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Internal and external factors affecting Starbucks

Introduction

This report will provide a critical review of Starbucks and its place in the coffee house market in the UK using three well tested approaches to strategic market analysis: SWOT, Porter’s Five forces and PESTLE analysis. A brief history of the coffee house market is provided in addition to some background to the company in question, Starbucks. Then the company is analysed using the three frameworks. Finally a few conclusions are drawn.

History of the coffee shop

The coffee house is not a new idea – they were established in Britain in the 17th century, the first opening in London in 1651 (Wilkes Group, 2012.). Some elements of the Coffee House clientele worried the establishment of the day, causing King Charles to speak of them as resort of ‘idle and disaffected persons’ producing ‘very evil and dangerous affects’ due to the fact people met there to discuss the politics of the day (Ibid, no page no.) 300 hundred years later coffee shops are just as popular, with an estimated 5,700 in the United Kingdom in 2013 (Ibid.); the market is fiercely fought, with Costa Coffee being number one brand in the market (in terms of the number of stores), followed by Starbucks (Figure 1). Third is Cafe Nero and there are a number of smaller companies joining the market, including Cafe Ritazza and a joint venture between Tesco and an Australian coffee company called Harris & Hoole (Ibid.)

Figure 1 – Coffee House UK market share (number of stores)

Source: The Wilkes Group, 2012.

Starbucks - Company background

The company was founded in Seattle, Washington State in 1971; the name was inspired by the mermaid in the novel Moby Dick, and the mermaid also inspired the company logo. It is now a very successful coffee house using ethically sourced Arabica coffee beans (Starbucks n.d.) Howard Schultz, now the company CEO, first visited a Starbucks store in 1981; he subsequently travelled to Italy where the coffee bars inspired him to bring the concept back to the United States (Starbucks website, n.d.) In 1987 Schultz purchased Starbucks with investment from local businesses. The ethos of the firm is to create a welcoming place for conversation: a third place between work and home. Today there are 15,000 Starbucks stores in 50 different countries (Starbucks website, n.d.)

SWOT Analysis – Strengths, Weaknesses, Opportunities and Threats (SWOT)

This section presents a SWOT analysis for Starbucks; SWOT is a method of market analysis; this familiar acronym stands for Strengths, Weaknesses, Opportunities and Threats. These four words represent the major constructs firms need to consider to make the most of their internal set up and the external marketplace characteristics. Its major value is in the identification of those business critical factors which provide opportunity for the firm, but also any threats from competitors and the changing business environment. These need to be weighed up against the internal factors (strengths and weaknesses) of the business to develop the best business solutions and strategies, both short term and long term (Meek & Meek, 2003).

(i) Strengths

~ One of the major strengths of the company is the strong Starbucks brand and it’s stylish image; this has made it very popular with young people, particularly students. According to Alderman (2012, no page number) “laptop-wielding young people embrace the coffee chain as an avatar of American popular culture”

~ Starbucks has a very modern website which is attractive to users and easy to navigate. This is so important in this digital age when the majority of people rely on the Internet to gather information about goods and services.

~The loyalty scheme introduced by Starbucks is another major advantage, a strategy adopted early on in the firm’s development. Encouraging consumers to increase their frequency of purchase through the use of loyalty cards is now a marketing tactic successfully adopted by many companies in different sectors.

~ The fact that Starbucks beans are ethically produced is a strong advantage to the company as consumers are increasingly concerned about sustainable production and corporate responsibility. A recent large-scale survey on social responsibility (Nielsen, 2014) shows that around 50% of consumers will choose to buy socially responsible brands. This includes going so far as to check packaging for claims about sustainability.

(ii) Weaknesses

~ Starbucks has been experiencing financial difficulties in recent years, even recording a loss (Wilkes Group, 2012.) putting it at a disadvantage in terms of having the capacity to invest in developing new products or expanding its network of stores.

~ Perhaps as a result of poor performance Starbucks has experienced some decline in its stock values which also can result in reduced investment.

~ As students and the youth market is one of the main market segments for Starbucks, this is one age group in the UK demographics which is declining and projected to continue to do so over the next few years (ONS, 2011).

