drink beverages. It has addition retail avenues to sell its products. These outside retail avenues are collectively known as the specialty operations. The major brands include Seattle’s Best Coffee®, Starbucks VIA®Ready Brew and Tazo®Tea (“Starbucks Coffee Company”).
The Starbucks Company deals with coffee. It is not usually a beverage that is prepared. Moreover, the business had grown to a roasting facility and a wholesale business. The growth of this company caught Schultz`s attention ( Garthwaite, Meghan, and & Brown 15). Schultz was the proprietor of a Swedish company that specialized in marketing coffee makers. He got interested in Starbucks and later joined the company as manager of retail sales and marketing.
However, Starbucks faced some problems, related to its management team, which opposed Schultz`s idea of marketing prepared drinks. The main reason was that the management wanted to protect the company`s initial business strategy, which was, selling of roasted coffee beans. Schultz was very successful in expanding the business in 1986. Despite a lot of success, a number of investors were a bit skeptical as he tried to raise of the company`s sales to $1.25 million. He decided to use the fund for expanding the business. That was an uphill task since a number of potential investors cited lack of patenting of Starbucks’ coffee business (Garthwaite, Busse, and & Brown 14). They feared that unscrupulous individuals could patent the right to produce the dark roasted coffee, thus, turning their investments into losses.
The main objective of the organization is to become the leading organization that is a recognized and respected producer of high quality products in the world.
The main goals of Starbucks is to build an international model that will facilitate and accelerate growth of the industry across the globe; to reach new customers with new Seattle’s best coffee; to optimize and expand the U.S market which is highly profitable; to accelerate growth in China; to honor and elevate partner experience, giving back to the community the company serves (Garthwaite, Busse, and Brown 16).
Building of a world-class sales organization is also an opportunity for the company to grow substantially across the world. My Starbucks Rewards loyalty program initiated by the organization has assisted in attracting more customers. The company`s aim is to source, roast and sell high quality coffee.
Starbucks has been in the business related to roasting and selling coffee for many years, thus, it has a great experience in provision of high quality services. For instance, first Starbucks was a small roasting facility. The transformation of the company was observed when Schultz acquired it in 1987. Schultz believed that there was need to improve the image of the company in order to attract more customers. First of all, the company’s retail outlets were supplied with chairs, cozy fireplaces, and wood floors. As a result, customers started to linger over coffee and more business people started to visit the coffee outlets.
Among other positive features exhibited by Starbucks was adoption of a policy that enabled the company to sell its products in massive quantities through distribution channels. Moreover, the company expanded the retail footprints in an effort to make a profit. Invention of another brand of drink, referred to as quasi-Italian, acted as another major boost that enabled it to increase its profits. Invention of the new drink enabled the company to expand its product base, thus, attracting more customers. Starbucks was able to secure a long licensing agreement with the Kraft Foods Company. It enabled Starbucks to grow into a grocery channel that distributed its products across the US (Garthwaite, Busse, and Brown 17). Furthermore, Starbucks expanded its channels of mass distribution where its products were distributed in the form of licensing agreements. For instance, the company went into an agreement with the United Airlines where the company was mandated to carry out provision of coffee since 1995.
The company produces both regular and decaffeinated coffee that allows it to control the market since the company has gained the upper hand and is able to attract both caffeine and non-caffeine users. The company produces high quality fresh foods, with high nutritional value and flavor content. The company is able to offer a food warming program in the U.S and Canada. In the company-operated stores in the United States, the company is able to provide its customers with free wireless internet services.
Despite Starbucks enjoying some success, the company still exhibits some drawbacks that hindered its development in some ways. First, Starbucks was not fully registered or patented. As a result, adverse effects haunted the company in that it was unable to secure a loan from potential investors. Moreover, the structure of leadership seems to be totally authoritarian or autocratic. The management of Starbucks was not interested in Schultz’s ideas. Schultz had suggested to venture into drinks business, but the management didn’t support this idea and were rigid to change citing that such a move could disrupt the company’s original idea. Schultz later left the company to open his own companies (Garthwaite, Busse, and Brown 14). One of these companies was called Giornale and it dealt with selling such drinks as cappuccino.
