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Supply chain and expansion strategy of Starbucks

Introduction: Starbucks as a corporation started its business from the year 1971 in the city of Seattle in Washington. In its early stages Starbucks opened four stores in the city and the business was looking good. (“Starbucks Corporation”, 1997). After some major changes and alterations the company opened about fifty outlets by 1989. The focus of the company was not only expanding the number of stores but also at the same time educate the consumers .(“Starbucks Corporation”, 1997). But at that situation the owners were reluctant of entering into the main industry. But in the year 1984, the company management acquired another coffee retailer called the Peet’s Coffee and Tea. (“Starbucks Corporation”, 1997). Since then the company adapted many significant changes in order to establish its brand in the international market.

Supply Chain and Expansion Strategy: With various competitors the industry is a monopolistic in nature. For that reason a strong player like Starbucks is has to depend on the product mix and strategic locations as the main differentiating factor in order to influence effective consumers’ demand for their products. For that reason the marketing strategy that Starbucks adapts targets only one particular segment of customers. This marketing strategy for years has yielded great results for the company. Starbucks can be considered as the market leader with over $1.3 billion in sales in the year 1998.

Figure 1: Supply Chain Network of the company

The above diagram shows the distribution system of the industry in which the company is operating. Due to the complexity of the network it is important that the management locates the cost centers and allocates the resources accordingly.

In order to evaluate the supply chain issues it is important to realize the expansion strategy of the firm. The expansion strategy adapted by the firm is mainly increasing the market share in the retail segment and for that reason t focused on increasing the number of stores.(Berger, Buchman, Chase, Hsu, N.d). It is important to note that Starbucks followed a pattern of store opening strategy in order to form a network. The company adapted a hub and spoke model for its regional expansions. Starbucks at the initial stage selected a large city in the region which will serve the purpose of a "hub"; and tried to open as many as twenty or more stores in the hub city itself in the first two years. (“Starbucks Corporation”, 1997). After opening the targeted stores in the hub city the other stores are also being opened in the surrounding areas which are considered as the “spoke” stores. In the year 1995 alone, new stores opened generated average revenue of US$700,000 in their first year, which is far more than the average revenue figure of US$427,000 in 1990. (“Starbucks Corporation”, 1997). The growth in the sales was mainly due to the growing brand image of the firm. With the increase in the number of stores the complexity of the supply chain increased and this lead to the various security issues for the firm. For that reason a security team is being introduced in the system which is called the “Enterprise Security Platform” and it keeps track of the critical facilities , operations at the retail outlets and the also monitors the activities in the international market. This centrally integrated supply chain model helps the company management to keep track of the proceedings and predict demand so that they can adjust their expansion strategy accordingly.

Critical Issues and factors affecting import and export: The Company faced some obstacles in the last two years of operation. The global economic crisis has reduced the disposable income of the mass and for that reason the spending in the industry has reduced. (“Starbucks Recent Same Store Sales; Implication for future growth”, 2009). The store closing has its other implications. The negative sales figure actually got compounded each quarter and it is mainly contributed by the sudden decrease in demand and the increasing cost component as the company focused on sustaining the expansion strategy. (“Starbucks Recent Same Store Sales; Implication for future growth”, 2009).

It has to be noted that about Eighty four percent of the revenue for the company was realized from the retail stores and thus the expansion strategy remained as the core business strategy of the firm. (Berger, Buchman, Chase, Hsu, N.d). Before this drop of the net revenues the company was experiencing a steady increase of 27% per year. In the years 1998-1999 in North America, the company launched about two hundred and ninety three stores was opened and the retail sale immediately went up by twenty five percent. The other segment of business apart from the retail sales also flourished during that period. (“Starbucks Company 10K”, 1998).

The major concern for Starbucks is their cost of sales. It has been noted that the cost of sales is as high as 78.8% of the sales revenues and the problem multiplied as the labor cost increased which increased the operating expense of the stores by 37.6%.(“Starbucks Company 10K”, 1998). In order to handle this situation Starbucks transited its grocery business to Kraft which automatically resulted in lower of the operating expenses and as a result there was a net increase in revenues in the specialty sales division by 20%.

The main strength of the firm is in the specialty coffee market and for that reason it targets a particular segment of the population while at the same time maintaining its niche. The extensive opining of stores has led to market cannibalization in certain regions of the world. The employee training and development program have ensured quality service throughout the globe.

There are industry level factors that drive the operations of the firm and there is a constant level of risk which affects the business operation of the company.

The lack of ownership in the coffee supplier segment in Central and South America is a crucial factor which affects the import of the company. This makes the variable cost to go up and hampers the net profit. Over exporting and concentration of retail outlets at some regions hampers the sales per store figure of the company.

