An Analysis of Starbucks Coffee Company - Assignment Example

? STARBUCKS COFFEE COMPANY- An Analysis Words Count – 3242 (without table of contents and list of references) Table of Contents S. No Heading Page No1 Introduction 3 1.1 Segment Analysis – Current Market Position 4 1.2 Current Strategies 4 2 Task A –External Environment Analysis 5 2.1 Starbucks UK’s Operation 5 2.2 PESTEL Analysis 6 2.2.1 Political 6 2.2.2 High Incidence of Taxes in UK- Economical Issues 6 2.2.3 Sociological Issues 6 2.2.4 Technologies 6 2.2.5 Legal 7 2.2.6 Environment 7 2.3 Porter’s Five Force Analysis 7 2.3.1 Threat of Entry 7 2.3.2 Threat of Substitutes 7 2.3.3 Buyer Power 8 2.3.4 Supplier Power 8 2.3.5 Competitive Rivalry 8 3 Task B- Strategic Capability Analysis 9 3.1 Value Chain Analysis 9 3.2 Threshold resources and competences and Distinctive resources and competences 11 3.3 Strength 12 3.4 Weakness 12 4 Task C “ Strategic Fit Analysis “ 13 4.1 Strength 13 4.2 Weakness 13 4.3 Opportunities 14 4.4 Threats 14 5 List of References 16 List of Figures and Tables S. No Heading Page No 1 Retail Sales Mix by Products Type for Company –Operated Stores 3 2 Coffee & Snacks Shops – Industry at a Glance – 2011 4 3 Total Net Revenues of Starbucks 5 4 Ranking of Porter’s Five Forces 7 5 Outlet Numbers of Selected Specialty coffee stores 9 4 Number of Coffee Outlets - UK 10 6 Comparable Stores Sales Growth 15 1.0 Introduction: Starbuck is the leader in roaster, retailer and marketer of specialty coffee in the international level functioning in sixty nations around the world. Through company operated stores, Starbucks buy and roast first-rate coffee beans which it would market with handcrafted tea, coffee and other hot drinks, roasted beans, coffee accessories and a number of food items to its customers around the world. Starbuck main goal is that its coffee should be grown under the top standards of quality employing just buying practices. (Bussing-Burks: 1). Retail Sales Mix by Products Type for Company –Operated Stores: Starbucks established its first store on March 29, 1971 in Seattle. The major turning point in Starbucks operations started after Howard Schultz joined as director of Starbucks retail marketing and operations in 1982 as Starbucks started to offer coffee to espresso bars and fine restaurants. In 1984, Howard convinced the founders of Starbucks to apply the Italian coffeehouse concept in Seattle and in 1984, the ever first Starbucks Caffe Latte was offered. In 1987, Starbucks was acquired by II Giornale and the name was changed to Starbucks Corporation (Gilbert: 1). In 2000, Howard Schultz was promoted as chairman of the company. In 2008, Howard Schultz returned as the chief executive officer from the position of chairman and Coffee Equipment Company was acquired. In 2011, it acquired evolution fresh and in 2012, it acquired La Boulange. As of 30th September 2012, Starbucks has 9405 company –operated stores and 8661 licensed stores around the world. (“Starbucks Timeline 2012”). 1.1 “Segment Analysis “ “Current Market Position” Coffee & Snacks Shops – Industry at a Glance – 2011 “USD in Billions” Revenue 26.5 Industry Annual Growth 2006 to 2011 2% “Annual Growth 2011 to 2016” 4.1% Industry Profit 1.6 Industry Wages 6.1 As per IBIS World Industry Report 2011 (Coffee & Snacks Shops), Starbuck is occupying 32.6% of share in the industry. (Fellner 2008:17). As per Starbucks annual report, Starbuck serves about 33% of total QSR (Quick Service Restaurant), which includes both convenience store coffee shop and coffee shop despite cutthroat competition in QSR, Starbuck is able to hold its share in the industry. Further in the global market, every one cup of coffee out of 100 cups of coffee served is being served by the Starbucks. 1.2 “Current Strategies” Recovering from recession, Starbucks has attained the highest annual income of $11.7 bn in the year 2011. During 2011, Blonde Roast, was introduced in its products, it entered into the juice segment by acquiring Evolution Fresh. Starbucks is now able to serve about 60 million customers per week. Starbucks has effectively transitioned to a direct distribution model from its packaged tea and coffee business in-house in the year 2011.During the year 2011, it penetrated into new markets like the Netherlands, El Salvador and Guatemala. (Starbucks Annual Report 2011:1). In this research report, PEST analysis will be employed to analyse the Starbucks market environment in Task A section. By employing SWOT analysis, internal environment of Starbucks will be carried through in Table B section. In section Table C, strategic fit of Starbucks, highlighting any special strengths/weaknesses and opportunities/threats will be summarised. 