Starbucks Market Analysis

2843 words (11 pages) Essay in Marketing

12/07/17 Marketing Reference this

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Starbucks Corporation is an international coffee and coffee house chain based in Seattle, Washington, United States. It opened as a single small store opened in 1971 and became a coffee giant at the end of the millennium. Starbucks has led a coffee revolution in the United States and beyond. The store was opened by 3 men: Jerry Baldwin, Zev Siegl and Gordon Browker. Starbucks for first nine months bought coffee from Peet’s Coffee. Within first decade Starbucks opened five stores.

Mid-1980:

In 1983, Starbucks bought Peet’s Coffee the same year, Schultz who was hired in 1982 to manage the company’s retail sales and marketing, took a buying trip to Italy, where another coffee revelation took place. He visited Milan’s famous espresso bars and captivated by the culture of coffee and the romance of Italian coffee bars. He returned home determined to bring that type of culture to the United States but the higher authorities didn’t support him. As a result he left the company and decided to write business plan of his own. His parting with Starbucks was so amicable that the founders invested in Schultz’s vision, he then returned to Italy to do research, visiting coffee and espresso bars.

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In 1986, he opened his first coffee bar in the Columbia Seafirst Center second was soon opened in Seattle and third in Vancouver. He also hired Dave Olsen, as a coffee consultant and employee trainer; he was the proprietor of one of the first bohemian espresso bars in Seattle. A year later Schultz was thriving while Starbucks was encountering frustration. Schultz then approached his old colleagues with an attractive offer: “how about $4 million for the six-unit Starbucks chain?” They sold, with Olsen remaining as Starbucks coffee buyer and roaster. He merged and changed the name to Starbucks; the company then became Starbucks Corporation and prepared to go national.

In August 1987 Starbucks Corporation had 11 stores and fewer than 100 employees. In October of that year it opened its first store in Chicago, and by 1989 there were nine Chicago Starbucks. Starbucks market was growing rapidly, in the United States sales grew from $50 million in 1983 to $500 million five years later. In 1988 Starbucks introduced a mail-order catalogue; the company was serving mail-order customers in every state and operating 33 stores. By then the company’s reputation had grown steadily by word of mouth.

Starbucks installed a costly computer network and hired a specialist in information technology from McDonald’s Corporation to design a point-of-sale system via PCs for store managers to use. Every night all the information pass to Seattle headquarters. In 1990 the headquarters expanded and a new roasting plant was built.

Rapid Early 1990s:

Starbucks also developed a reputation for treating its employees well which results in low turnover in the food service industry. The company went public in 1992, the same year it opened its first stores in San Francisco, San Diego, Orange County, and Denver.  By the year’s end there were total 165 stores. In 1993 Starbuck opened first East Coast store, in a premier location in Washington D.C. At the end of 1993 the chain had 275 stores and 425 one year later. Over the previous three years, sales had grown an average of 65 percent annually, with net income growing 70 to 100 percent a year during that time. Starbucks broke into important new markets in 1994, and purchased a 23-store rival based Coffee Connection. There was unexpected increase in sales when in 1995 Starbucks launched a frozen coffee drink called Frappuccino in its stores. That same year, Starbucks began supplying coffee for United Airlines flights.

Late 1990s and Beyond:

For the first time, the company ventured overseas the following year. They initially started by joint venture and licensing with local retailers. In Japan the first foreign market was developed with the help of SZABY Inc., a Japanese retailer and restaurateur, through other partnerships they also opened in Hawaii and Singapore the same year and in 1997 they also opened in Philippines. They in 1996 partnership with Dreyer’s Grand Ice Cream, Inc. to develop and sell Starbucks Ice cream. Within eight months of introduction, the number one coffee ice cream in the United States. When they expanded in 1997 into Florida, Michigan and Wisconsin the total number of branches were 1,412 by the end of year. Sales reached up to $1 billion and net income hit $57.4 million. Critics complained that the company was deliberately locating its units near local coffee merchants to siphon off sales, sometimes placing a Starbucks directly across the street. In 1996 and 1997 residents in Toronto, San Francisco, Brooklyn, and Portland, Oregon, staged sidewalk protests to attempt to keep Starbucks out of their neighbourhoods. In late 1999 the protestors took their anger out on several Starbucks stores which were then temporarily closed in the company’s hometown of Seattle.

