Strategic Management Report - A Strategic Pathfinder for Starbucks

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Strategic Management

Report

A Strategic Pathfinder for STARBUCKS

Version 1.0

S T A R B U C K S I N C.

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Fachhochschule Osnabrück Faculty of Business Management and Social Sciences

Master in International Business and Management

Strategic Management Report – A Strategic Pathfinder for STARBUCKS Assignment for the module Strategic Management Summer Semester 2014 Lecturer: Mrs. Kaur-Lahrmann Authors: Elin Lee (598736) Marina Ristic (637822) Maximilian Franke (634580) Submission date: 6th of June 2014

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DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be

accurate and reliable at the time of publishing. In consideration of human and / or mechanical errors, either

during the process of compiling the report or production, the author accepts no liability whatsoever for any

damage resulting from errors, inaccuracies or omissions affecting any part of the publication.

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Table of Content

Executive Summary ................................................................................................................................. 3

1. Introduction ..................................................................................................................................... 5

2. Problem Definition .......................................................................................................................... 6

3. Report Objective .............................................................................................................................. 6

4. Report Framework .......................................................................................................................... 6

5. Theoretical Framework ................................................................................................................... 7

6. Analysis of Current Situation ......................................................................................................... 14

6.1. Internal Analysis ........................................................................................................................ 14

6.1.1. Company Background Analysis.............................................................................................. 14

6.1.2. Internal Characteristics Analysis ............................................................................................ 19

6.1.3. Strategy Analysis ................................................................................................................... 21

6.1.4. Financial Performance Analysis ............................................................................................. 28

6.1.5. Internal Factor Evaluation Matrix.......................................................................................... 30

6.2. External Analysis ........................................................................................................................ 32

6.2.1. Macro-Environmental Analysis ............................................................................................. 32

6.2.2. Industry Analysis .................................................................................................................... 37

6.2.3. External Factor Evaluation Matrix ......................................................................................... 39

7. Assessment Analysis (Fulcrum) ..................................................................................................... 41

7.1. Current Performance Assessment ............................................................................................. 41

7.2. Expected Performance Assessment .......................................................................................... 44

7.3. Developing Strategic Focus ....................................................................................................... 47

8. Solution Analysis ............................................................................................................................ 50

8.1. Strategic Alternatives ................................................................................................................ 50

8.2. Goals and Evaluation Criteria .................................................................................................... 51

8.3. Strategy Selection ...................................................................................................................... 53

9. Recommendations......................................................................................................................... 59

Appendices ............................................................................................................................................ 63

Bibliography ........................................................................................................................................... 69

Declaration ............................................................................................................................................ 73

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Executive Summary

Starbucks is a global company operating in the coffee retail market since 1972. The

company, which has positioned itself as a seller of premium coffee products, has greatly

expanded its market position and presence in the past two decades. Today, the company is

serving coffee enthusiasts in 64 countries and has grown to become the world’s largest

coffee house company. Starbucks seemingly undisputed market leadership position can be

attributed to the company’s clever product diversification and market expansion strategies.

In response to changing consumer needs and demand, Starbucks has evolved from a mere

seller of coffee products to full-fledged chain “restaurant”, offering not only coffee products

but also other beverages, foods, and merchandise. Moreover, stagnating market growth in

developed economies has prompted the company to move into emerging economies with

high growth potential. Countries like China, India, and Brazil have been portraying increasing

consumption rates of coffee products for years and are likely to surpass coffee consumption

in developed countries by 2020.

Despite a positive market outlook, Starbucks is in need of strategic counseling as the

company faces not to be underestimated challenges in the short- to medium-term. Those

challenges emanate from established competitors like McDonalds and Dunkin’ Donuts who

defy Starbuck’s market leadership position by driving aggressive low-pricing strategies in

established and emerging markets. Moreover, new trends in the coffee industry have

opened up new segments with high growth potentials. Starbucks remains unsure how tackle

new segments and what impact trends could have on its product portfolio.

This report is meant to be a strategic pathfinder that aims at illuminating different strategic

alternatives in the light of the many opportunities and threats that lie ahead. The report will

also give advice on how to utilize internal strengths to capitalize on opportunities and how

to minimize weaknesses to avoid threats.

The internal position of Starbucks is strong, indicating that the company excels in utilizing

strengths to create competitive advantages. Core strengths of the company are its excellent

brand image, customer service, supply chain management, and financial position. With the

help of the latter capabilities, Starbucks is able to retain its market leadership position,

improve the ability to open new stores at top-sites, and mitigate volatilities in global coffee

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bean prices. One major weakness is that continuous adaptations and additions to the

product portfolio have resulted in various products lines becoming unprofitable

(overextension). The external position of Starbucks is balanced, indicating that the company

is only marginally able to respond to external forces. Since the economic downturn in

2008/2009, customers have grown more price-sensitive and low switching costs in the

industry have made them more prone to move to competing brands. Moreover, saturated

markets at home have increased the competitive pressure on Starbucks. Having missed the

first-mover advantage in the single-serve coffee segment, Starbucks has to quarrel with a

number of competitors.

Despite heavy challenges in the external environment, the analysis has shown that Starbucks

is well-positioned to confront expected changes in the industry. The company is advised to

continue key strategies on corporate level: aggressive expansion strategy in emerging

markets, product development/positioning strategies for niche markets, retrenchment

strategies for unprofitable product lines, and alliances for reputable yet slow-growing

product lines. Whilst the latter strategies are enough to maintain and defend current

markets shares, the company must undertake additional strategic changes to achieve a

sustainable market leader position in the short – to medium-term. Here it is important to

increase marketing spending to raise awareness among customers, retain the premium-

pricing strategy to boost brand image, establish trend-scouting facilities to foresee emerging

consumer needs, and hedge against volatilities in the market prices of coffee beans by

employing forward contracts or similar hedging strategies.

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1. Introduction

Being the world’s largest coffee company both in terms of sales and market share, Starbucks

Coffee Company (hereinafter referred to as “Starbucks”) has managed to position itself as a

distinguished and successful provider of high-quality coffee products, attracting millions of

customers worldwide. The company, which was founded in Seattle in 1971 as a mere roaster

and retailer of whole bean and ground coffee, tea, and spices, first entered the market as a

seller of brewed coffee in 1985, when Howard Schulz, former employee and current CEO,

realized the huge potential of selling brewed specialty coffee. Following the opening of

eleven stores in the Seattle area, Starbucks began its expansion first in the north-western

United States and then across the rest of the country. Global expansion did not take place

until Starbucks’ initial public offering (IPO) in 1992, which further highlighted Mr. Schulz’s

intention to turn Starbucks into a truly global company. Its first international store opened in

Tokyo in 1996, followed by Singapore and the Philippines. In the early 2000s, Starbucks

expanded into other important key markets, covering most Asian countries and also moving

into the European, Australian, and Latin-American market. Today (2011), the company has

16,635 stores in 50 countries of which 8,832 are wholly-owned stores and 7,803 licensed

stores. By forming alliances with major coffee producers and retailers as well as acquiring

emerging competitors, Starbucks has managed to extend and eventually consolidate its

market position in recent years. The company is also following hot trends in the coffee

market, such as single-serve coffee or the delivery of ready-to-be-served coffee to luxury

hotel rooms. Moreover, Starbucks has realized that emerging markets, most prominently

China, have huge untapped potentials that need to be exploited if the company wants to

gain and maintain a competitive edge over competitors. The aggressive expansion strategy

that Starbucks is currently pursuing in China can thus be understood as a clear message to

competitors that it will not render the number one spot in the global coffee market without

a fight. In fact, Starbucks’ future could not look any brighter. With third quarter (2011) sales

figures exceeding the five percent threshold in both the USA and internationally, and new

shops opening in China almost on a daily basis, the company seems have chosen the correct

strategic path for the upcoming years. In the words of Starbucks’ CEO Howard Schulz,

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“Starbucks has never been healthier, more connected to customers and partners, or better

positioned to go after tremendous business opportunities that lie ahead.”1

2. Problem Definition

Despite the current success and seemingly undisputed market position of Starbucks, the

company faces not to be underestimated challenges in the short- to medium-term. Analysts

are reminded that direct competitors, such as Dunkin Brands and McDonald’s are aiming to

gain and attract customers globally who otherwise may go to the pricier Starbucks stores.2

Moreover, the company remains unsure as to what impact its growth strategy in emerging

market will have on corporate performance – whether perceived opportunities are really

sustainable or actually short-winded. Saturated home markets and the rising importance of

niche markets pose further challenges for the company. Facing uncertainty, Mr. Schultz is in

need of a clear strategic plan for the short-to medium-term.

3. Report Objective

This report aims at helping Mr. Schultz to better illuminate and pinpoint the different

strategic paths that branch out in front of the company. In a sense, this report is meant to be

a strategic pathfinder with the objective to help Starbucks better assess its current strategic

position and – if necessary – propose a new strategic approach in the light of the many

opportunities, threats, strengths and weaknesses that surround the company.

4. Report Framework

The framework of this report reflects the phases a comprehensive strategic analysis (see

appendix 1).3 In the first phase, the current situation of the Starbucks is analyzed by means

of highlighting strengths and weaknesses (internal analysis) and opportunities and threats

(external analysis) that have an impact on the company’s current strategic performance –

both on corporate and competitive level. The effectiveness of the current strategy is

determined by considering past and current financial ratios (financial analysis). In the second

1 Cf. Reed, M., Brunson, R. (2011): p. 175

2 Cf. Reed, M., Brunson, R. (2011): p. 175

3 Cf. Boardman, A., Vining, A. (1999): p. 3

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phase, the current performance of Starbucks is summarized and judged based on whether or

not it fulfills corporate expectations. Depending on the outcome, a rationale for action is

raised and broad strategic directions are formulated. In the third phase, several reasonable

and mutually-exclusive strategic alternatives are generated. Those alternatives are analyzed

based on the goals and objectives of the company. The most attractive strategic alternative

(or alternatives) is determined by the degree of impact it will have on Starbucks’

performance goals and value chain. The last phase consists of the recommendation. Here,

the proposed strategy (or strategies) is justified.

5. Theoretical Framework

Backing the comprehensive strategic analysis will be a multitude of strategic management

tools and methods which have been deemed relevant for solving the problem at hand. The

relevance and applicability of the tools will be explained in this chapter to avoid lengthy

explanations in the main body of this report.

BCG MATRIX

The BCG Matrix was applied in order to explore the growth potential of Starbucks’ four

major product categories. The matrix divides product categories into four segments based

on their market share (x-axis) and market growth (y-axis). Since it was impossible to find

accurate and up-to-date market share figures for Starbucks’ product categories, the matrix

was modified according to what sales growth categories portray (y-axis) and how profitable

they are (x-axis). Consequently, categories were allocated to four distinct portfolio

segments:

1. Stars: product categories which display high sales growth and substantially

contribute to overall profits.

2. Question marks: product categories which display high sales growth, however only

contribute little to overall profits.

3. Cash cows: product categories which display low sales growth but still contribute

substantially to overall profits.

4. Dogs: product categories which display low sales growth and contribute little (or

nothing) to overall profits.

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PRODUCT-CUSTOMER ANALYSIS

The Product-Customer Analysis was applied to highlight the relationship between Starbucks’

different product categories and customer groups. The analysis highlights which customer

groups prefer which product categories, and what they value most in each product category.

For Starbucks, this information can be important if the company has to decide which product

lines to develop or discard.

PORTER’S GENERIC STRATEGIES

Porter’s Generic Strategies were used as a means of evaluating Starbucks’ current strategic

stance on competitive level. This model describes how Starbuck pursues competitive

advantages across its market scope. With Porter’s Generic Strategies, competitive advantage

is defined either by offering lower costs than competitors or by differentiating product

offerings to an extent that allows the company to command higher prices. Those strategies

are applied either in a wide market context (industry-wide) or in a narrow market context

(focus on selected markets). Consequently, four distinct business strategies can be

determined:

1. Overall cost-leadership: the company offers lower prices than competitors to a wide

selection of customer groups.

2. Differentiation: the company offers distinct and unique product categories which

cannot be emulated by competitors at a higher price and to a wide selection of

customer groups.

3. Cost focus: the company offers lower prices than competitors in niche markets.

4. Differentiation focus: the company offers distinct and unique product categories

which cannot be emulated by competitors at a higher price in niche markets.

INTERNAL FACTOR EVAULATION MATRIX (IFE)

The IFE Matrix was used to evaluate major strengths and weaknesses in functional areas of

Starbucks and determine whether or not the company has a strong or weak internal

position. The IFE Matrix can be compiled using the following four steps:4

4 Cf. Maxi-Pedia (2014a): Online publication

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1. Compile key internal factors: key internal factors are the strengths and weaknesses

that can be complied from the internal analysis of Starbucks.

2. Assign weights: assign weights that range from 0.00 to 1.00 to each factor. The

weights should be assigned according to each factor’s importance to Starbucks’

overall business strategy.

3. Assign ratings: assign ratings on a scale from 1 to 4. A rating of 1 represents a major

weakness, a rating of 2 represents a minor weakness, a rating of 3 represents a minor

strength, and a rating of 4 represents a major strength.

4. Multiply and sum: multiply the weights with the ratings and sum all products to

reach the final score.

The average score is 2.5. A score exceeding the average indicates a strong internal position.

A score that is under the average indicates a weak internal position.