2.TASK (A)- External Analysis 2.1. Starbucks UK’s Operation Through acquiring 65 Seattle Coffee Company stores in UK, Starbucks successfully penetrated into UKs market in May 1998.Starbucks is in operation for the last fourteen years in UK, and it employs more than 8500 in its UK operations through 700 stores. In the next five years, Starbucks has plans to establish 300 new stores, which will create 5000 new jobs in the UK. Starbucks is of the opinion that UK is the most competitive place to sell coffee as it is paying highest rent in its global operations for its stores in UK. Further, in UK, it offers highest quality of coffee, 100% Fairtrade espresso and 100% Arabica coffees. Moreover, it has to spend more in store design to make the customer’s experience as pleasant in UK as compared to other destinations. PEST analysis (political, economic, social, and technological) evaluates a specific market, including the strength of its competitors, from the viewpoint of a specific scheme or a business. 2.2 “PESTEL ANALYSIS” 2.2.1 Political Starbuck’s UK operation is impacted by the price and supply of coffee beans and other raw materials in producing nations’ political scenario. Starbuck’s UKs operation’s impact due to the global financial downturn will have a direct impact on Starbucks’ financial results of its international operations. (Phal N 2009:29) 2.2.2 High Incidence of Taxes in UK- Economical Issues Starbuck’s UK operations are impacted by the high incidence of tax. For instance, in UK, Starbucks has to pay 33% as corporate tax on its earnings whereas the average effective tax in USA is just 18.5% Starbucks in UK is paying about ?25m to ?30m through the way of various taxes except VAT payments to UK government. It is alleged that Starbucks has employed tax evasion in UK by reducing their profits before tax simply by altering their inter-company transfer pricing. (“Starbucks Blog 2012”). 2.2.3 “Sociological Issues:” In the year 2011, Starbucks observed Global Month of Service where more than 156,000 hours were dedicated to the community services. It has engaged more than 60,000 persons in 30 nations thereby effecting 1,400 communities –service projects. Further, it engaged more than 50,000 youngsters in community actions. It has started education initiative in Guatemala. It has made collaboration tie-up to assist the kids of the farmers in their school education. Starbucks is planning to help the local non-profit organisations from the revenue generated from each transaction from its local community stores. (Starbucks Annual Report 2012:1). 2.2.4 “Technology” Starbucks heavily bank upon information technology in its business activities and any major impediments, break, the shortfall of such technology or failure in security could destabilise its capability to succeed in its business objectives. Major business operations of Starbucks like point-of-sale methods of its retail stores, administration of its supply-chain management, online business, and Starbucks cards are all based on IT systems. To overcome this, Starbucks is continuously investing in improving its information technology systems to improve its performance. In 2012, Starbucks is expected to spend about $900 million in its technologies alone. In 2011, it switched to Oracle Accounting system to improve financial reporting. Starbucks has rolled out a new inventory management system and a point-of sale in 2011 mainly to increase its stores efficiency. (Starbucks Annual Report 2011:15). 2.2.5” Legal” There is legal dispute between Starbucks and Kraft Foods Global, Inc as Starbucks discontinued its distribution arrangement with the Kraft on the ground that Kraft infringed the main distribution agreement between them. Kraft claimed compensation from Starbucks for the abrupt termination of distribution agreement .Starbucks offered $750 million as compensation to settle the issue out of court. (Starbucks Annual Report 2012:17). 2.2.6 “Environment” Paper cups disposal is the main allegation levelled against Starbucks under environmental issues. The paper cups should have been composted but unfortunately, the lion’s share of Starbucks paper cups ended in landfills thereby creating more environmental issues. Further, about 73% of its stores had recycled its paper cups in 2008 as compared to 79% in 2006. Further, Starbucks is being alleged to add greenhouse-gas emissions from coffee roasting process and consumption of electricity in its stores. In an attempt to address the environmental impact, Starbucks had committed $7.5 million over the following three years with the Conservation International to reduce environmental impacts in its coffee-growing communities. (Alison 2008). 2.3 “Porter’s Five Forces Analysis” The above graph shows the aggregate ranking of the forces which has influence over the performance of a business as detailed by Porter. 