Starbucks Global Coffee Industry’ Strategic Plan

Abstract

Starbucks has attained remarkable market success since its inception in the US coffee industry. The firm has attained a global market footprint and a strong financial base. The firm focuses on offering high-quality products and ensuring that its employees are motivated. Despite its past market success, Starbucks’ management team should be conscious of the prevailing market environment. Gaining such knowledge will give the firm’s management team insight into how to adjust its strategic practices. Moreover, the firm should assess the macro-environmental forces that are likely to affect the firm using PESTLE and Porter’s five forces. To survive in the coffee industry, Starbucks should consider adjusting its competitive strategies. Some of the strategies that the firm should take into account entail market entry, acquisition, and product improvement.

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Introduction

Surviving in the contemporary business environment requires companies to implement effective strategies. Firms should consider incorporating global strategies to entrench their competitive advantage. However, the success of the global strategy is subject to the extent to which a firm understands the internal and external environments. Gaining such understanding provides insight into the most appropriate global strategy to adopt. This paper entails Starbucks’ strategic analysis and recommendations that the management team should consider.

Firm Analysis

Starbucks Corporation operates as a public limited company in the United States’ hospitality industry. The firm was founded in 1971 in Seattle under the leadership of Gordon Bowker, Jerry Baldwin, and Zev Siegl. The firm has penetrated the global market. The firm operates 21,536 outlets located in 50 different countries around the world. Starbucks specializes in offering diverse beverage products.

Despite the turbulent business environment, Starbucks has attained remarkable success. In 2014, the net operating income increased to $ 3,081.1 million from the $ (325.4) million loss in 2013. Moreover, the firm’s strong financial position is further indicated by the balance sheet. For example, the total assets between 2013 and 2014 amounted to $11,516.7 million and $10,752.9 million respectively. Conversely, the total liabilities amounted to $7,034.4 million and $5,479.2 million. Starbucks has based its operations on a strong philosophy that has entrenched its culture.

Starbucks’ philosophy entails considering employees as partners. Its employees are allowed to own shares in the company. Furthermore, the firm trains the employees to continue to enhance their skills. Subsequently, the firm has established a positive culture, hence reducing staff turnover (Jianfei, 2014). In 2013, Starbucks’ market share was estimated to be 36.7%, and it was ranked 91st amongst global brands.

Industry Analysis

Domestic Analysis

The coffee industry in the US is in its maturity stage, and it is characterized by a moderate level of concentration. The dominant players in the US market include Dunkin Brands and Starbucks Corporation. The two firms control over 60% of the domestic coffee market. Thus, the firms have developed considerable market power. The consumers’ demand for premium coffee is subject to different factors. Some of the factors relate to the consumers’ disposable income, attitude towards health, consumer demographics, and the world’s coffee pricing. The coffee industry is subject to the consumers’ disposable income, which is a factor of economic cycles. An increase in consumer disposable income is critical in an organization’s quest to achieve high profitability.

Global Analysis

The global demand for coffee is expected to grow tremendously. The demand for coffee beans in 2014 was estimated to be 145.8 million bags. However, the demand in 2015 is projected to be 145.7 million bags. The situation might be worsened by the shortage of coffee beans. The International Coffee Organization projects 2015 to be characterized by a supply deficit. Brazil, which is a major coffee bean supplier in the global market, experienced severe drought in 2014, hence affecting the production of coffee beans. This deficit will cause a significant increment in the price of coffee.

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Considering the view that coffee beans constitute the most important component in the coffee industry’s value chain, the increase in prices will affect the price of a cup of coffee directly (MarketLine, 2015). Starbucks is further likely to be affected by growth in preference for healthy eating patterns. This change will affect the demand for some of the firm’s products such as ‘smoothies’ and pastries. Consumers associate these products with an increase in the cases of obesity.

Industry Growth, Trends, and Characteristics

The coffee industry has experienced significant changes due to business cycles. For example, the 2009 economic slowdown affected the consumers’ purchase behavior negatively. Consumers adjusted their consumption behavior regarding specialty goods and mainly focused on necessities. Prior to the economic recession, the industry was characterized by remarkable growth. Between 2009 and 2013, the industry’s annualized average growth rate was estimated to be 0.9%. This aspect indicates a considerably low rate of growth. A study conducted in 2013 shows that the industry is projected to grow at a rate of 3.9% per annum until 2018 (MarketLine, 2015). One of the factors that are expected to stimulate the growth of the sector is an increase in the global demand for coffee. The International Coffee Organization asserts that the demand for coffee is projected to increase to 25% by 2020 (MarketLine, 2015). This aspect presents a unique opportunity for firms in the coffee industry such as Starbucks.