PESTEL ANALYSIS

The PESTEL analysis was applied to evaluate the macro environment to which Starbucks is

exposed. It helps the company to better determine external factors that might have an

influence on the company’s performance in the global coffee market. Originally, the PESTEL

analysis has been designed to evaluate macro-environmental influences on industries in

certain countries. However, since Starbucks is operating in a global environment, the PESTEL

analysis was fine-tuned to determine the macro-environmental influences on the coffee

industry within a global context. The analysis evaluates six macro-environmental variables:

1. Political Environment: are there any governmental regulations that would inhibit

Starbucks in the global coffee market?

2. Economic Environment: has the recent economic crisis had any effect on disposable

income of customers?

3. Social Environment: how has the social attitude towards coffee changed over the

years? How far developed is the coffee culture?

4. Technological Environment: what key technological changes in the production and

consumption of coffee have taken place over the years?

5. Ecological Environment: how important is environmental stewardship in the

industry?

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6. Legal Environment: how stringently are intellectual property rights enforced?

PORTER’S FIVE FORCES

The Porter’s Five Forces Model was used to determine Starbucks’ competitive position in the

global coffee market. It helps Starbucks get a notion about the extent of competitive rivalry

in the industry. In essence, five forces determine the attractiveness of the market:

1. Threat of established rivals: how saturated is the market with established

competitors and how strong is their market position?

2. Threat of new entrants: at what pace are new entrants swarming the market and

how strong are they?

3. Threat of substitutes: how well positioned are substitute products and do they pose

a threat to coffee products?

4. Bargaining power of suppliers: how strong is the position of coffee bean farmers to

dictate coffee bean prices?

5. Bargaining power of buyers: how strong is the position of customers to switch

between different bands and demand lower prices?

EXTERNAL FACTOR EVALUATION MATRIX (EFE)

The EFE Matrix was used to assess Starbucks’ current business conditions. It helps Starbucks

to better visualize and prioritize the opportunities and threats to which the business is

exposed. The EFE Matrix can be compiled using the following four steps:5

1. Compile key external factors: key external factors are the opportunities and threats

that can be complied from the external analysis of Starbucks.

2. Assign weights: assign weights that range from 0.00 to 1.00 to each factor. The

weight should be assigned according to each factor’s importance to Starbucks’


3. Assign ratings: assign ratings on a scale from 1 to 4. The ratings indicate how

effective the company’s current strategy responds to each factor. A rating of 1

represents a poor response, a rating of 2 represents a response below average, a

5 Cf. Maxi-Pedia (2014b): Online publication

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rating of 3 represents a response above average, and a rating of 4 represents a

superior response.

4. Multiply and sum: multiply the weights with the ratings and sum all products to

reach the final score.

The average score is 2.5. A score exceeding the average indicates a strong strategic ability to

respond to external factors. A score that is under the average indicates a weak strategic

ability to respond to external factors.

SWOT ANALYSIS

The SWOT Analysis was used to summarize internal strengths and weaknesses as well as

external opportunities and threats. It helped paving the way for the ensuing TOWS Analysis

by redirecting the focus on key issues within and outside the company’s boundaries.

TOWS ANALYSIS

The TOWS Analysis was applied to highlight four broad strategic directions from which

possible strategic alternatives can be drawn. The analysis matches strengths and weaknesses

with opportunities and threats in order to arrive at four mutually-exclusive strategy types:6

1. Maxi-Maxi Strategies: strategies that use strengths to maximize opportunities.

2. Maxi-Mini Strategies: strategies that use strengths to minimize threats.

3. Mini-Maxi Strategies: strategies that minimize weaknesses by taking advantage of

opportunities.

4. Mini-Mini Strategies: strategies that minimize weaknesses and avoid threats.

SPACE MATRIX

The SPACE Matrix was used to determine which nature of strategy Starbucks should

undertake in the short- to medium-term. This strategic tool is meant to formulate a strategy

based on the competitive position of Starbucks. The matrix is constructed by plotting

calculated values for the competitive advantage and industry strength dimensions on the X-

6 Cf. MindTools (2014): Online publication

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axis. Variables for the environmental stability and financial strength dimensions are plotted

on the Y-axis. Five steps are necessary to compile a SPACE matrix:7

1. Determine values for dimensions: values for each dimensions are determined:

a. Competitive advantage (CA): values for calculating the competitive advantage

are taken from Current Performance Assessment Analysis.

b. Industry strength (IS): values for calculating the industry strengths are taken

from the Porter’s Five Forces Analysis.

c. Environmental stability (ES): values for calculating the environmental stability

are taken from the PESTEL Analysis.

d. Financial strength (FS): values for calculating the financial stability are taken

from the Financial Performance Analysis.

2. Rate the dimensions: the CA and ES dimensions are rated using a scale from -6

(worst) to -1 (best). The IS and FS dimensions are rated using a scale from +1 (worst)

to +6 (best).

3. Find average scores of dimensions.

4. Add average scores: add the average score of CA to that of IS, and that of FS to ES to

arrive at the total X-axis (Y-axis) score.

5. Plot scores to the graph: plot both scores to the graph and draw a line from the

center to the XY-intersection.

Depending into which quadrant the line points, the nature of the proposed strategy can

either be aggressive (top-right quadrant), conservative (top-left quadrant), defensive

(bottom-left quadrant), or competitive (bottom-right quadrant).

QSP MATRIX

The Quantitative Strategic Planning Matrix (QSPM) was utilized for evaluating possible

strategies and comparing them as alternatives among each other. The QSPM helped to set

priorities as to which strategies are more attractive for Starbucks taking into consideration

their goals and objectives. Five steps are necessary to compile a QSPM:8

7 Cf. Maxi-Pedia (2014c): Online publication

8 Cf. Maxi-Pedia (2014d): Online publication

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1. Provide a list with internal and external factors: strengths and weaknesses can be

compiled from the IFE Matrix. Opportunities and threats are taken from the EFE

Matrix.

2. Identify strategic alternatives: strategic alternatives are taken from the TOWS

analysis.

3. Assign weights: weights are assigned to key internal and external factors. Those

weights are taken from the IFE and EFE matrices.

4. Assign attractiveness scores: attractiveness scores are assigned based on whether

the factor makes a difference in the decision about which strategy to pursue. If the

answer is “yes”, then the score of 1 = not attractive, 2 = somewhat attractive, 3 =

reasonably attractive, and 4 = highly attractive. If the answer is “no”, the score will be

0.

5. Calculate total attractiveness score: multiply the weights with the attractiveness

scores and sum up the products.

The strategic alternative with the biggest total attractiveness score portrays the most

attractive strategy for the company.

GRAND STRATEGY MATRIX

The Grand Strategy Matrix was applied to develop strategies for Starbucks’ different

business units. Product categories are allotted to four different quadrants according to their

competitive position and market growth. From each quadrant, different strategies can be

chosen:9

1. Quadrant I: product categories with a strong competitive position and rapid market

growth.

2. Quadrant II: product categories with a weak competitive position but rapid market

growth.

3. Quadrant III: product categories with a weak competitive position and slow market

growth.

4. Quadrant IV: product categories with a strong competitive position but slow market

growth.

9 Cf. Maxi-Pedia (2014e): Online publication

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6. Analysis of Current Situation

The analysis of the current situation is meant to provide a context for any strategic analysis

and should be understood first.10 It provides an insight into the internal composition as well

as the external position of the company. The current situation analysis culminates in distinct

strengths/weaknesses and opportunities/threats which are important key consideration

when compiling the strategic alternatives in the solution analysis.

6.1. Internal Analysis

The internal analysis is meant to provide a review of Starbucks’ organizational strengths and

weaknesses. By analyzing the internal composition of the company, the reader will gain a

better understanding of the company’s background, product categories, basic competencies,

and strategic coordination. The analysis culminates in an Internal Factor Evaluation Matrix

(IFE Matrix) which summarizes and evaluates distinct strengths and weaknesses according to

their importance to Starbucks’ overall business strategy.

6.1.1. Company Background Analysis

Ownership and Control

Starbucks was founded as a privately-owned company by the company’s current CEO Mr.

Schulz in 1971. In 1992, the company went public in order to further improve its financial

position to better tackle and expand into overseas markets. The company is controlled by

Mr. Schulz who serves as the chairman of the board, president, and CEO. The organization is

managerially-controlled because share ownership is widely dispersed. About 75 percent of

shares are held by institutional and mutual fund owners and only three percent is held by

insiders.11

Vision, Mission, and Principles

It is Starbucks mission “to inspire and nurture the human spirit; one person, one cup, and

one neighborhood at a time.” Starbucks regards human dignity and a warm and comfortable

10

Cf. Boardman, A., Vining, A. (1999): p. 3 11

Cf. Yahoo Finance (2014): Online publication

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atmosphere as the highest value to its customers, employees, and partners. The company

allows customers to personalize their beverage according to their needs, for example by

adding milk content, syrup, and even temperature. According to its vision statement and

principles, Starbucks not only calls its employees “partners” and treats them with respect

and dignity, but it also treats its suppliers ethically, applying fair trade and fair sourcing

principles as well as providing financial support.

Flow of Goods

Purchasing at Starbucks involves company agents who are choosing bean producers

(farmers) predominantly in Africa, Latin America, and Asia. Coffee beans are selected under

the highest standards of quality and the goal is to establish long-term strategic partnerships

with high-performing suppliers. The beans are then exported by export agents, imported by

brokers, tested on quality, roasted, and eventually packaged before they are being sent off

to Starbucks stores around the world. Sales can take three distinct ways: beans are sold

either directly through stores without intermediaries (retailing), to specialty retailers such as

restaurants, or via the internet (direct response). In terms of marketing activities, Starbucks

is relying mostly on word-of-mouth which is facilitated by the high-quality image of the

company. A detailed description of the value chain can be found in appendix 2.

Product Portfolio

Starbucks coffee comes in two forms: one is already processed coffee comprising Starbucks

VIA®, K-cup® Packs, Verismo™ System Pods, Pods, Portions, and Filter Packs. The other is by

profile like blonde roast, medium roast, dark roast, flavored roast, and seasonal favorites.

Starbucks' major income source is from selling beverages: it sells hot and iced coffee which

makes up the lion’s share of sales (75% of total revenues in 2010). Starbucks’ beverage

portfolio consists of brewed coffees like Seattle’s Best Coffee and Torrefazione Italia Coffee.

Other product lines are non-coffee blended beverages like Vivano Smoothies, Tazo Tea, and

Ethos Water. Starbucks sells single-serve coffee (VIA instant coffee and K-cups) through

strategic partnerships, and those product lines have also been expanded abroad with

success. Thus, Starbucks’ channel development segment includes whole bean and ground

coffees, as well as branded products which are sold worldwide through channels such as

grocery stores, warehouse clubs, retailers, and convenient stores. On the other hand, sales

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of beverages have been decreasing in 2010 as compared to the previous year, which is

mainly due to the addition of various products lines to the existing portfolio. Recently,

Starbucks has added various product lines to its portfolio, which primarily consist of

merchandise items such as home espresso machines, coffee brewers and grinders, coffee

mugs and accessories. Music, packaged goods, books, and gift items are the newest

contribution to Starbucks’ rapidly expanding product portfolio. Apart from selling beverages

and merchandise, the company also sells various food products that frequently accompany

the coffee experience: sandwiches, baked pastries, salads, oatmeal yogurt, parfaits and fruit

cups. Moreover, in an effort to increase evening sales (people do not tend to drink coffee in

the evening), Starbucks added beverages such as beer and wines as well as evening snacks

like cheese plates and flatbread to the menu in 26 stores in States.12 The detailed product

portfolio can be found in appendix 3.

According to the product portfolio, products can be roughly divided into four major

categories: beverages, foods, packaged and single-serve coffee (whole bean coffee), and

coffee-making equipment and other merchandise. In order to determine which product

categories are the most profitable and fastest-growing ones, the BCG matrix will be applied:

12

Starbucks homepage

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Figure 1: BCG Matrix

Source: Own illustration

The BCG matrix shows that the beverage category (including all over-the-counter coffee

products) is the cash cow of Starbucks. In fact, 76 percent of total sales (2010) have been

generated from selling beverages. However, sales of beverages have been declining one

percent from 2008. The rising stars on the horizon are food products which made up 19

percent of total sales in 2010 (2% up from 2008). Successful adaptations of the food offering

(e.g. hot breakfasts and salads) have spurred sales in this category. Packaged coffee products

and single-serve coffees portray a positive growth trend (1% up from 2008), however only

made up about four percent of total sales in 2010. Sales in this category are expected to go

up as Starbucks VIA instant coffee and K-cups are bound to make a successful entry into

emerging markets in 2011. The most underperforming category is coffee-producing

equipment and other merchandise. While total sales accounted for only two percent in

2010, this category is also on the downgrade as sales have been declining two percent from

2008. With the rise of single-serve coffee products, conventional coffee machines have

become rather obsolete and unfashionable.

