Market Strategies applied by Starbucks

Starbucks established in 1971 has grown vigorously and at present operates in 41 countries around the world. Major business comes from Starbucks retail stores outlets which differentiated themselves with quality and specialty coffeehouses providing unique experiences by its products and services.

Starbucks major success comes from its three successful strategies i.e. the third place experience, creating human connections and providing a quality experience everyday to its consumers.

Starbucks follows specific strategies that include:

Horizontal integration, market penetration, Market development, Concentric diversification, Conglomerate Diversification and Value chain Development.

This plan further explores SWOT analysis of starbucks which identified various threats and weakness Starbucks Faces to overcome in future.

Starbucks has suffered heavy losses in past five years resulting in various stores across the world been closed, drop in share prices and loss in consistent brand value. This Plan further explores How Starbucks can employ other Strategies to develop sustainable growth in future and continue to be a major brand in coffee specialty.

The overall level of competitive threat for Starbucks is moderate to high . this is primarily due to high competition in market and emergence various strong brands like McCafe from McDonalds etc. and moderate threat of green coffee supply. This threat carry more weight than the lower threats of buyers, substitutes and new entrants.

1.2 Current Performance:

Overall, Starbuck’s Vision of becoming a worldwide global brand seems to be working in favour of the company. It is helping it to attract the attention of some major companies who would like to start a partnership. This approach gives a much stronger basis for future development into international markets and further strengthens the mission to become one of the leading coffee retailers in the world.

Starbucks, the leading retailer of specialty coffee in the world has been struggling due to various reasons ; uncertain state of the economy, increased competition from cheaper rivals and its own rapid growth through international expansions ( growing presence in 44 countries). In the first quarter of 2008, company’s net income fell to $108.7 million down 28% from the same period of 2007. Starbucks shares have fallen over the previous two years and the company has struggled to maintain its differentiation strategy in the face of growing competition. Also the crisis in the housing market has led to a further fall in sales. Rising costs of wholesale prices for coffee & dairy products and store space has also led increased Starbucks’ problems.

2.0 STRATEGIC POSTURE:

2.1 Mission:

“To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” – http://www.starbucks.com/about-us/company-information/mission-statement

“The mission of Starbucks is to establish Starbucks as the

Premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow” –

http://www.starbucks.com/about-us/company-information/mission-statement

To achieve its mission company’s has followed six principles which are:

1 – Great work environment where each employee is termed as partners and been treated with respect and dignity.

2- Embrace diversity as an essential component…

3- Highest standards of purchasing to provide quality products.

4- Roasting and delivering of coffee at its best.

5- Develop relationship and satisfied customers all of the time -As a part of its mission Starbucks presented their outlets as the third place between work and home.

6- Contribute positively to our communities and our environment, and recognize that profitability is essential to our future success.

Applications of these principles are used as a guideline for all stakeholders to aim to achieve desired goals and maintaining standards.

2.2. Objectives and Strategies:

Inspite of Starbucks’ difficulties in the past, with Schultz back at the helm there appears to be renewed faith by the markets that the company can be turned around. In order to develop long term objectives the current position of Starbucks needs to be considered.

One of the first long term objective that should be considered is linked to profits. Starbucks has seen a general increase in the profit levels, mainly due to international growth, with profit margins declining, the net profit margin was 12.5% in 2005, since then it has been declining. Therefore, first long term Objective for Starbucks is to increase the net profit margin to 12.5% and at the same time increasing the profit level by 15% per annum over the next decade.

Starbucks also needs to remain competitive. One the major problem company faced is difficulty in connecting and attracting younger coffee drinkers and creating a core target market within the younger market. Thus, Second Long Term objective is to develop themselves as the preferred coffee house establishment for the age group under thirties. The Long term objective is that there should be an increase in this target market without loosing from older consumers. Thus by end of year 2012 the customers under thirties should account for 35% of the total sales.

Customer Loyalty is another very important in terms of the long term sustainable firm, therefore the long term goal is to increase loyalty with average customer visiting the company minimum 2-3 times a week.

2.3. Business Strategy:

The Starbucks mission and principles are encompassed by three major strategic stances i.e. –

The Third Place after work and home – Created by Starbuck’s unique ambience

Establishing human Connections – Starbucks strives to maintain this through ecosystem management, sustainable practices, supplier networks maintenance, innovation and firm transparency.