Despite stiff competition from other coffee shops, Starbucks has maintained most of its initial principles. There are number of opportunities that Starbucks can benefit from. For instance, Starbucks saw it essential to market its products through the use of the already established distribution channels. It made a deal with Pepsi-Cola to help it sell a coffee drink called Frappuccino in North America. The joint venture was created in 1996. Starbucks went further to form another joint venture; it invented another product with a company called Dreyer. There is an increase in the demand for beverages which act as replacement for soda water which is usually carbonated. This is because American consumers were slowly adapting to coffee (Garthwaite, Busse, and Brown 16).
The location of its retail stores gives the company an opportunity to tap capital markets. The company`s locations are generally located in high traffic and highly visible sites that can be easily accessible. In addition, there is also a variety of settings that the company uses to place its stores, for example, downtown, suburban areas, office buildings, universities and campuses, off-highway locations and selected rural regions. To provide a greater degree of access to non-pedestrian customers, the company targets to locate drive-through retail shops. Expansion of a food warming program in the United States and Canada is another opportunity that is likely to attract more customers.
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Starbucks operates under various threats that tend to pull it down. One of these threats was presence of a stiff competition brought by similar companies. The approximate number of coffee businesses has decreased to 24,000. Over 50% of them were operated and owned by individuals. What made the competition a bit stiffer is the fact that these coffee shops differentiated their coffee products from that of Starbucks. Indeed, these shops hired experienced baristas. The state regulates consumption of Starbucks’ products locally through imposition of taxes and regulations (Garthwaite, Busse, and Brown).
Sometimes the retail shops are forced to lower the prices of commodities due to stiff competition from other suppliers. Lack of customer acceptance especially when they are not able to purchase a product at a price that will be inclusive of the production of the product is another threat. Unfavorable economic conditions that interfere with consumer spending can also be termed as a threat. Decline in the general consumer demand for new products is another threat. Negative publicity that affects the purchasing power of customers is also a form of a threat (“Starbucks Coffee Company”).
Starbucks is a company that deals with manufacturing of coffee drinks in an effort to acquire a large market share in the United States. Members of the company, therefore, have to strategize on the how they can topple the giant of the beverage industry in the US. A majority of Americans prefer Coke or Pepsi even though the number is decreasing. This is due to an effort to avoid health related complications. Therefore, the primary strategy of Starbucks should be an effort to create new products that will act as a substitute for Coke and Pepsi. This is a loophole that is created by consumers when they shy away from carbonated drinks. This should be sufficient enough for the company to plan long-term strategies to fill in the gap. Invention and production of more consumer appealing products that are chemical-free should be prioritized.
Starbucks is a coffee company which sells non-carbonated beverages. This fact underpins its presence in the US market. Health policies accentuate consumption of such beverages so as to eliminate health related diseases. Due to production of such products Starbucks acts as its own goodwill ambassador winning more customers who run away from carbonated beverages such as Coke. Therefore, this fact should induce Starbucks to find better ways in which the company can satisfy its consumers. One of these strategies is producing more caffeinated and non-caffeinated products for its consumers.
Starbucks` size cannot be compared with that one of Coke or Pepsi. The company should assess and re-examine its employment terms and staffing. It should review the number of workers to ensure that no resources are wasted in terms of salaries and remuneration.
Starbucks should also look at various ways it can use in order to become more popular among customers. In 1997 it tried to use a combined strategy to market itself. It combined its effort with Pepsi to market its new product. It acted as a double-edged sword where Pepsi helped to popularize Starbucks and its products in Canada. On the other hand, Starbucks helped boost the image of Pepsi in that its products were now healthier for human consumption. Whatever the case, Starbucks used this platform as one of its short-term strategies that helped in boosting the image of the company.
A. Phase I: Now
The company needs to prioritize its weaknesses and capitalize on its strengths. Therefore, the main strategy will be to see how the overall performance of Starbucks can be improved. This will act as one of the primary strategy of the company. The company needs to expand the variety of its current products. In addition, the company needs to put its products on the market in other parts of the world.
B.Phase II: 1-3 years
The approach should be focused on fully implementing the recommended strategic measures in order to ensure that all production processes run smoothly. It should be noted that this entails short-term strategic measurements whenever they are needed. A good example is promotional services carried out to remind consumers about the company’s products.
C.Phase III: 3+ years
The final phase should entail control of the strategies that the company employs in order to streamline production of the company and keep it in the right manner and pace. Such move as improvement of a certain product`s condition to correspond to customers’ needs should be taken seriously.