Profitability

Question Marks

Dogs

Stars

Cash Cows

Beverages

Foods

Whole

bean

coffee

Merch

andise

Sales growth

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Customers

Table 1: Product-Customer Matrix

Products/Customers Kids and Teens Young Adults 25-40 years

Beverages Passiveness Coolness Social Status

Foods Taste Complementary Nutrition

Whole bean and soluble coffees

- - Loyalty

Coffee-making equipment and other merchandise

- Fashion, Coolness Loyalty


Starbucks is catering its products to three different customer groups: kids and teens, young

adults, and adults (25-40 years). The company’s primary market comprises men and women

between 25 and 40 years. They account for almost half (49%) of its total business sales.13

This age group perceives Starbucks as a status symbol. For them, beverages and Starbucks’

merchandise is hip and contemporary and perfectly relates with their relatively high income,

professional career, and urban lifestyle. The long-term experience with Starbucks turns this

age group into frequent visitors and loyal customers.

Young adults comprise the age group of 18 to 24 year old customers. About 40 percent of

total sales can be contributed to this group.14 Starbucks positions itself as a place where

college students can hang out, work on their assignments, and meet people. Wi-Fi access,

contemporary store design, and “cool” music help to retain young adults and eventually turn

them into regular customers. Beverages and food products are perceived as cool and

merchandise as hip and must-have.

Although Starbucks is not catering directly to kids (high calorie and caffeine products), about

two percent of sales can be attributed to customers age 13 to 17. While kids usually

accompany their parents (passiveness), teens use Starbucks as a place to hang out with

friends. They usually order non-caffeine beverages and foods because of how it tastes.

13

Cf. O’Farrell, R. (n.d.): Online publication 14

Cf. O’Farrell, R. (n.d.): Online publication

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Acquisitions and Alliances

Since its foundation in 1971, Starbucks has acquired or formed alliances with a number of

companies. The most prominent acquisitions of Starbucks include the purchase of Tazo Tea

Company in 1999, which allowed Starbucks to add various tea products to its portfolio, the

Seattle Coffee Company in 2003, which further expanded Starbucks’ presence in the US

coffee market and also opened the way into the wholesale sector, and the Coffee Equipment

Company in 2008, which granted Starbucks the right to use the innovative Clover Brewing

System.

Key alliances include the partnership with Target, which allowed Starbucks to sell its coffee

in highly frequented cafés in Target Stores, the Green Mountain Coffee Roasters, providing

Starbucks with access to the fast-growing single-serve coffee market, and Tata Coffee of

India, which will lead to Starbucks gaining a threshold in the aspiring Indian coffee market

and also providing the company with access to high-quality Arabian coffee beans.

Acquisitions and alliance can therefore be seen as important measures to diversify the

product portfolio (e.g. Tazo Tea), gaining market share (e.g. Seattle Coffee Company),

penetrating new segments (e.g. Green Mountain Coffee Roasters), gaining access to

intellectual property (e.g. Coffee Equipment Company), and expanding into new markets

(e.g. Tata).

6.1.2. Internal Characteristics Analysis Resources, Skills, and Attributes

Starbucks expects its staffs to excel in customer relationship management. Employees are

strongly committed and motivated to share their coffee knowledge, product expertise, and

service with customers. In the recruitment process, the company makes sure that baristas

have the ability to build relationships, work in teams, and portray interpersonal

(communication) skills.15 Next to offering qualified customer service, Starbucks is showing

social, ethical, and environmental stewardship. A detailed description of Starbucks’ Global

Responsibility Program can be found in the appendix 4. Despite Starbucks’ active

15

Cf. Starbucks Website (2014a): Online publication

20

participation in environmental programs, the company has been criticized by environmental

experts for pouring millions of gallons of water down the drain at its coffee stores.16

In addition, Starbucks offers more than 30 different blends of coffee and its single-origin

premium Arabica coffee fulfills the highest standards in premium coffee making. Farmers are

selected according the highest quality standards, and only the best beans are processed into

Starbucks coffee. The Starbucks Roast® is a special roasting technique which not only

provides the coffee with a distinct, dark color but also contributes to achieving a unique and

highly recognized flavor.17 Starbucks has further enhanced its brewing skills by acquiring the

Clover® Brewing System of the Coffee Equipment Company, and the strategic partnership

with Green Mountain Coffee (maker of the K-cups) has opened the way into the fast-growing

single-serve coffee market.

The company’s brand power and recognition are strong, and Starbucks is generally perceived

as a high-quality and trendy coffee store. Nonetheless, one study of Starbucks’ brand

awareness revealed that people have difficulties connecting the logo (portraying a mermaid)

to coffee and that the actual coffee experience is not as attractive as the spiritual

atmosphere of the stores.18

In recent years, Starbucks has been aggressively extending its product portfolio by adding

different foods, drinks, and merchandise products to the store shelves. Next to the fact that

sales of merchandise and other coffee-making equipment have been declining over the past

years (from 4% in 2008 to 2% in 201019), overloading store shelves with merchandises can

also have a negative effect on brand identity. Especially the sales of food products could

reduce the consumption of coffee, which, after all, is Starbucks’ cash cow.

Organization

Howard Schulz serves as the chairman of the board, president, and CEO of Starbucks.

Appendix 5 shows the organizational chart of the company. Starbucks’ overseas markets are

divided into regions (Asia Pacific, Europe, Middle East, North- and South America). However,

regions are not headed by their own regional headquarters but individual stores (whether

16

Cf. Balakrishnan, A. (2008): Online publication 17

Cf. Starbucks Website (2014b): Online publication 18

Cf. Dahlin, P. (2008): p. 47 19

Cf. Starbucks Corporation (2010): p. 4

21

licensed or not) report directly to the international headquarter which oversees all

operations. This centralized control over stores allows Starbucks to implement far-reaching

decisions in a prompt and accurate manner. The downturn of centralized control is that it

might complicate the implementation of regional strategies that are necessary to respond to

local consumer needs. Especially for companies that seek rapid overseas expansion, knowing

the local market and its needs is imperative for establishing a long-lasting presence.

Therefore, Starbucks prefers to penetrate new markets by means of prominent, local

retailers who dispose of in-depth market knowledge and access. Licensees, as the company

claims, provide improved, and at times the only access to desirable retail space.20 Hence, it

comes as no surprise that 63 percent of international stores are licensed, while about 60

percent of US-based stores are company-owned.21 Starbucks maintains a high level of

control over licensed stores by imposing company guidelines such as operating standards,

store development procedures, and training classes for employees. This high level of control

is necessary to preserve the global image of Starbucks and to thwart intellectual property

theft.

The organizational structure within a store is vertically organized. The store manager, who

reports to the district manager, and who is represented by the assistant store manager, is

giving orders to the shift supervisor who is responsible for the baristas. The baristas are the

face of Starbucks as they are in direct contact with customers. Their dedication towards

creating a friendly and carefree atmosphere is very important for the image that Starbucks is

trying to display to customers.

6.1.3. Strategy Analysis

In this section, Starbucks’ corporate and business level strategy will be scrutinized. Corporate

level strategy concerns the scope of the firm, the general direction the company is heading

towards in the medium- to long-run. The business or competitive strategy concerns how well

the business competes, that is, how the business generates money in the short-run.22

20

Cf. Starbucks Corporation (2010): p. 5 21


Cf. Boardman, A., Vining, A. (1999): p. 14

22

Corporate Level Strategy

As the world’s leading coffee company, Starbucks is striving to defend and, if procurable,

expand its current market position against rising competitors. Consequently, Starbucks’ long-

term strategy is tailored to fending off competitors both at home and abroad and expanding

current market shares. The company has understood that its seemingly unrivaled market

position in the past two decades will no longer be tolerated by competition. Especially

McDonalds and Dunkin’ Donuts are going great lengths to dethrone Starbucks as the world’s

number one. With this in mind, Starbucks undertakes several long-run strategic actions to

contain competition.

1. Partnership Strategies

Starbucks is a company with tradition and can be seen as a co-initiator of the global coffee

frenzy that started in the late 60s/early 70s (see appendix 6). Despite its history and

excellent capabilities in coffee-making, the company has to revert to external help to further

grow in the market. Alliances with key strategic partners have helped Starbucks to gain

access to new market segments, expand into new overseas markets, and obtain intellectual

property such as the Clover Brewing System. Acquisitions of direct (e.g. Seattle’s Best Coffee

Company) or indirect competitors (e.g. Tazo Tea or Teavana) helped Starbucks to level the

competitive landscape and diversify its product portfolio. Also in the future, Starbucks is

expected to utilize alliances and acquisitions to spur expansion in emerging markets.

2. Global Market Expansion Strategies

In 1994, two years after the IPO, Starbucks initiated its global expansion program by opening

its first store in Japan. With additional capital backing the expansion strategy, the company

set out to conquer the world in a breathtaking fashion. Within ten years it managed to more

than decuple the number of stores to 8,569 in 2004 (see appendix 7). Most of this growth

was fueled by overseas expansion, which in the beginning was limited to developed

continents such as Europe and Australia. Expansion into developing countries started in the

early 2000s despite slow growth rates resulting from low incomes of potential customer

groups. With the global financial crisis hitting the company hard and sales coming to a still

stand in 2008, Starbucks redirected its attention to emerging markets which came out of the

crisis relatively unscathed. Especially China and India, and to a lesser extend Brazil, have

23

captured the interest of the company. In 2010, Starbucks had locations in 35 Chinese cities

and Mr. Schulz proclaimed that the company plans to double the number of cities soon. In

2011, Starbucks will be opening more than 100 new stores in Brazil, which turns out to be

the second-largest coffee-consuming country in the world.23 According to Mr. Schulz, India

could one day rival China in the consumption of coffee.24 Starbucks’ alliance with Tata Group

(also owner of India’s biggest coffee chain Eight O’clock Coffee Company) can therefore be

seen as a long-run strategic partnership to secure access to this promising growth market.

Starbucks will also be aggressively expanding its coffee line in its home market, the United

States. Here, the company sees a potential $377 million market for flavored coffee.25 The

long-term strategic objective will be to further consolidate the 75 percent domestic market

share that the company has achieved a far.

3. Product Portfolio Diversification Strategies

In order to increase sales and also to hedge against possible slumps in coffee consumption,

Starbucks has been expanding its product portfolio over the years. Having started as a mere

seller of coffee products in 1971, the company is now catering a wide variety of product

categories to its customers, ranging from foods and teas to coffee-making equipment and

music CDs. The company wants to further diversify its product portfolio to “upgrade the

customer experience.”26 The success of this product portfolio diversification strategy is

debatable; while sales of food products have been increasing by two percentage points from

2008 to 2010, sales of merchandise and coffee-making equipment have been decreasing by

two percent over the same period.27

4. Market Segment Diversification Strategies

With new products being added to the existing brand portfolio, it is inevitable for Starbucks

to penetrate new market segments. The acquisition of Hear Music allowed the company to

play and sell “hip” music in its stores. Starbucks also entered the bottled water market by

acquiring Ethos water. While the latter two acquisitions portray two markets that have little

to do with coffee, Starbucks also kept track of hot trends within the coffee market. For

23

Cf. Reed, M., Brunson, R. (2011): p. 168 24




Cf. Reed, M., Brunson, R. (2011): p. 173

24

example, the alliance with Keurig allowed the company to deliver K-cups to the fast-growing

single-serve coffee segment. By signing a deal with Courtesy Products, a provider of in-room

coffee service in hotels, Starbucks is further advancing its position in the luxury coffee

segment. This alliance will allow the company to cater its instant coffee to as many as

500,000 luxury hotel rooms in the United States.28 The implementation of market segment

diversification strategy will bring Starbucks closer to becoming a full-fledged chain

restaurant, similar to Burger King, McDonalds, or Subway.

5. Social and Environmental Stewardship

With growing popularity comes growing responsibility. Starbucks has realized this and

consequently launched its Global Responsibility Program which is also part of its long-term

strategy. The ulterior motive behind the Global Responsibility Program is to enhance

Starbucks’ corporate image as a caring, clean, and sustainable company that goes great

lengths to invest in communities and minimize its environmental footprint. Albeit criticism

concerning the company’s handling of waste water, Starbucks’ strategy seems to be working

out as the company has been frequently awarded for its good corporate responsibility

management.29

6. Brand Modernization Strategy

Starbucks is modernizing its brand in an effort to attract younger customer groups. As it was

mentioned in the Background Analysis (see chapter 6.1.1), young adults make up 40 percent

of sales. In order to turn them into loyal customers, the company must ensure that young

customers (mostly students) feel at home when they enter a Starbucks store. In the era of

internet, offering Wi-Fi is indispensable and Starbucks has realized this as one of the first

companies when it launched its first Wi-Fi stores in as early as 2002.30 The company is also

following other technological trends, such as mobile payment which allows customers to pay

with their smart phones.31 In 2011, Starbucks unveiled a new logo, leaving out the writing

“Starbucks Coffee”. This revamp gives the company freedom and flexibility to think beyond

coffee without losing its heritage. After all, with more than ten percent of total sales coming

28


Cf. Connor, M. (2013): Online publication 30

Cf. Morio, L. (2004): Online publication 31

Cf. Reed, M., Brunson, R. (2011): p. 168

25

from non-coffee products, a company logo referring to “coffee” could cause brand confusion

among customers.

7. Centralization Strategy

Last but not least, Starbucks is trying to increase the number of wholly-owned company

stores. As it was mentioned before, Starbucks’ strategy stipulates the establishment of

licensed stores in new markets in order to better react to local changes in consumer needs.

