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Internal and external factors affecting Starbucks

Founded in 1985, Starbucks is one of the largest coffeehouse companies in the world with over 16,000 stores in 50 countries. This report evaluates major internal and external factors affecting Starbucks using various analytical techniques. Based on the Starbucks brand in UK, it identifies suitable marketing strategies for Starbucks to expand its business in the UK market within the next two years. In line with the chosen marketing strategies, recommendations for the marketing mix are discussed.

Founded in 1985, Starbucks is one of the largest coffeehouse companies in the world, with over 16,000 stores in 50 countries (Starbucks Annual Report, 2009, p. 1). Starbucks sells high-quality whole coffee beans along with fresh, rich-brewed coffees, cold blended beverages, a variety of complimentary foods, coffee related accessories and a selection of premium teas primarily through Company-operated retail stores (Starbucks Annual Report, 2009, p. 1). In May 1998, Starbucks successfully entered the European market through its acquisition of 65 Seattle Coffee Company stores in the UK (Starbucks, 2009). In 1998, since opening its first UK store in London, Starbucks has been growing rapidly at a steady rate with over 660 stores opened by the end of 2009 (Starbucks Annual Report, 2009, p. 3).

This report aims to evaluate major internal and external factors affecting Starbucks using different environmental analysis methods such as SWOT analysis, Porters Five Forces and PESTLE Analysis. It will be based on the Starbucks brand in UK, and will identify suitable marketing strategies for Starbucks to expand their business within the next two years. In line with the chosen marketing strategies, recommendations for the marketing mix will be discussed.

ENVIRONMENTAL ANALYSIS

Environmental analysis or situation analysis is a systematic collection and evaluation of past and present trends within the economy and it involves a comprehensive analysis of competitors and a company’s current position in its respective market (Rajagopal, 2007, p. 341). It is aimed at identification of internal and external forces that may influence the company’s performance and choice of strategies in the future (Kotler et al., 1999, p. 111).

A number of analytical techniques can be used to evaluate a company’s environment. Starbucks will be analyzed using the following marketing techniques:

(a). SWOT Analysis

(b). Porter’s Five Forces

(c). PESTLE Analysis

3.1 SWOT ANALYSIS

In this technique, internal strengths and weaknesses of a company and external opportunities and threats faced by it are closely examined to chart a marketing strategy for the future (Forsyth, 2010, pp. 102-106). Major strengths, weaknesses, opportunities and threats of Starbucks are analyzed below.

3.1.1 Strengths

(a). Brand

Starbucks has developed a brand image that has revolutionized coffee drinking experience. It has created an ambiance that is designed to attract customers and keep them coming back to Starbucks stores. It offers wide varieties of services such as comfortable seating areas with unique music and free wireless Internet for their customers while sipping their favorite coffee. This distinctiveness sets Starbucks apart from most of its competitors and has allowed the company to successfully grow and profit while charging premium prices for their products.

(b). Loyal Customers

Owing to the strong brand recognition, most customers show faithfulness and are frequent to the shop. This is also partly due to the strong commitment that Starbucks gives to their customers. Many loyal customers visit the shops twice a day, mostly on their way to work and during break hours.

(c). Supporting Social Issues

The company lives by its mission statement “Starbucks is committed to a role of environmental leadership in all facets of our business” (Starbucks, 2009). It supports several social issues including fair trade policies, access to clean water and many environmental issues such as recycling and renewable energy. One of the latest involvements is in ‘product red’ where each time a customer purchases a Starbucks red product or uses red card, a contribution is made to the Global Fund to help people living with HIV in Africa (Starbucks, 2009).

(d). Strong Financials

Starbucks saw consistent revenue growth over the years except for last year mainly relating to the economic crisis. However, the consistent revenue growth has provided the company with a strong financial base enabling it to undertake new business ventures (Starbucks Annual Report, 2009, pp. 40-43).

3.1.2 Weaknesses

(a). Over Expansion

The Starbucks phenomenon has expanded so rapidly during the last 10 years that the company has faced hardships in managing this. Several stores throughout the world including in UK had to be shut down (Starbucks Annual Report, 2009, p. 3). However, the company continues to venture out of the coffee industry with many brand extensions, which may have negative affects.

(b). Reliance on one Brand

Starbucks relies heavily on its high quality coffee brand upon which its success depends. As a result any negative impacts to the major brand could affect adversely to all its brand extensions.