~ The tax avoidance scandal of recent years, when Starbucks avoided paying corporation tax in the UK (Bergin, 2012), temporarily dented the company reputation. However, in the long term it does not appear to have affected the popularity of the firm with consumers still patronising the stores.

(iii) Opportunities

~ The taste for coffee houses and coffee consumption, particularly as part of the working day routine is continuing (Wilkes Group, n.d.) and showing little sign of slowing down.

~ This is supported by a recovering economy and signs that consumers are finding they have more discretionary income to spend (CEBR, 2014).

~ The relaxation of the licensing laws has provided an opportunity for firms like Starbucks to broaden their offering in coffee houses to include alcohol. This will attract new market segments.

~ There are further potential niche markets or segments to target, for example developing a caffeine free alternative for those consumers concerned about the health risks of too much caffeine.

~ Increased interest in corporate responsibility, ethical trading and sustainable coffee growing techniques for reducing the carbon footprint provide Starbucks with a competitive advantage as it has always adopted ethical business strategies.

~ The enduring trend for ‘drive thru’ premises and kiosks on railway and bus stations as a valid and popular way of delivering products in the food and drink sector provides good, relatively low cost, ways for Starbucks to increase sales and raise brand awareness and loyalty further.

~ An extension of this might be ‘pop-up shops’; temporary occupation of premises as part of for example, music and cultural events. This would also be an ideal vehicle for reaching the target market segments particularly young adults and students.

~ The increasing globalisation of markets provides wider opportunities for Starbucks to expand into new markets; some authors maintain that young people in different countries have more in common than people of different age groups in the same country (Usunier and Lee, 2013). This presents “an opportunity to target consumers sharing a common set of values, needs, habits and preferences” (Usunier and Lee, 2013 p. 131).

(iv) Threats

~ The increasing emphasis on healthy lifestyles and reducing caffeine intake for people with certain health conditions is a potential threat to coffee house companies (Lopez-Garcia et al, 2008). The secret will be finding suitable alternatives for those consumers who cannot or choose not to drink caffeinated coffee. A quality decaffeinated alternative will provide access to this sub-segment of the market.

~ Climate change may well represent a threat to coffee production and hence make the raw materials more expensive.

~ There is very strong competition in the coffee house market with Costa Coffee firmly in the number one spot (Wilkes Group, n.d.) It is important for Starbucks to maintain relationships with its customers; the loyalty card is a good way of doing this as is two way communication with consumers via social networking sites (SNS). However, Starbucks must be careful to ensure not all messages it sends out to consumers are sales promotions; according to (Cohen, 2011) nine out of ten communications should be sharing information not sales pitches.

Porter’s five forces

This represents an equally important activity for any firm - competitor analysis; in a rapidly changing world and such a fiercely contested marketplace a scientific view of the competition is key to success. This particular approach being described was designed by Michael Porter and is a systematic approach to identifying and assessing the relative strength of the ‘five forces’ influencing the nature of competition in the coffee industry. Figure 2 below illustrates the five forces which include competitors, new products, new entrants to the marketplace and the bargaining power of consumers (Porter, 2008).

Figure 2 – Porter’s five forces Source: Porter, 2008

1. The potential threat of a new competitor and/or a new product in the already crowded coffee house marketplace is high, with strong contenders such as Cafe Ritazza on the fringes. The barriers to entry to the market are quite high as any company wanting to compete with Starbuck or Costa would need to open a large chain of shops. However, the example of the coffee house joining forces with Tesco (Poulter, 2013) is a case in point and could have disastrous consequences for Starbucks.

2. Secondly, the bargaining power of suppliers and the costs of raw materials is another strong force for any firm. In the case of Starbucks and its commitment to only using ethically sourced coffee beans, prices are at a premium anyway for fair trade goods. This will squeeze profit margins if the company is not able to pass the increased costs on to the customer. Other coffee houses may get their raw materials, particularly the high cost coffee beans, elsewhere and non-fair-trade meaning the price is most likely lower.