However, once enough market knowledge has been accumulated, the company would like

to regain full control over its stores. In Switzerland and Austria, Starbucks is currently

negotiating full ownership of its retail operations.32 Full control over retail operations not

only reduces the risk of intellectual property theft (which is particularly prominent in China),

but also increases revenues. Product sales to and royalty and license fee revenues from

licensed stores only account for roughly 10 percent of total net revenues,33 while company-

owned stores generate 84 percent of Starbucks’ revenues worldwide.34

Business Level Strategy

Without going too much into detail concerning the business strategy of every single region,

this section focuses on describing how Starbucks creates demand and how it gains a

competitive edge over competitors. Here it is useful to describe Starbucks’ strategic stance

and value chain.35

1. Strategic Stance

When consulting Porter’s generic strategies, it becomes apparent that Starbucks is driving a

differentiation strategy which is defined as offering a wide range of products (as opposed to

offering low prices) to a broad customer group (as opposed to a narrow customer group).

According to the definition, a company that drives a differentiation strategy “seeks to be

unique in its industry along some dimensions that are widely valued by buyers. It selects one

or more attributes that many buyers in an industry perceive as important, and uniquely

positions itself to meet those needs. It is rewarded for its uniqueness with a premium

32




Cf. Boardman, A., Vining, A. (1999): p. 14

26

price.”36 This applies for Starbucks as the company seeks to be unique in its industry by

positioning itself as a premium producer of coffee products. Customers value the high

quality of coffee products, the friendly and cozy atmosphere, and contemporary image of

the company. Based on the latter, Starbucks is able to charge a premium price for its

products.

The company is creating demand by product differentiation. This can best be depicted by

looking at the change in competitive scope. While the company started with a relatively

simple business model, that is as a mere seller of coffee products, it has evolved into a

business model that is more similar to that of a restaurant, offering different types of foods

and drinks. In other words, customers no longer come to Starbucks just for the coffee

experience but also to enjoy pastries, sandwiches, or “chill” to good music.

Starbucks continuously adds quality (vertical differentiation) to its products and service via

advanced process technology (e.g. Starbucks Roast®, Clover® Brewing System) and product

technology (e.g. K-cups). The careful selection of high-quality Arabica coffee beans coming

from reputable farmers ensures superiority of the input materials.

As a result, the company is more production-oriented than marketing-oriented. As it was

mentioned before, Starbucks is relying on word-of-mouth instead of spending millions on

conventional marketing activities. This also means that the company is highly process-

oriented, as the process of how the coffee is made is more important than the final product.

In terms of technology, Starbucks is both a leader and follower. For example, the Starbucks

Roast® has set new quality standards when it comes to roasting coffee beans. Concerning

single-serve coffee, Starbucks has sold the K-Cups (which were not even invented by

Starbucks) long after Nespresso had launched its Grands Crus.

2. Value Chain Strategy

The value chain describes all functional activities of a company and therefore is responsible

for generating profit or loss. The value chain strategy can be broadly divided into the

production, organizational, and financial strategies. The marketing and retail strategies have

already been discussed in the previous sections.

36

Cf. University of Cambridge (2014): Online publication

27

Starbucks outsources the entire production process to suppliers. From farming to packaging,

Starbucks is not directly involved. Instead, it focuses on forming long-lasting strategic

partnerships with farmers, exporters, brokers, roasters, warehouses, and packaging

manufacturers. Nonetheless, the production process is heavily controlled and supervised by

the company’s key account managers. Starbucks has a direct saying in how beans are

selected, roasted, and packaged. This is important to guarantee top quality and maintain a

unique brand image. The outsourcing strategy allows Starbucks to cut costs by delegating

production processes to companies that have a better expertise in each process. It also

allows the company to focus its attention to selling (retailing) its products, which, as it was

mentioned before, is done via wholly-owned and licensed stores, as well as online.

The organizational strategy describes how Starbucks is handling staff decisions. It was

already mentioned that Starbucks is looking for interpersonal skills in potential employees.

The company works to provide satisfying jobs, a positive work environment, appropriate

work schedules, and fair compensation and benefits.37 These activities are part of Starbucks’

strategy to deploy human resources in order to gain a competitive advantage. The company

uses the following outlets to advertise openings: the job center on the corporate website,

college campus recruiting, internships, employment websites, newspaper classified ads,

Facebook and twitter, local job fairs, in-store recruiting posters, and informative “business

cards.” Applicants then go through a series of employment tests and interviews. A typical

assessment center is not applied. Employees receive both off-the-job and on-the-job

training, depending on which position they occupy. Starbucks uses stock options as an

incentive to add value to the company. All employees can earn “bean stock”, which is the

company’s stock-option plan. If the company does well and its stock goes up, employees

make a profit. In fact, Starbucks is quite generous in offering benefits to employees – even

part-time workers, which make up two-thirds of the company’s workforce, receive social

security and Medicare.38 Therefore it comes as no surprise that Starbucks is constantly listed

in the Financial Time’s Top 100 Best Companies to Work For.39

In order to comply with its objectives to maintain the number one position in the global

coffee market, Starbucks is aiming to continuously increase profits of both its U.S. and

37

Cf. Flat World Knowledge (2012): Online publication 38

Cf. Flat World Knowledge (2012): Online publication 39

Cf. Fortune (2012): Online publication

28

international businesses. To achieve this, the short-term financial strategy stipulates an

increase in store revenues and a reduction in operating expenses without forfeiting quality

and keeping the selling price of products stable. From the 2010 perspective, Starbucks seems

to have fulfilled its objective as net earnings increased from $391 million in 2009 to $948

million in 2010 (an increase of 142%).40 The majority of this unprecedented increase in

profits can be attributed to the revitalization program that the company launched following

the financial crisis in 2008 and 2009. In an effort to reduce operating expenses and fixed

asset costs, Starbucks closed 600 unprofitable stores in 2009. As a result, operating expenses

fell from $9,993 million in 2008 to $9,436 million in 2010.41 At the same time, the company

was able to increase revenues from $8,772 million to $8,964 million over the same period.42

The increase in sales can be attributed to growing sales figures from overseas markets and

success of single-serve coffee products (K-cups and VIA instant coffee). The financial strategy

also stipulates a decrease in short-term debt to make Starbucks more flexible in undertaking

prompt financial decisions. From 2008 to 2010, the company reduced short-term debt from

$714 million to 0.43

6.1.4. Financial Performance Analysis

The financial performance analysis looks at key financial performance indicators, commonly

referred to as ratios. The most important ratios, namely profitability, liquidity, leverage, and

activity (operational efficiency) are covered to determine the financial health and

sustainability of Starbucks.

Table 2: Ratio Analysis

In millions USD 2010 2009 2008

Growth

Sales

$10,707.4

$9,774.6

$10,383.0

Sales growth rate 9.54% -5.86% -

Net income $948.3

$390.8 $315.5

Net income growth 142.66% 23.87% _

40





29

rate

Net earnings-diluted $1.24 $0.52 $0.43

Profitability

Gross profit margin

58.36%

55.36%

55.26%

Operating income margin

13.26% 5.75% 4.85%

ROA 14.85% 7.01% 5.56%

ROE 25.81% 12.83% 12.67%

Leverage ratio

Debt-to-total-assets-ratio

42.46 45.39 56.09

Debt-to-Equity-Ratio 0.74

0.83 1.28

Long-term-debt-to Equity ratio

0.13 0.15

0.18

Times-Interest-Earned ratio

44.95 15.3 9.6

Equity multiplier 1.74 1.83 2.28

Activity Ratio

Inventory Turnover 8.21 6.50 6.70

Days‘ sales in inventory

44.46 56.15 54.40

Receivables turnover 35.37 36.07 31.51

Days‘ sales in receivables

10.32 10.12 11.58

NWC turnover 9.18 8.57 -19.84

Fixed Asset Turnover 4.43 3.85 3.51

Total assets turnover 1.68 1.75 1.83

Liquidity ratio

Current ratio 2.36 2.20 1.78

Quick ratio

2.15 1.94 1.57

Cash ratio 0.43 0.24 0.08

NWC to total asset ratio

0.58 0.55 0.44

Source: Starbucks’ Annual Report 2010

From a financial point of view, Starbucks has become more profitable over the past three

years (2008-2010). Net income went up 143 percent from 2009, and the company shared

30

the profit with shareholders as shown by earnings per share diluted (EPSd) more than

doubling from $0.52 (2009) to $1.24 (2010). In fact, all profitability ratios of 2010 portray a

higher value relative to 2009, emphasizing the company’s ability to generate earnings as

compared to its expenses and other relevant costs incurred during the given time period.

Starbucks’ leverage capabilities have also improved from 2008 to 2010, as the most

important leverage metrics have been declining in the given time period. This means that

Starbucks is able to raise more capital by raising debt (leveraging). It is also a sign that the

company has managed to reduce total liabilities (mainly by paying off debt) and increase

equity (mainly by raising common stock). This indicates that Starbucks prefers to finance

new investments with new capital instead of issuing new debt.

The inventory turnover of Starbucks has been increasing from 6.70 in 2009 to 8.21 in 2010,

indicating that Starbucks was able to increase the number of times inventory is sold or used.

In other words, the company managed to reduce stock by either forecasting sales more

accurately or selling more products. The days sales of inventory (DSI) ratio further supports

the latter, indicating that Starbucks takes less time to turn inventory into sales. Starbucks’

Net Working Capital (NWC) turnover ratio increased from -19.84 in 2008 to 9.18 in 2010,

indicating that the company has improved its ability to generate sales compared to the

money it uses to fund the sales. This means that the company was able to increase current

assets (e.g. cash, accounts receivables, inventory) and reduce current liabilities (e.g. short-

term debt, accounts payables). On the bottom line it can be said that Starbucks has

improved its capabilities of converting different accounts on its balance sheet (in this

analysis most assets and liabilities were considered) into cash or sales.

Concerning the liquidity of Starbucks, it can be concluded that all important liquidity ratios

have been increasing from 2008 to 2010, indicating that Starbucks’ ability to pay off its

short-term debt obligations has improved. Put into other words, the margin of safety to

cover short-term debts is better than in previous years.

6.1.5. Internal Factor Evaluation Matrix

The Internal Factor Evaluation (IFE) Matrix will be utilized to evaluate the major internal

strengths and weaknesses in functional areas of Starbucks.

31

Table 3: IFE Matrix

Key Internal Factors Weight Rating (1-4) Weighted Score

Strengths

Successful and popular product lines such as VIA instant coffee, K-cups, Frappuccino, or Paninis

0.15 4 0.6

Access to premium and high-quality Arabica beans obtained through Fair Trade and strong supplier relationships

0.1 4 0.4

Strong supply chain management 0.1 4 0.4

Strong intellectual property (Starbucks Roast®, Clover® Brewing System)

0.05 4 0.2

Healthy financial situation (positive ratios)

0.1 3 0.3

Highly recognizable brand image and comfortable store atmosphere

0.1 4 0.4

Highly motivated, professional workforce and good customer service (Top employer company)

0.05 4 0.2

Strong and reputable strategic partners (Tata, Target, Green Mountain, etc.)

0.05 3 0.15

Variety of flavors 0.05 3 0.15

Weaknesses

Overextension of product portfolio causes brand confusion and loss of brand identity

0.1 1 0.1

High prices increase competitive pressure

0.1 1 0.1

Environmental issues concerning waste water jeopardize brand image

0.05 2 0.1

TOTAL 1.00 3.10 Source: Own illustration

The IFE Matrix has resulted in a final score of 3.10, which scores significantly above 2.5 and

thus indicates a strong internal position.

32

6.2. External Analysis

The external analysis will unravel potential opportunities and threats that exist in the

environment to which Starbucks is exposed. It provides an insight into the global coffee

market and will give the reader an impression on how competitive the industry is. The

analysis culminates in an External Factor Evaluation Matrix (EFE Matrix) which summarizes

and evaluates distinct opportunities and threats according to their importance to Starbucks’


6.2.1. Macro-Environmental Analysis

In order to gauge the impact of the macro environment on Starbucks’ business, the PESTEL

analysis will be utilized. Emphasis will be paid to emerging markets, most particularly China

and India since those two countries are expected to be the growth markets in terms of

coffee consumption in the future.

Political Environment

The political influence on coffee markets is generally not as pronounced as it is with other

markets. Coffee is generally perceived as a beverage that is harmless to the consumer’s

health and thus is not subject to extensive political debate.

In China, the government is rigorously promoting the establishment of a coffee culture.

Having endured the collapse of the tea bubble in 2008, Chinese tea farmers in the Yunnan

Province (China’s major coffee production area) switched from growing tea leaves to sowing

coffee seeds.44 The government plans to expand the coffee plantation area in that region to

over one million mu (approx. 66,667 hectares) to capture a market value about RMB 10

billion (US$ 1.61 billion).45 In 2010, Starbucks inked a Memorandum of Understanding

(MOU) agreement with Yunnan Academy of Agricultural Science (YAAS) and People’s

Government of Pu’er City to support local farmers in the promotion of responsible coffee-

growing practices and the development of localized coffee. Moreover, the company, with

support of the government, will introduce Starbucks Coffee and Farmer Equity (CAFÉ)

44

Cf. The Economist (2012): Online publication 45

Cf. Barlow, N. (2013): Online publication

33

Practices in China.46 This MOA will provide Starbucks with the opportunity to gain a

permanent foothold in the Chinese coffee market. A possible threat to Starbucks is the

unpredictability of government decisions. Since China is a one-party dictatorship, analysts

warn that a new regime could close the marketplace and even nationalized properties

overnight.47 However, since China has entered the WTO in 2001, foreign investment has

been welcomed with open arms.