(c). High Operating Cost

The large worldwide expansion of the brand has increased the operating cost. This is mainly due to increase in distribution costs and property rent. In addition, increase in store operating costs such as wages and raw materials have amplified over all cost of sales (Starbucks Annual Report, 2009, pp. 40-77).

3.1.3 Opportunities

(a). Brand Extention

There is plenty of opportunities for Starbucks to extend its brand into the UK market to provide more variety to its loyal customers and potentially reach new customers. This will provide the company new opportunities for revenue growth to attain more market share.

(b). Growth in Coffee Market

Despite being in recession, the UK coffee industry has shown a growth of 12% in the last 12 months (Weston, 2010). This is further supported by a study conducted by Allegra Strategies which stated that the UK branded coffee market valued at more than £1 billion will grow by 8.9% per annum (Manson, 2010). With its huge UK market share, the anticipated growth in the coffee market will offer Starbucks considerable opportunities for further growth and future expansion.

(c). Product Line Extention

This is crucial for growth and success to perform well with the immense competition in this market. There is vast opportunity for the company to extend its product line with varieties of products such as breakfast items, more flavors of beverages, hot chocolate variations, cocoa products, etc.

3.1.4 Threats

(a). Competition

There is immense competition from wide range of sectors such as restaurants, coffee shops, fast food outlets, etc for Starbucks. Major competitors in UK include Costa Coffee, Caffe Nero and Pret A Manger. In addition, fast food companies such as McDonalds joining the coffee market has intensified the coffee market further.

(b). Economy

Changes in the economic condition, particularly consumer spending, may pose a threat to Starbucks’ overall sales growth in UK. New budget cuts by the government may weaken customer’s spending power for premium coffee brands such as Starbucks.

(c). Change in Life Style

Consumer preference plays a huge role in the success or failure of companies in the food service industry. Health-related concerns regarding caffeinated beverages could dampen the demand for coffee (Kitty, 2010). With more people opting for healthier life styles, the sales growth of Starbucks may be negatively affected.

3.2 PORTER’S FIVE FORCES

This is a framework used to analyze a company’s industry environment. According to Porter (2008, p. 4), understanding the competitive forces, and their underlying causes will reveal the roots of an industry's current profitability while providing a framework for anticipating and influencing competition overtime. Porter’s five forces will be applied to analyze the Starbucks industry environment.

3.2.1 Threat of potential new entrants

A new entrant to an industry brings new capacity, the desire to gain market share and often-substantial resources (Porter, 1985, pp.3-33). Two types of new entrants can cause threat to Starbucks. Small cafes on the high street may be many in numbers due to the low start up cost but are minor threats due to their size in comparison with Starbucks. They require vast amount of resources and time to pose competition. With McDonald’s introducing its range of coffee products, there is a threat of new entry from other fast food restaurants. Well-established and possessing capacity, adding coffee to their existing services to tap into the coffee market will be a significant threat to Starbucks.

3.2.2. Bargaining power of suppliers

Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchase goods and services (Porter, 1985, pp.3-33). Starbucks has agreements with their suppliers with set guidelines regarding the standard of coffee beans harvested and fixed prices for these (Starbucks, 2009). This allows Starbucks to have some degree of control over its suppliers in an industry where it is possible for suppliers of premium coffee beans to have an enormous amount of bargaining power. However, if Starbucks chooses to switch suppliers, high costs associated with switching will be incurred.

3.2.3. Bargaining power of buyers

Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services and playing competitors against each other (Porter, 1985, pp.3-33). Unique customer experience and highly differentiated products provided by Starbucks reduces the bargaining power of the buyer. However, customers have the ability to brew their own coffee at home. Starbucks has recently tried to offset this threat by offering various coffee beans and roasts along with directions on how to make the perfect cup of Starbucks coffee at home (Starbucks, 2009).

3.2.4. Threat of substitute products

All companies within an industry are competing, in a broad sense with industries producing substitute products (Porter, 1985, pp.3-33). In the premium coffee industry threat of substitutes is reasonably high especially because of the increase in consumption of bottled water and the popularity of energy drinks. However, Starbucks has evaluated this threat and are finding different ways to offset this threat by adding most of its substitute to their menu such as Tazo tea, fruit juice blends, etc.