Providing quality experience everyday

Starbuck Corporation External Analysis:

Michael Porter defines five forces impacting a firm’s competitiveness- threat of substitutes, threat of new entrants in the industry, bargaining power of suppliers, bargaining power of customers, and the intensity of competition within the industry.

Suppliers

Starbucks Corporation as big size organization can put significant pressure on its suppliers. As per its goals and values it does not abuse this power as it is not in its best interests. It treats its relationship with supplies as a partnership and it has high operating standards for its suppliers. Starbucks ensures its supplier make reasonable profit so that they can meet company’s corporate standards and expectations which include environmental policies such as excessive packaging, energy conservation and farming methods and employee benefits.

Dairy, paper products, Coffee are the major inputs into the Starbucks operation. It is fully dependant on its supply of coffee ad demands a high quality bean thus it has developed various programs in the development of farmers and coffee producing regions. Starbucks also grows its supply base as it grows its retail base and to keep its supplies in business and loyal it pays a premium to ensure this.

Overall, the threat pressured by suppliers is moderate due to the instability of green coffee industry and the scarcity of the high quality bean that the company demands.

Customers:

The thread of customers is low for Starbucks because of low likelihood of backward integration; Starbucks differentiated products, diversified customer base and company’s ability to shape consumer taste and demand. It is generally been presumed that coffeehouse products are of superior quality that other venues which gives competitive advantage to Starbucks.

Starbucks itself is well established bran worldwide and one of Starbucks’ branding strategy of differentiation as third place experience is unique and contributed a lot to its success.

Competitors:

For Starbucks where its products can be found from specialty coffee mainstream to convenience stores and gas stations, defining the basis for competition is difficult. Starbucks competes in two ways i.e. product and venue. But considering both aspects Starbucks faces high competition in both segments. Various companies like MacDonald’s McCafe, Dunkin Doughnuts, Costa etc. have emerge and provides better products in low prices and with other meals. Coffee houses give tough competition as Starbucks prices are higher in prices and have limited product line. Also in some countries like Japan, Australia, Europe etc. Starbucks faces low sales as people taste preferences are not much likely favoring Starbucks products. In Japan, taste of coffee is considered to be artificial.

Therefore, Competitive threat for Starbucks is from moderate to high due to increasing number of firms penetrating Market and product line.

New Entrants:

Although there is room for new entrants into the market, strong barriers to entry to compete with Starbucks directly in the coffeehouse segment makes it difficult for the new entrants. Starbucks had developed better skills, networking, brand image and distribution channel which might take years for new entrants to directly compete with Starbucks. Also, Starbucks is able to interact creatively with customers and form partnerships with suppliers by utilizing its knowledge.

Also, Starbucks got its stores located at the best geographic location worldwide thus helping it gain competitive advantage. As one of the strongest brand, Starbucks products are highly differentiated and provide unique experience. Furthermore, the company has a loyal customer base that is willing to trust the new products including books, movies and DVDs. Considering Starbucks’s Scale and competitive advantage, it has posed barriers to entry. But Market is difficult to define and changes or innovative approaches may allow a disruption to occur from a low-end player or new channel of distribution which Starbuck may not be prepared for. Thus threat for new entrant is slow but Starbuck need to be vigilant.

Substitutes:

Similar to competitors, Threat of substitute exist in two levels. The first is the coffeehouse experience. The experience customers receive from Starbucks Coffee outlets can also be received from bards and cafes. The experience is providing people a place to hand out and meeting friends. Starbucks projects itself as community place or third place. In this regards various substitutes like community centers, parks, churches, bars etc can be better substitutes. The second Level is the product level. Even the product can further be broken down into the need for a caffeine boost and the need for a special drink. Considering both of these, the closest substitutes for coffee include tea, soft drinks, energy drinks, smoothies, etc. Starbucks addresses this threat by increasing this product range with non coffee drinks (blended sodas & Frappaccino drinks) & acquiring Tazo Tea. However, considering this threat of substitute is low as coffee being iconic product and the environment provided by Starbucks is too unique among itself.

3.2 PESTEL ANALYSIS:

Political/Legal:

1 Increasing tensions between United States and the rest of the world directly effects the business environment operated worldwide.

2. Allegations give poor brand image to company. Branding being the strongest competitive advantage can be harnessed by any allegations.