India is on the verge of becoming the second biggest country in terms of coffee

consumption. Starbucks arrives to India at a time when the government is trying to attract

more foreign retail investment, but is slow in loosening restrictions.48 Stringent limitations

on foreign ownership have inhibited many international companies from setting up their

branches. Unlike those companies, Starbucks seems to have a less difficult time in gaining a

foothold in the highly profitable Indian coffee market. It can retain 100 percent of ownership

of its outlets with the requirement that a part of its products come from Indian producers –

which, essentially, will not be problem since the Arabica coffee beans will be sourced from

Indian farmers anyways.49 The joint venture with conglomerate Tata Group will further help

Starbucks to circumvent possible political bottlenecks.

Economic Environment

The financial crisis of 2008 has left its hefty mark on many, mostly western companies. Also

Starbucks suffered from the global downturn and profit plummeted to an all-time low in

September 2008 ($316 million). Increasing (fixed) costs forced the company to shut-down

600 unprofitable stores (net opening of stores in 2009: -474).50 But also declining revenues

added to the slump in profits; in the U.S., sales went down seven percent from 2008.51

During the crisis years, disposable income of the U.S. stagnated and then fell a few

percentage points until it gained pace again in 2010.52 Price-sensitive customers went from

pricier Starbucks stores to competitors which were able to offer coffee at a lower price.

Surprisingly, revenue growth was mostly positive in emerging markets, in particular in China

46

Cf. New Statesman (2010): Online publication 47

Cf. Khairulyakub (2011): Online publication 48

Cf. Li, Z. (2012): Online publication 49

Cf. Li, Z. (2012): Online publication 50



Cf. Trading Economics (2014a): Online publication

34

and India. This observation goes hand in hand with the fact that the disposable income of

the latter countries continued to rise during crises years.53,54

The economic situation of developed countries can be highly volatile, especially during

crises. The recent financial crisis has shown that emerging markets remain relatively

unscathed by economic turmoil in developed markets. Strong economic growth, political

stability, and rising living standards make emerging markets less prone to crises. For

Starbucks, investing in growth markets such as China and India is important to hedge against

volatile sales in already established, mostly western markets.

Social Environment

The coffee culture experienced an upswing in the early 1960 (see appendix 6). Coffee is

historically produced in Latin America, Central Africa, and South Asia. However, most of its

production was exported to western countries, particularly to the United States where it

became in vogue following the Second World War. Aggressively promoted by the Pan-

American Coffee Bureau in 1952, the “coffee break” became an inherent part of the

American workplace.55 Nowadays, the coffee culture has shifted from self-made coffee to

single-serve coffee. While coffee has become an established beverage in western societies, it

has only just begun to make an appearance in developing countries, particularly in countries

where it is produced. Especially in Asian countries, which have been known for

predominantly consuming tea, drinking coffee has become a social status.

In India, it became cool to drink coffee due to the influence of western cultures and

fashionable international brands, such as Starbucks. Moreover, coffee houses have become

an alternative sanctuary and social hangout or India’s youth in a culture that has generally

shun bar-going, particularly for young women.56 Growing disposable income, urbanization,

and coffee drinking becoming a fashion have spurred the expansion of the domestic coffee

market in India. The customer base generally comprises young age groups (15 – 30 years

old), and the company who is able to offer good coffee at an affordable price will have a

competitive edge over competitors.

53

Cf. Trading Economics (2014b): Online publication 54

Cf. Trading Economics (2014c): Online publication 55

Cf. Pendergrast, M. (2001): p. 85 56

Cf. Li, Z. (2012): Online publication

35

Also in China, the coffee culture has just recently experienced an upsurge. While coffee was

disdained as a capitalist product under Mao, it reemerged on the streets of Shanghai in the

late 1980s.57 Although coffee is produced in the rural regions of Yunnan, consumption

primarily rests on the developing demand among eastern China’s growing urban middle

class. However, China does not have the kind of pervasive coffee culture that is found in

many parts of the West. While young urbanites patronize cafes as an outward sign of their

engagement with global trends (status symbol), their coffee-drinking is less a habit and more

about seeking a certain kind of experience.58

Technological Environment

The technological environment surrounding coffee consumption has changed over the years.

While typical coffee was originally grounded at roasteries, in grocery stores, or at home

using burr grinder, blade grinder, or mortars, and then brewed by means of coffee

percolators or automatic coffeemakers, nowadays instant coffee and single-serve coffee,

which is served in small capsules (or “pods”), is usually brewed in special machines at home.

Coffee capsules and instant coffee packs have revolutionized the technological landscape of

coffee making equipment. In the old days, coffee making was a rather time-consuming and

arduous task which required skill, practice, and the right equipment. Nowadays, people can

get a good cup of coffee by simply pouring instant coffee into a cup of boiled water, or by

putting a capsule into a machine. In today’s fast-moving world, this easy and uncomplicated

way of making coffee has become the norm. Making coffee the old-fashioned way has

become more of a trend among true coffee connoisseurs.

This change in technological environment has promoted Starbucks to move into the single-

serve coffee market by introducing the VIA instant coffee and K-cup lines. The first-mover

advantage, however, was reserved for Nestlé which introduced its Nespresso line in the

early 2000s. Nonetheless, the fast-growing instant coffee market, which displays annual

growth rates of seven to ten percent, is certainly big enough to host a number of players.59

57

Cf. Cunningham, E. (2010): Online publication 58

Cf. Cunningham, E. (2010): Online publication 59

Cf. Global Coffee Report (2013): Online publication

36

Environmental Environment

Environmental stewardship has become a priority for coffee makers, and producing “green”

and fair coffee is an important attribute for improving the brand image among consumers

and environmentalists. The production of coffee has a distinct impact on forests,

biodiversity, and water usage and companies like Starbucks actively try to reduce their

environmental footprint. Another big question is whether the profits of big coffee chains are

trickling down to the people who actually grow the beans. Traditionally, complexities within

the supply chain have meant that the 100 million people growing coffee around the world

have been excluded from the huge profit making potential of coffee. On average, third world

coffee farmers receive a paltry of ten percent of the eventual retail price.60 Along with the

negative effect this has on the living conditions of farmers, the drive for increased output

has had a knock-on effect on the environment as well, with monocropping and sun grown

coffee now being the norm.61 It must also be taken into consideration that most coffee

growing regions are home to delicate ecosystems, which increases the potential for serious

damage. Governments around the world have been urging coffee producers to adopt fair

trade and environmentally-friendly practices. However, the implementation and execution

of fair trade norms is not practiced thoroughly by governments, particularly in developing

countries. Fortunately, companies have taken the implementation of such norms into their

own hands and established their own responsibility guidelines. Starbucks, for example,

carries out ethical sourcing practices and drives an environmental responsibility program to

support local farmers and protect the environment.

Legal Environment

It is essential to understand the intellectual property right laws and licensing issues when

entering emerging market. For Starbucks it is important to make use of intellectual property

protection laws because the technology which the company uses (e.g. Starbucks Roast®) is

an essential component of the company’s competitive advantage.

Especially in China, western companies have frequently experienced infringements on their

intellectual property rights. Intellectual property which has not been thoroughly protected

60

Cf. Blacksell, G. (2011): Online publication 61

Cf. Blacksell, G. (2011): Online publication

37

has often been copied by direct, mostly local competitors. Upon first entering the Chinese

market in 1999, Starbucks has managed to secure all of its major trademarks within four

years.62 Some local companies have overstepped legal boundaries in their effort to mimic

Starbucks’ popular and successful branding strategy, and have consequently been sued by

Starbucks – with success.

Just like in China, India’s intellectual property legislation covers every significant aspect of

the protection of intellectual property if the property is registered in a prompt and proper

manner.63 Potential shortcomings of the IP legislation in India are bureaucratic delay in the

enforcement of IP laws, backlog of cases at both the civil and criminal courts, and lack of

transparency, particularly at local level. Also the large number of small players infringing on

IP rights puts a financial burden on the government, which can result in court cases being

dropped without clear reasons.64

6.2.2. Industry Analysis

The attractiveness of the global coffee industry will be analyzed by means of applying

Porter’s Five Forces.

Figure 2: Porter’s Five Forces


62

Cf. DeVault, G. (n.d.): Online publication 63

Cf. Intellectual Property Office (2013): p.7 64

Cf. Intellectual Property Office (2013): p.7

0

1

2

3

4

5

Threat ofEstablished Rivals

Threat of NewEntrants

Bargaining Power ofBuyers

Threat ofSubstitutes

Bargaining Power ofSuppliers

38

The spider diagram depicted above shows the competitive rivalry in the global coffee

industry. The forces that exceed a score of three can be defined as potential threats that

need to be considered by Starbucks.

Threat of Established Rivals (HIGH)

The rivalry among exiting competitors is high. Starbucks is competing against major

competitors such as McDonalds, Dunkin Donuts, Costa, or Caribou Coffee. In addition to

that, the company has to compete with countless smaller coffee shops and cafes. The

competitive advantage that competitors have over Starbucks is that they offer their (coffee)

products at a cheaper price. In appendix 8, a price comparison on the basis of two popular

beverages (hot black coffee and iced mocha) between Starbucks, Dunkin Donuts, and

McDonalds can be found. Despite the fact that only two products have been compared, it

becomes obvious that Starbucks is the pricier stores of the three. The coffee war is

particularly acute in emerging markets. While Starbucks targets the upper income level

Chinese with beverages costing up to RMB30 (about US$5), Nestlé’s Nescafé instant coffee,

for example, can cost as little as RMB1.5 (about US$0.10) per package.65 Other competitors,

such as McDonalds and Dunkin Donuts, pursue similar pricing strategies with which not so

much the high income segments are targeted but rather the rising middle income class

(urbanites). Competitors are also aggressively expanding their presence in emerging market.

British coffee chain Costa Coffee entered China in 2006 and currently has over 250 stores

with the objective to increase the number to 500 stores by 2016 – accounting for 8.9 percent

market share of the coffee retail market.66 McDonalds can currently boast of 1,500 outlets in

China. Small competitors such as Taiwanese 85 Degrees and Hong Kong-based Pacific Coffee

are also planning on making a market entry into China soon.67 Starbucks’ current market

share of 66 percent of the total coffee retail sector in China is therefore crumbling.

Threat of New Entrants (LOW)

The threat of new entrants to the industry to compete with Starbucks is low because the

coffee market is highly saturated with established players. Moreover, a substantial amount

of financial resources associated with buildings and properties are required in order to enter

65

Cf. Barlow, N. (2013): Online publication 66

Cf. Barlow, N. (2013): Online publication 67

Cf. Barlow, N. (2013): Online publication

39

the industry.68 In developing markets, the threat of new entrant is marginally higher because

fast market growth and poor execution of intellectual property rights allow small coffee

startups to gain a foothold in the market.

Bargaining Power of Buyers (HIGH)

The bargaining power of customer is high because there are no or relatively small switching

costs for customers. Monetary switching costs, such as transportation and the actual cost of

coffee are low because customer can essentially buy a coffee at every gas station or

supermarket. In fact, customers can switch to competitors with ease and Starbucks must be

careful to not lose customers to cheaper competitors. On the other hand, non-monetary, or

emotional switching costs are high because other brands might not meet customer

expectations.

Threat of Substitutes (MEDIUM)

The threat of substitute products is medium. Typical substitute products for coffee are tea,

juices, soft drinks, water and energy drinks. Pubs and bars can be seen as alternative

locations to meet people and spend time outside of university or work. Nonetheless, the

Starbucks atmosphere is unique and hard to replicate by bars and pubs.

Bargaining Power of Suppliers (HIGH)

The bargaining power of supplier is high. The law of supply and demand states that when

demand exceeds supply, producers are able to offer higher prices. This is the case with

today’s coffee market. The demand for coffee is high and the supply limited because coffee

can only be produced in certain geographical areas. Moreover, fair trade laws have obliged

coffee companies to pay farmers adequate prices for their outputs. All this increases the

bargaining power of suppliers.

6.2.3. External Factor Evaluation Matrix

The External Factor Evaluation (EFE) Matrix will be utilized to evaluate the major external

opportunities and threats in the global coffee market.

68

Cf. Dudovskiy, J. (2014): Online publication

40

Table 4: External Factor Evaluation Matrix

Key External Factors Weight Rating (1-4) Weighted Score

Opportunities

Expansion to emerging markets, in particular to China, India, and Brazil

0.2

4 0.8

High growth potential of single-serve (instant) coffee market both in the U.S. and abroad

0.1 3 0.3

High potential for flavored coffee in the US market ($US 377 million)

0.05 2 0.1

High potential for courtesy coffee products

0.05 2 0.1

Threats

High bargaining power of suppliers raises prices of coffee beans

0.15 4 0.6

Trademark infringements, particularly in emerging markets

0.1 3 0.3

Increased competition from local coffee companies and international entrants in emerging markets

0.15 1 0.15

Saturated markets in developed economies

0.05 2 0.1

Increasing price sensitivity of Starbucks customers

0.1 1 0.1

Negative publicity because of water treatment

0.05 3 0.15

Total 1.00 2.7 Source: Own illustration

The EFE Matrix has resulted in a final score of 2.7, which scores slightly above the average

score of 2.5 meaning that with its current strategic orientation Starbucks is only marginally

able to respond to external factors.

