This report is prepared for Starbucks Coffee Company Starbucks by a Specialist Marketing Consultant, to analyse the strategic position for Starbucks in the Specialty Coffee Industry. It provides a summary of all the major findings and, explores various strategic options and recommendations for Starbucks in order to increase and maintain its competitive advantage within the industry.
Starbucks is a global leading brand, well known for its specialty coffee. The coffee house does not only sell high-quality coffees, but also Italian style beverages, cold beverages, complimentary food items, premium teas and coffee-related accessories. It has further retained its competitive advantage by selling packaged coffees and teas, ready-to-drink beverages, ice creams and many other products in other retail stores such as supermarkets through licensing relationships.
Starbucks is facing various issues, some of which include;
- Maintaining the Starbucks Experience for customers and not being seen as just a money making machine
- Store Expansion
- Competition from fast-food chains and other specialty coffee retailers
- Generating more demand
- Lowering input costs
- Based on the strategic findings, the report outlined several recommended strategic options, the mains ones of which are:
- To improve the subliminal and express aura of Starbucks by supporting more good causes and paying its proper taxes.
- To increase revenue at lower costs, Starbucks must try and search for more licensing relationships and expose the brand further.
- Existing stores could attract more customers, particularly after the morning peak times by offering non-coffee beverage options or products for specific groups such as retired people.
- The recommended policies will help to enhance and strengthen Starbuck’s market share in the specialty coffee industry.
Background Information on Starbucks Coffee Company (“Starbucks”)
Starbucks was incorporated in the year 1971 by its founding directors Jerry Baldwin, Zev Siegl and Gordon Bowker. The Company was set up to operate as a roaster and retailer of whole bean and ground coffee, tea and spices together with coffee making equipment in Pike Place Market in Seattle, Washington (Starbucks 2013b).
In the year 1987, the original owners sold the Starbucks chain to former employee Howard Schultz, who is now the current Chief Executive Officer (“CEO”) of Starbucks. Schultz re-branded his already existin – II Giornale Coffee outlets as Starbucks and quickly began to expand (Grant 2010) as he believed that:
“From the beginning, Starbucks set out to be a different kind of company. One that not only celebrated coffee and the rich tradition, but that also brought a feeling of connection” (Starbucks 2013a).
Starbucks has truly developed a unique brand experience, one which is the most respected and recognized around the world (Starbucks Annual Report 2012). Today, it is known to be one of the largest and best established American global coffeehouse chains (Grant 2010). It has grown to have over 20,800 stores in over 60 countries, with the United States having the highest number of stores, followed by Canada. The UK has approximately 806 stores. However, countries like India, the second most populous country in the world, has only circa 8 stores (Loxcel Starbucks 2013).
Critical Evaluation of the Porter Five Forces Concept
All organisations need to understand the dynamics of their industries and markets in order to compete effectively and intensively in the market place.
An American management writer Michael Porter came up with a framework called Porter’s Five Forces (Porter 2008). The framework analysis the attractiveness of an organisation and or/industry structure, determines the main external competitive threats, and assesses the extent to which the five forces are relevant to the organisation and/or industry (Hollensen 2003;Purcell 2013).
The five fundamental competitive forces include (1) Rivalry, (2) Buyer Power, (3) Threat of Entry, (4) Supplier Power and (5) Threat of Substitutes (Porter 2008) (Figure1 Porter’s Five Forces Framework). These five forces, as explained above, aid an organisation to understand two strengths;
The current competitive situation and,
The strength of a position it would like to move into (Purcell 2013).
Michael Porter simplified the micro-economic theory into the above five major influences. Each of these influences take into account demand and supply, corresponding products as well as substitutes, the relationship between volume and production and the cost of production, and the structure of the market such as oligopoly, monopoly etc. (Grundy 2006;Porter 2008).
Apart from that, the value of information abstracted from the Framework analysis, assists to fuel three aspects of corporate planning;
The attractiveness and profitability of an organisation/industry can be determined by using Porter’s Five Force Analysis, hence supporting decision making on whether to enter/exit from an industry or market segment (Porter 2008).
Furthermore, the framework considers and takes into account the impact of competitive forces on the organization (RAPIDBI 2012) itself versus impacts on its competitors (Ketels 2006). Due to the availability of different resources and levels of competences, the competitors may have different reactions when there is a change in competitive forces, hence influencing the structure of the whole industry (Grundy 2006;Ketels 2006).
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A combination of both Porter’s Five Force Analysis and a PEST- Analysis (Political, Economical, Social, Technological), will disclose clues on how attractive the organisation/industry will be in the future (Porter 2008). This is because a change in Political, Economical, Socio-demographical and Technological aspects of organisations/industry can be influential on the five competitive forces and, hence will impact on the industry structure (Karagiannopoulos et al. 2005).
Analysis of Options
Improvement of an organisations own competitive position can be influenced by having some knowledge on both the degree of intensity and power of competitive forces (Recklies 2001). A new strategic direction can be derived from this such as new positioning in the market and differentiation for competitive products (Porter 2008).