Growth in the Pacific Rim continued with the opening of locations in Taiwan, Thailand, New Zealand, and Malaysia in 1998 and in China and South Korea in 1999. By early 2000 the number of Starbucks in Japan had reached 100. The company aimed to have 500 stores in the Pacific Rim by 2003. The Middle East was another target of global growth, but it was the United Kingdom that was the object of the company’s other big late 1990s push. In 1998 Starbucks acquired Seattle Coffee Company, the leading U.K. specialty coffee firm, for about $86 million in stock. There were more than 100 branches in United Kingdom by late 1999. Starbucks hoped to use its U.K. base for an invasion of the Continent, aiming for 500 stores in Europe by 2003.

Starbucks in 1998 entered into a long-term licensing agreement with Kraft Foods, Inc. for the marketing and distribution of Starbucks whole bean and ground coffee into grocery, warehouse club, and mass merchandise stores. The company also began experimenting with a full-service casual restaurant called Café Starbucks. In early 1999 through the purchase of Pasqua Coffee Co., a chain of coffee and sandwich shops with 56 units in California and New York. Starbucks had already developed its own in-house tea brand, Infusia, but it was replaced following the early 1999 acquisition of Tazo Tea Company, a Portland, Oregon-based maker of premium teas and related products with distribution through 5,000 retail outlets. In early 2000, the company did an agreement with Kozmo.com Inc., an operator of an Internet home-delivery service providing its customers with videos, snacks and other items.

In the early 21st century, Starbucks was working to achieve Schultz’s ambitious goals of 500 stores in both Japan and Europe by 2003, as well as his ultimate goal of 20,000 units worldwide. In June 2000 he stepped down as CEO of the company to become its chief global strategist, while remaining chairman. In the early 21st century, Starbucks was working to achieve Schultz’s ambitious goals of 500 stores in both Japan and Europe by 2003, as well as his ultimate goal of 20,000 units worldwide.

STRATEGIC DEVELOPMENT:

1982: Howard Schultz is hired to manage retail sales and marketing. 

1983: Peet’s Coffee is acquired. 

1985: Schultz leaves the company. 

1987: Schultz buys the six-unit Starbucks chain from the original owners for $4 million, merges and renames his company Starbucks Corporation. 

1988: A mail-order catalog is introduced. 

1992: Company goes public. 

1993: First East Coast store opens, in Washington, D.C. 

1995: Frappuccino beverages are introduced. 

1996: Overseas expansion begins. Partnership with Dreyer’s begins selling Starbucks Ice Cream.

1998: U.K.-based Seattle Coffee Company is acquired. Partnership with Kraft Foods is formed for the distribution of Starbucks coffee into supermarkets. 

1999: Pasqua Coffee Co. and Tazo Tea Company are acquired. 

2000: Schultz steps aside as CEO to become chief global strategist, while remaining chairman; Orin Smith takes over as CEO. 

Situation Analysis:

MARKET:

A market is an actual or conceptual place in commercial world where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments, for money.

COFFEE MARKET:

Almost 70% of the world’s coffee supply is provided by smallholders cultivating less than 10 hectares in 80 countries in Africa, Asia and Latin America. However, the extreme volatility and long-term decline in coffee prices on international markets endangers the livelihoods of the 10 million small coffee farmers dependent on coffee for their primary source of income.

In December 2000, international coffee prices hit a 30-year low, with further falls expected. These prices barely cover production costs in many countries. Current coffee oversupply is massive and production is increased more than demand due to latest technologies.

Coffee consumption in the US still focuses on the morning/breakfast.

Starbucks is the leading and most major name in promoting coffee throughout the world. They have expanded continuously and it has resulted in their growth and popularity. Starbucks revenue is generated both from company-operated retail stores and from specialty operations.

Source:Company Reports

Market share of starbucks:

Total per annum sales of coffee in Britain has reached up to £1bn-a-year. The number of people with “coffee intolerance” has more than doubled in the past four years.

Starbucks has seen sales and earnings rise, despite of challenging and economic situation in the world. Together, these improvements are enabling the company to continue to make key long-term investments in the world.

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Starbucks positions itself as a specialty premium coffee retailer, which sells a wide variety of coffees and other beverages, both hot and cold, together with snacks and sandwiches. The company currently has a network of over 10,000 coffee shops in 37 countries which give the company a strong and well known brand image and clear differentiation from many other coffee brands. This scale and strong brand give Starbucks a high degree of bargaining power with suppliers and also and differentiate its offerings. However, intense competition in the retail beverage segment could adversely affect the company’s profit margins, and the company is currently still strongly dependent on the US market for the majority of its revenue and profits.

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Market segmentation of starbucks:

Market segments are group of customers having similar needs / wants and preferences. It enables the organization to more closely match it marketing mix with the customers of same needs or demands.

Starbucks is mainly adult-focused and aims to connect with their customers, communities, and children through various advertising tactics. The vast majority of these customers come from urban areas.