41

7. Assessment Analysis (Fulcrum)

On the basis of the current situation analysis, it will be determined whether Starbucks’

current strategy is appropriate and sustainable for the future. The question is: what will

happen if the existing strategy (see chapter 6.1.3) continuous?

7.1. Current Performance Assessment

The current performance assessment summarizes the current situation analysis of the

previous chapter and determines whether Starbucks has a problem, and if so, what is the

nature of the real problem? This can be done by posing four meaningful questions that will

lead to accurate and perspective answers.

Is the global coffee industry attractive for Starbucks?

The attractiveness of the global coffee industry can be seen as relatively high. Positive

market growth in emerging markets requires Starbucks to shift the strategic focus away from

saturated markets in developed economies (mostly the U.S. and Europe) to ascending

economies such as China, India, and Brazil. The market presence (number of stores) must be

increased incessantly in order to protect market share not only against international

competitors which swarm emerging markets at a rapid pace, but also against local coffee

companies which have the home field- and price advantage. In developed countries, niche

segments, such as the flavored coffee and courtesy coffee segments, deserve more

attention, as well as “hot” coffee trends, such as single-serve coffee. Market attractiveness is

moderated by high bargaining power of buyers and sellers.

What are key success factors in the global coffee market and does Starbucks have

them?

Key success factors are a combination of important facts that are required in order to

accomplish one or more desirable business goals.69 For Starbucks, key success factors are

based on its numerous capabilities which distinguish the company from competitors. Three

particular capabilities can be highlighted to have the biggest impact on Starbucks’ market

success.

69

Cf. Business Dictionary (2014): Online publication

42

1. Market leadership

Starbucks is occupying the market leadership position in many developed and emerging

markets. For example, the company can boast of market share of 75 percent in the U.S.

market.70 In China, Starbucks holds a market share of nearly 70 percent.71 Being the leader

of the market allows Starbucks to set industry trends which the company has done in the

past with beverages like the Frappuccino.72 In other words, the higher the market share the

higher the control over competitors and influence on customers.

2. Superior store locations

Starbucks is able to locate their stores in areas with much higher foot traffic and better local

demographic compositions, such as in close proximity to places of interests or landmarks.

Through this, Starbucks is able to attract more customers and also improve its quality image.

In addition to that, the store atmosphere enjoys a unique perception among customers.

3. Supply chain management

One of Starbucks’ strongest key success factors is its own supply chain operations. In a time

where coffee prices are rising and ethical sourcing practices becoming the norm, the

company has managed to form long-lasting and mutually-beneficial partnerships with

farmers around the world. Starbucks’ transportation rates are the best in the industry, and

the ability to protect the integrity of their coffee beans from detrimental effects of oxygen

and time through a closed loop system of packaging is unprecedented in the industry.73

Key success factors are continuously nurtured by and guided by Starbucks’ six principles,

which, in short, leverage customer loyalty, premium quality coffee, and homey atmosphere

of its stores to fend off competitors.

Does the strategy fit the environment, or is incongruent?

Starbucks’ current strategy orientation has been highlighted at great length in chapter 6.1.3.

The EFE matrix has shown that the company is only marginally able to respond to external

factors. This means that with its current strategic orientation, Starbucks is able to sufficiently 70


Cf. Burkitt, L. (2010): Online publication 72

Cf. The Jeebboo Gazette (2012): Online publication 73

Cf. The Jeebboo Gazette (2012): Online publication

43

cover most of the external factors but not all of them. In other words, Starbucks’ current

strategy is appropriate, nonetheless it requires fine-tuning to be sustainable in the short- to

medium-run.

Does Starbucks have a competitive advantage?

The key success factors of Starbucks have been briefly discussed in the penultimate

paragraph. In order to determine the competitive advantages of Starbucks, one must

combine the key success factors with the company’s strengths and see if some of the

strengths really help a key success factor stand out from competitors.

Starbucks’ successful and popular product lines (e.g. VIA instant coffee, Frappuccino) and

highly recognizable brand have helped the company to conquer market share in established

and emerging markets. The company continuous to attract customers by further

differentiating its product portfolio (e.g. beer will attract beer drinkers) and expanding into

niche markets (e.g. courtesy coffee products for luxury hotels). Those strengths help

Starbucks to maintain its current market leader position.

The highly recognizable and popular brand image as well as strong financial muscle helps

Starbucks to locate stores at highly-frequented and exclusive shopping sites in major cities

around the world. Being perceived as a luxury coffee house, Starbucks stores fit perfectly

between stores like Versace and Gucci. Moreover, Starbucks has the necessary financial

means to rent store room in those areas. While direct competitors, such as McDonalds and

Dunkin Donuts, also have the necessary financial means, they are not perceived as luxury

coffee companies but rather as fast-food chains. Starbucks therefore has a competitive

advantage in selling coffee to high-end customers in high-end places.

Unlike other competitors, Starbucks maintains an effective and efficient relationship with

coffee bean suppliers by implementing fair trade and ethical sourcing principles. This

reduces the bargaining power of suppliers substantially and can have a positive influence on

the price development of coffee beans. Other competitors have to deal with rising resource

prices which have a negative impact on their margins.

44

Hence, it can be said that Starbucks is able to utilize its strengths to turn key success factors

into comparative advantages. This is also why Starbucks has been testified with a rather

strong internal position (see IFE Matrix).

7.2. Expected Performance Assessment

This assessment summarizes expected performance in the future if the current strategy is

maintained. Based on the current situation analysis, a most-likely-scenario for the industry

will be developed to determine which changes will take place to the external environment.

The main question is: will Starbucks’ current strategy be sustainable if the industry develops

a certain way? When trying to build a scenario, four key drivers usually play an important

role in determining the future attractiveness of the industry: change in long-term industry

growth rate, change in product and marketing innovation, change in competitive intensity,

and change in consumer needs.74

Change in long-term industry growth rate

The average annual growth rate of the global coffee market accounts for about two to three

percent.75 This rate is not likely to change in the short-run as stagnating growth rates in

developed countries balance out increasing growth rates in emerging countries. In the

medium-run, however, growth rates are expected to pick up as increasing coffee

consumption in highly populous markets such as China, India, and Brazil outpaces

consumption in developed countries. It is therefore interesting to look at the market

development in emerging economies:

In China, coffee consumption level is increasing at a rate of 25 to 30 percent (ten times more

than the average world rate).76 The rising middle class with higher incomes can be

considered the major growth engine. In India, annual growth in consumption accounts for

five to six percent.77 Just like in China, a rising middle class with increasing disposable income

is driving the growth. Comparable to India, coffee consumption in Brazil is increasing at an

74

Cf. Huntley, F. (n.d.): Online publication 75

Cf. Brown, N. (2012): Online publication 76

Cf. Hong, D. (2013): Online publication 77

Cf. Kulkarni, M. (2013): Online publication

45

annual rate of approximately five percent.78 Economic stability and higher wages have led to

an expanding middle-class which accounted for 42 percent in total coffee consumption in

2009.79 A study of Rabobank has shown that by 2020, emerging markets will account for 50

percent of global coffee consumption.80

Equally important are growth rates in certain market segments. The shift from multi-serve

coffee to single-serve coffee is going to accelerate in the future. The at-home and out-of-

home coffee consumption will be changed by single-serve systems, such as Starbucks’

Verismo and Keurig Brewers. Currently, sales of single-serve coffee account for only eight

percent of total coffee sales, but saw an increase of 31.3 percent from the previous year

indicating strong growth figures for the future.81 Single-serve coffee is predominantly sold in

developed countries, where it can be seen as a new and efficient alternative to making

coffee the old-fashioned way. However, also in emerging markets, single-serve coffee

products are increasingly gaining attractiveness among customers.

Starbucks will be able to quench increasing coffee demand in the future because of its

comparative advantage in sourcing coffee beans from loyal and high-quality bean producers

as well as by key strategic partnerships with local coffee retailers that help Starbucks to

distribute its products globally.

Change in Product and Marketing Innovation

Innovation is expected to drive market share gains and gross profits. Consumer preference

for convenience and quality will drive innovation in single-serve brewing technology.82

Moreover, it will be important to further extend the product portfolio by adding new

products (categories) to quench emerging customer needs. As a consequence, traditional

coffee companies that started out as mere coffee stores are going to transform into full-

scale restaurants over time.

Equally important is the role of service innovation. With access to high-quality Arabica coffee

beans widening, the quality gap between competitors is closing. Sometimes, the service

78

Cf. Bartender (2013): Online publication 79

Cf. Bartender (2013): Online publication 80

Cf. Rabobank (2013): slide 7 81

Cf. Geller, M., Dalal, M. (2012): Online publication 82

Cf. Rabobank (2013): slide 7

46

offering is the only possible way to gain a competitive edge over market contenders. In the

future, the coffee store is no longer going to be a place where one buys a cup of coffee or

sandwich, but a sanctuary where people can go to escape the daily grind, meet friends, or

simply enjoy a good reading. Coffee stores are therefore going to turn into places where

people actually feel at home. As result, many coffee companies offer cozy and comfortable

sitting areas, Wi-Fi access, and music.

With competition in the global coffee market increasing, it will be ever more difficult to

attract customer or tap into new customer groups. Spending on marketing activities is

therefore expected to grow. Companies that have previously relied on the power of their

brand image must be careful to not underinvest in marketing activities.

Starbucks’ strong intellectual property and extensive R&D activities will help the company to

keep up with product innovation in the future. Its service capabilities are unrivaled beyond

any doubt. Starbucks’ has Wi-Fi connections in all of its stores and strives to improve the

purchasing procedure by providing mobile payment. Only in terms marketing activities there

is room for improvement.

Change in Competitive Intensity

As it was mentioned before, the competitive intensity is bound to increase – especially in

emerging markets. Starbuck, who is enjoying leadership positions in the majority of its

markets, is not sufficiently prepared to counteract new entrants both from the domestic and

international field. The reason for this is the premium price it charges for its coffee products.

Despite the increase in disposable income, only high-end customers will be able to afford

Starbucks products (see price comparison in appendix 8) on a sustainable basis, meaning

that customer will come back frequently to repurchase products. However, in emerging

markets it is the middle-class that is responsible for increasing coffee consumption.

Competitors like McDonalds and Dunkin Donuts are better positioned to respond to the

price expectations of this customer segment.

In terms of niche competition, Starbucks must be careful to not miss out on upcoming

trends. The company has underestimated the profit potential of single-serve coffee and has

only recently joined the market when most of the “cake” was already divided among other

47

competitors. For example, in China, Nestlé capitalized on its first mover advantage and now

dominates the market for single-serve coffee.83

Change in Consumer Needs

Consumer needs change over time and companies must be keen to tailor their product

offerings to emerging needs. One conspicuous change in consumer needs has happened in

the past decade and will carry on well into the next; the need for fast coffee. With time

being of essence, consumers are in need of coffee that is ready to serve within seconds. This

particular need has promoted the emergence of instant coffees and single-serve coffees.

Another change in consumer needs is the rising emphasis on fair trade. With the rise of the

internet, consumers have the chance to carefully follow social responsibility practices of

companies online, and rumors and scandals, such as the waste water scandal of Starbucks,

gain publicity a lot faster. According to the market study of Rabobank, the “premiumization”

of the coffee market is another ascending consumer trend. Especially in developed markets,

customers are willing to pay extra money for premium coffee and premium offerings

supported by fair trade, health benefits, and organic and origin.84 In developing countries,

consumers demand coffee at a reasonable price and with a western image.

Starbucks’ current strategic orientation is able to capture most consumer trends that are

expected to make an impact on the coffee market in the future. However, the company

seems to have problems foreseeing emerging trends.

7.3. Developing Strategic Focus

In order to develop strategic focus, it is important to first summarize the strengths and

weaknesses of Starbucks and the opportunities and threats the company is exposed to. This

will be done by means of applying a simple SWOT analysis:

83

Cf. Doherty, D. (2012): Online publication 84

Cf. Rabobank (2013): slide 7

48

Table 5: SWOT Analysis

Strengths Opportunities

1. Successful and popular products lines 2. Access to high-quality Arabica coffee

beans 3. Strong supply chain management 4. Strong intellectual property and R&D

capabilities 5. Strong financial muscle 6. Strong brand image 7. Strong customer service 8. Strong and reputable partners 9. Variety of flavors

1. High growth rates in emerging markets (China, India, Brazil)

2. High growth potential of the single-serve coffee market

3. High growth potential for flavored coffee in the U.S.

4. High growth potential for courtesy coffee products

Weaknesses Threats

1. Overextension of product portfolio 2. High prices of products 3. Environmental issues

1. High bargaining power of suppliers 2. Trademark infringements in emerging

markets 3. Increasing competition from local

competitors and new entrants in emerging markets

4. Saturated market in developed economies

5. Increasing price sensitivity of customers Source: Own illustration

Based on the SWOT analysis, a TOWS analysis can be compiled to provide the necessary

strategic focus.