Accordingly, Porter’s Five Force Framework allows an organization to analyse the market structure and competitive situation in a more systematic and structured way (Recklies 2001). Once all relevant forces for that particular market are identified and analyzed, managers can find options that influence these forces, subject to the organizations interest (Grundy 2006;Ketels 2006;Recklies 2001).
Recent research has shown that Porter’s Five Force Framework has got both strengths and weaknesses when used in today’s dynamic environment, the main weakness highlighted has been the historic nature of its development (Grundy 2006). Cyclical growth in the 80s showed that the global economy had been fairly stable and predictable, compared to the current economy (Grundy 2006).
Several limitations to the Porter’s Five Force Framework have been shown as;
- From the economic point of view, the framework is under the assumption that the market is perfect (Rivard et al. 2006). As a result, the framework will not be able to deliver meaningful insights on highly regulated industries (Grundy 2006)) .
- The applicability of the framework is more towards the analysis of simple market structures, rather than those which are in a much more complex industry (Grant 2010). As a result, the framework is limited to focusing on particular segments of such industries. This imposes an increased risk in omitting important elements (Grant 2010) .
- The framework assumption on having moderate static market structures makes it a non – suitable framework for today’s dynamic markets. Business models, entry barriers and relationships may change along the supply chain within a snapshot due to technological breakthroughs and dynamic market entrants (Karagiannopoulos et al. 2005). As a result, the framework could be a preferred model to be used at a later stage for analyzing new situations; however, it is limited to and perhaps not ideal to a certain extent to provide preventative actions (Rivard et al. 2006) .
- Porter’s Framework is based around the idea of competition, hence the name “competitive forces”. The assumption made by the framework is that a company will try to attain competitive advantage over the various players in the markets together with suppliers or customers (Aktouf et al. 2005). As a result of this, the framework only focuses on such aspect of strategy rather than taking into consideration the availability of strategic alliances, virtual enterprise- networks or others (Aktouf et al. 2005).
Overall, Porters Five Forces Framework has limitations because it does not take into consideration new business models and the dynamics of the market place (Recklies 2001).
This report will now apply the Porter’s Five Force Framework to Starbucks Coffee Company (“Starbucks”) which is a large specialty coffee shop popular in most western countries such as the United States of America, United Kingdom and many others.
Critical Analysis of Starbucks External Environment
Within the rapidly changing global picture, companies and consumers are increasingly affected by global forces, represented as “non-controllable”. These forces are external environmental influences which must be monitored and responded to, on an ongoing basis by marketers, as they will lead to new opportunities and threats (Kotler 2007).
An external environmental analysis, using the macro-economic PESTLE model was carried out for Starbucks and has been attached at Appendix 2 of this report.
It can be seen from the analysis at Appendix 2 that there is currently a negative imbalance in Starbucks’ external influence matrix. This is because whilst the sociologic factors are favourable, whilst other factors such as Political, Economic and Legal show substantial threats.
However, Starbucks has got some strengths that over-come some of these non-controllable influences from the external environment. It has built in flexibility to change, for example, agreeing to pay extra corporation tax in the UK, for the next two years (BBC News Business 2013), or relating to the closure of non-profit making stores, and lastly it has developed high powered management decision making process which ensures that is quick at exploiting opportunities (Patton 2012).
Critical Analysis of Starbucks Business Environment
Michael Porter (1985) posits that, in an attempt to find effective sources of competitive advantage, a thorough research should be conducted on the structure of the industry. In this case, an analysis of the speciality coffee industry can help to establish the strategic position Starbucks occupies and wishes to occupy. Porter’s Five Forces model is a useful tool in this regard. It shows how key elements have shaped the competition in the industry (Hill and Jones 2009).
In the specialty coffee industry today, consumers have wide access to different products at different prices with better quality services (Hunt et al. 2011). This practically means that individuals have the choice to easily switch from product to product, whichever is the preferred one. This is where Starbucks has an advantage; it decides on the prices of the drinks offered to its consumers, by taking into consideration the price-elasticity which is strongly influenced by loyalty to its brand and also current prices at rival stores (Grant 2010).
Since Starbucks is known to be an up-market coffee shop with high quality, based on perception and offering vertically differentiated products – it is very likely for it to be able to sell its products at high prices, hence leaving no room for price-negotiation with its customers (Grant 2010).
In 2008, Starbucks purchased its input goods from suppliers at a market price which was 23 per cent lower than it is now (Corporation, 2008) It also takes advantage of its size and benefits from economies of scale, however, this does not help Starbucks to increase its number of suppliers due to the circumstances within Starbucks own marketplace (Grant 2010). Prices are usually determined based on the demand and supply ratio, hence, with an increased level of competition (Kotler 2007), substitute suppliers are always available if Starbucks wishes to purchase at a different price point. Despite all the supplier conditions, Starbucks holds a better relationship status with its suppliers than most of its competitors (Starbucks, 2013).
Threat of substitutes
Product-for-product analysis together with an analysis of generic substitution is an important area to consider for Starbucks, since 14% of coffee drinkers have a favourable opinion for them (Rasmussen Reports 2011).