Another new and large growing target market within the coffee industry is college-age students and post-graduate individuals residing in urban areas. These two segments are heavy coffee drinkers. Starbucks has identified through market research that this is the segment that will generate the greatest impact to their business and they have targeted them with products. Starbucks presents a narrow range of products geared towards this segment. By limiting choice and presenting a few products. There have been studies showing that coffee consumption has increased with the drinker’s educational level.

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Starbucks is a company that embraces diversity, not limiting themselves to one specific demographic, behavioural, or geographic segment, Starbucks they are always treated as equals. The company promotes minorities and women who own businesses. This helps to increase the feeling amongall their customers that they are valued .

Internal Analysis-SWOT Analysis:

Strengths:

  • Customer Loyalty- Starbucks has very strong brand recognition and faithfulness among those who frequent the coffee shop.
  • Employee Loyalty- Starbucks’ partners are their greatest assets.They empower their employees, allowing them to make their customers’ experiences memorable and satisfactory.
  • Social Issues- Starbucks supports many social issues like literacy, clean water and health issues etc.

Weaknesses

  • Starbucks has a somewhat narrow product line for their overseas countries. For example, it is hard for Starbucks Coffee to promote tea in China.
  • Many people and industries view the company’s lack of advertising as a negative business strategy.
  • Over-expansion: Right now Starbucks is venturing out of the coffee industry and into music, books, entertainment, and other foods as well. Too many brand extensions may become harmful to the company.

Opportunities

  • Starbucks could add to their product line multiple brand extensions: desserts, sandwiches, more coffee/hot chocolate variations, etc.
  • There is a great deal of overseas expansion.

Threats

Immediate competition from fast-food restaurants catching on the specialty coffee wave and developing products that competes with Starbucks.

  • Tim Hortons
  • Dunkin Donuts
  • McDonalds
  • Nestle

External Analysis – PEST Analysis:

Starbucks holds a different brand name and reputation in the market, although there do exist many companies in the market and the competition in the market is also fierce. The competitors in the market make use of location, product mix and develop small markets (niches) to make themselves sustainable in the big market.

PESTEL stands for Political, Economic, Social, Technical, Environmental and Legal environments surrounding a business firm. It is a strategic, analytical tool to understand external forces. A brief overview of each of them is given below:

  • Political Environment:

The relationship that exists between the coffee producing countries and the United States is of importance. In addition, the UK US relations and the political stability in UK will also play a role in the success of the company.

  • Economic Environment:

In UK, the unemployment rate is 7.8%, Inflation rate is 3.2%, Exports are £520m, Imports are £493m, GDP Per Capita is $43,785, GDP Real growth rate is 1.20%.

There is a constant demand of food and beverage products, and the Americanization of the new younger generation brings opportunity in terms of the acceptance of the brand in UK. Nevertheless, as revealed by figures, the development in the country has increased the income of the people providing them with higher disposable income.

  • Social Environment:

The great population of 62 million has made UK high in social trends. The effects that can be encountered from the social environment pertain to the change in the use of coffee as a beverage.

  • Technological Environment:

New technologies can create new products, can lead to innovation and reduction of cost, Starbucks can take the advantage of UK innovations made in technology.

  • Environmental Influence:

Environmental factors include the weather and climate change. Changes in temperature can impact on the company. This heavily affects the coffee industries.

  • Legal Environment:

In UK there have been many significant legal changes that can affect company behaviour. The introduction of age discrimination, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that can affect company’s actions.

Michael Porters 5 Forces:

According to Michael Porter, the five forces that affect the company in any industry include the competition, the suppliers, the customers, the threat of new entrants and the threat of substitutes. The porters five forces analysis for Starbucks in UK is given below:

  • Industry Competition:

There is no competition in terms of volume of operations.

Competitors are selling similar products including specialty coffee and high quality food.

Tully’s Coffee, Gloria Jeans, Caribou Coffee are major competitors.

  • Threat of New Entrant:

The innovation and product differentiation can be brought in by new entrants.

  • Threat of Substitutes:

There are many substitutes, offering similar services and also taking a share of the market available to Starbucks.

  • Bargaining Power of Suppliers:

Star bucks is vulnerable in terms of power of the supplier.

  • Bargaining Power of Buyers:

Supplier products are highly differentiated. Customers are buying experiences and are fiercely loyal to a particular specialty coffee retailer.

Ansoff’s Growth Matrix:

Existing Product

New Product

Existing Market

Hotels, Grocery Stores, Airlines

Salads and New bold Fresh Lunch Program.

New Market

Open stores all over the world.

Music CDs, clothing, Chocolates, Coffee mugs.

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