49

Table 6: TOWS Analysis

Opportunities (O) Threats (T)

Stre

ngt

hs

(S)

SO “Maxi-Maxi” Strategy

1. Utilize financial power and brand

image to spur expansion in emerging markets (S5,6; O1)

2. Utilize strong intellectual properties and strategic partnerships to tap into/further expand in the single-serve coffee market (S4.8; O2)

3. Utilize the wide variety of flavors and successful product lines to penetrate the flavored coffee market in the U.S. (S1,9; O3)

4. Utilize high quality, brand image, and customer service to penetrate the courtesy coffee market in the U.S. (S2,6,7; O4)

ST “Maxi-Mini” Strategy

1. Utilize strong supply chain/supplier

relationship management to reduce bargaining power of supplier (S3, T1)

2. Focus on quality, customer service, brand reputation, and key strategic partners to counter low-price offering of competitors (S2,6,7,8; T3)

3. Utilize strong intellectual property and R&D capabilities to penetrate niche segments in saturated developed markets (S4; T4)

Wea

knes

ses

(W)

WO “Mini-Maxi” Strategy

1. Redirect focus to profitable niche markets to avoid overextension of portfolio in unprofitable market segments (W1; O2,3,4)

2. Tackle middle-class customer in emerging market by adjusting prices to affordable levels (W2; O1)

WT “Mini-Mini” Strategy

1. Discard unprofitable product lines to avoid portfolio overextension and foster profitable product lines to exploit niche market (W1; T4)

2. Lower prices in reaction to increasing price sensitivity of customers (W2; T5)


The TOWS analysis has highlighted four, broad strategic directions from which possible

strategic alternatives can be drawn.

50

8. Solution Analysis

The objective of the solution analysis is to come up with a final strategy (or strategies) for

Starbucks to help it improve its competitive position in the short- to medium-term. Three

steps a necessary to achieve this: generate strategic alternatives, determine the goals and

evaluation criteria, select the final strategy or strategies.

8.1. Strategic Alternatives

The strategic alternatives are taken from the TOWS analysis which has been compiled in the

previous chapter.

1. SO Alternative

The SO alternative is the most aggressive strategy, as it utilizes internal strengths to

capitalize on opportunities. The main objective of this alternative is to aggressively expand

operations in emerging markets by flexing the financial muscle and utilizing brand

superiority as well as key strategic partnerships to gain a permanent and preferably

unrivaled foothold in the market (market leadership). In developed, already saturated

markets, the alternative envisages a strong focus on niche segments such as the single-serve

coffee segment. Technologies that are necessary to succeed in niche segments must be

either developed by using own R&D capabilities or acquired from competitors. Furthermore,

it is important to promote the high-quality and one-of-a-kind image of the Starbucks brand,

meaning that prices should not be lowered but kept stable to not deteriorate the brand

image.

2. ST Alternative

The ST alternative takes a more conservative stance as it utilizes strengths to minimize

threats. In other words, it suggests the retention of the status quo. Current market share

must be defended by foreseeing threats and eliminating them before they become an issue.

The preeminent threat of rising coffee bean prices must be constrained by nurturing good

relationships with supplier, focusing on fair trade and ethical sourcing practices. Similar to

the SO alternative, the ST alternative also suggest to counter the low-price strategy of

competitors by sticking to the high-quality and exclusive brand image. Good customer

51

service and a unique and state-of-art store atmosphere should be sufficient to justify the

extra price customer pay for Starbucks products.

3. WO Alternative

The WO alternative denies Starbucks’ current strategic approach and suggests a turnabout in

the pricing strategy. In response to the rising middle-class in emerging markets, the product

prices must be adjusted according to the customer’s budget. This does not mean

undercutting the prices of competitors, but it will no longer allow Starbucks to charge a

premium price for its products. Also, niche segments should be tackled in a more precise and

slim-cut manner, meaning that certain product categories should be discarded (e.g.

merchandise) to free up financial resources that are necessary to boost expansion in key

segments, such as the flavored coffee market or the courtesy coffee market.

4. WT Alternative

The WT alternative is the most defensive strategy, as it suggests getting on the same level

with competitors. On the one hand, this alternative would allow Starbucks to enter the

highly profitable and fast growing middle-class segment in emerging markets. On the other

hand, the company would be exposed to a severe price war and loose its high-quality brand

image among customers. Similar to the WO alternative, the WT alternative stipulates that all

unprofitable product categories (dogs) should be discarded and that emphasis should be put

on highly profitable and fast-growing products (stars).

8.2. Goals and Evaluation Criteria

In this section, the goals of Starbucks are highlighted. In order to select the right strategy for

the company, it is important to know what the company wants to achieve in the future.

Goals are then translated into specific performance criteria which take the form of

objectives. Those short- to medium-term objectives should be specific, measurable,

achievable, realistic, and time-bound (SMART principle).

52

Table 7: Starbucks‘ Goals and Objectives

Goals Objectives

Expand market position in the China-Asia-Pacific (CAP) market (in particular India, Japan, and Korea) Build China as a second home market outside the United States

Open 1,500 stores in China until 2015

Double the number of cities until 201585

Acquire full ownership of all stores in China from joint venture partner Maxim’s Caterers Limited to expand control in central, southern, and western China86

Expand number of stores in Japan to 1,000 by 201387

Expand number of stores in Korea to 500 by 201388

Complete the joint venture with Tata Group in 2011 to increase market presence in India89

Expand market leader position in the Americas

Open 3,000 stores until 201590

Acquire Peet’s Coffee and Tea Incorporated in 2011 to consolidate and grow market share91

Further increase presence in Brazil by opening 100 stores in 201192

Develop current position in the fast-growing single-serve coffee market

Enter into expanded, long-term strategic partnership with Green Mountain Coffee to increase sales of K-Cup packs and Keurig Brewers93

Become the first coffee company to offer mobile payment

Launch mobile payment system for BlackBerry and iPhone in all U.S.-based stores in 201194

Improve and develop ethical sourcing practices

Extension of line of credit for farmers to $20 million by 201595

Purchase of coffee which is 100% sourced according to the ethical criteria of C.A.F.E by 201396

Enter the courtesy coffee market in the United States

Establish partnership with in-room market leader Courtsey Products in 2011

85

Cf. Vanderborg, C. (2013): Online publication 86

Cf. Zhihao, T. (2011): Online publication 87

Cf. Chowdhury, S. (2012): Online publication 88


Cf. Canterbee, J. (2011): Online publication 90

Cf. Vanderborg, C. (2013): Online publication 91



Cf. The Motley Fool (2013): Online publication 94

Cf. Hardy, E. (2011): Online publication 95



53

to gain access to 500,000 luxury and premium hotel rooms in the United States97

Increase the number of wholly-owned company stores

Acquire full ownership of stores in Switzerland and Austria in 201198

Acquire full ownership of stores in mainland China by buying stores from Maxim’s caterer99

Improve and accelerate supply chain activities

Build 100,000 distribution centers in 20 countries by 2015100

Improve customer loyalty Introduce My Starbucks Rewards by 2013101

Improve and develop current position in the tea market

Acquire Atlanta-based tea store chain Teavana Holding Incorporated in 2012 to expand in the $40 million global tea market and claim a leading position102

Extend product portfolio, especially the food and beverage lines

By the end of 2013, Starbucks customer in the U.S. will be able to enjoy La Boulange products and Evolution Fresh juices in company-operated stores103


8.3. Strategy Selection

The selection of the most suitable strategy (or strategies) for Starbucks is based on the

evaluation of the alternatives while taking into consideration the goals and objectives of the

company. As in the strategy analysis, there will be a distinction between corporate level and

business (competitive) level strategies.

Corporate Level Strategies

The SPACE matrix will be utilized to determine which nature of corporate strategy Starbucks

should undertake. The dimensions and evaluation of the SPACE matrix can be found in

appendix 9.

97

Cf. Courtesy Products (2011): Online publication 98

Cf. Starbucks Website (2011): Online publication 99

Cf. China (2011): Online publication 100




Cf. Chowdhury, S. (2012): Online publication

54

Figure 3: SPACE Matrix


The SPACE matrix shows that Starbucks should drive an aggressive strategy for the short- to

medium-term. As a result, the WO and WT alternatives can be eliminated as they take on an

extremely defensive/conservative stance by trying to emulate low pricing strategies of

competitors. The question remains as to whether Starbucks should expand or simply

maintain current market shares (SO versus ST). In order to determine which strategic

alternative is the most suitable one for Starbucks, the QSPM Matrix will be applied.

55

Table 8: QSPM Matrix

Alternative 1 (SO) Alternative 2 (ST)

Expand Market Share Maintain Market Share

Key Factors Weight Attract Score

Total Attractiveness

Score Weight Attractiveness

Score

Total Attractiveness

Score

Strengths

Successful and popular product lines 0,15 4 0,6 0,15 2 0,3 Access to high-quality Arabica coffee beans 0,1 4 0,4 0,1 2 0,2

Strong supply chain management 0,1 4 0,4 0,1 3 0,3

Strong intellectual property and R&D capabilities 0,05 4 0,2 0,05 4 0,2

Strong financial muscle 0,1 4 0,4 0,1 2 0,2

Strong brand image 0,1 3 0,3 0,1 3 0,3

Reputable customer service 0,05 3 0,15 0,05 2 0,1

Strong and reputable partners 0,05 4 0,2 0,05 1 0,05

Variety of flavors 0,05 0 0 0,05 0 0

Weaknesses

Overextension of product portfolio 0,1 0 0 0,1 4 0,4

High prices of products 0,1 4 0,4 0,1 4 0,4

Environmental issues 0,05 1 0,05 0,05 3 0,15

Sum Weights 1 1

Opportunities

High growth rates in emerging markets 0,2 4 0,8 0,2 1 0,2

High growth potential of single-serve coffee market 0,1 4 0,4 0,1 2 0,2

High growth potential for flavored coffee in the U.S. 0,05 4 0,2 0,05 2 0,1

High growth potential for courtesy coffee products 0,05 4 0,2 0,05 2 0,1

Threats

High bargaining power of suppliers 0,15 3 0,45 0,15 4 0,6

Trademark infringements in emerging markets 0,1 4 0,4 0,1 4 0,4

Increasing competition from local competitors and new entrants in emerging markets 0,15 4 0,6 0,15 4 0,6 Saturated market in developed economies 0,1 3 0,3 0,1 4 0,4

Increasing price sensitivity of customers 0,1 3 0,3 0,1 4 0,4

Sum Weights 1 1

Sum Total Attractiveness Score 6,75 > 5,6 Source: Own illustration

The QSPM Matrix clearly shows that Starbucks should drive an aggressive expansion strategy

both in domestic and foreign markets. Maintaining current market shares and trying to

foresee and then dodge attacks from competitors is not an option.

56

Weak

competitive

position

Quadrant I

Market development Market penetration

Product development Integration (any direction)

Related diversification

Quadrant IV

Joint Ventures Strategic alliances

Merger Acquisition

Related diversification Unrelated diversification

Quadrant III

Retrenchment Related diversification

Unrelated diversification Horizontal integration

Divestiture Liquidation

Strong

competitive

position

Rapid

Market

Growth

Slow

Market

Growth

Quadrant II

Market development Market penetration

Product development Horizontal integration

Divestiture Liquidation

Business Level Strategies

In contrast to corporate level strategies, which concern the scope of the firm, business level

strategies deal with product categories and their profit-making potential. The BCG matrix

(see chapter 6.1.1) has already highlighted the profitability of Starbucks’ four major product

categories. The Grand Strategy Matrix will be applied to determine which product strategies

are most appropriate for each category on the basis of competitive position and market

growth.

Figure 4: Grand Strategy Matrix


57

1. Strategy for Quadrant I

Products that have a strong competitive position and experience rapid market growth fall

into quadrant I. For Starbucks, such products are typically beverages and foods that enjoy a

high acceptance among customers. Examples are the Frappuccino and the Panini, but also

juices and teas (e.g. Chai). In order to consolidate the market position and boost growth,

Starbucks needs to further develop those product categories. This can be done by adding

flavors, ingredients, or temperature. Starbucks has already applied this strategy on domestic

scale by introducing the Caramel Ribbon Crunch Frappuccino® blended beverage or the

Vegie Panini.

2. Strategy for Quadrant II

Products that have a weak competitive position and experience rapid market growth fall into

quadrant II. For Starbucks, product lines such as the K-Cup and VIA instant coffee are good

examples. Having missed out on the first-mover advantage, such products have to quarrel

with strong competitive brands (e.g. Nestlé). Hence, their competitive position is weak yet

fast market growth rates in the single-serve coffee sector make them highly profitable. It is

therefore important to further develop the market by redirecting financial resources and

R&D capabilities to making niche products more attractive in the eyes of consumers.

Marketing campaigns that highlight product qualities or appearance make-overs are possible

options to better the competitive position of such products and turn them into stars

(quadrant I).

3. Strategy for Quadrant III

Products that have a weak competitive position and experience slow (or no) market growth

fall into quadrant III. Being portrayed as dogs in the BCG-matrix, such products are

merchandise and traditional coffee-making equipment. As it was shown in the internal

analysis, sales of merchandise products have been declining over the past years (despite the

company’s excellent brand image). Sales of traditional coffee making equipment have been

declining as well, mainly because of the single-serve coffee frenzy. Clinching to such

products can have a negative impact on profit. Possible strategic alternatives are therefore

retrenchment and even complete liquidation of product lines. The retrenchment alternative

suggests slimming down the merchandise offering, only keeping items with positive sales

58

figures (e.g. stainless coffee mugs and tumblers or Verismo® Machines) and getting rid of

unprofitable product lines (e.g. music CDs). Liquidation suggests offering no merchandise

and solely focus on selling beverage and food products.