3. The third of Porter’s forces is the increasing bargaining power of customers; most decisions are influenced to a considerable extent by on-line peer reviews and recommendations. This can influence which product consumers will buy, with a bandwagon effect applying i.e. consumers buying the brand which is most popular (Kastanakis & Balabanis, 2012). The power of the consumer is not to be underestimated and smart firms invest in nurturing relationships and communication with consumers. This can ultimately result in co-production e.g. of new products. There is clear appreciation of the value of social media to communicate with consumers who want to feel engaged with their favourite brands. Such engagement cancels out the ‘us and them’ culture of corporation-consumer relationships; now customers feel closer to brands (Engeseth, 2005). Yan (2011, p.695) describes this phenomenon as “consumers want to know they have some influence over the brands that they connect with”.

4. Fourthly is the force resulting from substitute products entering the marketplace; this might be in the form of an innovative new product for an established competitor e.g. a new flavour coffee from Costa; or a coffee house offering from a non-coffee house company. This might be considered the case when McDonalds introduced the concept of ‘McCafe’ providing a coffee house concept within the traditional burger house (Petersen, 2014).

5. Finally, Porter’s fifth force is the way any combination of the four other forces may influence the strength of competition provided by rival firms and products. There is strong competition from rival companies in the coffee house market, particularly Costa Coffee which dominates the number one spot in the market (Wilkes Group, 2012).

PESTLE Analysis

This represents the marketing audit angle and those

companies which are most thorough in their analysis of the internal and external marketplace are the best placed to exploit any opportunities and protect against any threats. The analysis is based on clarity around the following questions:

1. Where is the company now?

2. How did the company get where it is today?

3. Where is the company heading and what are the corporate objectives?

Jobber (2010) defines a marketing audit as the process of examining marketing in a business in a systematic way, including the environment, corporate objectives, strategies and any activities to assist in identifying any factors that may impact on the company and its products. The Chartered Institute of Marketing (CIM 2013) explains that the business environment is in a constant state of flux, hence a regular audit is necessary to provide any intelligence needed to inform sound decision-making. Such decisions have to take many aspects of current and future influences in the external environment into account in a process widely termed a ‘PESTLE’ analysis. The acronym stands for:

1. Political

2. Economic

3. Social

4. Technological

5. Legal

6. Environmental

This method assesses the impact on the firm of macro-environmental factors (Kotler and Armstrong 2010) and may well include those PESTLE elements listed in Table 1 below. Some factors will be more relevant to the coffee house market than others and these will be drawn out in the analysis.

Table 1 – examples of PESTLE analysis components

Political

Economic

Social

Technological

Pressure to strengthen environmental regulation.

Hangover from recession still limits discretionary spending.

Income distribution: coffee houses tend to sell premium priced products which people on lower incomes cannot afford.

New inventions, including advanced roasting techniques can provide advantage.

Employment law –pressure to increase the minimum wage

Interest rates will increase soon.

Coffee drinking is enduring as a popular ‘fashion’

New product development, including flavoured coffees and improved decaffeinated coffee for those concerned about the caffeine content.

Political stability – general election in May 2015.

Uncertainty and unemployment is commonplace.

Lifestyle changes, including longer working hours are making a coffee ‘pick-me-up’ a regular part of the working day.

Energy use and costs are key with ethically sourced coffee beans adding to raw material costs.

Inflation rates are on the up.

Health consciousness with coffee having advantages and disadvantages:

Consumer confidence is improving slowly.

- High caffeine intake raises pulse rate and hence is not recommended for certain groups e.g. those with hypertension (van Dam, n.d.), but doesn’t increase risk of death (Lopez-Garcia et al, 2008)

-But coffee does contain high levels of anti-oxidants which are beneficial and may protect against diabetes, Parkinson’s and liver disease (Ibid.)

Legislation

Environment

New/extra legislation around sustainable coffee production will impact. Consumers in the UK are conscious of the ethical implications, with increasing consumption of Fairtrade coffee (Blacksell, 2011).

Biodegradable packaging is key to reducing waste.

Tax evasion scandal – this has legal implications for the company and damages the corporate reputation.