3.2.5. Rivalry among existing competitors

Rivalry occurs as a result when one or more competitors either feel the pressure or see an opportunity to improve position (Porter, 1985, pp.3-33). In this premium coffee market, rivalry amongst existing companies is very high. In the UK there are number of competitors such as Costa Coffee, Caffe Nero and Pret A Manger which provide similar services and hold strong positions in different regions of the country. As a result, competing with them is a sizeable task. However, Starbucks competes well with its differentiation strategy of consistent premium quality coffee and distinct experience.

3.3. PESTLE ANALYSIS

PESTLE framework is an analysis tool that is used to identify the key drivers of change in the strategic environment (Johnson et al., 2008). Analysis includes political, economic, socio-cultural, technological, legal and environmental factors surrounding a company. These factors are briefly analyzed below.

3.3.1 Political/Legal Factors

These are about how much the government intervenes with the economy and how much the country’s legal system will affect companies (Senter and Edmonds, 2003 pp. 39-42). UK is politically stable with a legal system seen as favorable to companies such as Starbucks that trade in the country.

3.3.2 Economic Factors

Economic factors have major impact on how businesses operate and are mainly concerned with consumer’s purchasing power and spending patterns (Senter and Edmonds, 2003 pp. 39-42). Being a highly developed country, UK has a very high purchasing power where consumers are willing to spend a bit more in return for a quality product such as Starbucks coffee.

3.3.3 Socio-cultural Factors

Socio-cultural factors are all those forces that affect the value, perceptions, preferences and behaviors of the people in society (Senter and Edmonds, 2003 pp. 39-42). Coffee drinking culture has been around in the UK for years and currently university students and workers are the major coffee consumers. With the busy routine of life, coffee shops flourish as a convenient choice for all.

3.3.4 Technological Factors

This involves the rate of technological changes that takes place in the country (Senter and Edmonds, 2003 pp. 39-42). There has been constant updating of new technology in the UK, which allows companies like Starbucks to operate at ease.

3.3.5 Environmental Factors

Environmental factors include environmental aspects that may affect the industry (Senter and Edmonds, 2003 pp. 39-42). With the chilly weather in the UK, hot drinks are consumed more often enabling beverage companies like Starbucks to thrive in this market. With increasing concerns over environmental degradation, more and more people are going green with their choices. Several customers choose Starbucks for being a generous contributor to sustain natural resources.

MARKETING STRATEGY

Marketing strategies are utilized by companies with the aim of creating customer value and achieving profitable customer relationships (Kotler and Armstrong, 2010, p. 72). In today’s competitive premium coffee market, there are different kinds of consumers with diverse preferences. Therefore, Starbucks has to divide their total market in order to choose the best segments and design strategies to serve the chosen market profitably (Kotler and Armstrong, 2010, p. 73). This process involves market segmentation, targeting and positioning which are analyzed below.

4.1. Segmentation

Segmentation is the process by which a market is divided into distinct groups of consumers with different needs (Hiam, 2009, p. 30). Currently, Starbucks is using psychographic segmentation where they target their customers based on values, opinions, lifestyle and personal characteristics. In this competitive market, Starbucks should try to diversify by means of demographic segmentation in which the company can segment its market based on age, education and occupation. Starbucks should try to appeal the younger generation studying at colleges and universities. In addition, couples aged 25-55 with children can be a target market where the whole family can indulge in the unique Starbucks experience. These segmentation strategies can increase the customer base for Starbucks.

4.2. Targeting

Targeting involves making a decision regarding prioritization of market segments for Starbucks in order to increase their future market share (Proctor, 2005, p. 399). Starbucks should continue to target with its psychographic segmentation with the help of differentiation by giving more value to the customers. Further, it should use customized targeting to attract young children using attractive children’s fruit drinks and milkshakes. In addition, introducing innovative energy drinks into Starbucks can target youth. Starbucks must use competitive differentiation strategies in order to draw customers towards them rather than to their competitors.

4.3. Positioning

Positioning relates to how Starbucks products are perceived by its consumers. Starbucks products have always been perceived with its prestigious brand image. Customers are willing to pay a premium price for the quality, consistent taste, ambience and accessibility to the products. When extending their product line with introduction of fruit drinks and energy drinks for the younger generation, Starbucks should retain their high quality and be environmentally friendly, as these are aspects that youth are especially aware of. Further, offering high quality products at their current price range will help to increase sales as well as keep customers satisfied with the quality and value.