4. Strategy for Quadrant IV

Products that have a strong competitive position and experience slow market growth fall

into quadrant IV. For Starbucks, an example would be the classical ground and whole bean

coffee with its different blends. Ground and whole bean coffee have been around almost

since the foundation of the company. Customer have been buying traditional coffee for

decades and Starbucks’ ground and whole bean coffee products enjoy a high reputation

among customer due to their high-quality image. However, over the past years sales of

traditional coffee have stagnated due to the appearance of single-serve coffee products and

changes in consumer needs. What Starbucks could do to boost sales of traditional coffee

products is to form strategic alliances with large restaurant chains, hotel chains, or specialty

and premium retailers that sell freshly-brewed coffee to customers. This retail strategy has

already been successfully applied in the early stages of Starbucks’ expansion and needs to be

further developed to boost sales of traditional coffee products.

59

9. Recommendations

Based on the assessment and solution analysis, the following key strategies can be

recommended to Starbucks:

Market penetration strategy: Starbucks should opt for an aggressive expansion

strategy in emerging markets. The aggressive strategic choice can be justified

because Starbucks has a strong competitive position which can be perfectly utilized

in a fast-growing market. The company should utilize its internal strengths to develop

market share in emerging economies, in particular India and Brazil. It is further

recommended to enter new markets with the help of key strategic partners since

they dispose of the necessary market knowledge and political ties which can greatly

facilitate the entry. Moreover, the licensing strategy should be continued for new

markets since it allows local store managers to tailor store format, product mixes,

and price points to the needs, lifestyles, and tastes of local customers and

communities.

Market development strategy in China: Starbucks has already made significant

inroads into China. However, there still remains a lot of untapped potential which the

company can capitalize on. In China it is important to develop marketing strategies

that appeal to younger generations who fantasize about western coffee culture as a

symbol of modern lifestyle.104 Moreover, the importance of partnering up with local

retailers to gain market presence cannot be stressed enough. Since China is not a

homogenous market (it is far too big for that), Starbucks is advised to nurture existing

partnerships as each partner contributes different strengths and local expertise that

can help Starbucks gain an understanding of the different tastes and preferences of

local Chinese customers. Once the market is consolidated, Starbucks is advised to

continue its centralization strategy of buying back stores from local partners to

increase profits and reduce the threat of intellectual property theft.

Market segment development strategy: Starbucks should apply a market segment

development strategy for niche markets in developed economies, in particular the

single-serve-, courtesy-, and flavored coffee segments. Those segments portray

104

Cf. Wang, H. (2012): Online publication

60

positive growth rates and must be exploited if the company plans to increase market

shares in established markets.

Product development strategy: on business level, the company is advised to further

develop successful product lines (Frappuccino, Paninis) so that they do not loose

attractiveness in the eyes of customers. Starbucks also has great growth potential in

Tea and Fresh Juice products, and the company is advised to build up those product

lines alongside their core coffee and food products.

Product positioning strategy: trendy products such as K-cups and VIA instant coffee

packs need to be better positioned in their respective segments in order to fully

exploit profit potentials. The company is advised to build better relationships with

specialty retailers or convenient stores to clinch premium shelf space for such

product lines to increase customer awareness. Moreover, tailored marketing

campaigns are necessary to highlight the benefits such products have over

competitors.

Retrenchment Strategy: Starbucks should consider slimming-down unprofitable

product categories, such as merchandise and traditional coffee equipment. This will

free up additional financial resources which is necessary to further drive the

extension of profitable and currently “hip” product lines. A liquidation strategy for

the entire merchandise category is not recommendable as certain products still enjoy

high demand among customers (e.g. tumblers and Verismo® machines).

Alliances: typical question mark products, such as ground and whole bean coffee

products, should not be given up on since they portray the heart of Starbuck product

portfolio. Growth in this segment can be revived by forming alliances with key

strategic retail partners (e.g. Tata Group or Kraft Foods) who dispose of the necessary

market spread to distribute traditional coffee products.

Most of the strategies that were recommended are already considered in the company’s

short- to medium-term objectives (see chapter 8.2), indicating that Starbucks is aware of

potential external threats and opportunities. In other words, Starbucks’ current strategic

orientation is appropriate for the company to persist in the market, nonetheless it requires

fine-tuning to be sustainable in the short- to medium-term. Following additional

recommendations can be made to help Starbucks improve and sustain its current strategic

orientation:

61

Aggressive marketing campaign in emerging markets: room for improvement exists

in the implementation of marketing campaigns in developing countries. Unlike in

developed markets where Starbucks has already made a name for itself, in emerging

markets Starbuck cannot rely on world-of-mouth marketing as it first has to establish

and consolidate its presence. It is therefore recommended to increase the marketing

budget for growth markets. Marketing campaigns featuring the western, high-

quality, and “hip” image of Starbucks can help the company offset the low-price

advantage of competitors. Also in developed markets it is necessary to step up

advertising. In contrast to emerging markets, which require a rather all-embracing

marketing strategy, the marketing strategy for developed countries should be fine-

tuned to specific niche markets.

Premium-pricing strategy: it is advisable to aggressively expand the number of stores

at home and abroad in order to not fall behind competitors, who, based on the their

low-cost advantage, are able to attract more customers particularly from the fast-

growing and highly coffee-conscious middle-class in emerging economies. Aggressive

expansion does not mean undercutting competitors. On the contrary, Starbucks

should hold on to its high-quality image. Lowering prices would most likely

mediocritize Starbucks’ excellent brand image and reputation as a provider of

premium coffee and exceptional service. The company has shown that customers still

value good service, high quality, and a cozy store atmosphere and that they are

willing to pay an extra price to feel “special”. Especially in emerging markets, pushing

for market share by cutting prices is a losing strategy as new entrants can never “out-

cut” the prices of local competitors.105

Trend-scouting departments: in the last decade Starbucks has failed to foresee and

capitalize on emerging trends in the coffee market. It is advisable for the company to

establish trend-scouting facilities to better unravel changes in consumer expectations

and behavior.

Price hedging strategy: there have been wide fluctuations in the market prices of

high-quality Arabica coffee beans. Although Starbucks has been able to mollify

extensive price peaks with its excellent supply chain management orientation, the

company could further mitigate price volatility by applying effective hedging

105

Cf. Wang, H. (2012): Online publication

62

strategies. One option could be to use future contracts for purchasing future

quantities at an agreed on price in the present. This will provide Starbucks with more

financial leeway.

63

Appendices

Appendix 1: Comprehensive Strategic Analysis Framework


III. Solution Analysis

Current Strategy

(corporate and

competitive level)

Internal

Characteristics

(background,

organization)

External

influences

(Macro-

environmental,

industry)

Past and

Current

Financial

Performance

Analysis

Expected

Performance

of Current

Strategy

Summary of

Current

Performance

Propose

Strategic

Direction +

Solution

Analysis

Strategic

Alternatives

Strategic

Choice

(corporate and

competitive

level)

Goals and

Evaluation

Criteria

Recommendation

and justification

of strategy

selection

I. Current Situation Analysis II. Assessment Analysis IV.

Recommendation

64

Appendix 2: Value Chain


Appendix 3: Product Portfolio

Product Categories

Beverages Food Packaged and single-serve coffees

Coffee-making equipment and other merchandise

Bottled Drinks

Brewed Coffee

Evolution Fresh™

Chocolate Beverages

Espresso Beverages

Frappuccino® Blended Beverages

Kids’ Drinks and others

Smoothies

Starbucks Refreshers™ Beverages

Teas

Iced Teas

Bakery

Starbucks Petites

Bistro Boxes

Hot Breakfast

Sandwiches, Paninis and Salads

Yogurt and Fruits

La Boulange

Evolution Harvest™

Profile

Blonde Roast

Medium Roast

Dark Roast

Flavored Coffee

Seasonal Favorites Form

Whole Bean Coffee

Ground Coffee

Starbucks VIA®

K-Cup® Packs

Pods, Portions and Filter Packs

Verismo® System Espresso

Macchiato Beverages

Latte Beverages

Mocha Beverages

Cappuccino Beverages

Americano Beverages

Espresso Beverages

Starbucks Reserve® Coffee

Brewing Equipment

Coffee presses

Coffeemakers

Espresso Machines

Grinders

Teapots and Tea Kettles

Other Merchandise

Hot Cocoa and Treats

Mugs and Tumblers

Music CDs

Starbucks Gifts

Syrups and Sauces

Inbound

•Farm

•Exporter

•Broker

•Testing

•Roasting

•Warehouse

•Packaging

Operations

•Company-operated stores

•Licensed stores

Outbound

•Retailing

•Speciality

•Direct response

Marketing

•Word-of-mouth

•in-store adds

Service

•customer satisfaction

•individuality

•atmoshpere

65

Zambia Peaberry Terranova Estate

Kona Coffee Parry Estate

Sumatra Blue Batak

Sun Dried Ethiopia Yirgacheffe

Finca Nuevo Mexico

Source: http://www.starbucks.com/

Appendix 4: Starbucks’ Global Responsibility Program106

Community Ethical Sourcing Environment

Community Service: Hosting community service projects

Thriving Neighborhoods: hosting get-togethers and charity events

Volunteer Canada Partnership: 10 cent donation per returned tumbler to Volunteer Canada

Youth Action: Starbucks Youth Action™ Grants encourage teens to make a difference

Starbucks Foundation: Supporting Coffee, Tea, Cocoa communities, access to clean water, fostering education in China, and rebuilding the gulf coast

Ethos® Water Fund: 5 cent donation for each bought bottle of Ethos water

People with disabilities: Starbucks is complying with the Accessibility for Ontarians and Disabilities Act

Coffee: Coffee and Farmer Equity (C.A.F..E) Practices helps farmers to grow coffee in a way that is both better for people and the planet

Farmer Support: Loan programs have committed over $15 million to a variety of farmers

Tea: Community Health and Advancement Initiative (CHAI) targets the needs of tea- and spice-growing communities with health services and economic development

Cocoa: Starbucks collaborates with The World Cocoa Foundation, adheres to the Cocoa Practice Guidelines, and supports the ECHOES Alliance with a contribution of $200,000 over three years

Recycling and Reducing Waste: Starbucks recycles waste directly in stores, uses greener and reusable cups, and engages in composting practices

Energy: Starbucks is purchasing renewable energy that represents 20% of the total electricity used in the Starbucks stores

Water: Starbucks’ dipper well system is reducing the consumption of water

Green Building: Starbucks is building energy-efficient stores according to the LEED® certification

Climate Change: Starbucks partnership with Conservation International helps to improves coffee production, conserve and restore natural habitat, and facilitates access to forest carbon markets

Source: http://www.starbucks.com/

106

http://www.starbucks.ca/responsibility

66

CEO

Howard Schulz

Executive V.P.

P. Boggs

President SB Coffe U.S.

C. Burrows

President SB Coffee Int.

J. Culver

President Global Food Service

J. Hansberry

President Global Development

A. Rubinfeld

Seattle's Best Coffee

M. Gass

CMO

A. Scrivner

CFO

T. Alstead

Appendix 5: Organizational Chart


Appendix 6: Global Coffee Consumption (millions of 60 kg bags)

Source: UNCTAD

0

10

20

30

40

50

60

70

80

90

100

18

50

18

60

18

70

18

80

18

90

19

00

19

10

19

20

19

30

19

40

19

50

19

60

19

70

19

80

19

90

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Starbucks funded

67

Appendix 7: Store development 1971 to 2010

Source: http://globalassets.starbucks.com/assets/c60c79d6c3a247e284640f17f1806283.pdf

Appendix 8: Price Comparison between Starbucks, McDonalds, and Dunkin Donut

Beverage/Company Starbucks McDonalds Dunkin Donut

Hot Black Coffee $1.95 $1.69 $1.89

Iced Mocha $3.95 $2.99 $2.29 Source: http://www.tampabay.com/features/food/general/coffee-wars-taste-test-of-starbucks-mcdonalds-7-

eleven-and-dunkin-donuts/1012417

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

http://www.tampabay.com/features/food/general/coffee-wars-taste-test-of-starbucks-mcdonalds-7-eleven-and-dunkin-donuts/1012417

http://www.tampabay.com/features/food/general/coffee-wars-taste-test-of-starbucks-mcdonalds-7-eleven-and-dunkin-donuts/1012417

68

Appendix 9: Dimensions and Evaluation of SPACE Matrix


Competitive Advantage (CA): As it was mentioned in the Current Performance Assessment

Analysis (chapter 7.1), Starbucks has a competitive advantage in market leadership, superior

store location, supply chain management, and brand image.

Financial Strength (FS): As it was analyzed in the Financial Performance Analysis (chapter

6.1.4), Starbucks ratios are generally healthy. Especially the profitability and liquidity ratios

have improved substantially since the downturn in 2008.

Industry Strength (IS): Based on Porter’s Five Forces (chapter 6.2.2), it can be concluded that

the industry is indeed competitive and that high bargaining power of suppliers and buyers

will make it even more competitive in the future. Nonetheless, potentially high growth rates

(especially in emerging markets) make the global coffee market highly profitable.

Environmental Stability (ES): Based on the PESTEL analysis (chapter 6.2.1), it can be

concluded that the macro environment is generally positive for Starbucks. The world

economy is gradually recovering from the 2008/2009 recession and coffee consumption is

gradually increasing. Higher technological and environmental standards portray challenges

for Starbucks in the future. Also, intellectual property infringements in developing countries

have to be dealt with.

69

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Strategic Management Report - A Strategic Pathfinder for Starbucks