Organic production of coffee is also on the rise due to consumer demand for naturally produced goods (Blacksell, 2011)

Source: After Kotler and Armstrong, 2010

Market segmentation

“The purpose of business is to create customers” is a definition by the business guru Peter Drucker (Swaim, 2010, p.14) who recommends that the best way to do so is to look at the company from the customer’s viewpoint. There are also a number of questions which need to be asked about segmentation of the market; specifically “what products does the customer buy” and “what does the customer value”? Research provides an indication of the market segments which are of importance to companies such as Starbucks.

(i) Students represent a clear and well defined segment which can assist in promoting and recommending the brand through social networking.

(ii) Young professionals and white collar workers: picking up a coffee on the way to work is a growing trend in the UK; the provision of Wi-Fi and newspapers in the stores assists the professionals to use Starbucks as a second office. Crookes (2014) observes that this has been so for a lot longer than many people realise, citing a London coffee shop opened in 1688 where ship-owners, insurance brokers and merchants would drop in to drink coffee but also to trade. There has been a long history of connecting coffee with work in terms of the introduction of the concept of the coffee break, first introduced in 1902 by Barcalounger, an American furniture manufacturer (Crookes, 2014). And the fondness for coffee amongst workers was the cause of a strike at Chrysler in 1964 when the management tried to stop company coffee breaks in an effort to increase production (ibid.)

(iii) Young adults may well be an increasing segment attracted by the availability of alcohol at Starbucks coffee shops (Crookes, 2014), hence providing an alternative to pubs and clubs for socialising.

Marketing mix

The marketing mix incorporates the traditional concept of the four Ps (product, price, promotion and place) and is integral to marketing strategy development. Some authors have expanded the mix to seven Ps (Kotler et al. 2012) encompassing three more criteria of ‘people’, ‘physical evidence’ or ‘environment’, and ‘process’; these might be considered to better describe any influences on the marketplace. Kotler (2012, p.31) explains that it “recognizes and reconciles the scope and complexities of marketing activities”. However, this report will focus on the four Ps and how they might apply to Starbucks.

(i) Product: Lower caffeine content options may attract more health conscious consumers; plus emphasis on ethically produced coffee beans.

(ii) Price: In a high price, premium market Starbucks might consider offering a value option to broaden the market, particularly for the student segment.

(iii) Promotion: Maximizing the social media promotion of Starbucks and its good works in ethical and responsible coffee production will improve the firm’s reputation (Berry, 2000). A constant and interactive presence on social networking sites will build relationships with consumers and can encourage co-production of new products and services, through electronic word of mouth (Chu & Kim, 2011).

(iv) Place: Starbucks has introduced around 200 ‘drive-thru’ coffee shops in the UK over the past couple of years enabling consumers to access coffee 24 hours a day (Smith, 2014). There may also be scope for pop-up shops at events or kiosks at railway and bus stations (e.g. the new mini-shop at Birmingham New Street station).

Conclusion

Starbucks is a well established part of the coffee house culture in the UK, well regarded for its ethical approach to sourcing and buying coffee beans. There are global opportunities for the firm as well as niche markets within the UK to exploit. Although not the number one firm in the coffee house market (a position held by Costa Coffee) Starbucks has developed a strong following amongst the youth and student segments; whilst continuing to provide the requisite products for the working population in their busy working day. Having weathered the temporary storm of bad publicity over the income tax evasion scandal, Starbucks has worked hard to improve its position in the eye of the consumer by emphasising the ethical and sustainable principles the firm has always maintained. Such communication and relationship marketing is key to long term brand loyalty. Despite fears that coffee may be bad for health there is also evidence to support drinking coffee in moderation to have preventive value against certain diseases. Starbucks is well placed to continue to trade competitively in the UK market, particularly as it continues to find and exploit new and innovative ways to get their product out to the consumer in the form of drive-thru’s and kiosks in high footfall areas. There seems little sign of the trend and fashion for coffee houses to diminish any time soon and it continues to be part of the UK culture just as it was over 300 years ago.

Word count: 3191

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