The major exporting countries for Starbucks are Canada and countries in Europe, while the importing countries of the company are mainly countries of eastern Africa like Burundi, Ethiopia, Kenya, Rwanda, Tanzania and Zambia.

Qualitative Techniques: The qualitative studies for forecasting will use various sources of data and information in order to ascertain the current position the firm. The two qualitative method used in this study are secondary market research and the Delphi method.

Market Research: Coffee as an industry has now great global level demand and all the coffee companies through out the globe provide employment to more than twenty million people. (“Coffee in the 21st Century”, 2009). It is being observed that coffee as a commodity alone occupies the second position to petroleum in terms of the dollars traded throughout the world. (“Coffee in the 21st Century”, 2009). A market research results found out that over four hundred billion cups of coffee is being consumed every year. In the country of Brazil itself over five million people are involved in the industry of cultivating coffee beans. The overall sales premium of specialty coffee in United States of America has now reached a multi-billion dollar level. (“Coffee in the 21st Century”, 2009).But Starbucks particularly does not operate in coffee industry alone but the industry can be identified as the “Specialty Eatery Industry”. This industry can be regarded as the part of food and beverage industry which occupies the largest segment of disposable income. (Berger, Buchman, Chase, Hsu, N.d). This indicates a huge potential market to capture. The level of competition also increased due to the huge scope available after the year 1990. (Berger, Buchman, Chase, Hsu, N.d). The year 1997 recorded an estimated eight thousand specialty coffee outlets in the United States. According to the industry analysts the beverage industry at that particular point had enough space for about two or three national players, maybe even more. (“Starbucks Corporation”, 1997). The closest competitor at that time for Starbucks was a Canadian franchisor with many stores in Canada but when compared the size it was less than one-third of the total size of Starbucks. (“Starbucks Corporation”, 1997). The other national level competitor was Gloria Jeans which was also a franchisor of specialty coffees, and its stores are located in most of the malls throughout the United States of America. (“Starbucks Corporation”, 1997). The other rivals did not have more that two hundred and fifty stores, but there were about twenty small local and regional coffee shop chains that aspired to grow into rivals of Starbucks, most notably New World Coffee, Coffee People, Coffee Station, Java Centrale, and Caribou Coffee. These coffee shops together captured a considerable portion of the market and made the competition tougher. (Berger, Buchman, Chase, Hsu, N.d). The company (Starbucks) also faced huge competition from the nationwide coffee manufacturers like the Kraft General Foods, Procter & Gamble and Nestlé, the company who were known for distributing the coffees mainly through supermarkets. (“Starbucks Corporation”, 1997).

For that reason the market structure thus can be considered to be a monopolistic one as there are several competitors present in the market who are at the same time offering almost similar kind of products and services. This reveals the competitive nature of the market both domestically and internationally. The competitors used certain parameters to gain the competitive advantages. These parameters are mainly strategic store locations, the product mix and most importantly the store atmosphere. The last parameter actually does influences to a great extent in building loyal customer base.

Now there are certain other influences which affect the overall industry. Large coffee producers like Nestle and Kraft are constantly being pressed to introduce a voluntary levy on raw coffee beans which is considered as part of a greater move to promote sustainable development of coffee throughout the globe. The Worldwide Sustainable Coffee Fund headed by the members of the coffee industry has put forward a proposal to levy one dollar on every sixty kilograms bag of beans at an International Coffee Organization meeting held in London. (“The Future of Coffee industry”, 2009). This proposal got informal backing from the seventy per cent of coffee-producing countries all over the world.

Delphi Method: A controlled group of executives were interviewed in order to understand the opinions for them regarding the future prospect of the firm. The questionnaire was designed in order to reflect on the opinions of the executives regarding the future and the strategies of the firm. A total of twenty five members were selected for this controlled session.

The first statement of the questionnaire stated that the sales revenue of the company will certainly take a positive turn. About forty eight percent of the respondents agreed to the statement. The findings also reveal that there are forty four percent of the respondents who are unaware of the future so provided a neutral view. This may be due to the sudden dip in the sales revenue observed last year, the employees are now not certain of the dramatic comeback.

Figure 2: Percentage feedback on question number 1

The statement asked about more of a strategic issue for the firm. The question asked whether the operating expenses of the firm are hindering the performance or in other words controlling the same would improve on the overall turnover.

Figure 3: Percentage feedback on question number 2

The feedback suggests that the selected executives of the firm do not accept the fact that the operating cost is the main determining factor which is hindering the process of growth. They consider that due to the complexity of the business model of the company minor variations are observable in the period of economic downturn; otherwise the operating margin is quite satisfying for them.

Figure 4: Percentage feedback on question number 3

The response to the third statement is a mixed one. The question was regarding the aggressive store expansion strategy adapted by the company. It is being observed that a major percentage of the employees under the control group are not in favor of the aggressive strategy adapted by the firm.