Appendix A.McKinsey 7-S
The company`s aim is to find a business model that is sustainable, to enjoy highly profitable growth and to expand the market even more outside the United States ( Garthwaite, Busse, and Brown 15). The development of new coffee products in multiple forms, through diverse channels in new categories is a strategy that the company employs. To build a high degree of customer loyalty, the organization puts plans in place that facilitate the production of products that are in line with customers` expectations. The company intends to expend to new markets and increase sales in the existing market. Starbucks provides its clients with Starbucks cards as a part of the Starbucks reward program. Based on a number of points, customers are given free products for being loyal to the company.
The fact that Starbucks was founded in 1985 depicts that its structure is not fully developed. It cannot be compared with companies such as Coca-Cola which was founded back in the 1800’s. This means that Starbucks is still in the stage of development (Garthwaite, Busse, and Brown 18).
Starbucks has its own goals and objectives that act like its driver engine towards the attainment of success. Its major driving force has been to stay put and to remain focused in the highly competitive industry.
The company has exhibited a certain style of leadership that helped in creation of a certain phenomenon which is critical to the running of the business. For instance, its style of using biodegradable packaging materials has boosted its public image. This has created a more appealing image and as a result the company has been able to capture attention of some customers who were loyal to other companies.
Starbucks has demonstrated its prowess in management and production of food and beverages. A company that started as a simple idea in 1971 in Seattle, Washington has grown into a multibillion-dollar enterprise. This has happened over a short period of time. Currently, it has over 17,000 stores that retail its products globally (Garthwaite, Busse, and Brown 16).
The company is committed to become an employer of choice. The company has employed more than 137,000 people worldwide. The top management team led by Howard Shultz is committed to adoption of strategies aimed at developing the company to higher standards.
There is a strategy that the company uses to ensure that it supports sustainability of its systems. For instance, there are Farmer Support Centers in Rwanda and Costa Rica. Experts in these centers are hired to ensure that the company is working closely with the coffee producing farmers to increase both the quality and quantity of coffee.
Appendix B: Financial Ratios
- Current ratio- Starbucks has enough liquidity to meet any arising liabilities.
- Quick- Starbucks has enough resources to immediately cover any liability arising without necessarily having to sell the current inventory.
- Average collection periods- Starbucks needs to re-evaluate its credit extension policies so as to lower the level of accounts receivable.
- Inventory turnover- the rate of turning inventory for Starbucks is relatively low.
B. Asset Management
- Total Asset Utilization- Starbucks utilizes its assets effectively to produce sales.
- Fixed Asset Utilization- Starbucks is also able to utilize the fixed assets to generate higher incomes.
C. Capital Structure
- Debt-to-Assets- Starbucks is able to maintain low level of long term debts which gives it more strategic flexibility in the future.
- Debt-to-Equity- the company has a low ratio of debt to shareholder equity. Therefore, the company is well financed.
- Times Interest Earned- interest expense as compared to operating income is low because the company is operating with minimal debts. In addition, the Interest Coverage Ratio is high meaning that the company has enough resources to pay off its outstanding debts.
- Contribution margin – Starbucks has been able to maintain good contribution margins over the last 10 years.
- Profit margins on sale – Starbucks has been able to make consistent profits over the last 10 years. Sometimes profits are affected when prices of goods have to be lowered due to a stiff competition in the market.
- Break-even in dollars – the break-even point of Starbucks keeps on changing from time to time due to the changes in prices of raw materials and variation in prices of finished products in the market.
- Return on total assets – return on total assets has not been consistent over the period of 10 years. Starbucks has to find ways to stabilize the situation.
- Return on shareholders’ equity – the amount of outstanding shares for Starbucks is relatively low and therefore there is still space for the company to sell the existing stock to raise more capital.
- Primary earnings per share – the price per share is higher because there are few outstanding shares.
- Price/earnings – earnings for Starbucks have been relatively higher as compared to the stock prices.
Appendix C: Macro Forces
The company was formed in 1985; therefore, it has never been hit by any major economic recession. However, during the initial stages, the company’s economic progression was moving at a slow pace. The phenomenon could be greatly attributed to the fact there was almost no awareness of the issue of health eating. So, Americans cared less about what they ate or drank until recently. During the late 1990’s, the scenario began to change whereby they became more concerned with their health. This was greatly beneficial to Starbucks since the company had a sizeable number of consumers who started to consumer the company`s products as they were deemed healthier. Ever since then, the total turnover of the company has been rising on an annual basis.