2.3.1 “Threat of Entry” This is ranked as the first among the five. There is no entry barrier exists for the premium coffee sector as of date in the international coffee segment, and Starbucks is not an exception to this. Premium coffee industry can be easily penetrated by any giant and adequately funded and cash rich competitor can easily enter into the market .Starbucks is able to differentiate its products by detailing the nutrition info of their products and as per research, about 15% consumers in UK prefer low calorie coffee and 59% of coffee lovers demand the description of the product as regards to calorie, ingredients and this is potential for any new entrant to the UK’s coffee market. (Spicer 2011). 2.3.2 “Threat of Substitutes” This is ranked as the first among the five. Starbucks offers premium brand coffee and hence, its products are highly priced. There is always a chance available to consumers to shift to less luxurious or lower-end coffee shops like Nero or BB’s. There are also constant threat from fast food shops, tea houses, side-walk cafes, ice-cream parlours and pubs and bars. Since, Starbucks offers both coffee and tea, there is lesser chance of switching to substitutes by their customers. 2.3.3 “Buyer Power” This is ranked as the first among the five. With new premium roast coffee retailers like McDonalds who offer premium coffee at lesser price , consumers now have aggressive bargaining power as compared to the past.As the supermarkets in UK occupy 80% of the market share for distribution channel, still Starbucks is able to maintain its market share due to high quality product and high-class ambience of its retail stores. 2.3.4 “Supplier Power” This is ranked as the second among the five. As regards to individual supplier’s sales, Starbucks occupies a major share, and this offers the ability to dominate the coffee bean sales’ price. Due to Starbucks long standing arrangement with the suppliers of paper cups, lids, napkins etc, there is a very little bargaining power to suppliers. Due to the limited number of suppliers in latte and espresso and automated coffee machines, these suppliers will be having more bargaining power than the coffee bean supplier. Prices of the coffee and tea which are grown in Asian and African countries are greatly vacillating but this is managed by entering into long term purchase contracts by Starbucks. In general, it can be stated the supplier’s power in UKs hot drink market can be assessed as low medium in UK. 2.3.5 “Competitive Rivalry” . The principal competitors for the Starbucks Company in the international segment are Dunkin Donuts, Burger King, Panera and McDonalds. McCafe is the specialty coffee which is offered at a lesser price by McDonald and has many retail stores in high-flying sites with drive-thru stores and can attract the major customers of Starbucks either through value or convenience. Panera is concentrating on the lunch and breakfast crowd through its high-quality and its practical healthy full menu food service. Dunkin operates in all most all places and offers donut along with the coffee product. In UK, Costa Coffee is the main competitor. As per a research study, about 48% of coffee lovers pay more attention to the location of coffee stores and Costa Coffee stands first as regards to the highest number of coffee store locations in UK and Starbucks has to increase its number of retails stores to compete with Costa Coffee. 3. Table (B-Strategic Capability Analysis 3.1” Value Chain Analysis” Company’s Infrastructure Starbuck is the leader in roaster, retailer and marketer of specialty coffee in the international level functioning in sixty nations around the world. Starbucks is having around 17,000 stores around the globe as of fiscal 2011. Starbucks employs more than 8500 persons in its UK operations through 700 stores. It is suggested that Starbucks should make market research to reap the maximum advantage by locating its stores approximate to universities, shopping centres and in the big shopping malls.(Starbucks Annual Report 2012) “Human Resource Management “ Starbucks has been rated as one of the Fortune 100 companies to work for. Knowing that human resource is an intangible and success factor for the company, the company is giving due recognition to its employees’ contribution. Starbucks is paying great attention that the coffee plantations’ workers should get minimum wages and benefits under local laws. Through C.A.F.E Practices, Starbucks is practicing ethical sourcing. (Starbucks Annual Report 2012:1). Further, it offers part-time employment to students which help them to meet their educational expenses . Technology Development Starbucks facilitated its customers to use smart phones to make payment in the year 2011 and more than 20 million transactions were carried over in 2011. (Annual Report 2012). Procurement Starbuck has strategic partnership with Conservation International and is observing a set of norms to procure responsibly cultivated and ethically offered coffee. Starbucks is investing in coffee farmers’ communities to make sure that a sustainable delivery of high-quality coffee. It