Thus the overall qualitative forecasting using the Delphi method suggests that the closed group considers that the sales figure to go up but does not really support the aggressive expansion strategy adapted by the firm.

Reasons for selecting the methods: The two qualitative methods used for the purpose of the study are secondary market research and the Delphi methods. The first one is useful for gathering information regarding the industry and the competitor analysis of the company which are essential parameters for determining the future or forecasting the sales. The second one is the Delphi method where the responses are summarized in order to understand the view of the employees regarding the future. The point of view of the employees is essential as they reflect on the actual picture of the firm. While the market research surveyed the external environment the Delphi analysis helped in realizing the internal point of view of the employees.

Time Series Analysis: Apart from the qualitative methods of forecasting quantitative analysis are also required in to estimate and forecast the exact figure of sales that can be estimated. Two time series analysis methods are applied in this case in order to predict the sales figures and also the relationship among the various parameters.

Moving Average Method: This method simply takes the average of the previous figures and forecast the next figures.

Figure 5: Sales Forecast for the year 2010 and 2011

In this case a span of six years has been taken in order to forecast the sales figure. The forecasted figures for the year 2010 and 2011 come to be 8.2 billion and 8.7 billion dollar respectively. It should be noted that these figures is much less compared to the peak sales figure of 10.4 billion dollar that the company achieved in the year 2008. But due to the certain dip in the market conditions and United States economy the net revenue of the year 2009 also dropped. Due to the late drop in the sales figure the forecasted figures of the year 2010 and 2011 are low and it will take certain time for the firm to achieve the previous level. Though the last trend is increasing as the forecasted revenue for 2011 is higher that of 201

Linear Regression: This method of forecasting is used for determining the causal relationship between predicting parameters and the variable which is depending on the others.

Regression Statistics

Multiple R

0.9952172

R Square

0.9904572

Adjusted R Square

0.9840953

Standard Error

256.28309

Observations

6

ANOVA

 

df

SS

MS

F

Significance F

Regression

2

20451290

10225645

155.6865

0.000932

Residual

3

197043.1

65681.02

Total

5

20648333

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

-58.491328

663.0271

-0.08822

0.935262

-2168.54

2051.557

-2168.54

2051.557

Operating Income

0.8536555

1.104188

0.773107

0.495786

-2.66036

4.367675

-2.66036

4.367675

No of Stores

0.5670203

0.048045

11.80197

0.001308

0.414121

0.71992

0.414121

0.71992Figure 6: Linear Regression analysis using figures from the year 2004 to 2009

In this particular case the sales revenue is the dependent variable, or the variable which will be forecasted, while the operating income and the number of stores are the predicting variables.

The results show that the value of the adjusted R-square is 0.9840953 which means that 98% of the variation of these two parameters explains the variation in the sales revenue. This reflects on the high predictability rate of these two parameters. Now the forecasting equation that is being derived from this analysis is given by

Y= -58.5+ 0.85 OI + 0.57 N

Where Y is the sales revenue, OI is the operating income of the firm and N is the number of stores. This provides the model with which the future sales figures can be forecasted. This model provides the causal relationship among the parameters.

Recommendation: According to the industry analysts Starbucks was a company which can replicate the giants like Nike or Coca-Cola in its own industry segment. In the period 1998 StarBucks was the only company with almost national market coverage in the United States of America. The immediate objective at that time for the firm was to have about two thousand stores in operation by the year 2000 and this target was fulfilled in time. The long term objective was to become the most recognized and respected brand in the world. This goes well with the actual value proposition of the company. The company's efforts to greatly increase its domain were stimulated by the joint ventures with Pepsi and Dreyer's and its move to sell coffee in supermarkets. (“Starbucks Corporation”, 1997). The company was also thinking of a possibility of marketing fruit-juice drinks and candy under the Starbucks label. But prior to any expansion that the firm must adapt, it should consider two crucial aspects. Firstly the cost component being so high the company cannot afford radical product line of store expansion in the given situation. Secondly if the company tries to expand its target customer base, it may dilute it overall brand and the customers as well as the employees (who have been a major asset for the company) may see this as a shift from the overall value proposition of the firm. This is bound to affect in a negative way. For that reason whichever among the two possible options that the company chooses to increase its sales revenue, it must analyze the long term growth and prosperity of the company.

Conclusion: The Company must continue on its expansion strategy as it is only way they can increase the sales revenue. Shifting the target base or shrinking the network will cause equal harm for their brand which will again hamper the future sales. Though the threat of competition is huge, still every time the company came out with successful marketing strategy to overcome the situation and it continues with its aim of continuous expansion plans. Quality product delivery along with increasing the network is what the company mainly works on, and for that reason it is expected the company will certainly overcome the current situation and its stock market figures will show positive trend again in the future.

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