The vast variety of the availability of different beverages such as soda, energy drinks, juices or water, in comparison to coffee, must be taken into consideration by Starbucks. However, this is not of a huge concern to Starbucks since it sells a large selection of these beverages within its stores, the biggest one being tea, a direct substitute to coffee. Starbucks has taken the initiative to sell this direct substitute product under its own TazoÂ® Tea brand (Starbucks 2013).
There is quite a concern when the threat of customers substituting away from Starbucks and going for direct competitors such as Café Nero and Costa Coffee (for example in the UK) is considered. These direct competitors are hard to differentiate because they also truly pride themselves on customer services and on the quality of their speciality drinks. Large food chain competitors such as McDonalds are usually known as having a negative undertone of being cheap, often compromising on the quality of coffee. This has no effect on Starbuck’s targeted customer base (Grant 2010).
Threat of entry
The barriers to entry in the specialty coffee market, such as the one Starbucks operates in have increased. This has reduced the potential threat of new entrants (Patton 2012).
The capital requirement for small coffee shops in this industry is relatively small as the shops require a small amount of floor space and not a high amount of technology is used, which is normally the biggest start-up cost. As a result the potential for more of these small coffee shops to enter the industry is still present (Articlesbase 2011).
McDonalds and other fast food chains are key competitors which are diversifying their beverage menu. The direct competitors like Costa Coffee and Café Nero compete on a much more of a parallel with Starbucks compared to the fast food chains, as they attract the same consumer base and offer similar products as in the way Starbuck’s does.
Starbucks differentiates itself from other coffeehouses as it reaps higher margins from its specialty drinks. This is because it takes advantage of economies of scale and has a different cost structure in contrast with other competitors in the market. They pay less for the products bought in bulk, such as dairy goods, syrups, paper goods etc (Starbucks – 10K 2010).
Whether Starbucks coffee has the actual quality to attract customers or whether there is just a perception of it being better than that of competitors has been the subject of much discussion on public media through many recent surveys and reviews. Irrespective of that, some possible strategies to be considered by Starbucks in order to maintain its market position are as follows:
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Strategy to renew the Starbucks brand name.
To maintain a strong brand name, Starbucks will have to assure people that their coffee is better than all other beverages, be it McDonalds coffee or Costa Coffee; by introducing a more aggressive advertising campaign in order to educate and acquaint customers about the uniqueness that Starbucks quality offers as well as by diversifying advertising channels using internet, visual media etc instead of depending on employee-customer liaison (Starbucks, 2013)
Product differentiation is very vital in order to develop new flavour, blends and also roast fusions (Ross & Gaddis, 2013) Starbucks should continue its coffee development program efforts through extensive research. This should continue to be done by providing free samples, at first, leading to launching the new product into all stores depending on what response it gets from the samples distributed (Porter, 2008)
Due to the recession, consumers try to cut their spending and are less likely to buy a cup of coffee for £2.50, and therefore, differentiation can be a useful tool to overcome economic downturns (Moon, 2010) Starbucks can promote new cost efficient products by selling them at lower prices, hence not affecting its “luxury-premium” status in the market. This strategy can help Starbucks retain its customers as well as intensify their brand name.
Privilege Card and Rewards Program
Starbucks’ Card program for consumers to reload credit online has been implemented in order to not only provide customers with rewards on online registering but also benefiting them with complementary beverages after a certain number of purchases, free refills as well as free syrup options (Starbucks, 2013). However, other competitors also have similar strategies for consumers and this leads Starbucks to offer distinct rewards in order to deliver incentives for coffee consumers as compared to its rivals. For instance, Starbucks could cooperate with airline companies and various large retail businesses so as to combine their rewards program with Starbucks (Hill & Jones, 2010)
Focus on the coffee
Starbucks should also consider cost reduction as well as potential growth strategies especially at the time of economic downturn. For example, Starbucks has begun to invest in new businesses other than coffee, such as films, music and books (Starbucks, 2013) This has led Starbucks to incurring higher costs and lower profit margins but this can be prevented by focusing on different marketing techniques to reach a wider audience. In these recessionary times, involving itself in fewer businesses can help Starbucks cut down costs and more resources can be utilised to improve their core product, which is coffee (Moon, 2010)
Efficient Store Expansion Decision
The launch of more stores has had to be reduced or halted completely in order for Starbucks to survive at the time recession in the United States. In the year 2007, Starbucks opened about 1700 stores; today it has around 15000 stores and still aims to build the number of stores up to 40000 in the foreseeable future (Corporation, 2008) Taking into account its overall financial performance as well as the downfall in the economy, it is best if Starbucks focuses on renewing its brand and customer base rather than opening stores at present (Omer, 2008).
The Starbucks” Feel”
People enter a Starbucks’ store not just for a cup of coffee but also for the relaxed environment and the opportunity to de-stress for a while. The initiative to write customers’ names on their cups adds to this club atmosphere. This Starbucks’ feel needs to be further developed and sold to the customers.
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