3. Starbucks rely heavily on coffee beans which imported from various countries. So possible threat like change in import laws etc may directly impact the productivity, cost etc affecting the level of consumption for Starbucks coffees.

Economic:

These are the major factor that derives and nurture the direction f the economy firm operates in. Starbucks have been facing problems due to economic recession in countries worldwide which resulted in various stores to be closed down and decrease in net profit margin. Economic factors directly influence buying power of consumers and thus resulting in direct losses in sales.

Social/Cultural:

Starbucks is committed to a role of environmental leadership in all faces of its business. Company follows stringent standards to develop and maintain social sustainability. This creates positive outcome and stronger brand in corporate Social world.

Technological:

Starbucks is very vigilant in adopting and innovating ways to better customers’ experience. For example, with the introduction of Starbucks card the company has created opportunity to improve customer service, shorten lines and more better and efficient services. Starbucks tied $100 million deal with Compaq to provide free wifi services to its consumers needs.

3.3 Internal Analysis:

Strengths

Brand Image: Starbucks is among few companies that has successfully created awareness for specialty coffee category while maintaining superior brand. Starbucks is considered to be among strongest brand serving second most traded commodity – Coffee. Starbuck emerged itself as a brand or gateway to western culture which became very popular in China and Japan.

Innovative Business Strategy: Starbucks innovative business Strategy resulting to better staff behind counter, ambience of the store and its fabulous products has enchanted the point of consumer interaction and spending.

Strong Finances: Starbucks after becoming a public company has grown in the 2 decades and has developed high trust in its investors who believe in Starbucks and give it independence to develop further. Starbucks possesses high capital and high income resulting from sales. The company has its own stores worldwide giving better capital to sign more ventures.

Weaknesses

Reliance on U.S. Market: Starbucks is a global company and has a presence in 37 countries. However major revenue and profit for Starbucks comes from its domestic market ranging to 80% from US only. Starbucks has suffered severe losses in Australia and in Europe in previous 2 yrs. Given its presence globally and the opportunities for further expansion, the company needs to be looking at generating proportion of revenue outside its domestic markets.

Large Corporate image: Starbucks struggles with the backlash despite efforts to seem more connected with community. Starbucks is generally compared to Wal-mart of coffeehouses.

Expensive Price: Starbucks and other coffeehouses have caused the price of coffee to increase by 300%.i.e $3 -$4. Though this price can still be acceptable in developed nations where the consumers buying power is high, in emerging economies such prices will make the Starbucks coffee more of a luxury good where limited people can enjoy the products.

4.0 Core Competencies and Competitive advantage:

Human Resource Management: Starbucks’ employees are one of its most important assets and sources of sustainability. The workforce is treated with respect and dignity. The empowering corporate culture, above industry standard employee benefits and employees stock ownership programs have aided in crafting an exceptional workforce that takes pride in its work. Cultures towards employees is laid back and supportive. Employees are empowered by management to make decisions without management referral and are encouraged to consider themselves as a part of the business. This type of approach has not only benefitted Starbucks in reducing staff turnover expenses but also attracted highly skilled and passionate staff.

Marketing: Starbucks has created a brand that presents an understanding of people’s values, lifestyles and needs. The company’s attention to the experiential factor has been crucial to its success. Marketing trends used b Starbucks are unique in itself. Starbucks market its brand considering local areas and Marketing strategies used vary demographically.

Sales/Retail locations: Service is the distinguishing factor that sets Starbucks apart from its competitors. Approximately, 85% of its total revenue comes from its retail storefronts. Starbucks represented for its consistency, customer services and pleasing experience made its locations more sought place after work and home for its consumers. Starbucks stores created a trend for hangout places and a place called third place.

5.0 Strategic Alternatives ( SWOT Analysis)

Internal Factors

External Factors

STRENGTH

High Bran Equity

Strong human resource

Economies of Scale in purchasing

WEAKNESSES

High prices of products

Dependency on coffee and coffee related products

Lack of internal focus ( much focuson expansion)

Opportunities

New Market with low investment

Coffee market growing worldwide

Product range diversification to food and non food items

1. Grow vertically to include other low cost countries using good brands

2. use of high skilled human resource to diversify in broader product range.