Competitive Analysis

The coffee industry has experienced considerable changes regarding the intensity of competition over the past decades. The intensity of competition has arisen from its lucrative nature. A study conducted by the Specialty Coffee Association of America in 2012 asserts that it is estimated that 40% of individuals aged between 18 and 24 years drink specialty coffee (MarketLine, 2015). Conversely, consumers aged between 25 and 39 years account for 54% (MarketLine, 2015).

One of the notable changes that illustrate the intensity of competition includes the increment in the number of retail coffee outlets. The US has over 20,000 coffee retail outlets. However, the main Starbucks’ competitors include McDonald’s Corporation, Nestle, Darden Restaurants, Yum Brands Incorporation, and Dunkin Brands Group.

The Porters’ Five Forces

Barriers to Entry [Moderate]

The barriers to entry into the industry are moderate, which makes it possible for competitors to enter. The initial investment required to enter the industry is not high. Additionally, consumers incur no concrete switching costs by changing their coffee brand.

Threats to Substitute [High]

Consumers can choose from different non-alcoholic beverages. Examples of such beverages include tea, sodas, fruit juices, water, and energy drinks. Consumers can also make specialty coffee at their homes at a low cost.

Buyer Power [Moderate to Low]

The industry is characterized by different buyers. Most of the buyers purchase in small volumes. Therefore, no buyer has substantial power to control the price.

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Supplier Power [Low to Moderate]

Starbucks depends on premium Arabic coffee beans sourced from selected parts of the world. Therefore, it is relatively high for Starbucks to switch to other suppliers due to the pressure to sustain the quality of its products. Despite its ability to influence the suppliers’ power, Starbucks has integrated fair trade practices.

Rivalry [High to Moderate]

The industry is characterized by monopolistic competition due to the dominance of the large players. Despite the intensity of competition, Starbucks has attained substantial market dominance as evidenced by its large market share. The firm has also overcome competitive rivalry by differentiating its products.

Other Factors

Starbucks is subject to diverse macro-environmental factors as outlined by the following PESTLE analysis.

Political Factors

The US has maintained a strong political relationship with different coffee-producing countries in Africa and South America. Political stability will further influence Starbucks’ ability to enter the emerging and frontier markets.

Economic Factors

The occurrence of economic recession or financial crises might lead to an increment in the rate of unemployment. Subsequently, the consumers’ purchasing power might be affected adversely due to the decline in the level of their disposable income. Other economic changes such as high taxation, currency, and interest rate fluctuation might affect the firm’s profitability.

Legal Factors

Starbucks has an obligation to adhere to business standards, rules, and regulations as stipulated by the US government. Furthermore, the firm must comply with the laws outlined by the host governments to operate efficiently both in the local and international markets. As a multinational company, Starbucks will be subject to strict scrutiny. The company must assess changes in different countries’ employment laws and tax policies.

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Social-Cultural Factors

Currently, consumers are demanding healthier food products. Thus, the firm must comply with the customers’ preferences. Additionally, Starbucks must adhere to ethical operations, for example by avoiding pollution. The society has become more concerned with the role of business in increasing climate change. Thus, the firm must consider how it can transform its operations. Besides, the firm must consider the most effective way to adjust its operations to align with the generational changes.

Technological Factors

The contemporary business environment is being affected by the adoption of emerging Internet-enabled technologies. Businesses are adopting web technologies to achieve operational efficiency. Starbucks must implement emerging technologies such as Wi-Fi and other mobile technologies. These technologies will improve the company’s competitiveness.

Environmental Factors

The company might be affected by pressure from different international environmental advocacy groups to operate in an environment-friendly manner. To avoid such pressure, the firm should comply with the set environmental rules and regulations. Moreover, the firm should operate responsibly by avoiding pollution, which is associated with a high rate of climate change. The high rate of climate change and other environmental disasters might affect the production of coffee beans.

SWOT Analysis

Starbucks has developed a global retail footprint in the specialty coffee market. The firm’s success is attributed to the adoption of effective strategic management practices. The SWOT analysis below illustrates the firm’s strengths, weaknesses, opportunities, and weaknesses.