MARKETING MIX

Marketing mix describes the variables that marketers must work with in deciding strategies to influence demand for products. These variables are discussed below with application to Starbucks.

5.1. Product

These are the goods and services offered by Starbucks to its target market (Kotler and Armstrong, 2010, p. 76). As mentioned above, Starbucks should introduce innovative products such as energy drinks and children’s fruit drinks, which can bring an entirely new segment to market its products.

5.2. Price

This is the amount of money Starbucks customers must pay to acquire their products (Kotler and Armstrong, 2010, p. 76). Starbucks should continue with the premium pricing strategy for their high quality products. They should communicate with their customers to justify the higher prices owing to their active involvement in corporate social responsibility and the consistent quality of products. When introducing new innovative products, they should use market skimming strategy which involves setting a high initial price for new products in order to generate maximum revenue layer by layer from the market segments willing to pay the high price (Kotler and Armstrong, 2010, p. 336).

5.3. Place

This includes all activities carried out by Starbucks to make their products available to their target market (Kotler and Armstrong, 2010, p. 76). Their main distribution strategy of sales from retails stores should be continued. Additionally, they should evaluate and increase the number of outlets and locations depending on customer segments improving accessibility. Starbucks should use indirect distribution methods such as supermarkets and convenience stores to sell the new proposed products.

“Starbucks vending machines” can be set up in buildings such as offices and universities through collaborating with a company that specializes in vending machine manufacturing to develop one that is capable of producing coffee within the high standards of Starbucks. These innovative vending machines should be utilized to distribute other Starbucks products such as cookies, juices, ice creams, etc.

5.4. Promotion

These are the activities conducted by Starbucks to communicate the merits of the product in order to persuade their customers to buy it (Kotler and Armstrong, 2010, p. 76). Starbucks should continue with their current promotional strategies such as advertising through Internet, personal selling, public relations and sales promotion. However, they should differentiate their promotional strategies from that of its competitors. Engaging in various social network sites such as twitter should enhance Internet resources targeting UK. These should be used to promote the new products and generate awareness of the products. Further, public relations activities should be increased with more involvement in community activities in order to create goodwill and a positive public perception. To increase their sales promotional activities Starbucks should give their loyal customers more rewards by means of different free offers such as free selected syrup and free brewed coffee refill from time to time.

5.5. People

People encompass everyone at every stage of marketing activity, both inside and outside Starbucks (Forsyth, 2010, pp. 11-12). Starbucks being involved in the service industry, their staffs have a major influence on marketing activities. Therefore, the company must give regular training and incentives to increase staff satisfaction, which in turn will indirectly influence customer satisfaction. Further, Starbucks must try to satisfy all stakeholders, both in the supply chain and the distribution chain, and must work together to maximize its marketing efforts (Forsyth, 2010, pp. 11-12).

5.6. Physical Evidence

Physical evidence describes the tangible aspects of delivering Starbucks products to customers (Forsyth, 2010, pp. 11-12). Starbucks should continue to innovate new ways of merchandising and display techniques which can contribute to the convenience and visual impact of products in coffee shops and make purchases more likely (Forsyth, 2010, pp. 11-12). It should increase their merchandising efforts by continuously reminding their customers about the merchandising products available at the coffee shops.

5.7. Process

This includes the procedures involved in rendering services to customers (Forsyth, 2010, pp. 11-12). Starbucks currently offers customer reward cards that can be topped up and used to purchase products in store. This can be used to analyze spending patterns. However, this card is not user friendly, as it requires more effort by the customer in order to receive a bonus. Therefore, a loyalty card offered free at the point of sales to all customers should be introduced. This should be made for permanent use with a customer code that enables the sales staff to identify the spending pattern once scanned. These data can then be used by the staff to suggest specific product choices that may interest particular customers. Customers will in turn feel more welcome and appreciated by such gestures. The current Starbucks reward card does not allow staff to view spending patterns before a purchase is made. Both cards can be expanded to enable mobile phone ordering service by collaborating with mobile service providers. Committing the customer to terms and conditions of the service can reduce risk of uncollected orders. Based on these, Starbucks would benefit more if loyalty cards were introduced instead of their current rewards card.

(Word Count: 3,314)

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