also procures tea, plastic cups, and coffee machines and is spending in buying or leasing stores and investing in interiors. Customer Order Customer can make order and make payment from their credit card now. In the year 2011, about 20 million mobile payments were made in its stores mainly through iPhone and Android. Operations Starbucks operation management strategy is expanding its global operations both through its own stores and licensed stores.It also expanded its area operations through acquisitions by adding more value-added products. As of 30th September 2012, Starbucks has 9405 company –operated stores and 8661 licensed stores around the world. (“Starbucks Timeline 2012”). It entered into the juice segment by acquiring Evolution Fresh in 2011. Marketing & Sales Starbucks is able to secure 33% of market share in the industry due to its high priority on quality of the coffee blended with aroma and fantastic taste. Further, its stores are situated in almost in all vicinities so that its customers are able to visit it without much difficulty. It has built up a community in and around their brand. Different aroma, variety of products is the key strength of its marketing strategy. By implementing Siebel CRM system, Starbucks is activating new preferences for evaluating product and customer scenarios thereby yielding more personalised marketing. (Murphy 2011). Services Starbucks improve its customer service through the feedback from its customers. Employees are given vigorous training in servicing the customer and to redress their grievances. By giving free samples to its customers frequently, Starbucks is increasing the customer base constantly. Starbucks is trying to offer quality products consistently. Customer satisfaction is the main criteria which Starbucks focus consistently to enhance its performance. 3.2 Threshold resources and competences and Distinctive resources and competences Competitive advantage means when a company stay competitive by marketing products that consumer purchase in preference to any substitute. Resources Competencies Threshold Employees Location of stores at convinient places Loyal Customers Constant advertising proficient and deliberate Management Very good knowledge about coffee retail market Unique Large choice of products like specialty coffee, tea, juices etc. Support from loyal customers constantly Superior standing in the market Strongest standing and products superior customer service well-maintained and clean company operated stores Facilitates its customer to order products in stores using one-click application [Baker 2011]. 3.3 “Strength” If we analyse the Starbucks 2011 Annual Report, we can understand the resiliency and strength of its business model, the power of its brand globally and the dedication and talent of its employees. (Starbucks Annual Report 2011:22). Starbucks has a strong brand image in the specialty coffee segment in the global level. Fortune Magazine has rated it as No 7 Company and in the year 2008, it was rated as one of the best 100 companies to work. Starbucks has higher market share, limited competition and strong growth rate. Starbucks have developed many products other than its famous coffee products like Seattle’s Best Coffee, La Boulange bakery, Tazo Tea and so on. In coffee alone, Starbucks offer single-origin premium coffees and about 30 blends. Starbuck main goal is that its coffee should be grown under the top standards of quality employing just buying practices. To select the best-quality coffee beans, employees of Starbuck personally visit to coffee farms situated in Asia, Latin America and Africa to source first rate coffee beans and its coffee roasters bring out rich flavour of the coffee beans through the name Starbucks Roast. (Pham-Gia 2009 8). 3.4 “Weakness” The spiralling increase in prices of coffee, cocoa, dairy products, fuel and sugar has in fact, negatively affected its EPS by about” $0.20 during the year 2011”. Further, the major segment of net income of Starbucks is generated from its US operations only. Excessive reliance on US market alone can be susceptible to unexpected changes that could happen in such a market like recent economic downturn , recession, etc., which would impact the disposable income of its customers and net margin may fall under the above scenarios. Thus, Starbuck management decision to focus heavily on American market denotes a disadvantage. Starbucks was compelled to close a number of its stores and to re-assess its growth and sales strategies in the recent economic meltdown. Further, it is also suffering from a cutthroat competition from McDonald’s Cafe and Dunkin’ Donuts. (Misonzhnik 2011). Due to high quality of ingredients employed, Starbucks charges higher prices as compared to its competitors. Opponents level charges against it as it is using genetically modified ingredients which Starbucks has not refuted yet. 4. Task ( C) “Strategic Fit Analysis” 4.1 “Strength:” Starbucks is spending nearly ?80 million per annum in UK economy by way of taxes and sourcing of materials. Starbucks UK has paid about ?8.6 m as corporation income-tax to the UK exchequer. At the time writing this essay, Starbucks has agreed to pay a further ?20 million in the next two years as arrears of tax not paid by it so far. Through “C.A.F.E Practices”, Starbucks is practicing ethical sourcing. (Starbucks Annual Report 2012:1). In its 2011 CSR Report, Starbucks has observed that it evaluated about 129 factories around the world and found that 38 factories were not met to its zero-tolerance norms and hence it discontinued operations in 26 factories. (Bruhn-Hansen 2012:25). Fortune Magazine has rated it as No 7 Company and in the year 2008, it was rated as one of the best 100 companies to work. Starbucks has higher market share, limited competition and strong growth rate. Starbucks owns a strong brand image for the specialty coffee in the world. Return of Howard Schultz as CEO in 2008 is a positive indicator as he is a visionary and his able leadership has taken the Starbucks to the top ladder of specialty coffee business. Location of stores is one another strategic factor as it is having around 17,000 stores in 55 nations as of fiscal 2011. Its store sales growth at the global level increased by 7%, and its Channel Development revenue witnessed a 50% increase in 2012. As regards to profitability and financial potency, Starbucks leads its competitors. 4.2 “Weakness:” Starbuck management decision to focus heavily on American market denotes a disadvantage. , it is also suffering from a cutthroat competition from McDonald’s Cafe and Dunkin’ Donuts. (Misonzhnik 2011). Due to high quality of ingredients employed, Starbucks charges higher prices as compared to its competitors. Hence, during the global economic meltdown in 2008 and 2009, Starbucks met losses as its customers switched to low priced products. Opponents level charges against it as it is using genetically modified ingredients which Starbucks has not refuted yet. On health ground, a severe propaganda is made against coffee consumption, and many of the Starbucks products have high-fat contents and calories. 4.3 “Opportunity” During the year 2011, it penetrated into new markets like the Netherlands, El Salvador and Guatemala. China seems to be a great market for Starbucks next to USA as it is currently having 500 stores spreads out in 44 cities and has future plan to open new stores about 150 stores in 2012. Further, in 2012, Starbucks has planned to open about 800 stores around the world and is planning to open its first store in India in 2012. (Form10k 2012:1). 4.4 “Threats” Starbuck’s UK operations are impacted by the high incidence of tax. . It is alleged that Starbucks has employed tax evasion in UK by reducing their profits before tax simply by altering their inter-company transfer pricing. McDonald and Dunkin are the competitors for the Starbucks and both are offering their products are a cheaper cost. McDonald’s Mc Cafe is being expanded globally on a large scale basis and it has wider geographical presence and offers the products at a very low price than Starbucks.One another competitor Panera is encroaching the market share of Starbucks in USA as Panera is growing fast both on analogues stores sales and net revenue basis. Panera offers premium coffee at premier price, and it can attract Starbucks customers if the quality of Starbucks goes down.(The Founder 2009). Starbucks is facing cut throat competition from premium brands and from low price substitutes. However, Starbucks has adequate differentiation muscle to retain its market share and also is continuously planning for aggressive expansion in various business segments and geographies. In a nutshell, even though a loyal customer has to shell out more dollars for a cup of Starbucks coffee, but it is still worthwhile to spend for a quality coffee. (Hennessey 2012). List of References Alison, M. (2008). Starbucks Continues to Fail on Environment Front. [online] available from [accessed 11 December 2012] Baker, R., 2011. Starbucks launches mobile payments. [Online] Available at: [Accessed on 05 December 2012]. Bruhn-Hansen, S. (2012). Corporate Social Responsibility and Starbucks. [Online] available from [accessed 6 December 2012] Bussing-Burks, M. (2010). Starbucks. New York: ABC-CLIO. Fellner, G. (2008). Wrestling with Starbucks. Rutgers:Rutgers University Press Gilbert, Sara. (2008).Built for Success: The Story of Starbucks. New York: The Creative Company Hennessey , R. (2012). 3 Reasons Why Starbucks Still Shines. [online] available from [accessed 7 December 2012] Michelli JA.(2009). Starbucks Experience. New Delhi: Tata McGraw-Hill Education. Misonzhnik, E. (2011). Starbucks Recaptures its Position at the Head of the U.S Coffee Market. [online] available from Read More