Strengths
  1. Global market recognition –Starbucks has developed a substantial geographical presence by operating in 50 countries. The company has positioned itself as a global brand.
  2. High-quality products– The Company is focused on offering customers high-quality products by avoiding standardization of quality.
  3. Customer base loyalty –the firm has developed a large customer base due to the strong level of customer loyalty. The loyalty-based programs have enhanced loyalty under the Starbucks Rewards.
  4. Human resource management– the firm’s operations are facilitated due to the knowledgeable, skilled, and experienced workforce.
  5. Product mix – the firm has developed an extensive product portfolio, hence meeting the customers’ needs.
Weaknesses
  1. Product recalls – the firm recalls some of its products from the market if it identifies that they are of low quality. This aspect might affect the company’s brand image adversely. For instance, in March 2014, Starbucks recalled its Greek Yogurt Raspberry due to poor labeling on the product’s ingredients.
  2. Overdependence on the local market –most of the firm’s stores [8,078] are located in the US. This aspect increases the risk of self-cannibalization.
  3. High product prices –the firm’s products are relatively expensive due to the premium pricing strategy.
Opportunities
  1. Market expansion –the firm can maximize its profitability by establishing retail stores in the emerging markets.
  2. New distribution channels – the firm can generate high revenue by adopting an efficient delivery system.
  3. Technological advancement – Starbucks should consider leveraging the emerging technologies in the hospitality industry such as mobile applications. This move will improve the level of customer experience.
  4. Brand extension– investing in new product development will enable the firm to enhance its product portfolio hence attracting new customers.
Threats
  1. Change in consumer behavior – change in consumer behavior such as the preference for healthy products might affect Starbucks’ future success adversely.
  2. Economic changes – price volatility in the coffee market might affect the firm’s profitability.
  3. Intense competition – the firm experiences intense competition from other firms such as McDonald’s, Pete’s Coffee, Costa Coffee, and Dunkin Brands.

Strategic Recommendations

Market expansion

Despite the intensity of competition, Starbucks should consider maximizing its profits through market expansion. The firm should target the emerging and frontier markets in Asia and Africa. Some of the countries that Starbucks should consider expanding into include India and China. Countries in these regions are characterized by a relatively high rate of economic and population growth (Tellis & Johnson, 2008). Over the past two decades, the emerging economies have grown by over 6 times (Poznanska & Poznanski, 2015). The economic growth in the emerging and frontier markets has led to a considerable increase in the consumers’ purchasing power. Expanding into these markets will give Starbucks an opportunity to maximize profit due to its potential customer base.

Franchising strategy

In its international market entry, Starbucks should consider adopting the franchising strategy. The strategy will ensure that the quality of its products is maintained in the new markets. Subsequently, the firm will be in a position to sustain the quality of its products in the new markets (Coate, 2014).

Acquisition

To enhance its dominance in the coffee industry, Starbucks should consider acquiring medium enterprises in the industry. This move will promote the firm’s competitive edge and market position. The acquisition strategy is very effective in consolidating a firm’s competitiveness, hence improving its ability to survive the business cycles.

Product improvement and new product development

Starbucks should consider diversifying its product portfolio by investing in product improvement and new product development. This approach will enable the firm to attract new customers.

Conclusion

One of the notable issues in the coffee industry is the increase in the intensity of competition. The industry is very lucrative as evidenced by the increase in the number of specialty coffee outlets established around the world. The industry players such as Starbucks must assess the internal and external business environments. The assessment should focus on identifying available opportunities and threats. Starbucks has attained an optimal market position in the specialty industry. However, the firm can enhance its performance by implementing the outlined strategic recommendations.

References

Coate, M. (2014). Market definition in differentiated goods when the final consumer buys the goods; insights from the H&R Block case. Anti-trust Bulletin, 59(3), 619-641.

Jianfei, X. (2014). Analysis of Starbucks employees operating philosophy, International Journal of Business and Social Sciences, 5(1), 55-62.

MarketLine: Starbucks Corporation; overview. (2015). Web.

Poznanska, J., & Poznanski, K. (2015). Comparison of patterns of convergence among emerging markets of Central Europe, Eastern Europe and Central Asia. Comparative Economic Research, 18(1), 6-21.

Tellis, G., & Johnson, J. (2008). Drivers of success for market entry into China and India. Journal of Marketing, 72(2), 1-13.

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