1. Diversification to related businesses to overcome the dependency of coffee and increase product line

2. Reduce costs to reduce prices in low investment markets

Threats

Financial Crisis and Recession

Increased Competition

Volatile Coffee markets

Differentiate using the high brand to prevent competition

Make backward vertical integration using economies of scale to avoid volatile of coffee and dairy

Reduce costs to reduce price to generate better revenue to survive in financial crisis

Focus on international alliance and develop more globally to avoid dependency on domestic market.

6.0 Business Strategies Recommended and Used by Starbucks:

Starbucks has been emerged as very successful company till date. It has been able to develop successfully in different demographics in order to penetrate and capture huge market share while changing the view that customers presume about coffee. In order to create a change Starbucks pursued many different strategic actions. However, due to changes in economic reforms and emerging of other brands like McCafe, etc and other substitutes and new coffeehouses highlighting the same experience as Starbucks did, affected its businesses negatively. Starbucks have seen decline in sales an heavy loses in various demographics.

6.1Current Key Strategies Employed by Starbucks:

Horizontal Integration: This strategy is employed by Starbucks to control its competition and reach new customers. It has used this acquisition of Seattle’s best, Torrefazione Italia, and Coffee people to accomplish this. It tied up long terms contract with varius other stronger brands to develop and penetrate other product lines.

Market Penetration: This strategy is being employed to increase the market share of products which are currently offered. To be successful, starbucks focused heavily on the developing quality experience of its product and service range and differentiated itself as a third place to enjoys its products. It also soucghtvarious methods to deliver its products outside its store front outlets. It opened licensed retail locations inside grocery stores and formed alliance with SSCO, pepsi C., U.S. foodservice, and Kraft foods to distribute products to grocery store and other food retailers.

Market Development: Starbucks created specialty coffee market in US by educating consumers and creating trends. Starbucks essentially transformed a commodity into specialty item that consumer were able to pay top money for it. Company developed its market from scratch and continued developing into various demographics and geographic market segments.

Concentric Diversification: to generate more revenue and high sales, Starbucks increased its product ranges mere quickly and without diverting from its main products. Starbucks new product ranges were related with each other and thus giving consumers a presentation of strongest of brand of specialty in its products.

Conglomerate Diversification: Starbucks being vigilant to sough new opportunities tat are unrelated to its traditional product offerings. The Hear music campaign in alliance with ITunes and XM satellite radio to offer music produced Starbucks, Alleah and bee as its first film production helped company to develop more stronger branding strategy.

Value chain developments: Starbucks value chain is among its best assets. Company has put a tremendous amount of energy and money into developing strong andloyal partners in its value chain. Company is committed to develop the human connections with its suppliers and supporting its ecosystem. Starbucks staff turnover is almost 65% than that of same brands in various other segments.

Creating and Appropriating Value Using New Game Strategies:

the value created is the difference between the benefits that customers perceive and the cost of providing the benefits. Effectively, value creation is about performing value chain activities so as to offer customers something that they perceive as beneficial to them, and insuring that the cost of offering the benefits does not exceed the benefits-it is about benefits and costs. The benefits that customers derive from a product can be from the product’s features (performance, quality, aesthetics, durability, ease of use), the product’s or firm’s brand, location of the product, network effects associated with the product, or the service that comes with the product. Thus, designing a product, manufacturing and testing it all add value since they all contribute to the product’s features. Advertising a product also adds value when it improves customers’ perception of the product. Distributing a product adds value when it brings the product closer to customers who would otherwise not have access to it. For products which exhibit network effects, performing activities that add more customers constitutes value creation because the more people that use the product, the more valuable that it becomes to each user.

Therefore Key Recommended Strategies For Starbucks are:

Starbucks will need to expand further in other areas of the United States as well as internationally.

Future joint ventures will expand the products into grocery and convenience store shelves through bottled beverages and ice cream flavors.

Other partnerships will bring new products for Starbucks, such as jazz CDs, and tandem units with bagel bakeries.

In addition to sales through its Company-operated retail stores, Starbucks sells coffee and tea products through other channels of distribution.

Other joint ventures will allow further expansion into the brewery business, which will produce beer with Starbucks’ coffee beans.

Starbucks Corporation purchases and roasts high quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of pastries and confections, coffee-related accessories and equipment, and a line of premium teas, primarily through its Company-operated retail stores.