Political / Legal / Regulatory
The Starbucks Company is vulnerable to legal, regulatory and political actions. This means that it has to conform to the standards set and other rules and regulations. Starbucks must be aware that the industry in which it operates can be highly politicized. Thus, the company’s management has taken certain legal measures in order to prevent such externalities. One of these measures is acquisition of parenting and copyrights. The company holds several copyrights for its products such as product packaging, training materials, in-store materials and promotional materials. It has also registered trademarks in the United States and many other countries across the world.
Initially, Americans preferred carbonated soft drinks such Coke to other drinks such as tea. The trend started to shift in the recent past as more and more Americans opted for other drinks such as coffee among other beverages. Consumption of such beverages as coffee is less detrimental to the body in addition of not being associated with obesity. Therefore, more Americans were willing to copy Starbucks’ coffee drinkers. Roly Morris stated that Starbucks offered a lifestyle product which tried to surpass the normally observed barriers in Canada. Nonetheless, the number of Americans who prefer Starbucks’ coffee products is constantly rising. The major reason behind their loyalty to the company is health concerns and an opinion that Starbucks’ products are healthy.
Starbucks is a company that uses various technologies when manufacturing different types of coffee products. Some of the major parts of production sectors include bottlers, retail channels, concentrate producers, and suppliers. It is clear that use of technology is vital for the company`s success. Starbucks has invigorated itself into seeing that proper technology is used not only to save on cost but also to enable the company to create a more appealing image. For instance, in 2009 there was an official opening of two stores referred to as Seattle`s 15th Avenue Coffee & Tea. A machine known as La Marzocco was used in processing coffee. Some coffee brewing machines that were used are Synesso manual machine , Clover coffee machines, and a French press.
Starbucks uses both social and digital media to market its products. This increases the number of the company`s engage clients. For example, it is estimated that the company has over 27 million fans on its Facebook page. A digital network had been launched and as a result it brought more than 8 million clients with a positive feedback. Innovation is one of the company`s priorities. With innovation, the company is able to produce more quality products that are in line with the contemporary customer demands. For example, there are new products such as iced, flavored and Christmas blend. The company employed a team of highly trained research and development experts who create new ideas that assist the company in both production and marketing of its products.
Ecological / Environmental
At Starbucks packaging is a top priority. The company is constantly in search of efforts that are aimed at conserving the environment. One of the ways in which the company demonstrates its care about the environment is through the proper packaging.
The company is committed to taking care of the society in which the company operates. The company produces goods that are ethical and friendly to the users. Its products are safe not only for human consumption but also to the environment. The company produces zero carbon dioxide gas. The company also aims at minimizing the chances of harming the environment through the use of environmentally-friendly packaging materials such as use of biodegradable materials.
Porter’s 5 Forces
Industry Competitors / Rivalry
The company faces a stiff competition from quick-service restaurants and specialty coffee shops. Among the company`s competitors are such companies as Mc Donald’s. The food and beverage industry is one of the most competitive industries in the United States. Any company planning to operate in the industry must do so with the highest standard possible. Starbucks seems to be aware of this. It responds to these requirements by producing products that are consumer- and environmentally friendly.
Potential of New Entrants
Due to the nature of this industry, the existing firms are usually faced with a threat of another firm entering the already crowded market. Starbucks seems to be aware of this and thus it devises a wide variety of products that consumers can choose from. Additionally, it has various promotional services that help to widen its market base and to win loyalty of the existing ones.
Threat of Substitutes
Food and beverages are highly prevalent products in the US market. Therefore, consumers have a lot of freedom since they have a wide variety of choices when it comes to shopping. Starbucks has mastered a great skill of capturing consumers’ attention. The company always sets prices slightly below the market price. Additionally, the company uses biodegradable packaging materials, thus, making it easy for them to be disposed.
Starbucks operates on the basis of supplying finished products by carefully observing the market behavior. The company is fully aware that any slightest mistake in pricing can affect its total turnover. The company is very sensitive to prices of its commodities.
Starbucks is fully aware that purchasing power varies on an individual basis. Therefore, it uses different packaging for the same product so that it cannot lock out any individual from acquiring the product. It takes into consideration four aspects that affect buying power of individuals. These are product, placement, promotional services, and price.